SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to _________________
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File Number: 1-10571
NORTHEAST FEDERAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 06-1288154
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(State or other jurisdiction of (I.R.S.Employer Identification Number)
incorporation of organization)
50 State House Square
Hartford, Connecticut 06103
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(Address of principal executive offices) (Zip Code)
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
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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 _____
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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 28, 1995.
Common Stock, $.01 par value -- $160,973,607
The number of shares outstanding for each of the registrant's classes of common
stock issued and outstanding as of February 28, 1995.
Common Stock, $.01 par value -- 14,974,289
DOCUMENTS INCORPORATED BY REFERENCE:
Part III -- Portions of Proxy Statement for the 1995 Annual Meeting of
Stockholders
NORTHEAST FEDERAL CORP.
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business......................................................................... 1
General......................................................................... 1
Lending Activities.............................................................. 5
Investment Activities........................................................... 29
Sources of Funds................................................................ 35
Subsidiaries.................................................................... 41
Employees....................................................................... 41
Regulations..................................................................... 41
Enforcement..................................................................... 48
Taxation........................................................................ 49
Item 2. Properties....................................................................... 50
Item 3. Legal Proceedings................................................................ 51
Item 4. Submission of Matters to a Vote of Security Holders.............................. 53
Supplementary Item......................................................................... 54
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........ 56
Item 6. Selected Financial Data.......................................................... 57
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.............................................................. 58
Item 8. Financial Statements and Supplementary Data...................................... 87
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................. 133
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 134
Item 11. Executive Compensation........................................................... 134
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 134
Item 13. Certain Relationships and Related Transactions................................... 134
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 135
PART I
ITEM 1. BUSINESS
GENERAL
Northeast Federal Corp. (the Company), a Delaware corporation incorporated in
January 1990, is a unitary savings association holding company engaged in the
financial services industry through its wholly-owned subsidiary, Northeast
Savings, F.A. (Northeast Savings or the Association). Northeast Savings, one of
the largest thrift institutions based in New England with total assets of $3.3
billion at December 31, 1994, is a federally-chartered savings and loan
association headquartered in Hartford, Connecticut with 33 retail branch offices
in Connecticut, Massachusetts, and New York. Through these retail branch
offices, Northeast Savings offers a wide range of mortgage loan and deposit
products. In addition, Northeast Savings operates a residential mortgage loan
origination office in Connecticut. The financial statements and the related
information included in this document reflect the consolidated balances of
Northeast Federal Corp. and its subsidiaries.
PRINCIPAL BUSINESS AND OPERATING STRATEGY. The business of the Company,
conducted through the Association, is providing traditional thrift banking
services to the general public. These services include a range of deposit
products such as checking accounts, savings accounts, retirement accounts, and
certificates of deposit; a wide range of residential mortgage loan programs
including both fixed and adjustable rate first mortgage loans and home equity
loans and credit lines; and ancillary banking services such as safe deposit
boxes and travelers checks.
The Association's primary source of income is the net interest income generated
through raising deposits from the general public and investing those deposits in
residential mortgage loans. Additional sources of revenue are the interest
earned on securities and the fees earned in connection with loans, deposits and
other banking services. Other expenses besides the interest incurred on
deposits and other borrowed funds, are the provision for loan losses and other
non-interest expenses including general and administrative expenses, deposit
insurance expense, and the expenses on foreclosed real estate.
BACKGROUND. Northeast Savings was formed in March 1982 when The Schenectady
Savings Bank, F.S.B., operating in the Albany-Schenectady area in upstate New
York, acquired Hartford Federal Savings and Loan Association in Connecticut.
Schenectady Savings was organized in 1834 as a New York state-chartered mutual
savings bank. Northeast Savings further expanded into Massachusetts in October
1982 when it acquired Freedom Federal Savings and Loan Association of Worcester
(Freedom Federal) with branch offices in Springfield, Worcester, Greater Boston,
and Cape Cod, and the First Federal Savings and Loan Association of Boston.
These acquisitions were Federal Savings and Loan Insurance Corporation (FSLIC)-
assisted supervisory mergers induced by the Federal Home Loan Bank Board
(FHLBB). As an integral part of the Freedom Federal acquisition, the FSLIC
purchased a $50,000,000 income capital certificate from the Association. In
exchange for the Association's agreement to acquire these troubled institutions,
the FSLIC and the FHLBB also agreed that the Association could account for the
mergers under the purchase method of accounting and that the resultant
supervisory goodwill would be included in regulatory capital.
On September 22, 1983, the Association converted from a mutual to a stock
association through the sale of 5,060,765 shares of common stock, which
generated net proceeds of $52,767,000. In October 1985, the Association issued
1,610,000 shares of $2.25 Cumulative Convertible Preferred Stock, Series A (the
convertible preferred stock), which generated net proceeds of $38,341,000.
Additionally, in March 1987, Northeast Savings issued 1,202,916 shares of
Adjustable Rate Cumulative Preferred Stock, Series A (the adjustable rate
preferred stock), valued at $60,145,000 to the FSLIC in exchange for the FSLIC's
1
cancellation of the income capital certificate and a portion of the accumulated
income payments on the certificate.
On July 6, 1990, at a Special Meeting of Stockholders, the holders of voting
stock of Northeast Savings approved a Plan of Reorganization whereby Northeast
Savings became the wholly-owned subsidiary of a Delaware holding company,
Northeast Federal Corp. Under the reorganization plan, 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 core capital. As a result, on July 6,
1990, Northeast Savings came into compliance with all of the then-applicable
Office of Thrift Supervision (OTS) capital requirements. Since that time,
Northeast Savings has remained in compliance with all current capital
requirements and, as of June 30, 1994, met the definition of a well-capitalized
thrift.
On June 19, 1991, the Association acquired $10.5 million of deposits of
Financial of Hartford, F.S.B. from the Resolution Trust Corporation (RTC). On
September 13, 1991, the Association acquired $210.9 million in insured deposits
of eight branches of ComFed Savings Bank, F.A. (ComFed), from the RTC. In
addition, on March 20, 1992, Northeast Savings acquired approximately $183.2
million in insured deposits of four southern California branches of FarWest
Savings and Loan Association, F.A. from the RTC.
On May 8, 1992, the Association acquired certain assets of four Rhode Island
financial institutions (the Rhode Island acquisition) which were in receivership
proceedings under the jurisdiction of the Superior Court of Providence County,
Rhode Island. In addition, deposits in the Association were issued to former
depositors in the Rhode Island institutions. As a result, the Association
acquired seven branches in Rhode Island which, at the time of acquisition, had
total deposits of $315.0 million.
In conjunction with the Rhode Island acquisition, the Company repurchased from
the FSLIC Resolution Fund (FRF) the Company's adjustable rate preferred stock
for $28.0 million in cash and $7.0 million of the Company's 9% Sinking Fund
Uncertificated Debentures, due 2012 (the 9% Debentures) for a total fair value
of $32.5 million. The 9% Debentures had a fair value of $4.5 million, based on
the value attributable to those debentures by the FRF, as determined by its
investment banker. The cash used for the repurchase of the adjustable rate
preferred stock was obtained by the sale of $28.95 million of 9% Debentures to
the receivers for the Rhode Island institutions, who distributed those 9%
Debentures to certain depositors in those institutions in partial settlement of
their claims against the receiverships. Also, the Company issued and sold
351,700 shares of a new class of preferred stock, its $8.50 Cumulative Preferred
Stock, Series B, (the Series B preferred stock) plus warrants to purchase an
aggregate of 800,000 shares of the Company's common stock to the Rhode Island
Depositors Economic Protection Corporation (DEPCO) for $35.17 million. The net
proceeds from the sale of the Series B preferred stock were used by the Company
to increase the equity capital of the Association. On December 9, 1994, DEPCO
exercised its warrants, which generated net proceeds of $2.4 million to the
Company.
On May 7, 1993, at a Special Meeting of Stockholders, the Company's stockholders
approved a reclassification of the Company's convertible preferred stock into
common stock at the ratio of 4.75 shares of common stock for each share of
convertible preferred stock. Effective May 14, 1993, the 1,610,000 outstanding
shares of convertible preferred stock were converted into an aggregate of
7,647,500 shares of common stock. At such time, in the aggregate, $12.2 million
of accumulated and unpaid dividends on the convertible preferred stock were
eliminated.
In a series of transactions completed during the first and second quarters of
1994, Northeast Savings sold virtually all of its adjustable rate single-family
loans secured by California properties as well as virtually all of its
foreclosed real estate in California. These transactions reduced the level of
the Company's exposure to the California real estate market to 6% of the total
loan portfolio at December 31, 1994 from 47% of the total loan portfolio at
December 31, 1993. In a series of transactions during April and May 1994,
Northeast Savings sold virtually all of its foreclosed properties in California,
in addition to certain other foreclosed
2
properties. These transactions, which were fully reserved for during the first
fiscal quarter, helped to reduce the Company's non-performing assets to $42.5
million at December 31, 1994 compared to $142.4 million at December 31, 1993.
In June 1994, Shawmut National Corp. acquired ten branches of Northeast Savings.
Five of the branches were in eastern Massachusetts, while the remaining five
were in Rhode Island. At the time of sale, deposits in these branches totaled
approximately $410.8 million. In July and August 1994, the Company also sold
its four San Diego, California branches and its single branch on Cape Cod, with
total deposits of $102.0 million among the five branches.
On June 11, 1994, Northeast Federal signed a definitive agreement for its
acquisition by Shawmut National Corporation (Shawmut) through a merger of
Northeast Federal and a subsidiary of Shawmut. Shawmut and Northeast filed all
applications for regulatory approval of the merger during the quarter ended
December 31, 1994. Certain approvals have been received and other applications
remain pending. The Company has established a record date of February 10, 1995
and scheduled a special stockholders meeting on March 17, 1995 to vote on the
agreement and plan of merger. Shareholders of record as of February 10, 1995
will be eligible to vote. On February 1, 1995, Fleet Financial Group (Fleet)
and Shawmut signed a definitive agreement for a strategic merger. Fleet has
indicated that the merger is expected to be completed in the fourth quarter of
1995 and is subject to approval by federal and state bank regulators and the
shareholders of both companies.
SUPERVISORY GOODWILL. Management believes that, based on the Association's
constitutional rights and legal rights under its 1982 contracts with the FSLIC
and the FHLBB, the supervisory goodwill generated by the 1982 acquisitions was
includable for purposes of all regulatory capital requirements. However, as
discussed in the Regulations section, current regulatory capital requirements of
the OTS, the successor agency to the FHLBB, exclude supervisory goodwill from
regulatory capital to the extent that such supervisory goodwill is in excess of
a specified allowed amount, which was initially 1.5% of tangible assets but
which declined to zero after December 31, 1994.
As a result of the impact of the OTS regulations on its regulatory capital
position, Northeast Savings asserted its constitutional rights and its
contractual rights to the inclusion in capital of the then remaining balance of
the supervisory goodwill in a suit filed on December 9, 1989 in the United
States District Court for the District of Columbia (the district court). On
July 16, 1991, the district court dismissed the lawsuit, ruling that it lacked
jurisdiction over the action, but that Northeast Savings could bring a damages
action against the government in the United States Claims Court. On July 8,
1992, the Association moved to voluntarily dismiss its appeal of the district
court's decision. The United States Court of Appeals for the District of
Columbia Circuit granted the Association's motion on July 9, 1992. On August
12, 1992, Northeast Savings refiled its action in the United States Claims
Court. (Note that, effective October 29, 1992, the United States Claims Court
was renamed the United States Court of Federal Claims.) The complaint is
discussed further in Item 3: Legal Proceedings.
Subsequent to the initial complaint filed in 1989, the Association has recorded
two significant reductions in the value of its supervisory goodwill. The first
reduction of $109.4 million took place in the year ended March 31, 1990 and the
second reduction occurred in September 1992. The reduction in supervisory
goodwill should not affect the Association's claim, described above, pending in
the United States Court of Federal Claims. The Association's remaining
supervisory goodwill was eliminated in the quarter ended December 31, 1992 as a
result of normal amortization and the utilization of net operating loss
carryforwards.
COMPETITIVE AND REGULATORY ENVIRONMENT. Northeast Savings faces strong
competition both in attracting retail deposits and in making residential real
estate loans. Its most direct competition for deposits has historically come
from savings banks, other savings and loan associations, commercial banks, and
credit unions. The Association faces additional competition for retail
depositors' funds from financial intermediaries offering money market and mutual
funds and corporate and government securities.
3
Additionally, Northeast Savings competes with mortgage banking companies,
finance companies, and other institutional lenders for residential real estate
loans. The Association competes by supplying efficient and quality service,
offering and charging competitive interest rates and fees, and providing
convenient branch locations with extended banking hours and 24 hour automated
teller service.
Northeast Savings' operations, like those of other financial institutions, are
significantly influenced by general economic conditions. Deposit flows and the
cost of funds to the Association are influenced by interest rates on competing
investments and the general level of market interest rates. The Association's
loan volume, loan yields, and loan prepayments are also impacted by market
interest rates on loans and other factors which affect the supply of and demand
for housing and the availability of funds. In the past several years, a weak
economy and real estate market have impacted the ability of borrowers to repay
their loans which, in turn, affects the Association's overall level of
nonperforming assets. Northeast Savings' operations are further influenced by
the policies and regulations of financial institution regulatory authorities
such as the Board of Governors of the Federal Reserve System (Federal Reserve
Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), and the OTS, and by the other monetary,
fiscal, legislative, and regulatory policies of the United States government and
various state governments.
The recently enacted Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the Interstate Act) authorizes (1) interstate acquisitions of banks by
bank holding companies without geographic limitation beginning September 29,
1995, (2) interstate mergers between insured banks with different home states,
subject to the ability of states to opt-out, and (3) any state to enact laws
permitting de novo branching by banks with a home state other than such state.
Specifically, beginning June 1, 1997, a bank may merge with a bank with a
different home state so long as neither of the home states have opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. Once a bank has established branches in a state through an interstate
merger transaction, such bank may establish and acquire additional branches at
any location in that state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable Federal
or state law. The Interstate Act further provides that states may enact laws
permitting interstate merger transactions prior to June 1, 1997. If a state
opts out of interstate branching within the specified time period, no bank in
any other state may establish a branch in that state, either through an
acquisition or de novo.
The Association is subject to the supervision and regulation of the OTS and,
secondarily, the FDIC. During the year ended December 31, 1994, the Company and
the Association were examined by the OTS. Management believes that this
examination was routine in nature and part of the normal supervisory examination
process. Management is not aware of any current directive by either the OTS or
the FDIC, specific to Northeast Federal Corp. or Northeast Savings that, if
implemented, would have a significant material effect on the Company's
liquidity, capital resources, or operations. The Association's deposits are
insured up to applicable limits by the Savings Association Insurance Fund (SAIF)
which is administered by the FDIC, the successor agency to the FSLIC. Northeast
Savings is further subject to regulations of the Federal Reserve Board with
respect to reserves required to be maintained against deposits and certain other
matters. For further discussion, see the Regulations section.
The Association underwent an OTS consumer compliance examination as of September
28, 1992. The OTS has a specialized group of examiners that focuses on consumer
regulations, including non-discrimination regulations, such as the Equal Credit
Opportunity Act and the Home Mortgage Disclosure Act; the Truth-in-Lending Act
and the Bank Secrecy Act. The consumer compliance examination revealed no
significant items of concern.
In conjunction with the consumer compliance examination, a separate Community
Reinvestment Act (CRA) evaluation and rating were provided. The CRA evaluation
and rating process assesses and ranks the overall performance of federally
regulated depository institutions in helping to meet community credit needs,
including those of low and moderate income neighborhoods. The evaluation and
ratings are narrative and
4
are public information; institutions are given ratings as follows: Outstanding,
Satisfactory, Needs to Improve, or Substantial Noncompliance. The Association
received a Satisfactory rating. An institution in this group has a satisfactory
record of ascertaining and helping to meet community credit needs consistent
with its resources and capabilities. The management of the CRA process is
satisfactory and includes adequate documentation of CRA related activities and
demonstrates regular involvement by the Board of Directors and senior management
in the institution's CRA planning, implementation, and monitoring process. An
institution's CRA rating is taken into consideration by the OTS when it reviews
applications to open or relocate a branch facility or to acquire assets and
assume liabilities. Generally, institutions that receive a satisfactory rating
are placed on an eighteen month review cycle by the OTS.
LENDING ACTIVITIES
Northeast Savings' primary business is receiving deposits from the public and
investing those funds in single-family residential mortgage loans. Prior to
fiscal year 1989, Northeast Savings substantially increased its total assets
primarily through the purchase of mortgage-backed securities and investment
securities in the secondary markets. However, in October 1988, under the
direction of a new chairman and chief executive officer, Northeast Savings
announced its intention to return to more traditional thrift activities and de-
emphasize its wholesale activities. Northeast Savings also announced it would
substantially stop the growth in its balance sheet and more fully utilize its
retail branch network as a low cost delivery system for deposit gathering and
single-family residential mortgage loan origination. A singularly important
element of this strategy was the strengthening of Northeast Savings' residential
mortgage loan origination network within its then-existing three-state branch
market as well as the expansion into selected geographic markets. Currently,
Northeast Savings originates its residential mortgage loans through its three-
state branch system and its residential mortgage loan origination office in
Connecticut. Previously, Northeast Savings also operated loan origination
offices in California, Colorado and Oregon. The Oregon office was closed in
September 1993 and the other two offices were closed in February 1994.
Northeast Savings' primary lending activities consist of originating single-
family residential mortgage loans; single-family residential related loans, such
as equity loans and lines of credit; and residential construction loans, and, to
a small extent, consumer loans such as checking account overdraft protection,
and loans collateralized by deposit accounts, and income property loans secured
by commercial real estate and/or guaranteed by the United States Small Business
Administration (SBA). Northeast Savings' lending objective is to meet its
customers' needs while managing the amount of credit and interest rate risk
exposure in its loan portfolio. To accomplish this goal, significant attention
is directed toward designing appropriate types of loans to be offered and the
proper pricing of each type of loan.
Northeast Savings reviews its loan volume capacity as compared with its asset
growth projection, desired level of net interest margin, and capital ratios on a
regular basis. Loans originated with the intention to sell are carried at the
lower of cost or fair value.
5
SINGLE-FAMILY RESIDENTIAL MORTGAGE LOANS. Single-family residential first
mortgage loans were $843.5 million or 88.5% of Northeast Savings' total loan
portfolio at December 31, 1994 and included $4.8 million in the available-for-
sale portfolio which is carried at the lower of cost or fair value. The
following table shows the geographic distribution of the Association's single-
family residential mortgage loan portfolio at the dates indicated:
December 31, March 31,
------------------------------------------------------------ -------------------
1994 1993 1992 1992
------------------- ------------------ -------------------- -------------------
(Dollars in Thousands)
Connecticut.... $ 239,379 28.38% $ 260,947 14.14% $ 276,429 12.55% $ 283,379 12.72%
New York....... 203,283 24.10 221,067 11.98 236,224 10.72 263,682 11.83
Massachusetts.. 149,862 17.77 158,968 8.61 144,727 6.57 177,649 7.98
California..... 40,854 4.84 903,540 48.95 1,228,381 55.76 1,142,906 51.29
Florida........ 36,613 4.34 42,745 2.32 54,338 2.47 63,053 2.83
New Jersey..... 16,338 1.94 56,915 3.08 71,443 3.24 83,550 3.75
Other.......... 157,148 18.63 201,608 10.92 191,432 8.69 213,962 9.60
-------- ------ --------- ------ --------- ------ --------- ------
Total........ $ 843,477 100.00% $1,845,790 100.00% $2,202,974 100.00% $2,228,181 100.00%
======== ======= ========= ====== ========== ====== ========= ======
The Association offers a variety of adjustable rate residential mortgage loan
products, all of which conform to secondary mortgage market requirements. The
Association's primary adjustable rate product is a one-year adjustable rate
loan, which is tied to the Weekly Average Yield on U.S. Treasury Securities
adjusted to a constant maturity of one year (One-Year Treasury Constant Maturity
Index). Payments and interest rates change annually with an interest rate cap
of 2%. Northeast Savings also offers a selection of fixed rate mortgage loans.
Generally, both adjustable and fixed rate loans originated by the Association
are based on product and underwriting standards such that the loans may be sold
or securitized in the secondary mortgage market.
Depending upon the underlying index, adjustable rate loans are offered at terms
ranging from 25 to 30 years. All adjustable rate loan products include a
lifetime cap and some contain options to convert to a fixed rate loan. A
lifetime cap on loans is determined by the Association at the inception of a
loan. For borrowers whose initial down payments are less than 20%, Northeast
Savings offers adjustable rate loans covered by private mortgage insurance which
insures that the Association's exposure is no greater than approximately 75% of
the appraised value of the property at the time the loan was originated.
Northeast Savings also originates 10, 15, 20, 25, and 30 year, conforming and
non-conforming, fully amortizing fixed rate residential mortgage loans, some of
which are sold in the secondary mortgage market as whole loans or, with
conforming loans, in the form of securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC) or the Federal National Mortgage Association
(FNMA). Single-family residential conforming loans are those loans which are
equal to or less than FNMA or FHLMC loan limits, which was $203,150 as of
January 1, 1994. Generally, when conforming loans are sold to FHLMC or FNMA,
Northeast Savings collects fees for continuing to service the loans. In
addition, the Association originates loans for private investors based on their
product and underwriting standards and sells these loans to the investors,
servicing released. All residential mortgage loans originated by the
Association contain due-on-sale clauses which provide that the Association may,
subject to certain regulatory restrictions, declare the unpaid principal amount
due and payable upon the resale of the mortgaged property.
The Association also originates a variety of other single-family residential
mortgage loan products including loans with fixed interest rates for the first
three or five years after origination which convert to adjustable rate mortgages
at the end of the fixed rate period. The adjustable rates are generally tied to
the One-Year Treasury Constant Maturity Index.
6
Originations of single-family residential mortgage loans by product type and by
geographic area during the year ended December 31, 1994 were as follows:
Percent of
California Connecticut New York Massachusetts Colorado Other Total Originations
---------- ----------- -------- ------------- -------- ------- ------- ------------
(Dollars in Thousands)
Adjustable rate loans:
One-Year Treasury Constant Maturity. $ 2,096 $27,172 $10,007 $13,948 $ 1,582 $ 698 $ 55,503 36.39%
Other adjustable...................... 5,851 585 2,043 644 1,940 180 11,243 7.37
10 and 15 year fixed rate loans....... 1,223 5,236 7,744 6,442 2,869 1,384 24,898 16.32
30 year and other fixed rate loans.... 3,464 22,840 13,360 14,452 4,836 1,945 60,897 39.92
------- ------- ------- ------- ------- ------ -------- ------
Total............................. $12,634 $55,833 $33,154 $35,486 $11,227 $4,207 $152,541 100.00%
======= ======= ======= ======= ======= ====== ======== ======
Northeast Savings' single-family residential loan portfolio at December 31, 1994
by product type and geographic area is as follows:
California Connecticut New York Massachusetts New Jersey Other Total
---------- ----------- -------- ------------- ---------- --------- ---------
(In Thousands)
One-year adjustable rate loans:
One-Year Treasury Constant Maturity... $21,007 $160,695 $106,587 $113,337 $14,225 $140,924 $556,775
Six-month adjustable rate loans:
One-Year Treasury Constant Maturity... 669 40,259 39,361 1,798 448 3,392 85,927
Six-Month Cost of Funds............... 2,207 1,298 - - - - 3,505
Other adjustable........................ 11,251 15,073 20,796 11,072 165 33,243 91,600
10 and 15 year fixed rate loans......... 367 13,297 18,935 13,700 161 4,479 50,939
30 year and other fixed rate loans...... 5,353 8,757 17,604 9,955 1,339 11,723 54,731
------- -------- -------- -------- ------- -------- --------
Total............................... $40,854 $239,379 $203,283 $149,862 $16,338 $193,761 $843,477
======= ======== ======== ======== ======= ======== ========
Included in the single-family residential loan portfolio are $183.9 million of
loans which were purchased prior to 1991 in the secondary market and are
serviced by FNMA/FHLMC approved servicers. At the time of purchase, the
underwriting guidelines for purchased loans met or exceeded the credit standards
established by the Board of Directors. Purchased loans cannot exceed $600,000
and loan-to-value ratios cannot exceed 80% without acceptable private mortgage
insurance. Properties collateralizing purchased loans are geographically
dispersed to limit the Association's exposure to unfavorable economic changes in
any one area of the country.
Under policies adopted by its Board of Directors, Northeast Savings limits the
loan-to-value ratio to 80% on single-family residential mortgage loans, and,
with private mortgage insurance, up to 95% on adjustable and fixed rate single-
family residential mortgage loans. The loan-to-value ratio limit is increased
to 97% on certain community lending fixed rate single-family residential loans.
In certain geographic areas of the country, Northeast Savings has limited the
loan-to-value ratio to even less than 80%. Beginning in 1994, the Association's
policies allowed originations of certain community lending fixed rate single-
family residential mortgage loans with loan-to-value ratios greater than 80%
without private mortgage insurance. Such loans are on an exception basis only
and require the approval of the Chairman of the Board or the President.
7
The following table shows certain information with respect to the original loan-
to-value ratios of single-family residential loans originated during the periods
indicated:
For the Years For nine Months For the Years
Ended December 31, Ended December 31, Ended March 31,
---------------------------------------- ---------------------- --------------------------
1994 1993 1992 1992 1991
------------------- ----------------- ---------------------- ----------- ----------
(Percent of Loans Funded)
Greater than 90%....... 1.46% .26% .09% .08% .30%
85% - 90%.............. .50 .34 .02 .05 .11
80% - 85%.............. - .40 .15 .13 .35
75% - 80%.............. 50.18 25.76 30.71 23.44 9.04
70% - 75%.............. 12.39 32.54 28.20 26.13 58.49
65% - 70%.............. 9.62 10.64 10.29 14.27 13.10
60% - 65%.............. 11.58 7.81 7.21 8.92 6.12
Under 60%.............. 14.27 22.25 23.33 26.98 12.49
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
The following table shows originations of single-family residential loans during
the year ended December 31, 1994 by state and by original loan-to-value ratios:
Percent of
California Connecticut New York Massachusetts Colorado Other Total Originations
------------ ----------- -------- ------------- -------- ------- ------- --------------
(Dollars in Thousands)
Greater than 90% $ - $ 967 $ 904 $ 362 $ - $ - $ 2,233 1.46%
85% - 90% 508 - 133 125 - - 766 .50
80% - 85% - - - - - - - -
75% - 80% 4,699 35,453 13,684 17,314 3,986 1,414 76,550 50.18
70% - 75% 2,125 5,321 4,985 4,612 1,164 696 18,903 12.39
65% - 70% 1,736 3,788 3,427 3,497 1,878 344 14,670 9.62
60% - 65% 1,399 9,017 3,197 2,507 1,194 341 17,655 11.58
under 60% 2,167 1,287 6,824 7,069 3,005 1,412 21,764 14.27
------- ------- ------- ------- ------- ------ ------- ------
$ 12,634 $ 55,833 $33,154 $ 35,486 $11,227 $ 4,207 $152,541 100.00%
======= ======= ======= ======= ======= ====== ======= ======
8
The following table presents the Association's single-family residential loans,
which are both originated and serviced by the Association, by state at December
31, 1994 based on original loan-to-value ratios:
New
California Connecticut New York Massachusetts Jersey Other Total Percent
------------ ----------- -------- ------------- -------- ------- --------- -------
(Dollars in Thousands)
Greater than 90% $ - $ 7,945 $ 6,593 $ 3,565 $ - $ 6,708 $ 24,811 3.81%
85% - 90% 560 30,977 11,846 17,778 332 14,917 76,410 11.75
80% - 85% - 6,813 4,849 4,458 198 1,834 18,152 2.79
75% - 80% 5,643 81,213 52,292 35,471 1,513 24,337 200,469 30.82
70% - 75% 5,121 28,738 31,782 17,587 734 20,107 104,069 16.00
65% - 70% 266 22,241 20,878 13,458 54 8,657 65,554 10.08
60% - 65% 1,867 9,916 18,080 7,865 46 6,727 44,501 6.84
under 60% 232 39,191 39,843 25,628 890 10,675 116,459 17.91
------- ------- ------- ------- ------ ------- -------- ------
$ 13,689 $227,034 $186,163 $125,810 $ 3,767 $ 93,962 $ 650,425 100.00%
======= ======= ======= ======= ====== ======= ======== ======
The remaining $193.1 million in the Association's single-family residential loan
portfolio consists primarily of purchased loans for which the above breakdown is
not available. Of the $119.4 million of single-family residential loans with an
original loan-to-value ratio of 80% or greater, $102.3 million are covered by
private mortgage insurance which effectively reduces the loan to value ratio to
under 80%.
The Association originates, reviews, and approves loans in accordance with
written, nondiscriminatory underwriting guidelines established by the Board of
Directors and requires property appraisals on all real estate loans. Pursuant
to federal regulations, Northeast Savings has developed and adopted a written
appraisal policy that meets certain minimum standards, including guidelines
pertaining to the hiring of the Senior Appraisal Officer, and the use of other
independent fee appraisers. Licensed or certified independent fee appraisers
must be approved by the Senior Appraisal Officer and reviewed and affirmed by
the Board of Directors and all appraisals must meet FNMA/FHLMC or secondary
market guidelines. Detailed loan applications and credit reports are obtained
to determine the borrower's ability to repay and the significant items on the
applications are verified through the use of financial statements and deposit
and employment verifications. Since the beginning of calendar year 1992, the
Association has required full or standardized documentation on all portfolio
loans. Northeast Savings requires borrowers to maintain fire and casualty
insurance for the lesser of the amount of the mortgage or 100% of the value of
the property improvements.
CONSUMER LOANS. Federal laws and regulations permit federally-chartered savings
institutions to make secured and unsecured consumer loans of up to 35% of the
institution's total assets. In addition, federally-chartered savings
institutions have lending authority above the 35% limit for certain consumer
loans such as home equity loans. In the past several years, Northeast Savings'
consumer lending activities have been directed almost exclusively towards loans
associated with deposit products, such as loans collateralized by deposit
accounts and overdraft protection on checking accounts. However, beginning in
late 1993, the Association also began offering equity lines of credit. The
equity lines of credit provide for an interest rate that is 1 1/2% above the
Wall Street Journal prime rate with a corresponding maximum lifetime interest
- -------------------
rate cap of 14.9%. The rate is adjusted monthly, based on changes in the index.
During 1994, Northeast offered two special rate programs; the first program
ended July 31, 1994 and provided an interest rate equal to the Wall Street
-----------
Journal prime rate for a period ending April 1995. The second program, which
- -------
ended December 31, 1994, provided an interest rate equal to the Wall Street
-----------
Journal prime rate for a period of one year. The equity line of credit remains
- -------
open with a revolving feature for ten years and requires the payment of interest
only during that time, after which the principal balance fully amortizes over a
twenty year period. The maximum amount on these loans is $100,000 and the
maximum combined loan-to-value ratio is 80%. In addition, the Association
originates a small number of fixed rate, closed-end equity loans. The
9
maximum amount on the fixed rate equity loans is also $100,000 and the maximum
combined loan-to-value ratio is 80%.
Deposit account loans have no set repayment date, are collateralized by deposit
accounts maintained at Northeast Savings, and provide for a rate of interest
that is 3% above the rate on the deposit account collateralizing the loan. The
overdraft protection associated with checking accounts is a revolving credit
line which is currently limited to a maximum of $1,000 and is restricted to
depositors who maintain a household deposit balance of at least $5,000 with
Northeast Savings. This product carries an interest rate of 15.75%.
Consumer loans are approved in accordance with written, non-discriminatory
underwriting guidelines established by the Board of Directors. Consumer loans
were $38.5 million or 4.0% of the total loan portfolio at December 31, 1994.
Consumer loans at December 31, 1994 included $15.8 million in equity credit
lines, $14.1 million in fixed rate equity loans, $5.6 million in loans secured
by deposit accounts, and $1.8 million in overdraft protection loans.
INCOME PROPERTY LOANS. At December 31, 1994, the income property loan portfolio
totaled $75.8 million or 8.0% of total loans. Approximately 89.2% of Northeast
Savings' income property loans are located within its primary market areas of
New York, Massachusetts, and Connecticut. Of the total income property loan
portfolio, $1.2 million or approximately 1.2%, was classified as non-accrual at
December 31, 1994. Income property loans are collateralized by the underlying
real estate, may be supported by additional personal guarantees, and conform to
all federal regulations. Income property loans are limited to 400% of an
institution's capital.
Northeast Savings offers loans secured by owner occupied commercial real estate
to established and expanding businesses. Such loans are generally guaranteed by
the SBA. Origination of these loans is consistent with the objectives of the
CRA. The Association also offers full-recourse loans to experienced,
substantial real estate owners. Such loans are secured by first mortgages
generally on newer commercial properties in desirable locations which have
demonstrated stable and adequate cash flows from acceptable leases to service
the loan payments.
10
SINGLE-FAMILY RESIDENTIAL CONSTRUCTION LOANS. At December 31, 1994, the single-
family residential construction loan portfolio totaled $20.8 million or 2.2% of
total loans. The amount disbursed on these loans at December 31, 1994 was $8.6
million of which $3.4 million was disbursed to consumers. Northeast Savings
offers single-family residential construction loans to stable developers and
consumers, since the construction of single-family residences is so closely tied
to the Association's primary lending activity. Specific loan structure and
pricing on single-family residential construction loans are consistent with
Association objectives. There were no single-family residential construction
loans classified as non-accrual or delinquent at December 31, 1994. During the
year ended December 31, 1994, the Association originated $25.7 million in
single-family residential construction loans.
The composition of Northeast Savings' loan portfolio is set forth in the
following table at the dates indicated:
December 31,
-----------------------------------------------------------
1994 1993 1992
----------------- ------------------ ------------------
(Dollars in Thousands)
Single-family residential
real estate loans:
Adjustable rate............. $ 736,603 77.32% $1,695,527 88.20% $2,073,986 89.74%
Fixed rate.................. 102,062 10.71 104,187 5.42 96,751 4.19
Available-for-sale.......... 4,812* .51 46,076 2.40 32,237 1.39
--------- ------- --------- ------- --------- -------
Total single-family
residential real
estate loans............ 843,477 88.54 1,845,790 96.02 2,202,974 95.32
--------- ------- --------- ------- --------- -------
Consumer loans:
Equity loans................ 14,122 1.48 15,507 .81 26,434 1.14
Collateralized by
deposits.................. 5,553 .58 8,709 .45 9,633 .42
Equity lines of credit...... 15,753 1.66 5,886 .31 6,942 .30
Overdraft protection........ 1,786 .19 2,110 .11 2,435 .11
Other ...................... 1,288 .13 2,467 .13 2,917 .12
--------- ------- --------- ------- --------- -------
Total consumer loans...... 38,502 4.04 34,679 1.81 48,361 2.09
--------- ------- --------- ------- --------- -------
Residential construction loans 20,805 2.18 10,138 0.52 9,158 0.40
--------- ------- --------- ------- --------- -------
Income property loans......... 75,835 7.97 69 223 3.60 81,654 3.53
--------- ------- --------- ------- --------- -------
Total loans, gross............ 978,619 102.72 1,959,830 101.95 2,342,147 101.34
--------- ------- --------- ------- --------- -------
Less:
Allowance for loan losses... 11,746 1.23 28,271 1.47 21,020 .91
Undisbursed portion of
loans in process.......... 11,990 1.26 6,097 .32 4,779 .21
Unearned discounts.......... 2,191 .23 2,822 .15 3,625 .15
Deferred origination (costs)
fees, net................. (22) - 383 .01 1,613 .07
--------- ------- --------- ------- --------- -------
25,905 2.72 37,573 1.95 31,037 1.34
--------- ------- --------- ------- --------- -------
$ 952,714 100.00% $1,922,257 100.00% $2,311,110 100.00%
========= ======= ========= ======= ========= =======
March 31,
---------------------------------------
1992 1991
------------------ ------------------
(Dollars in Thousands)
Single-family residential
real estate loans:
Adjustable rate............. $2,027,606 85.75% $2,197,358 84.96%
Fixed rate.................. 135,868 5.75 175,224 6.77
Available-for-sale.......... 64,707 2.74 21,157 .82
--------- ------- --------- -------
Total single-family
residential real
estate loans............ 2,228,181 94.24 2,393,739 92.55
--------- ------- --------- -------
Consumer loans:
Equity loans................ 38,104 1.61 55,600 2.15
Collateralized by
deposits.................. 10,083 .43 12,308 .48
Equity lines of credit...... 7,567 .32 8,277 .32
Overdraft protection........ 2,645 .11 3,051 .12
Other ...................... 4,645 .20 8,782 .34
--------- ------- --------- -------
Total consumer loans...... 63,044 2.67 88,018 3.41
--------- ------- --------- -------
Residential construction loans 6,731 0.28 - -
--------- ------- --------- -------
Income property loans......... 93,415 3.95 127,298 4.92
--------- ------- --------- -------
Total loans, gross............ 2,391,371 101.14 2,609,055 100.88
--------- ------- --------- -------
Less:
Allowance for loan losses... 17,084 .72 14,305 .55
Undisbursed portion of
loans in process.......... 3,734 .16 - -
Unearned discounts.......... 5,055 .21 7,609 .30
Deferred origination (costs)
fees, net................. 1,055 .05 746 .03
--------- ------- --------- -------
26,928 1.14 22,660 .88
--------- ------- --------- -------
$2,364,443 100.00% $2,586,395 100.00%
========= ======= ========= =======
* Available-for-sale loans include $3.6 million of fixed rate loans and $1.2
million of adjustable rate loans.
11
The table below shows the geographic distribution of the Association's gross
loans at the dates indicated:
December 31, March 31,
----------------------------------------------------------------- -------------------
1994 1993 1992 1992
------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
Connecticut..... $ 279,286 28.54% $ 287,011 14.64% $ 304,871 13.02% $ 313,354 13.10%
New York........ 249,998 25.55 261,415 13.34 288,802 12.33 328,628 13.74
Massachusetts... 169,256 17.29 178,606 9.11 168,658 7.20 206,604 8.64
California...... 57,372 5.86 921,218 47.01 1,243,905 53.11 1,160,523 48.53
Florida......... 36,857 3.77 43,108 2.20 54,793 2.34 63,759 2.67
New Jersey...... 16,507 1.69 57,223 2.92 71,686 3.06 83,898 3.51
Other........... 169,343 17.30 211,249 10.78 209,432 8.94 234,605 9.81
--------- ------ --------- ------ --------- ------ --------- ------
Total...... $ 978,619 100.00% $1,959,830 100.00% $2,342,147 100.00% $2,391,371 100.00%
========= ====== ========= ====== ========= ====== ========= ======
The following table shows the composition of Northeast Savings' gross portfolio
of loans by state and loan type at December 31, 1994:
Single-Family
Residential Residential Income Percent of
Real Estate Consumer Construction Property Total Portfolio
------------- -------- ------------ -------- --------- -----------
(Dollars in Thousands)
Connecticut.... $239,379 $ 6,523 $13,661 $19,723 $279,286 28.54%
New York....... 203,283 22,310 6,096 18,309 249,998 25.55
Massachusetts.. 149,862 6,731 105 12,558 169,256 17.29
California..... 40,854 726 - 15,792 57,372 5.86
Florida........ 36,613 244 - - 36,857 3.77
New Jersey..... 16,338 169 - - 16,507 1.69
Other.......... 157,148 1,799 943 9,453 169,343 17.30
------- ------ ------ ------ ------- ------
$843,477 $38,502 $20,805 $75,835 $978,619 100.00%
======= ====== ====== ====== ======= ======
12
The following table shows changes in Northeast Savings' loan portfolio for the
periods indicated:
For the Nine Months For the Years
For the Years Ended December 31, Ended December 31, Ended March 31,
---------------------------------------- ------------------- ---------------------
1994 1993 1992 1992 1991
------------------ -------------------- ------------------- ---------------------
(In Thousands)
Loans originated:
Single-family residential real estate:
Adjustable rate.................... $ 58,833 $ 460,184 $ 449,074 $ 288,463 $ 719,237
Fixed rate......................... 21,946 33,181 1,632 - -
Available-for-sale................. 71,762 241,099 141,848 154,026 48,782
Consumer............................. 29,425 16,095 14,657 22,920 39,237
Residential construction............. 25,717 7,533 7,017 8,708 -
Income property...................... 15,577 500 - 494 14,046
--------- --------- --------- --------- ---------
Total originations............... 223,260 758,592 614,228 474,611 821,302
--------- --------- --------- --------- ---------
Loans purchased:
Single-family residential real estate: 4,614(1) - 60 909(11) -
Available-for-sale .................. 3,445(2) 3,850(2) 6,549 12,671 9,073
Consumer............................. - - 25 813(12) -
Income property...................... - 104(6) - - -
--------- --------- --------- --------- ---------
Total purchases.................. 8,059 3,954 6,634 14,393 9,073
--------- --------- --------- --------- ---------
Loans securitized...................... ( 20,372) (376,551) ( 2,564) (14,504) (365,643)
--------- --------- --------- --------- ---------
Loans sold:
Single-family residential real estate:
Adjustable rate.................... (845,331)(3) (41,370)(7) - - (26,662)
Fixed rate......................... (573) (124)(8) (7,488)(10) (70) (9,237)
Available-for-sale................. (108,245) (229,850) (183,955) (133,429) (262,194)
Consumer............................. (1,805)(4) - - - (12,966)
Income property...................... - (6,004)(9) - (18,111) -
--------- --------- --------- --------- ---------
Total sales...................... (955,954) (277,348) (191,443) (151,610) (311,059)
--------- --------- --------- --------- ---------
Principal repayments and prepayments... (218,994) (416,725) (398,342) (476,110) (421,701)
Foreclosures........................... (17,210) (74,239) (77,737) (64,464) (23,971)
Decrease (increase) in deferred
origination fees...................... 405 1,230 (558) (290) (95)
Decrease in unearned discounts........ 631 803 1,430 2,535 5,275
Increase in undisbursed portion of
loans in process...................... (5,893) (1,318) (1,045) (3,734) -
Decrease (increase) in allowance for
loan losses.......................... 16,525(5) (7,251) (3,936) (2,779) (2,403)
--------- --------- --------- --------- ---------
Decrease in total loans, net........... $(969,543) $(388,853) $( 53,333) $(221,952) $(289,222)
========= ========= ========= ========= =========
(1) Purchase of an additional portion of a loan participation in which the
Association was already a co-participant.
(2) Loans repurchased from prior sales. Such loans were adjustable rate loans
which were convertible into fixed rate loans. Upon conversion, the
Association was required to repurchase the loans.
(3) Consists primarily of loans collateralized by California properties which
were sold in March 1994.
(4) Loans sold as part of branch sales and consist primarily of loans
collateralized by deposit accounts.
(5) Decrease is mainly due to the reduction in the allowance from the loan
sales.
(6) Consists of a purchase from the RTC of a portion of a loan participation in
which the Association was already a co-participant.
(7) Consists primarily of loans which were securitized and simultaneously sold.
In addition, $7.4 million resulted from the sale of California adjustable
rate mortgages.
(8) Sale of a loan participation to the servicer at the request of the servicer
in order to facilitate a pool sale.
(9) Sale of an income property participation loan in which the lead lender
elected to repurchase the Association's share of the loan.
(10) Represents a whole loan participation which was serviced by another
financial institution. This participation was sold because of management's
concerns over the creditworthiness of that servicer.
(11) Loans repurchased from prior sales due to documentation deficiencies.
(12) Acquired as part of the acquisitions of Financial of Hartford, ComFed, and
FarWest from the RTC and consists primarily of loans collateralized by
deposit accounts.
13
Scheduled fixed rate and adjustable rate loan maturities of the Association's
gross loan portfolio at December 31, 1994 are as follows. Actual maturities may
be significantly shorter due to market conditions on interest rates.
Over One Over Two Over Three Over Five Over Ten
Within One to Two to Three to Five to Ten to Fifteen Over Fifteen
Year Years Years Years Years Years Years Total
-------------- ------- -------- ---------- --------- ---------- ------------ --------
(In Thousands)
Single-family residential
real estate loans:
Adjustable rate........... $13,016 $14,119 $15,082 $38,558 $106,941 $145,996 $402,891 $736,603
Fixed rate................ 7,281 7,485 7,447 17,272 30,547 22,810 9,220 102,062
Available-for-sale........ 51 55 59 131 421 603 3,492 4,812
Consumer loans............. 4,834 2,112 1,865 9,353 8,803 5,891 5,644 38,502
Residential construction. 9,221 11,584 - - - - - 20,805
Income property loans...... 3,227 4,597 3,322 6,749 17,871 13,761 26,308 75,835
------ ------ ------ ------ ------- ------- ------- -------
$37,630 $39,952 $27,775 $72,063 $164,583 $189,061 $447,555 $978,619
====== ====== ====== ====== ======= ======= ======= =======
SALES OF LOANS AND LOAN SERVICING ACTIVITIES. Northeast Savings sells loans
primarily in order to manage interest rate risk and to maintain targeted asset
growth and capital levels. Factors such as overall loan demand, the level of
interest rates, and the relative pricing of mortgage loan products determine the
amount of fixed and adjustable rate loans originated for sale. Northeast
Savings' portfolio of loans originated for sale totaled $4.8 million and $46.1
million at December 31, 1994 and 1993, respectively.
In most cases when loans are sold, Northeast Savings retains the servicing of
the loans. Northeast Savings sells loans and retains the related servicing in
order to increase income while fully utilizing the capacity of its loan
servicing systems. Northeast Savings records gains or losses from the sale of
loans that it continues to service for others by computing the present value of
the difference between the yield on the loans sold and the yield to be paid to
the buyer, reduced by normal servicing and guarantee fees, over the estimated
remaining life of the loans. The present value gain or loss is based upon
market prepayment and discount rate assumptions. An asset, known as excess
servicing, which is equal to the present value gain, is recorded at the time a
loan is sold and is amortized over the estimated remaining life of the loans.
Northeast Savings monitors actual prepayments on the related loans and reduces
the balance of the asset by a charge to earnings if actual and/or projected
prepayments exceed the Association's original estimate. In addition, prior to
fiscal 1990, Northeast Savings purchased rights to service loans.
14
At December 31, 1994 and 1993, purchased mortgage servicing rights and deferred
excess servicing, as well as the principal balance of loans serviced for others
in connection with those assets, were as follows:
December 31,
------------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------------- -------------------------------------------
Asset balance as Loans Asset balance as
Asset Loans serviced for a percent of Asset serviced for a percent of
balance others loans serviced balance others loans serviced
----------- ------------------ ----------------- -------- -------------- -----------------
(Dollars in Thousands)
Purchased mortgage $1,686 $ 124,261 1.36% $5,794 $ 349,906 1.66%
servicing rights..........
Deferred excess servicing.. 3,028 459,034 .66 3,623 501,258 .72
Other loans serviced for - 905,742 - - 1,037,699 -
others.................... ------ ---------- ------ ----------
$4,714 $1,489,037 .32% $9,417 $1,888,863 .50%
====== ========== ====== ==========
Current capital regulations which limit the inclusion of purchased mortgage
servicing rights in regulatory capital are discussed in "Regulations -
Regulatory Capital and Other Requirements."
The following table summarizes loans serviced for others, by investor, at the
dates indicated:
December 31, March 31,
---------------------------------- ----------------------
1994 1993 1992 1992 1991
---------- ---------- ---------- ---------- ----------
(In Thousands)
Federal National Mortgage Association...... $ 639,573 $ 664,029 $ 765,682 $ 881,506 $ 945,779
Federal Home Loan Mortgage Corporation..... 375,606 434,715 460,113 517,532 611,674
Government National Mortgage Association. 1,293 197,219 260,987 302,045 341,895
Housing and Urban Development.............. 109,970 112,329 115,229 119,469 117,775
Other Investors............................ 362,595 480,571 181,354 235,635 276,916
---------- ---------- ---------- ---------- ----------
Total loans serviced for others.......... $1,489,037 $1,888,863 $1,783,365 $2,056,187 $2,294,039
========== ========== ========== ========== ==========
15
The decrease in the loans serviced for the Government National Mortgage
Association (GNMA) was mainly due to the sale of servicing rights on $164.2
million of residential loans completed during the fourth quarter of 1994.
Northeast Savings earns an annual servicing fee for servicing loans for others.
The servicing fee typically ranges from approximately twenty-five basis points
for fixed rate loans to thirty-eight basis points for adjustable rate loans.
Fees generated from servicing loans for others are included with non-interest
income in the Consolidated Statement of Operations. The following table details
fee income earned by the Association on loans serviced for others for the
periods indicated. The increase in gross servicing fees in 1994 was due to the
Association's servicing of the aforementioned $876.1 million of loans sold in
March 1994 for six months during the year. The lower amortization for the year
ended December 31, 1994 is due to decreased amortization of excess servicing due
to a lower level of prepayments on the loans and mortgage-backed securities
serviced by the Company in 1994. Interest losses on payoffs occur because,
although a borrower may pay off a mortgage early in the month, the Association
must still remit an entire month's interest to the investor.
For the Nine
For the Years Ended Months Ended For the Years Ended
December 31, December 31, March 31,
---------------------- ------------ ---------------------
1994 1993 1992 1992 1991
----------- --------- ------------ ----------- --------
(In Thousands)
Gross servicing fees...................... $ 8,453 $ 7,326 $ 6,755 $10,030 $10,794
Less:
Amortization............................ (1,946) (2,674) (2,316) (3,172) (3,303)
Adjustment to value due to prepayments.. - (993) (2,407) (763) 593
Adjustment to value due to sale of 2,451 - - - -
servicing rights......................
Interest loss on payoffs................ (1,084) (1,032) (1,239) (1,167) (813)
------- ------- ------- ------- -------
Net servicing fees........................ $ 2,972 $ 2,627 $ 793 $ 4,928 $ 7,271
======= ======= ======= ======= =======
SECURITIZATION. During the fiscal years ended December 31, 1994 and 1993, the
Association securitized residential mortgage loans totaling $20.4 million and
$376.6 million, respectively. These securitizations were transacted for a
number of reasons. First, the Association needed to enhance its risk-based
capital ratios. The high quality of the mortgage-backed securities received in
exchange for the mortgage loans require a risk-based capital weighting of only
20% whereas the underlying mortgage loans would have required a risk-based
capital weighting of 50%. Second, none of the mortgage-backed securities
created have recourse provisions. As a result, these securities mitigate the
credit risk inherent in the underlying loans. Third, at times the Association
securitizes mortgage loans to balance the diversification of its mortgage loan
portfolio, thereby reducing the concentration of loans in any one state or
region of the country. And finally, mortgage-backed securities are more readily
accepted as collateral for wholesale-type borrowings than whole loans and thus
have the effect of enhancing funding flexibility on a cost-effective basis.
ALLOWANCE FOR LOAN LOSSES. As a result of certain credit, appraisal, and
underwriting risks and uncertainties, potential credit losses are implicit in
the business of originating or investing in single-family residential real
estate, consumer, and income property loans. Accordingly, management determines
a provision necessary to maintain an allowance for loan losses which it believes
is adequate for potential losses at each period end. The evaluation of the loan
portfolio for potential losses includes a review on a periodic basis of the
financial status and credit standing of certain individual borrowers and/or, an
evaluation of available collateral. In addition, management's judgment
regarding prevailing and anticipated 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
16
regulatory examinations available to Northeast Savings, the overall loan
portfolio quality and the level of loan charge-offs are considered in evaluating
the adequacy of the allowance for loan losses. Although management believes
that the allowance is adequate, if events or economic conditions change, there
can be no assurance that losses, which could be substantial in relation to the
size of the allowance, will not be sustained in any given year. Further, no
assurance can be given that future increases to the allowance might not result
because of the economy for a particular region or the financial difficulties of
a particular borrower.
Management has established a monitoring system for its loan portfolio to
identify potential problem loans and to permit periodic evaluations of the
adequacy of the allowance for loan losses in a timely manner. The loan
portfolio is comprised of the following major categories: single-family
residential real estate loans, consumer loans, and income property loans. In
analyzing these categories, management has established specific monitoring
policies and procedures which it believes are suitable for the relative risk
profile and other characteristics of the loans within the various portfolios.
The Association's single-family residential real estate and consumer loans are
relatively homogeneous. Therefore, in general, management reviews its
residential and consumer portfolios by analyzing their performance and the
composition of their collateral for the portfolios as a whole. Residential loan
delinquencies and all residential loans greater than $250,000 and in foreclosure
are reviewed monthly by the Board of Directors. Additionally, all loans greater
than $1,000,000 which are more than sixty days past due are reviewed quarterly
by the Association's Asset Classification Committee (see below). Management
regularly monitors the status of each of the loan categories as compared with
the total loan portfolio and reviews the corresponding loss experience.
Northeast Savings' monitoring process for the income property portfolio includes
an annual review by loan personnel of all loans greater than $100,000,
regardless of performance. In addition, on a monthly basis, the Board of
Directors and senior management review specific loans and detailed delinquency
information, including a review of loans which are less than $100,000 about
which management has particular concerns and a review of loans to related
parties. As a result of this monitoring process, approximately 91% of the
income property loan portfolio is reviewed on a regular basis.
Finally, Northeast Savings has an Asset Classification Committee comprised of
senior executive officers which meets quarterly to determine which loans should
be classified as Pass, Substandard, Doubtful, or Loss. A brief description of
these classifications follows:
A Pass loan is considered of sufficient quality to preclude an adverse
rating. Pass loans generally are well protected by the current net worth and
paying capacity of the obligor or by the value of the underlying collateral.
A loan classified Substandard is inadequately protected by the current net
worth and paying capacity of the obligor or by the collateral pledged, if
any. Loans so classified have a well-defined weakness or weaknesses. They
are characterized by the distinct possibility that the Association will
sustain some loss if the deficiencies are not corrected. Substandard loans
totaled $41.1 million at December 31, 1994.
Loans classified as Doubtful have the weaknesses of those classified as
Substandard, with the added characteristic that the weaknesses make
collection or liquidation in full highly questionable or improbable, based on
currently existing facts, conditions, and values. The Association views the
Doubtful classification as a temporary category. The Association had no
loans classified as Doubtful at December 31, 1994.
Loans classified as Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
valuation allowance or charge-off is not warranted. A Loss classification
does not necessarily mean that a loan has absolutely no recovery or salvage
value; rather, it is not practical or desirable to defer writing off a
basically worthless loan even though partial
17
recovery may occur in the future. The Association had no loans classified as
Loss at December 31, 1994.
In addition to the aforementioned procedures, the results of the Asset
Classification Committee are reviewed quarterly by the Board of Directors.
The following table presents a reconciliation of the Association's classified
loans to its non-accrual loans, restructured loans, and real estate and other
assets acquired in settlement of loans (REO) at December 31, 1994 and 1993.
Further information regarding non-accrual loans, restructured loans, and REO may
be found in the following pages.
December 31,
---------------------------------
1994 1993
------------- -------------
Substandard Substandard
------------- -------------
(Dollars in Thousands)
Non-accrual:
Single-family residential real estate loans............ $27,259 $ 65,770
Consumer loans......................................... 902 1,315
Income property loans.................................. 1,170 377
------- --------
Total non-accrual loans................................ 29,331 67,462
Less non-classified loans*........................... 2,242 2,914
------- --------
27,089 64,548
------- --------
Restructured............................................ - 1,641
------- --------
REO:
Single-family residential.............................. 11,196 57,165
Hotels................................................. - 6,453
Apartment building..................................... - 5,270
Office and industrial complexes, land.................. 1,376 3,357
Real estate brokerage operations....................... - 1,744
Residential subdivisions............................. 620 973
------- --------
Total REO............................................. 13,192 74,962
------- --------
Less real estate brokerage operations - 1,041
not classified.................................... ------- --------
Total classified REO................................ 13,192 73,921
------- --------
Potential problem loans................................. 860 10,215
------- --------
Total classified loans and REO........................ $41,141 $150,325
======= ========
Total classified loans and REO as a percent
of total gross loans.................................. 4.20% 7.67%
======= ========
Total allowance for loan losses as a percent
of total classified loans and REO..................... 28.55% 18.81%
======= ========
* At December 31, 1994 and 1993, respectively, $2.2 million and $2.9 million of
non-accrual loans were not classified. These loans identified as non-accrual
but not classified were primarily single-family residential loans which were
guaranteed through government programs or which have full recourse against
the servicer.
Potential problem loans amounted to approximately $860,000 at December 31, 1994.
Potential problem loans are currently performing and have not been restructured
but compliance with the present loan repayment terms is doubtful based on
management's assessment of possible credit problems of the borrowers. These
potential problem loans have been included above as substandard loans. The
decrease in the ratio of classified loans and REO to total gross loans in 1994
is due in part to the sale of $40.5 million of non-accrual loans in March 1994
and to $27.2 million of REO being sold in a series of transactions during the
quarter ended June 30, 1994.
18
The following table reflects the activity in the allowance for loan losses for
the periods indicated:
For the Years For the Nine Months For the Years
Ended December 31, Ended December 31, Ended March 31,
------------------------------ ------------------- -------------------
1994 1993 1992 1992 1991
-------------- -------------- ------------------- -------- --------
(Dollars in Thousands)
Balance, beginning of period.... $ 28,271 $ 21,020 $ 17,084 $14,305 $11,902
Provision for loan losses....... 4,900 23,300 16,300 10,200 8,900
Charge-offs:
Single-family residential real
estate loans................ (5,514) (14,835) (12,305) (6,264) (1,902)
Consumer loans................ (328) (393) (373) (846) (1,837)
Income property loans......... (105) (1,395) - (1,041) (3,993)
-------- -------- -------- ------- -------
Total charge-offs (5,947) (16,623) (12,678) (8,151) (7,732)
-------- -------- -------- ------- -------
Recoveries:
Single-family residential real
estate loans................ 210 176 8 29 160
Consumer loans................ 309 398 306 459 1,075
Income property loans......... 3 - - 242 -
-------- -------- -------- ------- -------
Total recoveries............ 522 574 314 730 1,235
-------- -------- -------- ------- -------
Net charge-offs................. (5,425) (16,049) (12,364) (7,421) (6,497)
-------- -------- -------- ------- -------
Other........................... (16,000)* - - -
-------- -------- -------- ------- -------
Balance, end of period.......... $ 11,746 $ 28,271 $ 21,020 $17,084 $14,305
======== ======== ======== ======= =======
Total net charge-offs during
the period to average
loans outstanding during
the period................ 0.46% .69% .54% .30% .23%
* Represents reduction of allowance allocated to loans sold.
The following table summarizes net charge-offs/(recoveries) by state for the
year ended December 31, 1994:
Single-Family
Residential Income
State Real Estate Consumer Residential Construction Property Total
- ---------------- ------------------ --------------------- ------------------------ ------------------ ------------------
Amount % Amount % Amount % Amount % Amount %
-------- -------- -------- ----------- ---------- ------------ -------- -------- -------- --------
(Dollars in Thousands)
California...... $ 2,065 38.93% $ - - % $ - - % $ - - % $ 2,065 38.07%
New York........ 1,113 20.99 52 273.68 - - - - 1,165 21.48
Connecticut..... 1,289 24.30 (57) (300.00) - - 51 50.00 1,283 23.65
New Jersey...... 470 8.86 - - - - - - 470 8.66
Massachusetts... 414 7.81 24 126.32 - - 51 50.00 489 9.01
Other........... (47) (.89) - - - - - - (47) (.87)
-------- ------ -------- ------ -------- -------- -------- ------ -------- ------
Total...... $ 5,304 100.00% $ 19 100.00% $ - - % $ 102 100.00% 5,425 100.00%
======== ====== ======== ====== ======== ======== ======== ====== ======== ======
19
The following table summarizes the Association's net charge-offs to average
loans outstanding for the periods indicated.
For the Years For the Nine Months For the Years
Ended December 31, Ended December 31, Ended March 31,
------------------------ --------------------- -----------------------
1994 1993 1992 1992 1991
----------- ----------- --------------------- --------- ----------
(Dollars in Thousands)
Single-family
residential real
estate loans:
Average gross loans............ $1,080,712 $2,193,138 $2,162,684 $2,302,909 $2,636,709
Net charge-offs................ (5,304) (14,659) (12,297) (6,235) (1,742)
Net charge-offs/
Average loans................ .49% .67% .57% .27% .07%
Consumer loans:
Average gross loans............ $ 36,137 $ 42,406 $ 57,760 $ 78,078 $ 112,512
Net charge-offs................ (19) 5 (67) (387) (762)
Net charge-offs/
Average loans................ .05% .01% .12% .50% .68%
Residential construction loans:
Average gross loans............ $ 5,695 $ 4,737 $ 3,797 $ 2,236 $ -
Net charge-offs................ - - - - -
Net charge-offs/
Average loans................ - % - % - % - % - %
Income property loans:
Average gross loans............ $ 68,929 $ 74,200 $ 85,834 $ 105,220 $ 125,738
Net charge-offs................ (102) (1,395) - (799) (3,993)
Net charge-offs/
Average loans................... .15% 1.88% - .76% 3.18%
The decrease in the ratio of single-family residential real estate loan net
charge-offs to average loans for the year ended December 31, 1994 is due to the
reduction in the loan portfolio credit risk from the aforementioned sales and
overall improvements in delinquencies. The increases in the ratio of single-
family residential real estate loan net charge-offs to average loans for the
periods ended December 31, 1993 and 1992, and March 31, 1992 were due to general
economic conditions, particularly the recessions in New England and California.
Net charge-offs due to losses on single-family residential loans in California
totaled $2.1 million, $9.8 million, and $6.2 million for the years ended
December 31, 1994 and 1993 and for the nine months ended December 31, 1992,
respectively. The reduction for 1994 was due to the Company's reduction of the
loan concentration in California, as the result of the aforementioned sales.
Net charge-offs on income property loans for the year ended December 31, 1994
resulted from charge-offs of $102,000 on one income property loan in Connecticut
and two commercial loans in Massachusetts. A further discussion of loan charge-
offs may be found in Item 7: Management's Discussion and Analysis of the
Results of Operations and Financial Condition.
The nature of the allowance for loan losses is such that it is not possible to
allocate it to specific loans with a high degree of precision. However, the
allowance has been allocated for the periods indicated in the following table to
broad categories of loans to indicate management's assessment of the relative
risk characteristics of those types of loans and consideration of other factors.
This allocation is based not only on an evaluation of specifically identified
loans, but also includes considerations of historical loan losses, levels of
non-accrual and restructured loans, if any, and an assessment of local and
regional economic conditions and other factors which may influence risk.
Activity in the allowance for loan losses is also discussed in Item 7:
Management's Discussion and Analysis of the Results of Operations and Financial
Condition.
20
The following table shows the allocation of the allowance for loan losses to the
various loan types at the dates indicated:
December 31, March 31,
---------------------------- --------------------
1994 1993 1992 1992 1991
------- ------- ------- ------- ---------
(In Thousands)
Allowance for loan
losses applicable to:
--------------------
Single-family residential real
estate loans................... $ 8,883 $25,751 $17,611 $10,296 $ 7,437
Consumer loans.................. 300 300 300 2,000 2,170
Residential construction loans.. 100 100 100 100 -
Income property loans........... 1,966 700 2,008 2,662 3,500
Unallocated..................... 497 1,420 1,001 2,026 1,198
------- ------- ------- ------- -------
$11,746 $28,271 $21,020 $17,084 $14,305
======= ======= ======= ======= =======
Percent of Loans in Each Category to Total Loans
-----------------------------------------------------
December 31,* March 31,*
-------------------------------- -----------------
1994 1993 1992 1992 1991
-------- ------ --------- -------- -------
Single-family residential real
estate loans................... 87.29% 94.49% 94.24% 93.30% 91.77%
Consumer loans.................. 4.03 1.81 2.13 2.73 3.49
Residential construction loans.. .90 .21 .19 .13 -
Income property loans........... 7.78 3.49 3.44 3.84 4.74
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
* The gross loan portfolio balances used in the calculations are net of
unearned discounts, deferred origination fees, and the undisbursed
portion of loans in process.
21
At the dates indicated, the percentage distribution of the allowance for loan
losses was as follows:
December 31,
-----------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
As a % of As a % of As a % of
As a % of the Total As a % of the Total As a % of the Total
Gross Loan Allowance Gross Loan Allowance Gross Loan Allowance
Allowance for loan Portfolio for Loan Portfolio for Loan Portfolio for Loan
losses applicable to: Balance* Losses Balance* Losses Balance* Losses
---------- --------- ---------- --------- ---------- ---------
Single-family residential
real estate loans...... 1.11% 75.63% 1.47% 91.09% .85% 83.78%
Consumer loans........... 0.77 2.55 .85 1.06 .60 1.43
Residential construction
loans.................. 1.15 .85 2.42 .35 2.29 .48
Income property loans.... 2.62 16.74 1.03 2.48 2.51 9.55
Unallocated.............. ** 4.23 ** 5.02 ** 4.76
------ ------ ------
Total.................... 1.22% 100.00% 1.45% 100.00% .90% 100.00%
====== ====== ======
March 31,
------------------------------------------------
1992 1991
---------------------- ----------------------
As a % of As a % of
As a % of the Total As a % of the Total
Gross Loan Allowance Gross Loan Allowance
Allowance for loan Portfolio for Loan Portfolio for Loan
losses applicable to: Balance* Losses Balance* Losses
Single-family residential real estate loans..... .55% 60.27% .36% 51.99%
Consumer loans.................................. 3.08 11.71 2.39 15.17
Residential construction loans.................. 3.36 .58 - -
Income property loans........................... 2.91 15.58 2.84 24.47
Unallocated..................................... ** 11.86 ** 8.37
------ ------
Total........................................... .72% 100.00% .55% 100.00%
====== ======
* The gross loan portfolio balance is net of unearned discounts, deferred
origination fees, and the undisbursed portion of loans in process.
** For purposes of this analysis, the unallocated portion of the allowance
for loan losses has been included in the single-family residential
allocation.
The allowance for loan losses as a percentage of non-accrual loans by loan
category was as follows:
December 31, March 31,
------------------------ ----------------
1994 1993 1992 1992 1991
------- ------- ------ ------- -------
Single-family residential real
estate........................ 34.41% 41.31% 21.16% 11.43% 10.42%
Consumer........................ 33.26 22.81 17.23 103.57 115.92
Residential construction loans.. - - - - -
Income property................. 176.58 212.20 39.78 112.77 28.95
Unallocated..................... * * * * *
Total allowance to total
non-accrual loans............. 40.05% 41.91% 22.13% 15.24% 14.78%
* For purposes of this analysis, the unallocated portion of the allowance for
loan losses has been included in the single-family residential real estate
allocation.
The ratios of the allowance for loan losses to non-accrual loans since 1991
reflect a change in composition of the allowance which corresponds to the change
in the composition of the Association's non-accrual loans, specifically the
level of single-family residential non-accrual loans as a percentage of total
non-accrual loans. At December 31, 1994, 1993 and 1992, and March 31, 1992 and
1991, single-family residential non-accrual loans were 92.9%, 97.5%, 92.6%,
96.2%, and 85.6%, respectively, of non-accrual loans. The decrease in the ratio
of single-family residential real estate allowance for loan losses to non-
accrual loans is due to the aforementioned sale of approximately $40.5 million
of non-accrual loans in March 1994 and the reduction of the allowance that
occurred due to the change in the loan portfolio risk.
22
At December 31, 1994, the increased ratio of the allowance for loan losses to
non-accrual consumer loans reflects an overall improvement in delinquencies.
The Association's consumer loans, which totaled 4.0% of the total loan portfolio
at December 31, 1994, consist primarily of well-seasoned loans collateralized by
deposit accounts or real estate. At December 31, 1994, 14.4% of the
Association's consumer loans were collateralized by deposit accounts, while
77.6% consisted of loans collateralized by real estate.
The increase in the ratio of the allowance for loan losses to the gross loan
portfolio balance for income property loans at December 31, 1994 was in response
to the increase in non-accrual income property loans at December 31, 1994 from a
year earlier. The decrease in this ratio at December 31, 1993 was due to the
charge-off of approximately $1.3 million of two income property loans, both of
which had previously been specifically allocated for. The non-accrual income
property loans at December 31, 1994 consist primarily of loans which have been
reserved to their estimated fair values based on current appraisals.
NON-ACCRUAL LOANS. Non-accrual loans are loans on which the accrual of interest
has been discontinued. Northeast Savings' policy is to discontinue the accrual
of interest on loans and to reverse previously accrued interest when there is
reasonable doubt as to its collectibility. Interest accruals on loans are
normally discontinued and previously accrued interest is reversed whenever the
payment of interest or principal is more than ninety days past due, or earlier
when conditions warrant it. For example, although a loan may be current, the
Association discontinues accruing interest on that loan when foreclosure is
brought about by other owner defaults. When the interest accrual on a loan is
discontinued, any previously accrued interest is reversed. A non-accrual loan
may be restored to an accrual basis when principal and interest payments are
current and full payment of principal and interest is expected. For all of the
periods noted below, Northeast Savings had no loans more than ninety days past
due on which interest was still accruing. The total interest income that would
have been recorded for the year ended December 31, 1994 on non-accrual loans,
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 $2.3
million. The amount of interest income which was included in net income for the
year ended December 31, 1994 on those loans was $379,000. The following is a
table of non-accrual loans along with the percentage to total gross loans and
total assets as of the dates indicated.
December 31, March 31,
----------------------------- -------------------
1994 1993 1992 1992 1991
-------- -------- --------- --------- --------
(Dollars in Thousands)
Single-family residential real
estate loans............................... $27,259 $65,770 $87,949 $107,791 $82,854
Consumer loans................................ 902 1,315 1,741 1,931 1,872
Residential construction loans................ - - - - -
Income property loans......................... 1,170 377 5,299 2,372 12,089
------- ------- ------- -------- -------
$29,331 $67,462 $94,989 $112,094 $96,815
======= ======= ======= ======== =======
As a percentage of total gross loans. 3.00% 3.44% 4.06% 4.69% 3.71%
==== ==== ==== ==== ====
As a percentage of total assets............... .88% 1.72% 2.43% 2.93% 2.13%
=== ==== ==== ==== ====
23
The decrease in non-accrual loans as a percentage of total assets is due to the
sale of adjustable rate residential loans, $40.5 million of which were non-
accrual loans. The proceeds of this sale were used to purchase mortgage-backed
securities. The decreases in non-accrual loans at December 31, 1993 and 1992
from March 31, 1992 were primarily due to increased foreclosures of the
underlying collateral securing the loans. The high levels of non-accrual loans
as a percentage of total loans at December 31, 1993 and 1992 and March 31, 1992
was primarily a result of general economic conditions in the Association's
primary markets, particularly the recessions in New England and California. The
following table presents the Association's gross non-accrual loans by state at
the dates indicated.
December 31,
---------------------------------------------------------------------------------------------------
1994 1993
----------------------------------------------------- -------------------------------------------
Percent Percent of Percent Percent of
Non-accrual of loans in non-accrual Non-accrual of loans non-accrual
loans state loans loans in state loans
-------------------- ------------- -------------- --------------- ----------- ------------
(Dollars in Thousands)
New York....... $11,448 4.58% 39.03% $ 13,942 5.33% 20.67%
Connecticut.... 6,261 2.24 21.35 7,691 2.68 11.40
Massachusetts.. 4,601 2.72 15.69 2,647 1.48 3.92
California..... 2,645 4.61 9.02 35,970 3.90 53.32
New Jersey..... 2,354 14.26 8.02 3,789 6.62 5.62
New Hampshire.. - - - 95 1.27 .14
Other.......... 2,022 1.01 6.89 3,328 1.35 4.93
------- ------ -------- ------
Total.......... $29,331 3.00% 100.00% $ 67,462 3.44% 100.00%
======= ====== ======== ======
December 31, 1992 March 31, 1992
---------------------------------------------- -----------------------------------------
Percent Percent of Percent Percent of
Non-accrual of loans non-accrual Non-accrual of loans non-accrual
loans in state loans loans in state loans
------------- ---------- ------------- ------------- ---------- -------------
(Dollars in Thousands)
New York....... $16,975 5.88% 17.87% 20,344 6.19% 18.15%
Connecticut.... 10,227 3.36 10.77 13,906 4.44 12.41
Massachusetts.. 5,190 3.07 5.46 14,250 6.90 12.71
California..... 43,671 3.51 45.98 44,982 3.88 40.13
New Jersey..... 7,600 10.60 8.00 10,952 13.06 9.77
New Hampshire.. 5,086 35.68 5.35 287 1.89 .26
Other.......... 6,240 2.50 6.57 7,373 2.60 6.57
------- ------ -------- ------
Total........ $94,989 4.06% 100.00% $112,094 4.69% 100.00%
======= ====== ======== ======
24
The following table presents the Association's non-accrual loans by state and
property type at December 31, 1994:
Single-family
Residential Residential Income
Real Estate Consumer Construction Property Total
------------ -------- ------------ -------- -------
(In Thousands)
New York....... $ 10,864 $ 584 $ - $ - $ 11,448
Connecticut.... 5,898 96 - 267 6,261
Massachusetts.. 3,541 157 - 903 4,601
California..... 2,645 - - - 2,645
New Jersey..... 2,354 - - - 2,354
Other.......... 1,957 65 - - 2,022
------- ---- ----------- ------ -------
Total........ $ 27,259 $ 902 $ - $ 1,170 $ 29,331
======= ==== =========== ====== =======
The table which follows shows the loan-to-value ratios based on the original
appraisal and the current loan balance of the Association's single-family
residential non-accrual loans at the dates indicated.
December 31,
---------------------------------------
1994 1993 1992
---------------------------------------
(In Thousands)
Greater than $ 204 $ 377 $ 764
90%
85% - 90% 55 324 196
80% - 85% 108 84 201
75% - 80% 8,903 19,339 29,386
70% - 75% 3,228 15,239 11,238
65% - 70% 757 10,038 15,146
60% - 65% 3,610 5,599 5,933
under 60% 4,327 7,816 11,361
------- ------- -------
$ 21,192 $ 58,816 $ 74,225
======= ======= =======
The remaining $6.1 million, $7.0 million, and $13.7 million of single-family
residential non-accrual loans at December 31, 1994, 1993 and 1992, respectively,
was serviced by other servicers. As a result, the above information is not
available for these loans.
Loan-to-value ratios for income property non-accrual loans are based on current
appraisals and current loan balances. At December 31, 1994, 1993 and 1992, all
of the income property non-accrual loans were in the 85-90% category based on
the most current appraisal available at the indicated dates.
Non-accrual loans are discussed further in Item 7: Management's Discussion and
Analysis of the Results of Operations and Financial Condition.
25
DELINQUENT LOANS. While non-accrual loans are generally loans which are more
than ninety days past due, delinquent loans are all loans more than thirty days
past due, including non-accrual loans. The following table presents the
principal amount of the Association's delinquencies by loan types at the dates
indicated:
December 31, 1994 December 31, 1993
------------------------------------------------- ------------------------------------------------
30-59 60-89 90-days 30-59 60-89 90-days
days days and over Total days days and over Total
---------- ------------ ------------ ----------- ----------- ---------- ----------- ---------
(Dollars in Thousands)
Single-family residen-
tial real estate......... $ 15,968 $ 6,590 $ 27,259 $ 49,817 $ 30,497 $ 13,139 $ 65,770 $109,406
Consumer................... 347 103 902 1,352 438 82 1,315 1,835
Residential - - - - - - - -
construction.............
Income property............ 320 861 1,170 2,351 2,825 993 377 4,195
------- ------- ------- -------- ------- ------- -------- --------
Total................... $ 16,635 $ 7,554 $29,331 $ 53,520 $ 33,760 $ 14,214 $ 67,462 $115,436
======= ======= ======= ======== ======= ======= ======== ========
Percent of total gross
loan portfolio........... 1.70% 0.77% 3.00% 5.47% 1.72% .73% 3.44% 5.89%
======= ======= ======= ======== ======= ======= ======== ========
Percent of total
assets................... 0.50% 0.23% 0.88% 1.60% .86% .36% 1.72% 2.94%
======= ======= ======= ======== ======= ======= ======== ========
December 31, 1992 March 31, 1992
----------------------------------------------- --------------------------------------------
30-59 60-89 90 days 30-59 60-89 90 days
days days and over Total days days and over Total
----- ----- -------- ------- ----- ----- -------- --------
Single-family residen-
tial real estate......... $ 45,931 $ 15,658 $ 87,949 $ 149,538 $ 49,741 $ 15,451 $107,791 $172,983
Consumer................... 1,074 150 1,741 2,965 1,038 307 1,931 3,276
Residential
construction............. - - - - - - - -
Income property............ 7 932 5,299 6,238 36 6,739 2,372 9,147
------- ------- ------- -------- ------- ------- -------- --------
Total................... $ 47,012 $ 16,740 $ 94,989 $158,741 $ 50,815 $ 22,497 $112,094 $185,406
======= ======= ======= ======== ======= ======= ======== ========
Percent of total gross
loan portfolio........... 2.01% .71% 4.06% 6.78% 2.12% .94% 4.69% 7.75%
======= ======= ======= ======== ======= ======= ======== ========
Percent of total
assets................... 1.20% .43% 2.43% 4.06% 1.33% .59% 2.93% 4.85%
======= ======= ======= ======== ======= ======= ======== ========
The following table presents the principal amount of the Association's loan
delinquencies and delinquency ratios by state as of the dates indicated:
December 31, 1994 December 31, 1993
------------------------------------ -----------------------------------
Percent of Percent of
Delinquent Percent Total Delinquent Percent Total
Loans (Over of Loans Delinquent Loans (Over of Loans Delinquent
30 days) in State Loans 30 days) in State Loans
----------- ---------- ---------- ----------- -------- ----------
(Dollars in Thousands)
New York................... $ 15,762 6.30% 29.45% $ 17,637 6.75% 15.28%
Connecticut................ 12,762 4.57 23.85 11,831 4.12 10.25
Massachusetts.............. 6,894 4.07 12.88 5,624 3.15 4.87
California................. 3,116 5.43 5.82 59,883 6.50 51.88
New Jersey................. 2,762 16.73 5.16 5,371 9.39 4.65
New Hampshire.............. 87 1.32 .16 104 1.39 .09
Other*..................... 12,137 6.08 22.68 14,986 6.07 12.98
------- ------ ------- ------
Total..................... $ 53,520 5.47% 100.00% $115,436 5.89% 100.00%
======= ====== ======= ======
December 31, 1992
-------------------------------------
Percent of Percent of
Delinquent Total
Loans (Over Loans Delinquent
30 days) in State Loans
------------ ---------- -----------
(Dollars in Thousands)
New York................... $ 22,684 7.85% 14.29%
Connecticut................ 15,834 5.19 9.97
Massachusetts. 9,753 5.77 6.14
California................. 72,547 5.83 45.70
New Jersey................. 9,187 12.81 5.79
New Hampshire.............. 5,185 36.81 3.27
Other*..................... 23,551 9.42 14.84
------- ------
Total..................... $158,741 6.78% 100.00%
======= ======
* State-by-state information is not available for certain purchased loans
serviced by others which were 30-59 days delinquent at the dates indicated.
These loans, which are included in "other" loans, totaled $7.8 million, $9.4
million, and $11.7 million at December 31, 1994, 1993 and 1992, respectively.
26
Delinquent loans in New Jersey have decreased at December 31, 1994 from December
31, 1993, however, the ratio of delinquencies to the loans in New Jersey has
increased due to the sale of $40.7 million or 71.1% of the loans in that state
during 1994.
REAL ESTATE AND OTHER ASSETS ACQUIRED IN SETTLEMENT OF LOANS. REO results when
property collateralizing a loan is foreclosed upon or otherwise acquired in
satisfaction of the loan. REO is recorded by the Association at the lower of
the recorded investment in the loan or fair value less estimated costs to sell.
When a borrower fails to make required payments on a loan and does not cure the
delinquency promptly, the Association takes the steps required under applicable
law to foreclose upon the property collateralizing the loan. If a delinquency
is not cured, the property is generally acquired by the Association in a
foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable
period of redemption by the borrower (which varies from state to state and by
method of foreclosure pursued) has expired, the Association is free to sell the
property.
The remedies available to lenders when a residential mortgage borrower is in
default vary from state to state. Certain states have antideficiency and
homeowner provisions which limit the Association's ability to foreclose upon, or
otherwise obtain ownership of, the property collateralizing the loan and which
prevent the Association from recovering from the borrower any deficiency
realized from the sale of such property. In these states the Association
generally has an option to sue on the note in lieu of a judicial foreclosure.
The activity in the Association's REO is presented in the following table:
For the Nine
For the Years Ended Months Ended For the years Ended
December 31, December 31, March 31,
--------------------------------------- -------------------------------
1994 1993 1992 1992 1991
--------------------------------------- ----------- -------------- ---------------
(In Thousands)
Beginning balance.......... $ 74,962 $ 99,376 $ 61,208 $ 22,123 $ 4,879
Foreclosures, net.......... 12,075 61,228 66,377 58,259 21,726
Capitalized expenses....... 1,389 2,226 1,333 998 312
Less:
Sales.................... (63,896) * (77,120) ** (22,448) (16,726) (5,933)
Valuation adjustments.... (9,581) (10,082) (3,823) - -
Mortgage insurance
receipts................ (303) (558) (806) (1,165) (1,082)
Other.................... (1,454) (108) (2,465) (2,281) 2,221
-------- -------- -------- -------- -------
Ending balance............. $ 13,192 $ 74,962 $ 99,376 $ 61,208 $22,123
======== ======== ======== ======== =======
* During the quarter ended June 30, 1994, $27.2 million of REO was sold in a
series of three transactions. The total loss on the sale was $6.5 million.
Excluding this sale, sales of REO in the normal course of business for the
year ended December 31, 1994 totaled $43.2 million.
** 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. Excluding
this sale, sales of REO in the normal course of business for the year ended
December 31, 1993 totaled $52.8 million.
27
The following table presents Northeast Savings' REO by property type at the
dates indicated.
December 31, March 31,
--------------------------------- ------------------
1994 1993 1992 1992 1991
-------- -------- -------- -------- --------
(Dollars In Thousands)
Single-family residential.................... $11,196 $57,165 $83,605 $42,055 $11,484
Hotels....................................... - 6,453 6,408 7,990 7,904
Apartment buildings.......................... - 5,270 4,464 4,273 -
Office, retail, industrial complexes; land. 1,376 3,357 2,499 2,789 270
Real estate brokerage operations............. - 1,744 1,544 2,812 2,465
Residential subdivisions..................... 620 973 856 1,289 -
------- ------- ------- ------- -------
REO, net................................... $13,192 $74,962 $99,376 $61,208 $22,123
======= ======= ======= ======= =======
Percent of total assets...................... 0.39% 1.91% 2.54% 1.60% .49%
======= ======= ======= ======= =======
The following table shows the detail of Northeast Savings' REO by state:
December 31, March 31,
------------------------- ----------------
1994 1993 1992 1992 1991
------- ------- ------- ------- -------
(In Thousands)
California...... $ 5,607 $47,970 $63,836 $23,992 $ 2,977
Connecticut..... 2,473 10,650 14,820 21,817 8,290
New York........ 2,257 2,992 3,701 619 121
Massachusetts... 1,474 4,111 7,847 5,202 883
New Jersey...... 1,199 2,302 2,500 1,232 1,348
South Carolina.. - 5,223 5,233 5,290 5,500
Texas........... - 129 198 532 477
Arizona......... - 52 - 117 613
Georgia......... - - 528 926 574
Other........... 182 1,533 713 1,481 1,340
------- ------- ------- ------- -------
REO, net...... $13,192 $74,962 $99,376 $61,208 $22,123
======= ======= ======= ======= =======
The following table details the Association's REO by state and property type at
December 31, 1994:
California New York Connecticut New Jersey Massachusetts Other Total
---------- -------- ----------- ---------- ------------- --------- -------
(In Thousands)
Single-family
residential............. $ 5,607 $ 2,257 $1 ,458 $ 1,199 $ 548 $ 127 $ 11,196
Income property:
Office, retail, indus-
trial complexes; land. - - 450 - 926 - 1,376
Residential
subdivisions.......... - - 565 - - 55 620
------ ------ ------ ------ ------ ----- -------
Total............... $ 5,607 $ 2,257 $ 2,473 $ 1,199 $ 1,474 $ 182 $ 13,192
====== ====== ====== ====== ====== ===== =======
The $61.8 million decrease in REO at December 31, 1994 from a year earlier was
due primarily to the sale of $43.2 million of REO in the normal course of
business including $15.1 million of income property REO consisting of two
hotels, two apartment buildings, an industrial complex, and the real estate
brokerage operations. Of the $8.0 million of properties in the portfolio for
longer than one year, $1.9 million are income property REO and $3.3 million are
residential REO secured by properties in California. The
28
remaining properties are residential REO located within the Association's
primary market areas. The table below presents the aging of foreclosed
properties at the dates indicated:
December 31, March 31,
--------------------------- ------------------
1994 1993 1992 1992 1991
-------- -------- ------- -------- ---------
(In Thousands)
From 0 to 90 days................. $ 2,618 $15,313 $20,156 $23,710 $14,020
From 91 to 180 days............... 975 11,745 25,557 11,678 3,082
From 181 to 270 days.............. 1,258 7,585 17,158 4,689 1,578
From 271 to 365 days.............. 301 7,715 10,508 6,316 166
From 1 to 1 1/2 years............. 2,679 11,087 11,894 11,835 637
From 1 1/2 years to 2 years....... 2,390 4,338 5,416 168 175
Over 2 years...................... 2,971 15,435 7,143 - -
------- ------- ------- ------- -------
Sub-total....................... 13,192 73,218 97,832 58,396 19,658
Real estate brokerage operations.. - 1,744 1,544 2,812 2,465
------- ------- ------- ------- -------
Total........................... $13,192 $74,962 $99,376 $61,208 $22,123
======= ======= ======= ======= =======
During the year ended December 31, 1994, 133 REO properties with a book value of
$43.2 million were disposed of in the normal course of business and net gains of
$82,000 were recorded on these sales. Also, REO properties with a book value of
$27.2 million were sold in a series of three transactions with a total loss of
$6.5 million. Additional discussion of REO may be found in Item 7:
Management's Discussion and Analysis of the Results of Operations and Financial
Condition.
INVESTMENT ACTIVITIES
Northeast Savings engages in investment activities for both investment and
liquidity purposes. Northeast Savings maintains an investment securities
portfolio, which consists primarily of U.S. government and agency securities,
corporate obligations, bank and finance securities, asset-backed securities,
collateralized mortgage obligations, Federal Home Loan Bank stock, and
marketable equity securities. Other short-term investments held by Northeast
Savings from time-to-time include interest-bearing deposits and federal funds
sold. Northeast Savings also maintains a mortgage-backed securities portfolio
consisting of securities issued and guaranteed by GNMA, FHLMC, and FNMA in
addition to publicly traded and rated mortgage-backed securities issued by
private financial intermediaries.
U.S. government and agency securities, corporate obligations, bank and finance
securities, collateralized mortgage obligations, and mortgage-backed securities,
which the Association has the intent and ability to hold until maturity, are
classified as held-to-maturity and are carried at amortized cost; however, those
securities which have been identified as assets which will be sold prior to
maturity or assets for which there is not a positive intent to hold to maturity
are classified as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from earnings and, reflecting the adoption
of Statement of Financial Accounting Standards (SFAS) 115, "Accounting for
Certain Investments in Debt and Equity Securities," reported as a separate
component of stockholders' equity. In addition, when management determines that
a security has been impaired by a loss which is other than temporary, the
Association writes the security down in accordance with its accounting policies
as outlined in Note 1 to the Consolidated Financial Statements and ceases to
accrue interest on it. At December 31, 1994, the Association had no investments
which were deemed to have been impaired by a loss which is other than temporary.
Northeast Savings is required by federal regulations to maintain a specified
minimum amount of liquid assets which must be invested in certain securities.
Management maintains liquidity at a level to assure adequate funds, taking into
account anticipated cash flows and available sources of credit, and to afford
future flexibility to meet deposit withdrawal requests and loan commitments.
Northeast Savings' liquidity portfolio is carried in the available-for-sale
portfolio at fair value. As required by federal regulations, Northeast Savings
maintains its liquidity ratio above 5%, and its short term liquid asset ratio
above 1% of net withdrawable deposits and borrowings payable in one year or
less. For the year ended December 31, 1994, Northeast Savings' liquidity ratio
averaged 5.78%, compared to 5.67% for the year ended December
29
31, 1993 and 9.88% for the nine months ended December 31, 1992. For the same
respective periods, the Association's short term liquid asset ratio averaged
3.01%, 2.34%, and 5.00%.
The following tables reflect the carrying value of the Association's investment
securities and the weighted average yield based on the amortized cost for each
category at the dates indicated. Both the amortized cost and the fair value of
these securities may be found in Note 5 to the Consolidated Financial
Statements.
December 31, March 31,
---------------------------------------------------------- --------------------
1994 1993 1992 1992 1991
-------------------- -------------------- -------- -------- --------
Carrying Amortized Carrying Amortized
Value Cost Value Cost
-------- --------- -------- ---------
(In Thousands)
U.S. Government and agency
obligations:
Fixed............................ $ - $ - $ - $ - $ - $ 322 $ 337
Available-for-sale............... - - - - 9,982 - -
Obligations of states and political
subdivisions..................... 398 398 432 432 466 491 525
Corporate securities:
Fixed............................ 3,703 3,703 4,254 4,254 13,566 16,538 21,933
Available-for-sale............... - - 62 60 120 - -
Bank and finance securities:
Fixed............................ - - - - - 497 493
Variable......................... - - - - 14,479 14,476 23,361
Available-for-sale............... - - - - - - 4,967
Asset-backed securities:
Available-for-sale............... 15,393 15,443 38,199 38,299 26,637 - -
High-yield corporate securities:
Available-for-sale............... - - - - - - 1,300
Collateralized mortgage obligations:
Fixed............................ 165,167 165,167 4,784 4,784 9,526 73,105 30,415
Variable......................... 821 821 1,319 1,319 2,156 2,815 3,232
Residual......................... - - - - - - 65,810
Available-for-sale............... 70,759 73,640 66,883 66,915 93,160 42,770 86,317
Federal Home Loan Bank stock....... 32,287 32,287 31,800 31,800 32,354 40,637 42,115
Marketable equity securities:
Equity investments............... - - - - 39,244 38,225 36,777
Available-for-sale............... 56,583 49,717 57,733 42,125 - - 23
-------- -------- -------- -------- -------- -------- --------
Total investment securities........ $345,111 $341,176 $205,466 $189,988 $241,690 $229,876 $317,605
======== ======== ======== ======== ======== ======== ========
30
Weighted Average Yield
-----------------------------------------------------------------
December 31, March 31,
-------------------------------------- -----------------------
1994 1993 1992 1992 1991
---------- ------------ --------- -----------------------
U.S. Government and agency
obligations:
Fixed............................ - % - % - % 7.52% 7.52%
Available-for-sale............... - - 3.35 - -
Obligations of states and political
subdivisions..................... 7.43 7.43 7.43 7.42 7.42
Corporate securities:
Fixed............................ 6.83 6.82 7.17 7.31 6.20
Available-for-sale............... - 9.88 9.88 - -
Bank and finance securities:
Fixed............................ - - - 8.48 8.48
Variable......................... - - 5.28 5.28 7.28
Available-for-sale............... - - - - 7.27
Asset-backed securities:
Available-for-sale............... 6.69 4.14 4.28 - -
High-yield corporate securities:
Available-for-sale............... - - - - 13.05
Collateralized mortgage obligations:
Fixed............................ 6.55 10.28 10.28 7.09 10.22
Variable......................... 5.50 5.18 5.89 7.29 9.31
Residual......................... - - - - 6.29
Available-for-sale............... 5.73 5.42 6.16 7.47 8.65
Federal Home Loan Bank stock......... 7.50 7.00 7.00 8.20 10.77
Marketable equity securities......... 2.19 3.37 6.00 6.00 6.00
Total investment securities.......... 5.84% 5.13% 6.09% 7.08% 8.01%
The following table shows the maturity distribution of the amortized cost and
the weighted average yields based on amortized cost of Northeast Savings'
investment securities at December 31, 1994. The carrying value of these
securities may be found in a previous table. Changes in interest rates will
affect the actual maturity.
Maturity Distribution
-----------------------------------------------------------------------------------------
Within Over One to Over Five to
One Year Five Years Ten Years Over Ten Years Total
--------------- --------------- --------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Obligations of states and
political subdivisions......... $ - - % $ - - % $ 19 6.00% $ 379 7.50% $ 398 7.43%
Corporate securities:
Fixed.......................... - - 2,205 6.87 - - 1,498 6.76 3,703 6.83
Asset-backed securities:
Available-for-sale............. 753 4.22 14,690 6.82 - - - - 15,443 6.69
Collateralized mortgage obligations:
Fixed.......................... - - - - - - 165,167 6.55 165,167 6.55
Variable....................... - - - - - - 821 5.50 821 5.50
Available-for-sale............. - - 73,640 5.73 - - - - 73,640 5.73
Federal Home Loan Bank stock..... - - - - - - 32,287 7.50 32,287 7.50
Marketable equity securities:
Available-for-sale............. - - 49,573 2.19 - - 144 - 49,717 2.19
------- ------- ------- ------- -------
Total investment securities...... $ 753 4.22% $140,108 4.61% $ 19 6.00% $200,296 6.70% $341,176 5.84%
======= ======= ======= ======= =======
31
The following table details the Standard and Poor's ratings for each major
category of the Association's investments at December 31, 1994:
A1+ AAA AA A BBB Not Rated Total
------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Obligations of states and $ - $ - $ - $ - $ - $ 398** $ 398
political subdivisions.........
Corporate securities:
Fixed........................ - 499 499 1,502 1,203 - 3,703
Asset-backed securities:
Available-for-sale........... 390 15,003 - - - - 15,393
Collateralized mortgage
obligations:
Fixed........................ - 165,167* - - - - 165,167
Variable..................... - 821 - - - - 821
Available-for-sale........... - 70,759 - - - - 70,759
Federal Home Loan Bank stock..... - - - - - 32,287 32,287
Marketable equity securities:
Available-for-sale........... - - - - - 56,583 56,583
----------- ------- -------- --------- --------- -------- --------
Total investment securities. $ 390 $252,249 $ 499 $ 1,502 $ 1,203 $ 89,268 $ 345,111
=========== ======= ======== ========= ========= ======== ========
Percent of portfolio......... .11% 73.09% .14% .44% .35% 25.87% 100.00%
=========== ======= ========= ========= ========= ======== ========
* Of this amount, $19.5 million has been translated from Moody's rating of Aaa.
** All obligations of states and political subdivisions are current.
32
The carrying value of the Association's mortgage-backed securities and the
weighted average yield based on amortized cost for each category at the dates
indicated is detailed in the following tables. Both the amortized cost and the
fair value of these mortgage-backed securities may be found in Note 6 and Note
20 to the Consolidated Financial Statements.
December 31, March 31,
--------------------------------------------------------------- ------------------------
1994 1993 1992 1992 1991
---------------------- --------------------- ---------- ---------- ----------
Carrying Amortized Carrying Amortized
Value Cost Value Cost
--------- --------- -------- ---------
(In Thousands)
GNMA:
Fixed..................... $ - $ - $ - $ - $ 81 $ 14,762 $ 47,305
Adjustable................ 29,880 29,880 33,583 33,583 19,589 - -
Available-for-sale........ 7,119 7,317 10,565 9,855 12,732 - 29,070
FHLMC:
Fixed..................... 253,293 253,293 3,184 3,184 5,810 82,203 138,080
Adjustable................ 241,109 241,109 171,675 171,675 135,195 13,639 -
Available-for-sale........ 1,329 1,320 2,321 2,197 42,742 - 277,987
FNMA:
Fixed..................... 174,941 174,941 29,650 29,650 23,330 54,058 120,397
Adjustable................ 210,439 210,439 142,904 142,904 157,492 154,689 197,811
Available-for-sale........ 12,910 13,400 - - - - 41,722
Private issuers:
Fixed..................... 4,957 4,957 8,323 8,323 14,957 24,828 32,215
Adjustable................ 843,560 843,560 941,567 941,567 473,318 336,573 447,971
Available-for-sale........ - - - - - - 38,109
--------- --------- --------- --------- --------- -------- ---------
Total mortgage-backed
securities................ $1,779,537 $1,780,216 $1,343,772 $1,342,938 $ 885,246 $ 680,752 $1,370,667
========= ========= ========= ========= ========= ======== =========
Weighted Average Yield
------------------------------------------------------------------
December 31, March 31,
-------------------------------------- ------------------------
1994 1993 1992 1992 1991
---------- ---------- ---------- ---------- ----------
GNMA:
Fixed....................... - % - % 12.39% 9.74% 8.41%
Adjustable.................. 6.00 5.59 5.93 - -
Available-for-sale.......... 9.22 9.46 9.59 - 8.14
FHLMC:
Fixed....................... 6.49 9.20 9.20 7.93 8.17
Adjustable.................. 5.92 4.98 5.01 7.91 -
Available-for-sale.......... 8.25 8.02 8.20 - 9.09
FNMA:
Fixed....................... 6.85 7.98 9.66 10.41 9.68
Adjustable.................. 6.03 6.01 6.89 8.24 9.19
Available-for-sale.......... 6.82 - - - 8.80
Private issuers:
Fixed....................... 9.57 9.55 9.52 9.53 9.53
Adjustable.................. 6.20 5.05 5.87 7.84 9.55
Available-for-sale.......... - - - - 8.83
Total mortgage-backed
securities.................. 6.27% 5.30% 6.27% 8.25% 9.17%
33
The following table shows the maturity distribution of the amortized cost and
the weighted average yields of Northeast Savings' mortgage-backed securities at
December 31, 1994. The carrying value of these mortgage-backed securities may
be found in a previous table. Changes in interest rates will affect the actual
maturity.
Maturity Distribution
--------------------------------------------------------------------------------------------
Within Over One to Over Five to
One Year Five Years Ten Years Over Ten Years Total
--------------- --------------- --------------- ---------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------- ----- -----------------
(Dollars in Thousands)
GNMA:
Adjustable............ $ - - % $ - - % $ - - % $ 29,880 6.00% $ 29,880 6.00%
Available-for-sale.... 43 11.25 292 8.85 2,756 6.63 4,226 10.92 7,317 9.22
FHLMC:
Fixed................. - - 94 9.07 6,591 7.97 246,609 6.45 253,294 6.49
Adjustable............ - - - - - - 241,109 5.92 241,109 5.92
Available-for-sale.... - - 434 5.62 263 6.70 623 10.74 1,320 8.25
FNMA:
Fixed................. - - - - 19,138 7.94 155,803 6.71 174,941 6.85
Adjustable............ - - - - - - 210,439 6.03 210,439 6.03
Available-for-sale.... - - 13,400 6.82 - - - - 13,400 6.82
Private issuers:
Fixed................. - - - - 3,862 9.34 1,094 10.41 4,956 9.57
Adjustable............ - - - - - - 843,560 6.20 843,560 6.20
----- ------ ------ --------- ---------
Total mortgage-backed
securities............ $ 43 11.25% $14,220 6.84% $32,610 7.99% $1,733,343 6.23% $1,780,216 6.27%
===== ====== ====== ========= =========
The following table details the Standard and Poor's ratings for each major
category of the Association's mortgage-backed securities at December 31, 1994:
AAA AA A Total
------------- --------- --------- ----------
(Dollars in Thousands)
GNMA:
Adjustable................................. $ 29,880 $ - $ - $ 29,880
Available-for-sale......................... 7,119 - - 7,119
FHLMC:
Fixed...................................... 253,293 - - 253,293
Adjustable................................. 241,109 - - 241,109
Available-for-sale......................... 1,329 - - 1,329
FNMA:
Fixed...................................... 174,941 - - 174,941
Adjustable................................. 210,439 - - 210,439
Available-for-sale......................... 12,910 - - 12,910
Private Issuers:
Fixed...................................... - 3,862 1,095 4,957
Adjustable................................. 338,007* 505,553* - 843,560
--------- ------- ----- ---------
$1,269,027 $ 509,415 $1,095 $1,779,537
Total mortgage-backed securities............. ========= ======== ===== =========
71.31% 28.63% .06% 100.00%
Percent of portfolio......................... ========== ======== ===== ======
* Of these amounts, $253.6 million of AAA-rated securities have been translated
from Moody's rating of Aaa, and $300.1 million of AA-rated securities have
been translated from Moody's ratings of Aa1, Aa2, and Aa3.
34
SOURCES OF FUNDS
DEPOSITS. The principal source of funds for the Association is retail customer
deposits. Northeast Savings offers a variety of deposit products ranging from
transaction accounts to certificate and retirement accounts with maturities from
30 days to seven years. Northeast Savings' deposits come primarily from its
three-state branch system area. To a lesser extent, wholesale funding sources,
including brokered deposits, are available to the Association. There were no
brokered deposits at December 31, 1994 and less than 1% of Northeast Savings'
total deposits at December 31, 1993 and 1992 represented brokered deposits.
Brokered deposits totaled $25.1 million at both December 31, 1993 and 1992. As
a result of the aforementioned branch sales during 1994, Northeast Savings was
71.2% funded by retail deposits at December 31, 1994, compared to 81.0% and
87.5% at December 31, 1993 and 1992, respectively. The decrease in retail
deposits during 1993 was offset with increased wholesale borrowings in order to
maintain the asset size of the Association at target levels.
Northeast Savings' other income from deposit accounts consists primarily of
monthly service charges, charges for insufficient or uncollected funds, stop
payment fees, check printing charges, retirement account fees, and automated
teller machine transaction fees. Fees from deposit accounts totaled $4.1
million for the year ended December 31, 1994, compared to $4.9 million and $3.9
million for the year ended December 31, 1993 and the nine months ended December
31, 1992, respectively.
35
The following table sets forth information relating to the
Association's deposit flows for each of the periods indicated:
Nine Months
Ended
Years Ended December 31, December 31,
-------------------------- -------------
1994 1993 1992
------------ ------------ -------------
(In Thousands)
Total deposits at the beginning of the period.... $2,977,217 $3,230,789 $3,488,047
Interest credited................................ 101,059 119,925 124,783
Deposits purchased............................... - - 314,668
Deposits sold.................................... (511,962) - -
Net retail deposit decrease...................... (145,239) (379,798) (682,150)
Net increase (decrease) in certificates greater
than $100,000.................................. (2,856) 6,301 (13,986)
Net brokered deposit decrease.................... (25,135) - (573)
---------- ---------- ----------
Total deposits at the end of the period........ $2,393,084 $2,977,217 $3,230,789
========== ========== ==========
The decrease in total deposits during 1994 is mainly due to the sale of
deposits when the Company refocused its franchise through the sale of
fifteen branch offices. These sales were consistent with Northeast
Savings' intention to concentrate on the four primary markets in which
it has its greatest presence and potential for growth: the capital
region of New York State; Hartford, Connecticut; and Springfield and
Worcester, Massachusetts.
The following tables, which include both retail customer deposits and
brokered deposits, set forth the amounts of deposits in the various
types of accounts offered by Northeast Savings, the amounts of those
deposits as a percentage of total deposits, and the weighted average
interest rates at the dates indicated, as well as the contractual
maturities of deposits at December 31, 1994:
December 31, March 31,
--------------------------------------------------------------------------------------------------
1994 1993 1992 1992* 1991*
---------------- ---------------- ---------------- ----------------- -----------------
(Dollars In Thousands)
Demand deposits......... $ 28,407 1.20% $ 35,865 1.21% $ 35,644 1.10% $ 30,709 .88% $ 30,105 .88%
NOW accounts............ 115,930 4.84 145,655 4.89 160,821 4.98 151,536 4.34 142,635 4.19
Super NOWs.............. 40,074 1.67 51,040 1.71 53,758 1.66 51,041 1.46 41,746 1.23
Regular savings......... 353,012 14.75 583,209 19.59 695,674 21.54 566,181 16.23 330,659 9.71
Money market savings.... 275,489 11.51 401,135 13.47 443,692 13.73 409,190 11.73 404,013 11.86
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total non-certifi-
cate accounts..... 812,912 33.97 1,216,904 40.87 1,389,589 43.01 1,208,657 34.64 949,158 27.87
Certificates maturing
in the year ending
December 31:
1992.................. - - - - - - - - 1,870,961 54.92
1993.................. - - - - 1,034,621 32.02 1,585,847 45.47 352,138 10.34
1994.................. - - 1,218,031 40.91 502,882 15.57 389,199 11.16 121,721 3.57
1995.................. 1,012,378 42.30 193,092 6.49 51,531 1.59 139,712 4.01 78,805 2.31
1996.................. 265,987 11.11 46,249 1.55 28,990 .90 33,378 .96 32,566 .96
1997.................. 67,300 2.81 56,834 1.91 57,683 1.79 18,418 .53 1,123 .03
1998.................. 42,496 1.78 51,438 1.73 24,840 .77 289 .01 - -
Thereafter............ 192,011 8.03 194,669 6.54 140,653 4.35 112,547 3.22 - -
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total certificates.. 1,580,172 66.03 1,760,313 59.13 1,841,200 56.99 2,279,390 65.36 2,457,314 72.13
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total deposits.......... $2,393,084 100.00% $2,977,217 100.00% $3,230,789 100.00% $3,488,047 100.00% $3,406,472 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
* Certificates mature in the applicable year ending March 31, rather than
December 31.
36
Weighted Average Interest Rate
---------------------------------------------------------
December 31, March 31,
-------------------------------- ---------------------
1994 1993 1992 1991* 1990*
-------- -------- -------- -------- ---------
Demand deposits............... - % - % - % - % - %
NOW accounts.................. 1.25 1.22 2.00 2.53 5.00
Super NOWs.................... 1.49 1.47 2.00 3.41 5.14
Regular savings............... 2.33 2.20 2.74 4.29 5.47
Money market savings.......... 3.02 2.67 3.09 4.34 5.99
Total non-certificate
accounts................ 2.29 2.14 2.67 3.94 5.43
Certificates maturing in the
year ending December 31:
1992........................ - - - - 7.83
1993........................ - - 4.70 6.00 8.31
1994........................ - 4.37 5.94 6.57 8.66
1995........................ 5.11 5.00 7.21 8.12 9.28
1996........................ 5.76 5.85 6.84 8.12 8.12
1997........................ 5.57 5.80 5.80 6.52 9.53
1998........................ 6.10 6.10 7.08 8.17 -
Thereafter.................. 6.61 6.85 7.18 7.33 -
Total certificates........ 5.45 4.85 5.40 6.33 7.99
Total deposits................ 4.37% 3.74% 4.22% 5.50% 7.28%
* Certificates mature in the applicable year ending March 31, rather than
December 31.
The following table, which includes both retail customer and brokered
certificates of deposit, provides information by interest rate ranges at each of
the dates indicated:
December 31, March 31,
---------------------------------- ----------------------
1994 1993 1992 1992 1991
---------- ---------- ---------- ---------- ----------
(In Thousands)
Less than 3.01%....... $ 74,424 $ 212,838 $ 106,536 $ 100 $ -
3.01-4.00%............ 225,669 514,545 434,750 90,299 -
4.01-5.00%............ 499,568 352,702 370,493 354,696 -
5.01-6.00%............ 251,089 265,552 320,446 760,301 273
6.01-7.00%............ 132,490 194,731 250,472 400,896 362,823
7.01-8.00%............ 365,996 87,883 115,000 188,612 810,711
8.01-9.00%............ 28,094 77,988 189,255 389,804 1,188,310
9.01-10.00%........... 1,148 41,805 41,323 77,658 74,632
Greater than 10.00%... 1,694 12,269 12,925 17,024 20,565
---------- ---------- ---------- ---------- ----------
Total certificates.. $1,580,172 $1,760,313 $1,841,200 $2,279,390 $2,457,314
========== ========== ========== ========== ==========
The following table sets forth the weighted average interest rates and amount of
deposits by original term for certificate accounts at December 31, 1994:
Original Term Weighted Average Rate Amount
------------- ---------------------- ----------
(Dollars in Thousands)
Less than 3 months............ 2.92% $ 6,277
3 months to 6 months.......... 3.56 126,652
7 months to 12 months......... 4.69 344,583
13 months to 24 months........ 5.65 682,479
25 months to 36 months........ 4.95 82,505
37 months to 48 months........ 5.12 3,694
49 months to 60 months........ 6.52 145,226
Over 60 months................ 6.75 188,756
---------
Total certificate accounts.. 5.45% $1,580,172
=========
37
At December 31, 1994, deposits had the following remaining contractual
maturities:
Over 3 Over 6 Over 12 Over 24
Months Months Months Months
Within to 6 to 12 to 24 to 36 Over 36
3 Months Months Months Months Months Months Total
---------- -------- -------- -------- -------- ------- ------------
(In Thousands)
Demand deposits............ $ 28,407 $ - $ - $ - $ - $ - $ 28,407
NOW accounts............... 115,930 - - - - - 115,930
Super NOWs................. 40,074 - - - - - 40,074
Regular savings............ 353,012 - - - - - 353,012
Money market savings....... 275,489 - - - - - 275,489
--------- ------- ------- ------- ------- ------- ---------
Total non-certificate
accounts............. $ 812,912 $ - $ - $ - $ - $ - $ 812,912
========= ======= ======= ======= ======= ======= =========
Certificates:
Less than 3.01%......... $ 59,968 $ 13,071 $ 1,380 $ 5 $ - $ - $ 74,424
3.01-4.00%.............. 58,249 70,964 62,856 27,797 5,637 166 225,669
4.01-5.00%.............. 1,176 57,716 364,390 48,156 7,280 20,850 499,568
5.01-6.00%.............. 2,490 2,747 46,822 89,287 47,308 62,435 251,089
6.01-7.00%.............. 63 12,836 55 10,749 6,805 101,982 132,490
7.01-8.00%.............. 24,671 26,133 178,679 89,682 61 46,770 365,996
8.01-9.00%.............. 8,613 10,751 6,832 233 45 1,620 28,094
9.01-10.00%............. - 245 332 53 164 354 1,148
Greater than 10.00%..... 792 540 7 25 - 330 1,694
--------- ------- ------- ------- ------- ------- ---------
Total certificates..... $ 156,022 $195,003 $661,353 $265,987 $ 67,300 $234,507 $1,580,172
========= ======= ======= ======= ======= ======= =========
While non-certificate accounts have no contractual maturities, they are reported
in the above table as though they mature within three months. Certificates of
deposit included above, which are equal to or in excess of $100,000, had the
following remaining contractual maturities at December 31, 1994:
Over 3 Over 6 Over 12 Over 24
Months Months Months Months
Within to 6 to 12 to 24 to 36 Over 36
3 Months Months Months Months Months Months Total
---------- -------- -------- -------- -------- ------- ------------
(In Thousands)
Less than 3.01%......... $18,522 $ 788 $ - $ - $ - $ - $ 19,310
3.01-4.00%.............. 4,905 2,297 2,920 1,389 344 152 12,007
4.01-5.00%.............. 500 2,613 16,869 3,317 264 1,116 24,679
5.01-6.00%.............. 236 410 3,185 3,682 3,336 4,264 15,113
6.01-7.00%.............. - 324 - 1,028 819 8,617 10,788
7.01-8.00%.............. 1,294 1,603 13,264 5,631 - 5,880 27,672
8.01-9.00%.............. 324 652 448 - - 324 1,748
9.01-10.00%............. - 110 109 - - - 219
Greater than 10.00%..... 200 - - - - - 200
------ ------ ------ ------ ------ ------ -------
Total.................. $25,981 $ 8,797 $36,795 $15,047 $ 4,763 $20,353 $111,736
====== ====== ====== ====== ====== ====== =======
The following table sets forth certain information relating to the Association's
concentration of deposits by state in which the Association's branches are
located:
December 31,
--------------------------------------------
1994 1993 1994 1993
---------- ---------- -------- --------
Total Deposits Number of Offices
---------------------- ------------------
(Dollars in Thousands)
New York.................... $1,333,755 $1,407,817 16 17
Massachusetts............... 571,180 876,180 9 16
Connecticut................. 488,149 484,909 8 8
Rhode Island................ - 148,134 - 6
California.................. - 60,177 - 4
--------- --------- -- --
$2,393,084 $2,977,217 33 51
========= ========= == ==
38
BORROWINGS. Northeast Savings' borrowing sources consist primarily of Federal
Home Loan Bank (FHLB) advances and securities sold under agreements to
repurchase. The Association borrows funds from the FHLB from time to time,
pledging certain of its mortgage loans as collateral. Such borrowings may be
obtained pursuant to several different credit programs, and each credit program
has its own rate and range of maturities up to a maximum of twenty years.
Prepayment fees are charged on fixed rate advances if paid prior to maturity.
The FHLB is required to review its credit programs at least once every six
months and such programs are subject to change. The Federal Housing Finance
Board (FHFB) also has established standards for community investment or service
for members of FHLBs to maintain continued access to long-term advances. Each
member institution must submit to its FHLB a community support statement
evidencing assistance to first-time homebuyers such as special credit programs
or participation in governmental homeownership programs and any additional
evidence of community support. A member institution's access to long term
advances could be restricted if it fails to comply with the FHFB community
support requirements. In addition, the FHLB of Boston limits additional
advances to a member institution that is approaching insolvency on a tangible
capital basis to certain short term advances. The FHLB of Boston also may
determine not to extend new credit to a member institution that is insolvent on
a regulatory capital basis. For further information, see Note 12 of the Notes
to the Consolidated Financial Statements.
Northeast Savings also enters into repurchase agreements whereby it sells
marketable mortgage-backed securities with a simultaneous commitment to
repurchase the same securities at a specified price at a specified later date.
Securities sold under agreements to repurchase are subject to risks relating to
the financial strength of the counterparty to the transaction, the nature of the
lien against the securities subject to the transaction, and the disparity
between the book value of the securities sold and the amount of funds obtained.
In order to reduce these risks, the Association deals only with national
investment banking firms which are primary dealers in United States government
securities. For further information, see Note 12 of the Notes to the
Consolidated Financial Statements.
In addition, at December 31, 1994, the Company had outstanding $42.2 million of
9% Uncertificated Debentures, Due in 2012. These debentures were issued in May
1992 to the receivers of four failed Rhode Island financial institutions and the
FRF in connection with the aforementioned acquisition of four Rhode Island
financial institutions and the repurchase of the Company's adjustable rate
preferred stock. For further information on the issuance and terms of the
debentures, see Note 12 of the Notes to the Consolidated Financial Statements.
39
Selected information relating to borrowings for the dates and periods
indicated is as follows:
For the Years For the Nine Months For the Years
Ended December 31, Ended December 31, Ended March 31,
--------------------- ----------------------
1994 1993 1992 1992 1991
---------- --------- -------------------- --------- -----------
(Dollars in Thousands)
Federal Home Loan Bank advances:
Balance at the end of the period.......... $ 203,527 $ 373,000 $ 140,000 $ 43,239 $495,177
Average balance during the period......... 235,350 351,267 54,242 169,079 498,801
Maximum month-end balance................. 361,288 409,500 140,000 370,183 820,172
Weighted average rate during the period... 4.67% 3.77% 7.48% 7.44% 8.00%
Rate at the end of the period............. 5.94% 3.76% 5.07% 8.51% 6.92%
Securities sold under agreements
to repurchase:
Wholesale:
Balance at the end of the period........ $ 489,541 $ 294,809 $ 291,014 $ 12,747 $330,156
Average balance during the period....... 359,848 290,112 152,923 188,839 465,916
Maximum month-end balance............... 489,541 311,385 327,360 326,685 529,006
Weighted average rate during the period. 4.69% 3.40% 3.53% 4.15% 8.37%
Rate at the end of the period........... 5.56% 3.43% 3.46% 4.00% 7.74%
Dollar:
Balance at the end of the period........ $ 14,704 $ - $ - $ - $ 32,189
Average balance during the period....... 3,016 - 227 8,134 7,877
Maximum month-end balance............... 14,938 - 2,957 40,417 32,189
Weighted average rate during the period. 2.85% - % .48% 5.34% 6.93%
Rate at the end of the period........... 3.41% - % - % - % 5.93%
Retail:
Balance at the end of the period........ $ - $ - $ - $ - $ 4,437
Average balance during the period....... - - - 3,591 4,969
Maximum month-end balance............... - - - 5,890 6,205
Weighted average rate during the period. - % - % - % 5.15% 5.31%
Rate at the end of the period........... - % - % - % - % 5.64%
Uncertificated debentures:
Balance at the end of the period.......... $ 42,243 $ 38,442 $ 34,990 $ - $ -
Average balance during the period......... 40,012 36,415 28,924 - -
Maximum month-end balance................. 42,243 38,442 34,991 - -
Weighted average rate during the period... 9.64% 9.65% 9.65% - % - %
Rate at the end of the period............. 9.00% 9.00% 9.00% - % - %
Collateralized floating rate notes:
Balance at the end of the period.......... $ - $ - $ - $ - $ -
Average balance during the period......... - - - - 158,150
Maximum month-end balance................. - - - - 218,040
Weighted average rate during the period... - % - % - % - % 8.57%
Rate at the end of the period............. - % - % - % - % - %
Convertible subordinated debentures:
Balance at the end of the period.......... $ - $ - $ 560 $ 560 $ 1,030
Average balance during the period......... - 344 560 697 2,474
Maximum month-end balance................. - 560 560 1,030 3,150
Weighted average rate during the period... - % 8.00% 8.00% 8.00% 8.00%
Rate at the end of the period............. - % - % 8.00% 8.00% 8.00%
Other borrowings:
Adjustable rate ESOP notes:
Balance at the end of the period........ $ - $ - $ - $ - $ -
Average balance during the period....... - - - 4,689 1,532
Maximum month-end balance............... - - - 11,400 12,700
Weighted average rate during the period. - % - % - % 5.24% 7.29%
Rate at the end of the period........... - % - % - % 4.00% 6.16%
Additional information regarding the Association's business activities can
be found in Item 7: Management's Discussion and Analysis of the Results of
Operations and Financial Condition and in the Notes to the Consolidated
Financial Statements.
40
SUBSIDIARIES
Northeast Savings is permitted by current OTS regulations to invest up to 3% of
its assets in service corporations whose operations are authorized by the OTS,
provided that any investment in excess of 2% must serve primarily community or
inner-city purposes. In addition, so long as the OTS continues to permit any
such investments, under its grandfathered savings bank investment authority,
Northeast Savings may invest up to the lesser of 2% of its assets or 20% of its
net worth in any type of investment, subject to certain limitations.
Investments in subsidiaries and investments made pursuant to its grandfathered
savings bank authority are subject to review by the FDIC to ensure that such
investments do not pose a serious threat to the SAIF.
OTS regulations also permit federal associations to establish operating
subsidiaries in any geographic location. Unlike a service corporation, an
operating subsidiary may engage only in such activities as a federal savings
association could engage in directly and would not be subject to the percentage
of assets limitation imposed on service corporations. To establish an operating
subsidiary, a federal savings association must either notify or obtain prior
approval of the OTS, depending on the association's capital level and CAMEL
rating, the OTS internal rating system used for supervisory and examination
purposes. All of Northeast Savings' subsidiaries have been redesignated as
operating subsidiaries with the exception of: First Service Corporation of New
England; First Service Insurance Agency, Inc.; and Family Security Corp.
Northeast Savings has twenty-five subsidiaries, six of which are active. The
businesses in which the six active subsidiaries are engaged are as follows.
NFRC III, Inc. holds an REO parcel of land in Chelmsford, Massachusetts. NFRC
V, Inc. holds an REO parcel of land in Wethersfield, Connecticut. NFRC VI, Inc.
holds an REO office building in Lowell, Massachusetts. NFRC IX, Inc. owns all
of the stock of Connecticut Realty Corp. IV, and Nutmeg Realty Corp., which are
Rhode Island corporations currently holding commercial REO properties.
EMPLOYEES
Northeast Savings had 608 employees (552 full-time equivalents) at December 31,
1994, compared to 999 (901 full-time equivalents) at December 31, 1993. The
decrease in employees during 1994 is mainly due to the sale of 15 branch offices
and the closing of the mortgage origination offices. Management considers its
relations with its employees to be good. Northeast Savings employees are not
represented by any collective bargaining group. Northeast Savings maintains a
comprehensive employee benefits program providing, among other benefits, a
retirement plan, medical and dental insurance, long-term and short-term
disability insurance, life insurance, a thrift and profit sharing plan, an
employee stock ownership plan, and educational assistance.
REGULATIONS
GENERAL. The Association is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF. The
Association is subject to extensive regulation by the OTS, as its chartering
agency and primary federal regulator, and the FDIC, as the deposit insurer. The
Association must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. Periodic examinations by the OTS
and the FDIC test the Association's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OTS, the FDIC, or the
41
Congress, could have a material adverse impact on the Company, the Association,
and their operations. Due to its ownership and control of Northeast Savings,
Northeast Federal Corp. is a savings and loan holding company within the meaning
of the Home Owners' Loan Act of 1933, as amended, and thus is subject to that
Act's regulation, examination, supervision, and reporting requirements imposed
on savings association holding companies.
INSURANCE OF DEPOSITS. The FDIC is the federal deposit insurance administrator
for both banks and savings associations. The FDIC administers separate
insurance funds, the SAIF and the BIF for thrifts and banks respectively, and
assessment rates are set independently. The FDIC has the specified authority to
prescribe and enforce such regulations and issue such orders as it deems
necessary to prevent actions or practices by savings associations that pose a
serious threat to the SAIF.
The FDIC has adopted a risk-based deposit insurance premium assessment system
which was implemented with the semi-annual assessment period commencing January
1, 1994. An institution's risk category is based partly upon whether the
institution is well-capitalized, adequately capitalized, or less than adequately
capitalized. As of June 30, 1994, Northeast Savings is deemed to be a well-
capitalized thrift. The first two groups are defined by application of the
capital ratio standards imposed under the prompt corrective action rule
(discussed below). The third group consists of those institutions not
qualifying as well capitalized or adequately capitalized. Within each group,
institutions are assigned to one of three supervisory subgroups: financially
sound institutions with only a few minor weaknesses; institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration; and institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. The FDIC assigns
institutions to supervisory subgroups on the basis of supervisory evaluations
provided by the institution's primary federal regulator and such other
information as the FDIC determined to be relevant to the institution's financial
condition and the risk posed to the insurance fund. The supervisory subgroup to
which an institution was assigned by the FDIC is confidential and may not be
disclosed. Based upon its capital and supervisory subgroups, each member
institution is assigned a FDIC assessment rate ranging from 23 cents for each
$100 of insured deposits to 31 cents for each $100 of insured deposits. A
savings association's capital group is determined on the basis of data reported
in its thrift financial report as of the date closest to June 30 or December 31
that included capital data. For the year ended December 31, 1994, SAIF deposit
insurance premium expense for the Association totaled $8.2 million. The FDIC is
authorized to raise insurance premiums for SAIF members in certain
circumstances. If the FDIC determined to increase the assessment rate for all
SAIF institutions, institutions in all risk categories could be affected. Any
increase in premiums could have an adverse effect on the Association's earnings.
Both the SAIF and the Bank Insurance Fund (BIF) are statutorily required to be
recapitalized to a 1.25% of insured reserve deposits ratio. It is presently
projected by the FDIC that the BIF will reach the required reserve ratio by mid-
1995, whereas the SAIF is not expected by the FDIC to be recapitalized until
2002 at the earliest. The Resolution Trust Corporation Completion Act (the RTC
Completion Act) authorizes $8 billion in funding for the SAIF; however, such
funds only become available to the SAIF if the FDIC determines that the funds
are needed to cover losses of the SAIF and several other stringent criteria are
met.
The FDIC recently proposed to establish a new assessment rate schedule of 4 to
31 basis points for BIF members beginning in the third quarter of 1995. Under
that proposal, approximately 91% of BIF members would pay the lowest assessment
rate of 4 basis points. The FDIC proposed to retain the existing assessment
rate schedule of 23 to 31 basis points applicable to SAIF member institutions.
In announcing this proposed rule, the FDIC noted that the premium differential
may have adverse consequences for SAIF members, including reduced earnings and
an impaired ability to raise funds in the capital markets.
The FDIC has authority to terminate the insurance of deposits of savings
associations upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to
42
continue operations, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the OTS. In addition, the FDIC has power to
suspend temporarily a savings association's insurance on deposits received after
the issuance of a suspension order in the event that the savings association has
no tangible capital. Savings associations are allowed to include certain
goodwill in tangible capital for this requirement; however, any savings
association with no tangible capital prior to including goodwill would be
considered a "special supervisory savings association."
ASSESSMENTS. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, to be paid on a semiannual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The Association's
total expense for assessments for the year ended December 31, 1994 was $567,000.
FEDERAL HOME LOAN BANK SYSTEM. Northeast Savings is a member of the FHLB of
Boston and as such is required to maintain an investment in capital stock of the
FHLB of Boston in an amount equal to the greater of one percent of its
outstanding residential mortgage loans and similar obligations, one-twentieth of
its outstanding advances, or .3% of total assets. Northeast Savings was in
compliance with this requirement with an investment in the FHLB of Boston stock
at December 31, 1994 of $32.3 million. The Association may borrow from the FHLB
of Boston pursuant to several different credit programs upon the security of
certain home mortgages and other assets assuming certain standards of credit
worthiness have been met. The FHLB may limit the uses and amount of borrowings
under different programs.
As of December 31, 1994 and 1993, respectively, Northeast Savings held $32.3
million and $31.8 million of FHLB of Boston stock. During the year ended
December 31, 1994 and 1993, respectively, Northeast Savings recorded dividend
income on its FHLB investment in an aggregate amount of $2.5 million and $2.4
million for a yield of 7.77% and 7.58%, respectively. The FHLB of Boston,
together with the other eleven regional FHLBs comprising the FHLB system, are
required to make certain principal and interest payments on bank notes to fund
the resolution of failed savings associations and to contribute for certain
affordable housing programs. Such obligations could adversely impact the FHLB
system and the FHLB of Boston and thereby adversely impact the value and return
on the Association's investment in the FHLB of Boston and the ability of the
Association to obtain future advances from the FHLB of Boston.
REGULATORY CAPITAL AND OTHER REQUIREMENTS: Current Capital Regulations. The
---------------------------
current OTS regulatory capital regulations require savings associations to meet
three capital standards: (1) tangible core capital of 1.5% of adjusted total
assets, (2) core capital (leverage ratio) of 3% of adjusted total assets, and
(3) risk-based capital of 8% of risk-weighted assets. See "Proposed Leverage
Ratio Requirement," "Final OTS Interest Rate Risk Component," and "Prompt
Corrective Action."
In calculating tangible core capital, a savings association must deduct from
capital most intangible assets. Core capital consists of tangible core capital
plus certain intangible assets such as qualifying purchased mortgage servicing
rights, subject to certain limitations. Other than qualifying purchased
mortgage servicing rights, intangible assets must be deducted from core capital
unless they meet a three-part test relating to identifiability, marketability,
and liquidity in which event they may be included in an amount up to 25% of core
capital.
The total risk-based capital requirement includes core capital plus
supplementary capital to the extent that supplementary capital does not exceed
100% of core capital. Supplementary capital includes certain capital
instruments which are not included in core capital and general loan loss
allowances. Risk-weighted assets equal total assets plus consolidated off-
balance sheet items where each asset or item is multiplied by the appropriate
risk-weighting applicable to the asset category. The capital regulations assign
each asset held by a savings association to one of four risk-weighting
categories, based upon the credit risk associated with each asset or item. The
risk-weighting categories range from 0% for low-risk assets (such as U.S.
43
Treasury securities and Government National Mortgage Association securities) to
100% for assets deemed to be of higher risk (such as repossessed assets and
certain equity investments).
The OTS also requires that consideration be given to credit concentration risk
and the risk of non-traditional activities. This regulation does not add a
quantitative formula to the risk-based standards in order to measure
concentration of credit risk. Instead, it affords the OTS the discretion to
require higher minimum capital ratios for institutions with significant exposure
due to interest rate risk, the risks from concentration of credit, certain risks
arising from nontraditional activities or management's overall inability to
monitor and control financial and operating risks presented by concentrations of
credit and nontraditional activities.
OTS Interest Rate Risk Component. The OTS also has adopted an interest rate
- ---------------------------------
risk component for its regulatory capital requirements. Under the rule, savings
associations are divided into two groups, those with "normal" levels of interest
rate risk and those with greater than "normal" levels of interest rate risk.
Associations with greater than normal levels are subject to a deduction from
total capital for purposes of calculating risk-based capital. Interest rate
risk is measured by the change in Net Portfolio Value under a 2.0% change in
market interest rates. The Net Portfolio Value is the economic value of an
association's assets less the economic value of its liabilities adjusted for the
economic value of off-balance-sheet contracts. If an association's change in
Net Portfolio Value under a 2.0% change in market interest rates exceeds 2.0% of
the estimated economic value of its assets, it will be considered to have
greater than normal interest rate risk, and its total capital for risk-based
capital purposes will be reduced by one-half of the difference between its
measured interest rate risk and the normal level of 2.0%. The rule adjusts the
interest rate risk measurement methodology when interest rates are low. In the
event that the 3-month Treasury rate is below 4.0%, interest rate risk will be
measured under a 2.0% increase in interest rates and under a decrease in
interest rates equal to one-half the value of the 3-month Treasury rate.
Northeast Savings is required to implement this rule on June 30, 1995.
The Association's regulatory capital position at December 31, 1994 is presented
in Item 7: Management's Discussion and Analysis of the Results of Operations
and Financial Condition.
PROMPT CORRECTIVE ACTION. Under the OTS prompt corrective action regulations
the OTS is required to take certain supervisory actions against undercapitalized
institutions. The severity of which depends upon the degree of
undercapitalization.
The relevant capital measures for the categories of well-capitalized, adequately
capitalized, undercapitalized, and significantly undercapitalized, are defined
to be the ratio of total capital to risk-weighted assets (i.e., the OTS risk-
based capital requirement), the ratio of core capital to risk-weighted assets
(i.e., the OTS Tier I risk-based capital requirement), and the ratio of core
capital to adjusted total assets (i.e., the OTS core or leverage capital
requirement). Under the rules, an institution will be deemed to be well
capitalized if the institution has a total risk-based capital ratio of 10% or
greater, a core capital to risk-weighted assets capital ratio of 6% or greater
and a ratio of core capital to adjusted total assets of 5% or greater and the
institution is not subject to any order, written agreement or prompt corrective
action directive. An institution is deemed to be adequately capitalized if it
has total risk-based capital of 8% or greater, core capital to risk-weighted
assets capital ratio of 4% or greater and a ratio of core capital to total
assets of 4% or greater (unless it has a composite one CAMEL rating). An
institution is deemed to be undercapitalized if it fails to meet any of the
relevant capital measures to be considered adequately capitalized, and
significantly undercapitalized if it has a total risk-based capital ratio of
less than 6% or a core capital to risk-weighted assets capital ratio of less
than 3% or a leverage ratio of less than 3%. An institution with a ratio of
tangible equity to total assets of 2% or less is deemed to be critically
undercapitalized.
In addition to establishing a system of prompt corrective action based on the
capital level of an institution, the prompt corrective action rule also permits
the OTS to reclassify a well-capitalized institution as an adequately
capitalized institution or to require an adequately capitalized institution to
comply with supervisory provisions as if the institution were in the next lower
category based on supervisory information
44
other than capital levels of the institution. The rules provide that an
institution may be reclassified if the appropriate federal banking agency
determines it is in an unsafe and unsound condition or engages in an unsafe or
unsound practice. An institution may be deemed to be in an unsafe and unsound
condition if (1) the institution receives a less than satisfactory rating in its
most recent examination report and (2) the institution has not corrected the
deficiency. The rule provides procedures for notice and a hearing in connection
with a reclassification based on supervisory information about the institution.
Based on the Association's capital position at December 31, 1994, Northeast
Savings is a well capitalized thrift and will not be subject to any of the
restrictions imposed by the prompt corrective action rule on institutions that
are less than adequately capitalized. However, should the Association receive a
less than satisfactory rating for asset quality, earnings, liquidity, or
management in a regulatory examination, the OTS could impose restrictions upon
Northeast Savings as if it were a less than adequately capitalized institution
until such time as the less than satisfactory rating is corrected.
LIMITATION ON CAPITAL DISTRIBUTIONS. The ability of the Company to pay
dividends for the foreseeable future is restricted by its receipt of dividends
from the Association and by regulatory and financial limitations on the
Association's payment of dividends. The prompt corrective action regulation
provides that a financial institution may not make a capital distribution if the
institution would be undercapitalized after making the capital distribution.
Also, the Company and the OTS entered into a Dividend Limitation Agreement as a
part of the holding company approval process which prohibited the payment of
dividends to the holding company without prior written OTS approval if the
Association's capital is below its fully phased-in capital requirement or if the
payment of such dividends would cause its capital to fall below its fully
phased-in capital requirement. The OTS Capital Distribution Regulation
differentiates among savings institutions primarily by their capital levels.
Associations which meet their fully phased-in capital requirements are
considered Tier 1 associations and require only normal OTS supervision. A Tier
1 association may make capital distributions during a calendar year up to the
higher of: (1) 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its surplus capital ratio of the beginning
of the calendar year; or (2) 75% of its net income over the most recent four-
quarter period. A Tier 1 association would not be permitted to make capital
distributions in excess of the foregoing limit without prior OTS approval.
Capital surplus is defined as the amount of capital over an association's fully
phased-in capital requirement. Tier 2 institutions meet current capital
requirements and are authorized to make some capital distributions without prior
permission. The amount of such capital distribution is limited to between 25%
and 75% of current earnings, depending on how close the institution is to
meeting its fully phased-in capital requirement. Tier 3 institutions do not
meet their current capital requirements and are prohibited from making any
capital distributions without OTS permission except where such distribution is
consistent with an approved capital plan. The Association meets its fully
phased-in regulatory capital requirements and is a Tier 1 association. A
savings association permitted to make a capital distribution under the prompt
corrective action regulations may do so if the amount and type of distribution
would be permitted under the Capital Distribution Regulation.
NEW SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies recently
adopted a regulation and Interagency Guidelines Prescribing Standards for Safety
and Soundness (Guidelines) to implement the safety and soundness standards
established by FDICIA. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system, credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies also adopted a proposed rule which proposes asset quality and
earnings standards which, if adopted in final, would be added to the guidelines.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final regulation establishes
deadlines for the submission and review of such safety and soundness compliance
plans.
45
LIQUIDITY REQUIREMENTS. OTS regulations require savings associations to
maintain for each calendar month an average daily balance of liquid assets
(including cash and certain time deposits, bankers' acceptances, specified
corporate obligations and specified United States government, state, and federal
agency obligations) of not less than five percent of the average daily balance
of its net withdrawable deposit accounts (the amount of all deposit accounts
less the unpaid balance of all loans made on the security of such accounts) and
borrowings payable on demand or in one year or less. OTS regulations also
require each savings association to maintain for each calendar month an average
daily balance of short-term liquid assets (generally those having maturities of
twelve months or less) at an amount not less than one percent of the average
daily balance of its net withdrawable accounts plus such short-term debt during
the preceding calendar month. The OTS may impose monetary penalties for failure
to meet the liquidity requirement. The average liquidity and average short-term
liquidity ratios of Northeast Savings for the year ended December 31, 1994, were
5.78% and 3.01%, respectively, which exceeded the applicable requirements.
INTERSTATE BRANCHING REGULATION. Under OTS regulations, federal savings
associations are authorized to branch interstate to the full extent permitted by
federal statute. An institution which makes application to branch interstate
would be required to meet or exceed applicable minimum capital standards,
demonstrate compliance with and commitment to the requirements of the Community
Reinvestment Act and to comply with the remaining statutory limitations on
branching.
GRANDFATHERED SAVINGS BANK AUTHORITY. Northeast Savings' predecessor, The
Schenectady Savings Bank was a New York state-chartered savings bank with
investment powers conferred by New York law. The Garn-St Germain Depository
Institutions Act of 1982 and the implementing regulations empower savings and
loan associations such as Northeast Savings to exercise all the powers that the
predecessor state-chartered savings bank possessed under state law, whether or
not such powers had been exercised. These powers are in addition to the powers
the Association possesses as a federally-chartered savings and loan association.
These powers allow Northeast Savings to pursue diversified acquisition
opportunities and provide the Association with flexibility in structuring its
investment portfolio. These powers are, however, subject to limitation by both
the OTS and the FDIC. Pursuant to authority granted to it by FIRREA, the FDIC
may determine, by regulation or by order, that an association may not engage in
any specific activity that poses a serious risk to the SAIF.
QUALIFIED THRIFT LENDER. The Qualified Thrift Lender (QTL) test generally
requires savings associations to concentrate a significant majority of their
assets in housing-related investments. Under the QTL test, qualified thrift
investments must equal 65% of portfolio assets on a monthly basis; a qualified
thrift lender must meet the 65% test in nine out of every twelve months.
Portfolio assets are defined as total assets minus supervisory goodwill and
other intangible assets, premises and equipment, and certain liquid assets up to
20% of assets. The Association is in compliance with the QTL test. As of
December 31, 1994, 87.6% of the Association's portfolio assets under the OTS QTL
definition consisted of qualified thrift assets.
An institution that fails the QTL test is subject to severe restrictions on its
activities and a holding company of such an institution would also be subject to
restrictions on its activities. In addition, failure to meet the QTL test could
result in a requirement to convert the savings association's charter to a bank
charter.
LOANS-TO-ONE BORROWER LIMITATION. With certain limited exceptions, the
statutory provision limiting the ability of national banks to make loans to a
single borrower is applicable to savings associations in the same manner and to
the same extent as it applies to national banks. A savings association may make
loans to one borrower equal to 15% of the savings association's unimpaired
capital and unimpaired surplus, plus an additional 10% of capital for loans
secured by readily marketable collateral. Real estate is not considered readily
marketable collateral. The OTS may impose more stringent requirements on a
savings association to protect its safety and soundness. At December 31, 1994,
the maximum amount that
46
Northeast Savings could loan to one borrower and the borrower's related entities
was $28.4 million. At December 31, 1994, the largest aggregate amount of loans
that Northeast Savings had committed and/or outstanding to one borrower and its
related entities was $6.5 million. Hence, Northeast Savings is in compliance
with this limitation.
COMMUNITY REINVESTMENT ACT. The CRA is intended to encourage financial
institutions to help meet the credit needs of their entire communities,
including low and moderate income areas, consistent with safe and sound
operations.
CRA regulations provide for three disclosure obligations. First, each
institution must prepare and make available a CRA Statement for each of its
local communities that includes a delineation of the community served and a list
of specified types of credit offered to the community. Second, each lending
institution must maintain a public comment file for public inspection that
includes written comments from the public on its CRA Statement or its
performance in meeting community credit needs. Third, public disclosure of
written CRA evaluations of financial institutions made by regulatory agencies is
required under the CRA to promote enforcement of CRA requirements by providing
the public with the status of a particular institution's community reinvestment
record. The regulatory agencies are required to include, in the written
evaluation, an institution's record of meeting the credit needs of its local
community including low and moderate income neighborhoods. Each written
evaluation required under CRA is required to have a public and confidential
section addressing the association's CRA performance. In connection with the
CRA examination, the federal banking agencies are required to assess each
institution's record of helping to meet the credit needs of its entire
community. The Association received a satisfactory rating in its written
evaluation as a result of its last CRA examination performed in September 1992.
Evaluations under the Community Reinvestment Act are taken into account in
determining whether to grant branch and merger applications as well as other
regulatory applications. The regulatory agencies have proposed amendments to
the CRA regulations that would change the manner of evaluation of the
performance of financial institutions within the confines of the Community
Reinvestment Act. The likelihood of adoption of the proposed regulation is
unknown, as is its effect on the Association's future evaluation ratings.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls, is controlled by, or is under common control with the Association,
including the Company and its non-savings institution subsidiaries), or to make
loans to certain insiders, is limited by Sections 23A and 23B of the Federal
Reserve Act (FRA). Section 23A limits the aggregate amount of transactions with
any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in the FRA and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated
individuals or entities. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to individuals
or entities. Notwithstanding Sections 23A and 23B, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act. Further, no savings institution may invest in the
securities of any affiliate other than a subsidiary.
In addition, Sections 22(g) and 22(h) of the FRA, which relate to limits on
loans and extensions of credit to executive officers, directors, and 10%
shareholders, as well as companies which such persons control, apply to savings
institutions. Among other things, such loans must be made on terms, including
interest rates, substantially the same as loans to unaffiliated individuals or
entities. OTS regulations implementing the provisions of 22(g) and 22(h) of the
FRA which govern extensions of credit to insiders, incorporate by means of
crossreference the provisions of Federal Reserve Regulation O.
47
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS. As a result of the reorganization
into a holding company form of organization, the Company is subject to
applicable OTS regulations regarding the activities of the savings and loan
holding company and the savings institution. Northeast Federal Corp. is
prohibited, either directly or indirectly, from acquiring control of any savings
association or savings and loan holding company without prior OTS approval and
from acquiring more than 5% of any voting stock of any savings association or
savings and loan holding company which is not a subsidiary of Northeast Federal
Corp. In addition, under the terms of the OTS approval of the Company's
application to reorganize to form a holding company, the Company may not at any
time, absent prior written approval by the Regional Director, engage in any
activity other than activities incident to holding the stock of the Association.
However, recently proposed legislation could restrict the activities of unitary
savings and loan holding companies to those permissible for mutual savings and
loan holding companies.
FEDERAL RESERVE SYSTEM REQUIREMENTS. The Federal Reserve Board requires savings
institutions to maintain non-interest-earning reserves against certain of their
transaction accounts. The regulations generally require a reserve of 3% against
total transaction accounts up to $54.0 million, which increased from $51.9
million effective December 20, 1994, and a reserve of 10% (subject to adjustment
by the Federal Reserve Board to an amount between 8% and 14%) against
transaction accounts in excess of $54.0 million. The first $4.2 million of
otherwise reservable balances are exempt from the reserve requirement. As of
December 31, 1994, Northeast Savings was in compliance with all reserve
requirements of the Federal Reserve Board. The balances used to meet these
reserve requirements imposed by the Federal Reserve Board may also be used to
satisfy the Association's liquidity requirements discussed above.
As a creditor and a financial institution, Northeast Savings is subject to
various regulations promulgated by the Federal Reserve Board, including, but not
limited to Regulation B (Equal Credit Opportunity); Regulation D (Reserve
Requirements); Regulation E (Electronic Funds Transfers); Regulation Z
(Truth-in-Lending); and Regulation CC (Availability of Funds); and Regulation DD
(Truth-In-Savings). Additionally, as creditors of loans secured by real
property, and as owners of real property, financial institutions, including
Northeast Savings, may be subject to potential liability under various statutes
and regulations applicable to property owners, generally including statutes and
regulations relating to the environmental condition of a property.
INTERBANK LIABILITIES. Effective December 19, 1992, the Federal Reserve Board
prescribed standards to limit the risk posed by an insured depository
institution's exposure to a correspondent institution. All insured institutions
were required to have policies in place by June 19, 1993 which set limits on
credit and liquidity risks in dealing with other depository institutions. The
rule includes a regulatory limit for exposure to correspondents that are less
than adequately capitalized.
ENFORCEMENT
Under the FDI Act, the OTS has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
"institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case, penalties
may be as high as $1 million per day. Criminal penalties for most financial
institution crimes include fines up to $1 million and imprisonment for up to 30
years. In addition, regulators have substantial discretion to impose enforcement
action on an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
action ranges from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS that enforcement actions be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take action under certain circumstances.
48
TAXATION
For tax purposes, Northeast Federal Corp. files a consolidated tax return with
its subsidiaries on a calendar year-end basis. Northeast Savings, F.A., a
subsidiary of Northeast Federal Corp., conducts its business primarily in
Connecticut, New York, and Massachusetts and previously in California, Colorado,
Oregon and Rhode Island. Accordingly, the Company is subject to taxation in
those jurisdictions. Taxes paid to such jurisdictions are deductible in
determining federal taxable income. Northeast Savings has been audited by the
Internal Revenue Service with respect to tax returns through 1979.
Savings and loan associations are generally subject to federal income taxation
in the same manner as regular corporations. However, under applicable provisions
of the Internal Revenue Code, savings and loan associations that meet certain
definitional and other tests are generally permitted to claim a deduction for
additions to their bad debt reserves computed as a percentage of taxable income
before such deduction. Alternatively, a qualifying association may elect to
utilize its own bad debt loss experience to compute its additions to its bad
debt reserves. At December 31, 1994, Northeast Savings qualifying tax bad debt
reserve equalled zero.
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, 1994, Northeast Federal Corp.
had current earnings and profits. Any dividends paid with respect to Northeast
Savings' 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 made out of the tax bad debt reserves and will increase taxable
income as noted in the preceding paragraph.
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." The Company implemented SFAS 109 for the fiscal year ended March 31,
1992. See "Results of Operations" in Item 7: Management's Discussion and
Analysis of Results of Operations and Financial Condition for a discussion of
the impact of SFAS 109 on the Company.
49
ITEM 2. PROPERTIES
Northeast Federal Corp.'s corporate headquarters are located at 50 State House
Square, Hartford, Connecticut 06103. Northeast Savings operates twelve branch
banking offices in the Hartford-Springfield market, seventeen in the Albany-
Schenectady and Pittsfield areas, and four in the Worcester area. Northeast
Savings also operates a separate residential mortgage loan origination office in
Connecticut.
All of Northeast Savings' facilities are leased except for seven branch offices
and an office building in Farmington, Connecticut. The aggregate net book value
of office buildings and leasehold improvements at December 31, 1994 was $20.8
million.
Northeast Savings' office locations by state are as follows:
Retail branch banking offices:
Connecticut:
782 Park Avenue Bloomfield
940 Silver Lane East Hartford
1105 New Britain Avenue Elmwood
50 State House Square Hartford (Home Office)
1147 Tolland Turnpike Manchester
530 Bushy Hill Road Simsbury
29 South Main Street West Hartford
38 Wells Road Wethersfield
New York:
900 Central Avenue Albany
Amsterdam Mall Amsterdam
15 Park Avenue Clifton Park
98 Wolf Road Colonie
579 Troy-Schenectady Road Colonie
501 Columbia Turnpike East Greenbush
Route 9W Glenmont
14 La Rose Street Glens Falls
200 Saratoga Road Glenville
475 Albany Shaker Road Loudonville
211 Park Avenue Mechanicville
420 Balltown Road Niskayuna
189 Ballston Avenue Saratoga Springs
500 State Street Schenectady
2525 Broadway Schenectady
13 Maple Road Voorheesville
Massachusetts:
56 Auburn Street Auburn
160 Reservoir Street Holden
609 Merrill Road Pittsfield
110 Boston Turnpike Shrewsbury
1724 Boston Road Springfield
1243 Main Street Springfield
560 Sumner Avenue Springfield
453 East Main Street Westfield
57 Pearl Street Worcester
50
Mortgage origination offices:
Connecticut:
1111 East Putnam Avenue Greenwich
ITEM 3. LEGAL PROCEEDINGS
On December 9, 1989, Northeast Savings filed suit in the United States District
Court for the District of Columbia claiming that the government breached its
contract with Northeast Savings as well as violated Northeast Savings'
constitutional rights as a result of the denial of core capital treatment to
supervisory goodwill acquired by Northeast Savings as a result of its 1982
acquisitions from the Federal Savings and Loan Insurance Corporation (FSLIC) of
three insolvent thrifts. The district court dismissed this action on July 16,
1991 for lack of jurisdiction and indicated that proper jurisdiction lay in an
action for money damages in the United States Claims Court. (The name of the
United States Claims Court subsequently was changed to the United States Court
of Federal Claims; such court hereinafter is referred to as the Claims Court).
Northeast Savings appealed this ruling to the United States Court of Appeals for
the District of Columbia Circuit (the Court of Appeals for D.C.), and then on
July 8, 1992, filed a motion to voluntarily dismiss its appeal. On July 9,
1992, the Court of Appeals for D.C. granted this motion to dismiss. Northeast
Savings then filed its claim for damages in the Claims Court on August 12, 1992.
This action is still pending. The Claims Court has indicated that it is
deferring action on the Northeast Savings case, as well as on over 30 other
supervisory goodwill cases pending before the Claims Court, until three cases
(the Test Cases), currently on appeal to the Unite States Court of Appeals for
the Federal Circuit (Federal Circuit Court of Appeals), are finally ruled upon.
In the Test Cases, including Winstar v. United States, the government has
------------------------
vigorously defended itself. Among other things, the government has contended
that the "supervisory goodwill" that was created in connection with the
resolution by the Federal Home Loan Bank Board (the Bank Board), which was the
predecessor agency to the OTS, of supervisory problems existed "under the Bank
Board's regulatory function and represents a statement of compliance with then-
existing statutory and regulatory requirements which requirements, however, were
subject to change." Thus, the government contends that Congress was entitled to
override the existing regulatory requirements which recognized supervisory
goodwill by new legislation directed at the general public welfare. The
government then contends that it cannot be obligated to measure regulatory
capital in a manner inconsistent with what Congress has mandated under FIRREA,
and therefore, it is absolved of any and all contract liability based on the
elimination of supervisory goodwill under the "Sovereign Acts Doctrine." In
support of its arguments, the government cites, among other things, the 1992
holding of the Court of Appeals for D.C. in Transohio Savings Bank v. Director
----------------------------------
(Transohio) in which that court rejected the attempt of a savings institution to
obtain injunctive relief against the application of the FIRREA capital
standards.
In each of the Test Cases, the Claims Court determined that plaintiffs had
contracts with the United States governing long-term regulatory treatment of
goodwill, and that those contracts had been breached by FIRREA's new
restrictions on use of goodwill to meet statutory capital mandates. The Claims
Court consolidated its rulings in the Test Cases for immediate interlocutory
appeal. On May 25, 1993, a divided panel of the Federal Circuit Court of
Appeals reversed the Claims Court's finding that the government was liable for
breach of contract in the Test Cases. The Federal Circuit Court of Appeals,
among other things, based its decision on its conclusion that "... the
plaintiffs had no contract right to have the goodwill generated by their
acquisitions treated as regulatory capital." According to the Federal Circuit
Court of Appeals, "all of the subject contracts left the Bank Board (and OTS)
free to regulate in accordance with subsequent acts of Congress, specifically
FIRREA. Thus, there was no contractual promise by the government which could be
breached."
Approximately one and one-half months later, on July 7, 1993, in Hughes
------
Communications Galaxy, Inc. v. United States (Hughes) a different panel of the
- --------------------------------------------
Federal Circuit Court of Appeals issued what has generally been interpreted as
an opposite ruling from that given in the Test Cases on another government
breach
51
of contract dispute. In Hughes, which was not a case involving depository
institutions, the Federal Circuit Court of Appeals determined that there was a
breach of contract by the government, and in doing so, apparently rejected some
of the same arguments advanced by the government and accepted by the Federal
Circuit Court of Appeals in the Test Cases. Although the government in Hughes
petitioned the Federal Circuit Court of Appeals for a rehearing and an en banc
hearing, on October 26, 1993, both were denied. The Federal Circuit Court of
Appeals, however, did vacate the panel decision in the Test Cases, which
decision was in favor of the government's position, and ordered an en banc
hearing. Briefing for that hearing has been completed and oral arguments took
place in February 1994. No decision on such rehearing has been rendered by the
Federal Circuit Court of Appeals at this time. Recently, a panel of the Court
of Appeals for D.C. issued a clarification of its Transohio decision indicating
that its analysis in that decision was solely directed at an action for
injunctive relief and did not address the merits of a claim for money damages in
the Claims Court.
Another supervisory goodwill case, Resolution Trust Corporation v. FSLIC (the
-------------------------------------
Resolution Trust Corporation), was recently decided by the Court of Appeals for
the 10th Circuit (the 10th Circuit Court of Appeals) in favor of the purchasers
of Security Federal from the FSLIC, which purchase was made prior to FIRREA.
Pursuant to an arrangement with the FSLIC, the purchasers infused $6 million in
Security Federal, an insolvent institution, and thereby saved the FSLIC the cost
of liquidating Security Federal. Even with such capital infusion, were it not
for the treatment of supervisory goodwill as capital, Security Federal would
have remained significantly under-capitalized at the time, and thereby would
have had to have been liquidated by the FSLIC.
As a result of the restriction on the use of supervisory goodwill as capital
pursuant to FIRREA and resulting OTS regulations, the OTS determined that
Security Federal was insolvent and in February 1990 ordered the purchasers to
infuse additional capital into it. In March of 1990, the purchasers notified
the OTS that they were rescinding the agreement to acquire the institution,
tendered their stock to the OTS, and requested the return of their capital
contribution. The OTS refused the tender, and the purchasers filed suit seeking
rescission and restitution for breach of contract. In Resolution Trust
Corporation, the FDIC and the OTS appealed a district court's summary judgment
ruling in favor of the purchasers for breach of contract, which held that the
treatment of goodwill as regulatory capital was an express term of the overall
contractual agreement. The 10th Circuit Court of Appeals affirmed the lower
court's ruling and stated that "because the Agencies breached their agreement to
treat supervisory goodwill...as assets for regulatory purposes, we [the Court]
agree that the investors [i.e., purchasers] properly rescinded the agreement and
thus are entitled to restitution." The Government has decided not to seek
Supreme Court review of the decision of the 10th Circuit Court of Appeals.
Northeast cannot predict when the Federal Circuit Court of Appeals will render
any decision on the test cases, or the nature of any such decision and its
effect on Northeast Savings' pending goodwill litigation in the Claims Court.
In addition, the Claims court's initial decision in the Test Cases did not
address the amount of damages, if any; therefore, questions regarding the amount
of damages are not subject to the current appeal pending in the Federal Circuit
Court of Appeals. Northeast anticipates that even if the Federal Circuit Court
of Appeals renders a decision in the Test Cases that is favorable to the claims
made by Northeast Savings in its goodwill litigation, a final judicial
determination, if any, as to Northeast Savings' pending goodwill litigation,
after addressing the issue of damages and the resolution of all appeals,
including likely appeals to the Supreme Court, will not occur for an extended
period of time; and even if Northeast Savings attains a final money judgment in
its goodwill litigation, as to which no prediction can be made, the amount of
any such judgment is highly uncertain. No amount has been recorded on
Northeast's financial statements based on any possible recovery by Northeast
under the litigation.
In connection with the formation of Northeast Federal Corp. as the holding
company of the Association, the Association sought the consent of the FDIC to
exchange the Adjustable Rate Preferred Stock, Series A, of the Association, then
owned by the FDIC as administrator of the FSLIC Resolution Fund, for Adjustable
Rate Preferred Stock, Series A of Northeast Federal Corp. As a condition to its
consent of the
52
exchange of the adjustable rate preferred stock, the FDIC required Northeast
Savings to agree not to seek monetary damages or any other form of monetary
relief from the FDIC arising out of or relating to the claims asserted in the
complaint for declaratory judgment and injunctive relief filed against the FDIC
and the OTS and to moot certain issues related to the adjustable rate preferred
stock. The release of the FDIC, however, did not restrict Northeast Savings'
ability to pursue its claim for injunctive relief in the action or to seek any
other equitable remedy in connection with the claims asserted in the litigation,
provided that such remedy would not involve the payment of money by the FDIC.
Further, the execution of the release did not alter or otherwise affect the
positions that the parties to the litigation have taken or may take. Issues
related to the adjustable rate preferred stock issued by Northeast Savings to
the FSLIC Resolution Fund are mooted, as provided in a Mootness Agreement
executed concurrently with the release. The release is exclusive to the FDIC
and is not extended to any other governmental agency, including but not limited
to the OTS. The execution of the release does not prejudice any new claims that
may arise with respect to the FDIC or the OTS regarding the capital treatment of
Northeast Savings' equity. Finally, the release is null and void in the event
that the OTS refuses to permit Northeast Federal Corp.'s Adjustable Rate
Preferred Stock, Series A, to be treated as core capital by Northeast Savings.
As discussed previously, in conjunction with the acquisition of four Rhode
Island financial institutions, on May 8, 1992, the Company repurchased all of
the adjustable rate preferred stock from the FSLIC Resolution Fund, administered
by the FDIC. Nothing in the agreement to repurchase the adjustable rate
preferred stock alters, impairs, or otherwise affects the validity or
enforceability of the Mootness Agreement or the Release and the parties have
agreed that the Mootness Agreement and the Release remain in full force and
effect.
The Association is also involved in litigation arising in the normal course of
business. Although the legal responsibility and financial impact with respect
to such litigation cannot presently be ascertained, the Association does not
anticipate that any of these matters will result in the payment by the
Association of damages that, in the aggregate, would be material in relation to
the consolidated financial position or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
53
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
At December 31, 1994, the following persons were executive officers of the
Company as defined by Rule 405 of Regulation C of the Securities and Exchange
Commission.
KIRK W. WALTERS, Director, Chairman of the Board, President, Chief Executive
Officer, Chief Operating Officer, and Chief Financial Officer
JOANN DOLAN, Executive Vice President - Loan Administration and Operations of
the Association
DANIEL J. STEINMETZ, Executive Vice President - Commercial Lending of the
Association
VICTOR VRIGIAN, Executive Vice President - Retail Banking of the Association
LYNNE C. WILSON, Senior Vice President, Controller and Principal Accounting
Officer of the Company and the Association
The following information concerns the executive officers of the Company:
KIRK W. WALTERS (age 39), was elected Chairman of the Board on May 20, 1994,
Chief Executive Officer in November 1993, effective January 1, 1994 and
President and Chief Operating Officer of the Company in September 1991. In
connection with the holding company reorganization in April 1990, he was elected
Senior Executive Vice President and Chief Financial Officer of the Company. He
joined Northeast Savings in April 1989 as Executive Vice President and
Controller. He was elected Senior Executive Vice President and Chief Financial
Officer of Northeast Savings in September 1989, and was elected to the position
of President and Chief Operating Officer of Northeast Savings in September 1991
and Chief Executive Officer of Northeast Savings in November 1993, effective
January 1, 1994. He was elected to the Board of Directors in 1990. He joined
Northeast Savings from California Federal Bank, a subsidiary of Calfed, Inc.,
where he was Senior Vice President and Controller. Prior to that, he worked for
Atlantic Richfield Company and prior to that, he served on the audit staff of
Coopers & Lybrand.
JOANN DOLAN (age 43) was elected Executive Vice President - Loan Administration
and Operations of the Association in May 1993. She joined the Association in
1987 as Vice President of Planning Administration and was elected to the
position of Senior Vice President of Consumer Lending in October of 1989. She
was elected to the position of Executive Vice President, Consumer Lending and
Loan Administration in March of 1990.
DANIEL J. STEINMETZ (age 42) was elected Executive Vice President - Commercial
Lending of the Association in December 1993. He formerly served as Senior Vice
President of Commercial Lending. He joined the Association in November 1988.
Prior to that time, he was Vice President and Regional Manager at Bank of
Boston, Connecticut.
VICTOR VRIGIAN (age 38) was elected Executive Vice President - Retail Banking of
the Association in April 1993. He served as Vice President of Deposit Products
from February of 1987 through June of 1990, at which time he was elected Senior
Vice President of Marketing.
54
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
(continued)
LYNNE C. WILSON (age 32), was elected Senior Vice President, Controller and
Principal Accounting Officer of the Company and the Association in April 1993.
She was formerly Senior Vice President and Controller and Vice President - Loan
Accounting, of the Association. She joined the Association in 1989.
Previously, she was an audit manager with Ernst & Young.
55
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Northeast Federal Corp.'s common stock is traded on the New York Stock Exchange
under the symbol NSB. Information concerning the prices paid per common share
of Northeast Federal Corp.'s common stock appears in Note 24 of the Notes to the
Consolidated Financial Statements. On February 28, 1995, 14,974,289 shares of
Northeast Federal Corp.'s common stock were issued and outstanding and held by
approximately 4,700 holders of record. See Item 6: Selected Financial Data for
market prices of the Company's common stock.
The Company has not paid any dividends on its common stock since its
reorganization into a holding company structure. The Board of Directors
considers the declaration of dividends quarterly, based on the financial
condition and capital position of the Company, its results of operations,
current economic conditions and industry standards, tax considerations and other
factors, including the restrictions regarding dividends as discussed in Item 7:
Management's Discussion and Analysis of Results of Operations and Financial
Condition and in Notes 13 and 15 of the Notes to Consolidated Financial
Statements, as well as in the Regulatory Capital and Other Requirements section
of Item 1: Business.
On May 8, 1992, in conjunction with the Association's acquisition of certain
assets of four Rhode Island financial institutions and the issuance of deposits
in the Association to depositors in those institutions, the Company repurchased
from the FSLIC Resolution Fund administered by the FDIC the Adjustable Rate
Preferred Stock, Series A, plus accumulated dividends, for $28.0 million in cash
and $7.0 million of 9% Debentures for a total fair value of $32.5 million. The
9% Debentures had a fair value of $4.5 million which was based on the value
attributable to those debentures by the FRF, as determined by its investment
banker. Also in conjunction with the aforementioned Rhode Island acquisition,
the Company issued and sold for $35.17 million 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, plus warrants to purchase
an aggregate of 800,000 shares of the Company's common stock. 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). The Certificate of Designation authorizes the issuance of a total
of 540,000 shares of the Series B preferred stock.
On May 7, 1993, at a Special Meeting of Stockholders, the Company stockholders
approved a reclassification of the Company's convertible preferred stock into
common stock at the ratio of 4.75 shares of common stock for each share of
convertible preferred stock. Effective May 14, 1993, the 1,610,000 outstanding
shares of convertible preferred stock were converted into an aggregate of
7,647,500 shares of common stock. At such time, in the aggregate, $12.2 million
of accumulated and unpaid dividends on the convertible preferred stock were
eliminated.
The Company has declared and paid dividends on its $8.50 Cumulative Preferred
Stock, Series B in the sum of one share of Series B preferred stock for each
$100 of the amount of dividends payable. The amount of dividends payable for
the second quarter of 1993 included accumulated and unpaid dividends from the
date of issuance (May 8, 1992) through June 30, 1993. The stock dividends
declared and paid have been as follows:
1994 1993
----------------- -------------------
Shares Amount Shares Amount
------ --------- ------ ----------
First quarter........ 8,555 $855,000 - $ -
Second quarter....... 8,737 874,000 34,296 3,429,700
Third quarter........ 8,923 892,000 8,203 820,000
Fourth quarter....... 9,112 911,200 8,377 838,000
56
ITEM 6. SELECTED FINANCIAL DATA
For the Years For the Nine Months For the Years
Ended December 31, Ended December 31, Ended March 31,
----------------------- ------------------- ----------------------
1994 1993 1992 1992 1991
---------- ---------- ------------------- ---------- ---------
(Dollars in Thousands Except Per Share Amounts)
Interest income............................ $ 192,711 $ 220,376 $ 196,345 $ 326,946 $ 449,077
Interest expense........................... 133,959 147,968 132,910 244,145 364,882
Net interest income........................ 58,752 72,408 63,435 82,801 84,195
Provision for loan losses.................. 4,900 23,300 16,300 10,200 8,900
Gain (loss) on sale of securities, net..... 7,283 5,625 4,100 1,991 (2,728)
Gain on sale of loans, net................. 13,813 1,939 1,870 2,532 4,999
General and administrative expenses........ 61,039 67,159 50,055 61,510 65,763
Supervisory goodwill amortization and
valuation adjustments.................... - - 58,570 3,971 5,294
SAIF insurance and OTS assessments......... 8,759 8,414 6,222 8,130 8,464
Expenses for real estate and other
assets acquired in settlement of loans... 13,203 17,606 9,652 5,702 1,491
Income (loss) before extraordinary items... 10,966 (14,139) (59,234) 4,490 7,149
Extraordinary items, net of income taxes... - - - 95 4,579
Cumulative effect of change in
accounting principle..................... - - - 1,022 -
Net income (loss).......................... 10,966 (14,139) (59,234) 5,607 11,728
Preferred stock dividend requirements...... 3,532 4,501 4,652 8,506 8,765
Income (loss) per common share before
extraordinary items:
Primary................................ .52 (1.75) (11.16) (.70) (.28)
Fully diluted.......................... .52 * * * *
Income (loss) per common share before
cumulative effect of change in
accounting principle:
Primary................................ .52 (1.75) (11.16) (.69) .52
Fully diluted.......................... .52 * * * *
Net income (loss) per common share:
Primary................................ .52 (1.75) (11.16) (.51) .52
Fully diluted.......................... .52 * * * *
Weighted average yield on interest-
earning assets........................... 5.82% 5.88% 7.16% 8.69% 9.58%
Weighted average yield on interest-
bearing liabilities...................... 4.04% 3.91% 4.78% 6.48% 7.79%
Net interest rate spread................... 1.78% 1.97% 2.38% 2.21% 1.79%
December 31, March 31,
---------------------------------------------- --------------------
1994 1993 1992 1992 1991
---------- ---------- ------------------- ---------- ----------
Total assets............................... $3,345,572 $3,920,027 $3,910,104 $3,821,342 $4,546,223
Investments................................ 367,836 288,976 275,120 511,361 318,390
Mortgage-backed securities................. 1,779,537 1,343,772 885,246 680,752 1,370,667
Loans...................................... 952,714 1,922,257 2,311,110 2,364,443 2,586,395
Rhode Island covered assets................ 82,236 105,625 151,828 - -
Supervisory goodwill....................... - - - 59,553 84,420
Retail deposits............................ 2,393,084 2,952,082 3,205,654 3,462,339 3,292,932
Brokered deposits.......................... - 25,135 25,135 25,708 113,540
FHLB advances.............................. 203,527 373,000 140,000 43,239 495,177
Securities sold under agreements
to repurchase............................ 504,245 294,809 291,014 12,747 366,782
Other borrowings........................... 42,243 38,442 35,550 560 1,030
Stockholders' equity....................... 138,900 132,513 137,573 191,024 182,832
SELECTED RATIOS:(1)
- ---------------
Return on average assets................... .31% (.36)% (2.03)% .14 % .24%
Return on average common equity............ 8.10% (24.51)% (88.48)% (3.28)% 3.96
Average equity to average assets ratio..... 3.83% 3.36 % 4.41 % 4.74 % 3.58
Book value per common share................ $ 6.63 $ 6.83 $ 8.42 $ 12.21 $ 12.20
Tangible book value per common share....... 6.63 6.83 8.42 1.79 1.88
OTHER DATA:
- ----------
Branch offices at period end............... 33 51 54 45 38
Number of employees (full-time
equivalents)............................. 552 901 1,036 956 879
Market prices of common stock:
High..................................... $ 10 1/2 $ 7 1/2 $ 7 1/8 $ 7 1/2 $ 6 3/8
Low...................................... 4 3/8 3 3/4 3 1 3/4 1 1/4
At period end............................ 8 3/8 4 3/8 6 5/8 6 5/8 3 3/8
* Antidilutive
(1) For comparative purposes, ratios for the nine
months ended December 31, 1992 have been
annualized to reflect twelve
months of activity.
57
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Northeast Federal Corp. reported a net income of $11.0 million for the year
ended December 31, 1994 which met the projections issued by the Company in May
1994 that it would have net income for 1994 of $9 million to $11 million. In
addition, during 1994 the Company met its goals of (1) refocusing its franchise
to concentrate on the four primary markets in which it has its greatest presence
and potential for growth: the capital region of New York state, Hartford,
Connecticut, and Springfield and Worcester, Massachusetts; (2) reducing its
overall level of non-performing assets and (3) increasing its capital levels to
become a well capitalized thrift.
In June 1994, Shawmut National Corporation acquired ten branches of Northeast
Savings. Five of the branches were in eastern Massachusetts, and the remaining
five were in Rhode Island. At the time of sale, deposits in these branches
totalled approximately $410.8 million. In July and August 1994, the Company
also sold its four San Diego, California branches and its single branch on Cape
Cod, with total aggregate deposits of approximately $102.0 million among the
five branches.
In addition, Northeast Savings restructured its mortgage portfolio and reduced
its exposure in the California real estate market by closing a mortgage lending
operation in San Diego, California and discontinuing the origination of new
loans in that state. The Company also closed its mortgage lending office in
Denver, Colorado. On March 24, the Company completed the sale of $876.1 million
of adjustable rate single-family residential mortgage loans, of which $40.5
million were non-performing. Of the total loans sold, 93% were secured by
California properties. As a result, the loan portfolio declined to $952.7
million at December 31, 1994 from $1.9 billion at December 31, 1993.
During April and May 1994, Northeast Savings completed a series of transactions
in which it sold virtually all of its foreclosed real estate in California,
thus, further significantly reducing its level of geographic risk in California.
In December 1994, the Company sold Westledge Real Estate, a real estate
brokerage firm, which has been part of Northeast Savings since February of 1991.
Total REO at December 31, 1994 decreased to $13.2 million from $75.0 and $99.4
million at December 31, 1993 and 1992, respectively.
As a result of the sale of loans and REO and an overall improvement in
delinquencies, asset quality improved significantly throughout 1994 as
delinquencies and non-performing assets decreased throughout the year. Total
non-performing assets were 1.27% of total assets at December 31, 1994, compared
to 3.63% and 4.97% at December 31, 1993 and 1992. Non-accrual loans were $29.3
million at December 31, 1994 compared to $67.5 million and $95.0 million at
December 31, 1993 and 1992, respectively.
Due to the sharp reduction in non-performing assets and a significant reduction
in credit risk exposure in the residential mortgage loan portfolio, the
provision for loan losses totaled $4.9 million in 1994 compared to $23.3 million
in 1993 and $16.3 million for the nine months ended December 31, 1992. REO
operations expenses totalled $13.2 million for the year ended December 31, 1994
compared to $17.6 million for the twelve months ended December 31, 1993 and $9.7
million for the nine months ended December 31, 1992.
On June 11, 1994, Northeast Federal signed a definitive agreement for its
acquisition by Shawmut National Corporation through a merger of Northeast
Federal and a subsidiary of Shawmut. Shawmut and Northeast filed all
applications for regulatory approval of the merger during the quarter ended
December 31, 1994. Certain approvals have been received and other applications
remain pending. The Company has established a record date of February 10, 1995
and scheduled a special stockholders meeting on March 17, 1995 to vote on the
agreement and plan of merger. Shareholders of record as of February 10, 1995
will be eligible to vote. On February 1, 1995, Fleet and Shawmut signed a
definitive agreement for a strategic merger. Fleet indicated that the merger is
expected to be completed in the fourth quarter of 1995
58
and is subject to approvals by federal and state bank regulators and the
shareholders of both companies.
In addition, see the proxy statement dated February 10, 1995 for a special
meeting of stockholders to consider the agreement and plan of merger with
Shawmut National Corporation regarding projections of earnings for 1995 and
1996.
The results of operations for 1994 and changes in the Company's financial
condition in 1994 are discussed in more detail in the sections that follow.
RESULTS OF OPERATIONS
Northeast Federal Corp. and consolidated subsidiaries reported net income of
$11.0 million for the year ended December 31, 1994 and a primary and fully
diluted net income per common share of $.52 after preferred stock dividend
requirements. For the year ended December 31, 1993, the Company reported a net
loss of $14.1 million and a primary and fully diluted net loss per common share
of $1.75 after preferred stock dividend requirements, which compared to a net
loss of $59.2 million and a primary and fully diluted net loss per common share
of $11.16 after preferred stock dividend requirements for the nine months ended
December 31, 1992. The loss in 1993 was precipitated largely by an increase in
the provision for loan losses, a reduced net interest margin, and higher
expenses related to real estate and other assets acquired in settlement of loans
(REO). The net loss of $59.2 million for the nine months ended December 31,
1992 was substantially due to the Company's $56.6 million reduction in the value
of its supervisory goodwill.
Interest Income and Expense
- ---------------------------
Northeast Savings' principal source of earnings is its net interest income. Net
interest income depends primarily upon the difference, or interest rate spread,
between the combined weighted average yield the Association earns from its net
loans, mortgage-backed securities, and investment portfolio (together, the
interest-earning assets) and the combined weighted average rate paid on deposits
and borrowings (together, the interest-bearing liabilities). Interest rate
spread is affected by changes in the level of non-performing loans as well as by
various external factors, including national and regional economic trends
governing general interest rates, changes in accounting rules, changes in
federal legislation, loan demand, deposit flows, and competition for deposit
funds and mortgage loans. When the balance of interest-earning assets equals or
exceeds the balance of interest-bearing liabilities, net interest income as a
percent of interest-earning assets will equal or exceed the interest rate
spread. When the balance of the interest-earning assets is less than the
balance of the interest-bearing liabilities, net interest income as a percentage
of interest-earning assets will be less than the interest rate spread.
Total interest income was $192.7 million, $220.4 million, and $196.3 million for
the years ended December 31, 1994 and 1993 and for the nine months ended
December 31, 1992. The decrease in total interest income for the year ended
December 31, 1994 when compared to the same period in 1993 was due primarily to
a decrease in average interest-earning assets to $3.3 billion from $3.7 billion,
and by a decrease of 6 basis points in the weighted average yield earned on
interest-earning assets, to 5.82% for the year ended December 31, 1994 from
5.88% for the same period in 1993.
The increase in total interest income for the year ended December 31, 1993 when
compared to the nine months ended December 31, 1992, was due primarily to a
longer reporting period, which increased total interest income by $65.4 million.
However, primarily as a result of a 128 basis point decrease in the weighted
average yield on interest-earning assets from 7.16%, total interest income
increased by only $24.0 million.
59
The weighted average yields on the Association's principal categories of
interest-earning assets were as follows for the periods indicated.
For the Year Ended For the Nine Months Ended
December 31, December 31,
------------------ -------------------------
1994 1993 1992
--------- ------- -------------------------
(Annualized)
Investment securities, net....... 5.32% 4.91% 5.40%
Mortgage-backed securities, net.. 5.36% 5.15% 6.70%
Loans, net....................... 6.51% 6.27% 7.45%
The table below presents the Association's loans, before consideration of
allowances for losses, deferred fees, discounts, and other items, and mortgage-
backed securities at December 31, 1994 and the primary indexes which dictate
their repricing:
Loans Mortgage-backed Securities
-------------------------------------- -------------------------------------
Balance at Balance at
December 31, 1994 % of Portfolio December 31, 1994 % of Portfolio
----------------- -------------- ----------------- --------------
(Dollars in Thousands)
One-year adjustable rate:
One-Year Treasury Constant Maturity.. $ 559,602 57.18% $ 1,078,639 60.59%
Six-month adjustable rate:
One-Year Treasury Constant Maturity.. 82,616 8.44 61,143 3.44
Other adjustable rate...................... 171,553 17.53 185,207 10.40
Fixed rate................................. 160,036 16.36 433,191 24.33
Available-for-sale......................... 4,812 .49 22,037 1.24
---------- ------ --------- ------
$ 978,619 100.00% $ 1,780,217 100.00%
========== ====== ========= ======
A portion of the Association's loans and mortgage-backed securities are tied to
indexes other than the primary ones noted above. However, no significant portion
of the Association's portfolios is tied to any one of these other individual
indexes. The One-Year Treasury Constant Maturity Index was 7.21%, 3.61% and
3.62% at December 31, 1994, 1993 and 1992, respectively.
The yield earned by the Association on its interest-earning assets for the year
ended December 31, 1994 was impacted by a shift in the composition of the
Company's assets. For the year ended December 31, 1993, single-family
residential real estate loans earning an average rate of 6.15%, comprised 58.6%
of average earning assets, while mortgage-backed securities, earning an average
rate of 5.15%, made up only 28.1% of average earning assets. However, in late
1993 in order to mitigate credit risk and to enhance its risk-based capital
ratios, the Company converted over $300 million of loans into mortgage-backed
securities. In addition, a large portion of the proceeds from the March 1994
sale of $876.1 million of primarily California residential loans was invested in
mortgage-backed securities. As a consequence, for the year ended December 31,
1994, single-family residential real estate loans earning an average of 6.30%
comprised only 32.6% of average earning assets, while mortgage-backed securities
earning an average of 5.36% totaled 50.7% of average earning assets.
Due in part to the branch sales during 1994 the balance sheet was reduced, which
led to lower interest expense for the year ended December 31, 1994 compared to
the same period in 1993. Total interest expense was $134.0 million, $148.0
million and $132.9 million for the years ended December 31, 1994 and 1993 and
the nine months ended December 31, 1992. During the year ended December 31,
1994, the cost of funds increased 13 basis points to 4.04% while during the year
ended December 31, 1993, the cost of funds decreased to 3.91%, 87 basis points
lower than in the nine months ended December 31, 1992. Average interest-bearing
liabilities were $3.3 billion, $3.8 billion and $3.7 billion for the years ended
December 31, 1994 and 1993 and for the nine months ended December 31, 1992,
respectively.
60
Net interest income totaled $58.8 million, $72.4 million, and $63.4 million for
the years ended December 31, 1994 and 1993 and the nine months ended December
31, 1992, respectively. The following table presents the primary determinants
of the Company's net interest income for the periods presented:
For the Year Ended For the
December 31, Nine Months Ended
------------------------------------- December 31,
1994 1993 1992
--------------- ------------------ -----------------
(Dollars in Thousands)
Average interest earning assets........... $3,310,348 $3,745,278 $3,656,916
Average interest bearing liabilities...... 3,316,533 3,788,210 3,691,602
---------- ---------- ----------
Excess of average interest-bearing lia-
bilities over average interest-
earning assets.......................... $ 6,185 $ 42,932 $ 34,686
========== ========== ==========
Yield earned on average interest-earning 5.82% 5.88% 7.16%
assets..................................
Rate paid on average interest-bearing 4.04 3.91 4.78
liabilities............................. ------ ------ ------
Net interest rate spread.................. 1.78% 1.97% 2.38%
====== ====== ======
Net interest rate margin.................. 1.77% 1.93% 2.34%
====== ====== ======
Total interest income..................... $ 192,711 $ 220,376 $ 196,345
Total interest expense.................... 133,959 147,968 132,910
---------- ---------- ----------
Net interest income....................... $ 58,752 $ 72,408 $ 63,435
========== ========== ==========
The decrease in the interest rate spread and margin were due primarily due to
the shift in the composition of the balance sheet from higher earning single-
family residential loans to lower earning mortgage-backed securities and to the
increase in the cost of borrowings for the year being more rapid than increases
on yields earned. Since 1992, deposit cash flows have been impacted by the
lowest level of market interest rates in thirty years. Depositors who had been
accustomed to receiving a higher level of interest income than has been
available on Northeast Savings' deposit products have withdrawn their funds.
The outflow of depositor funds has been made up by borrowings costing 4.83% for
the year ended December 31, 1994 compared to 3.79% for the year ended December
31, 1993.
For the year ended December 31, 1993, the interest rate spread decreased to
1.97%, compared to 2.38% for the nine months ended December 31, 1992. The net
interest rate margins for the same respective periods were 1.93% and 2.34%. The
decrease was primarily due to the high level of refinancing during the low
interest rate environment in 1993. As refinanced loans with relatively higher
rates were replaced by loans whose initial coupon rate was often lower than 4%,
the Association's yield on interest-earning assets decreased. For the year
ended December 31, 1993, the average rate on single-family residential real
estate loans was 6.15%, compared to 7.33% for the nine months ended December 31,
1992. The interest rate margin is calculated by dividing annualized net
interest income by average total earning assets.
In addition, the average level of non-performing loans has a negative impact on
the interest spread, lowering the spread by 7, 14 and 26 basis points for the
years ended December 31, 1994 and 1993 and the nine months ended December 31,
1992.
61
The table below summarizes the Consolidated Rate/Volume Tables, which present
the degree to which changes in the Association's interest income, interest
expense, and net interest income are due to changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities.
Year Ended
December 31, 1994 versus
Year Ended
December 31, 1993
------------------------------------------------------
Amount of increase
(decrease) due to change in:
------------------------------------------------------
Rate/
Volume Rate Volume Total
------------- ------------ ----------- -----------
(In Thousands)
Interest income:
Loans receivable........................... $(69,302) $ 3,506 $(1,714) $(67,510)
Other interest-earning assets.............. 34,403 3,475 1,967 39,845
------- ------ ------ -------
Total interest income................. (34,899) 6,981 253 (27,665)
======= ====== ====== =======
Interest expense:
Deposits................................... (14,563) (5,523) 809 (19,277)
Borrowings................................. (1,900) 7,279 (111) 5,268
------- ------ ------ -------
Total interest expense................ (16,463) 1,756 698 (14,009)
------- ------ ------ -------
Change in net interest income................ $(18,436) $ 5,225 $ (445) $(13,656)
======= ====== ====== =======
Year Ended
December 31, 1993 versus
Nine Months Ended
December 31, 1992
---------------------------------------------------------------
Amount of increase
(decrease) due to change in:
---------------------------------------------------------------
Rate/
Volume Rate Volume Timing Total
------------ --------- -------- ------- --------
(In Thousands)
Interest income:
Loans receivable........................... $ (110) $(26,553) $ (260) $43,012 $16,089
Other interest-earning assets.............. 6,289 (18,642) (2,139) 22,434 7,942
------- ------- ------ ------ ------
Total interest income................. 6,179 (45,195) (2,399) 65,446 24,031
------- ------- ------ ------ ------
Interest expense:
Deposits................................... (17,712) (28,662) 3,057 40,556 (2,761)
Borrowings................................. 27,674 (1,688) (11,108) 2,941 17,819
------- ------- ------- ------ ------
Total interest expense................ 9,962 (30,350) (8,051) 43,497 15,058
------- ------- ------- ------ ------
Change in net interest income................ $ (3,783) $(14,845) $ 5,652 $21,949 $ 8,973
======= ======= ======= ====== ======
The tables above indicate that total interest income during the year ended
December 31, 1994 versus the year ended December 31, 1993 was positively
affected by $7.0 million from the increase in average yield realized on
interest- earning assets, and negatively impacted by $34.9 million from the
decrease in the level of interest earning assets. Total interest expense was
impacted by $1.8 million from the increase in the average cost of interest-
bearing liabilities, particularly the increase in borrowings, and favorably
impacted by $16.5 million from a reduction in the level of average interest-
bearing liabilities. Net interest income was negatively impacted by $18.4
million due to changes in the levels of interest-earning assets and interest-
bearing liabilities.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the years ended December 31, 1994 and 1993,
and the nine months ended December 31, 1992 was $4.9 million, $23.3 million and
$16.3 million, respectively. The decrease was due to a reduction in non-
performing assets and a significant reduction in credit risk exposure in the
residential mortgage loan portfolio which resulted from the sale of $876.1
million of adjustable rate single-
62
family real estate loans in March 1994.
The allowance for loan losses at December 31, 1994 was $16.5 million lower than
at December 31, 1993, due to the change in the loan portfolio risk. The factors
considered in determining the adequacy of the allowance for loan losses on the
Association's loan portfolio are management's judgment regarding prevailing and
anticipated economic conditions, historical loan loss experience in relation to
outstanding loans, the diversification and size of the loan portfolio, the
results of the most recent regulatory examinations available to the Association,
the overall loan portfolio quality, and the level of loan charge-offs. The most
recent examination of the Association by the OTS was completed in the third
quarter of 1994. The activity in the allowance for loan losses for the years
ended December 31, 1994 and 1993, and the nine months ended December 31, 1992
can be found in Note 7 to the Consolidated Financial Statements. Although
management believes that the allowance for loan losses is adequate at December
31, 1994, based on the quality of the loan portfolio at that date, further
additions to the allowance may be necessary if a change in market conditions was
to occur.
Net charge-offs for the periods indicated by type of loan were:
For the Year
Ended December 31, For the Nine Months
----------------------------------------------- Ended December 31,
1994 1993 1992
------------------------ ------------------- -------------------
(Dollars in Thousands)
Single-family residential real
estate loans.......................... $(5,304) $(14,659) $(12,297)
Consumer loans.......................... (19) 5 (67)
Residential construction loans.......... - - -
Income property loans................... (102) (1,395) -
------- -------- --------
Total net charge-offs................. $(5,425) $(16,049) $(12,364)
======= ======== ========
As a percent of average loans........... .46% .69% .54%
======= ======== ========
The decrease in single-family residential real estate loan net charge-offs for
the year ended December 31, 1994 was due to the reduction of the credit risk in
this portfolio, which resulted from the aforementioned sale of adjustable rate
single-family real estate loans in March 1994. In addition, management believes
that the decrease in single-family residential real estate loan net charge-offs
is indicative of a declining level of non-performing assets and a stabilization
of housing values in the Company's primary market areas. The higher levels of
single-family residential real estate loan net charge-offs for the year ended
December 31, 1993 and the nine months ended December 31, 1992 was due to general
economic conditions, particularly the recessions in New England and California
in 1992 which continued into 1993. The increase in charge-offs on income
property loans for the year ended December 31, 1993 resulted from the sale in
April 1993 of the Association's portion of an income property loan
participation. The Association's portion of this participation had been
included in non-accrual loans since March 15, 1992.
NON-PERFORMING ASSETS. The risks and uncertainties involved in originating
loans may result in loans becoming non-performing assets. Non-performing assets
include non-accrual loans and real estate and other assets acquired in
settlement of loans.
63
The following table presents the Association's non-performing assets and
restructured loans at the dates indicated.
December 31,
---------------------------------------------------
1994 1993 1992
-------------- ---------- -----------
(Dollars in Thousands)
Non-accrual loans:
Single-family residential real estate. $27,259 $ 65,770 $ 87,949
Consumer................................ 902 1,315 1,741
Income property......................... 1,170 377 5,299
------- -------- --------
Total non-accrual loans............... 29,331 67,462 94,989
------- -------- --------
REO:
Single-family residential............... 11,196 57,165 83,605
Hotels.................................. - 6,453 6,408
Apartment building...................... - 5,270 4,464
Real estate brokerage operations........ - 1,744 1,544
Office, retail, industrial 1,376 3,357 2,499
complexes; land.......................
Residential subdivisions................ 620 973 856
------- -------- --------
Total REO............................. 13,192 74,962 99,376
------- -------- --------
Total non-performing assets........... $42,523 $142,424 $194,365
======= ======== ========
Restructured loans........................ $ - $ 1,641 $ 1,100
======= ======== ========
Total non-accrual loans as a percent of 3.00% 3.44% 4.06%
total gross loans receivable............ ======= ======== ========
Total non-performing assets as a 1.27% 3.63% 4.97%
percent of total assets................. ======= ======== ========
Activity within the non-performing asset portfolio was as follows:
For the Year Ended
December 31,
---------------------------------------
1994 1993
----------------- ----------------
(In Thousands) (In Thousands)
Loans
- -----
Beginning balance...................................... $ 67,462 $ 94,989
New non-performing loans............................... 28,926 39,215
Net recoveries (charge-offs)........................... (197) 5
Returned to accrual status............................. (5,545) (2,621)
Loan sales............................................. (40,500) -
Payoffs................................................ (8,740) (2,898)
Transfers to REO through foreclosure................... (12,075) (61,228)
-------- --------
Ending balance......................................... $ 29,331 $ 67,462
======== ========
Real estate owned
- -----------------
Beginning balance...................................... $ 74,962 $ 99,376
Acquisitions of properties through 12,075 61,228
foreclosure..........................................
Writedowns............................................. (9,581) (10,082)
Sales, dispositions and other.......................... (64,264) (75,560)
-------- --------
Ending balance......................................... $ 13,192 $ 74,962
======== ========
The above information is not available for the nine months ended December 31,
1992.
64
The following table sets forth the effect of non-performing and restructured
loans on interest income for the periods indicated.
For the Year Ended For the Nine Months Ended
December 31, December 31,
------------------------------------------------
1994 1993 1992
------------------------- ------------------------ -------------------------
Non-Accrual Restructured Non-Accrual Restructured Non-Accrual Restructured
----------- ------------ ----------- ------------ ----------- ------------
(In Thousands)
Principal.................... $29,331 $ - $67,462 $1,641 $94,989 $1,100
======= ======= ====== ======= ====== =====
Gross amount of interest that
would have been recorded
during the period at the
original rate................ $ 2,296 $ - $ 4,810 $ 59 $ 5,580 $ 172
Interest recorded in income... 379 - 1,341 41 1,297 68
------- -------- ------- ------ ------- ------
Interest income not recognized $ 1,917 $ - $ 3,469 $ 18 $ 4,283 $ 104
======= ======= ====== ======= ====== ======
Non-performing assets decreased $99.9 million to $42.5 million at December 31,
1994 as a result of the Association's increased efforts to reduce the amount of
such assets. The Association seeks to reduce nonperforming assets by
aggressively pursuing loan delinquencies through collection and foreclosure
processes and, if foreclosed, disposing rapidly of the acquired real estate.
During the first and second quarters of 1994, as part of its efforts to dispose
of foreclosed real estate more rapidly, the Association sold virtually all of
its foreclosed properties in California in a series of three transactions. The
sale is discussed further in "Real estate and other assets acquired in
settlement of loans." Including this sale, the Association sold approximately
$64.3 million in foreclosed single-family residential real estate in 1994,
compared to $76.7 million in 1993.
Non-accrual loans. Non-accrual loans are loans on which the accrual of interest
- -----------------
has been discontinued. The Association's policy is to discontinue the accrual
of interest on loans when there is reasonable doubt as to its collectibility.
Interest accruals on loans are normally discontinued whenever the payment of
interest or principal is more than ninety days past due, or earlier when
conditions warrant it. For example, although a loan may be current, the
Association discontinues accruing interest on that loan when a foreclosure is
brought about by other owner defaults. When interest accrual on a loan is
discontinued, any previously accrued interest is reversed. A non-accrual loan
may be restored to an accrual basis when principal and interest payments are
current and full payment of principal and interest is expected. Non-accrual
loans at December 31, 1994 were $29.3 million, compared to $67.5 million and
$95.0 million at December 31, 1993 and 1992, respectively. At December 31,
1994, 1993 and 1992, the Association had no loans more than ninety days past due
on which it was accruing interest.
65
Below is a table which summarizes Northeast Savings' gross loan portfolio and
non-accrual loans as a percentage of gross loans by state and property type at
December 31, 1994.
Single-Family
Residential Residential
Real Estate Consumer Construction Income Property 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)
Connecticut $ 239,379 2.46% $ 6,523 1.48% $13,661 - % $ 19,723 1.35% $279,286 2.24%
New York 203,283 5.34 22,310 2.62 6,096 - 18,309 - 249,998 4.58
Massachusetts 149,862 2.36 6,731 2.33 105 - 12,558 7.79 169,256 2.72
California 40,854 6.47 726 - - - 15,792 - 57,372 4.61
Florida 36,613 1.18 244 .97 - - - - 36,857 1.18
New Jersey 16,338 14.41 169 - - - - - 16,507 14.26
New Hampshire 3,315 - 252 - - - 3,033 - 6,600 -
Other 153,833 .99 1,547 4.08 943 - 6,420 - 162,743 .98
------- ------ ------ ------ -------
Total $843,477 3.23% $38,502 2.34% $20,805 - % $75,835 1.54% $978,619 3.00%
======= ====== ====== ====== =======
Northeast Savings' single-family residential non-accrual loans have decreased by
approximately 58.6% since December 31, 1993, which is indicative of a declining
level of non-accrual loans and a stabilization of housing values in the
Company's primary market areas. Virtually all of these residential mortgage
non-accrual loans are collateralized by properties with an original loan-to-
value ratio of 80% or less. At December 31, 1994, 1993 and 1992, single-family
residential non-accrual loans were 92.9%, 97.5%, and 92.6%, respectively, of
non-accrual loans. The ratio of the allowance, including the unallocated
portion, attributed to single-family residential loans as a percentage of total
single-family residential non-accrual loans was 34.4%, 41.3%, and 21.2%, at
December 31, 1994, 1993 and 1992, respectively.
The Association's consumer loans, which totaled 4.0% of the total loan portfolio
at December 31, 1994, consist primarily of well-seasoned loans collateralized by
deposits or real estate. At December 31, 1994, 14.4% of the Association's
consumer loans were collateralized by deposits, while 77.6% consisted of loans
collateralized by real estate. The Association recorded net recoveries of
$19,000 for the year ended December 31, 1994 compared to net charge-offs of
$15,000 for the year ended December 31, 1993 and net recoveries of $67,000 for
the nine months ended December 31, 1992.
The non-accrual income property loans at December 31, 1994 primarily represent
two loans which have been reserved to their estimated fair values based on
current appraisals. The Association's income property loan portfolio, totaling
7.8% of the total loan portfolio at December 31, 1994, consists of well-seasoned
loans, most of which were originated prior to 1986.
Real estate and other assets acquired in settlement of loans. The $61.8 million
- ------------------------------------------------------------
decrease in REO at December 31, 1994 from December 31, 1993 was due primarily to
a series of three transactions completed during the first and second quarters of
1994. The Association sold virtually all of its foreclosed properties in
California in addition to other foreclosed properties. The REO properties sold
had a book value of $27.2 million. The Company recorded a $6.5 million loss on
these sales. In addition, the Company sold, in the normal course of business
during 1994, $43.2 million of REO, including $15.1 million of income property
REO during 1994, consisting of two hotels, two apartment buildings, an
industrial complex, and the real estate brokerage operations. Included in
income property REO of $2.0 million at December 31, 1994 were an industrial
building lot, one retail/office building, one single-family residential
subdivision, one property zoned for residential development and a residential
subdivision purchased as part of the Rhode Island acquisition.
Management believes that the single-family residential real estate market has
stabilized in New England.
66
However, the amount of non-accrual loans and real estate owned may increase if a
change in market conditions were to occur.
Non-Interest Income
- -------------------
Non-interest income, which is comprised primarily of fees for services and net
gains or losses on the sales of securities and loans, totaled $39.7 million,
$17.7 million, and $13.0 million for the years ended December 31, 1994 and 1993,
and the nine months ended December 31, 1992, respectively. The increase was due
to gains recognized on the aforementioned sales of branch offices, the sale of
California adjustable rate single-family loans, and to realized capital gains
allocated to the Association by two limited partnerships in which the
Association invested and which are held in the available-for-sale portfolio
offset by lower fees charged to customers as a consequence of the branch sales.
Fees for services result principally from fees received for servicing loans and
fees charged to customers. Fees for services totaled $9.0 million, $10.2
million, and $7.1 million for the years ended December 31, 1994 and 1993 and the
nine months ended December 31, 1992, respectively. Total fees for services are
affected by the level of loans serviced for others and by the level of savings
deposits.
For the
For the Year Ended Nine Months Ended
December 31, December 31,
------------------------------- -----------------
1994 1993 1992
-------------- --------------- -----------------
(In Thousands)
Loan servicing fees......................... $ 2,972 $ 2,627 $ 793
Fees charged to customers................... 6,068 7,554 6,319
------ ------ ------
Total fees for services..................... $ 9,040 $10,181 $ 7,112
====== ====== ======
For the year ended December 31, 1994, loan servicing fees were impacted by the
sale of $164.2 million of GNMA servicing rights in the fourth quarter offset by
decreased amortization of excess servicing due to a lower level of prepayments
on the Company's loans and mortgage-backed securities in 1994. For the year
ended December 31, 1993, loan servicing fees were impacted by higher adjustments
to value and to increased amortization of the Association's purchased mortgage
servicing rights and deferred excess servicing resulting from higher prepayments
on underlying mortgage loans. The following table details fee income earned by
the Association on loans serviced for others for the periods indicated.
Interest losses on payoffs occur because, although a borrower may pay off a
mortgage early in the month, the Association must still remit an entire month's
interest to the investor.
For the
For the Year Ended Nine Months Ended
December 31, December 31,
--------------------------------------- -----------------
1994 1993 1992
--------------------------------------- -----------------
(In Thousands)
Gross servicing fees.................. $ 8,453 $ 7,326 $ 6,755
Less:
Amortization........................ (1,946) (2,674) (2,316)
Adjustment to value
due to prepayments................ - (993) (2,407)
Adjustment to value due to sale of
servicing rights.................. (2,451) - -
Interest loss on payoffs............ (1,084) (1,032) (1,239)
------ ------ ------
Net servicing fees.................... $ 2,972 $ 2,627 $ 793
====== ====== ======
67
Fees charged to customers were $6.1 million, $7.6 million, and $6.3 million for
the years ended December 31, 1994 and 1993 and the nine months ended December
31, 1992, respectively.The decrease of $1.5 million in fees during 1994 was
mainly due to the aforementioned branch sales.
Non-interest income for the year ended December 31, 1994 and 1993 and the nine
months ended December 31, 1992 included net realized gains on securities of $7.3
million, $5.6 million and $4.1 million, respectively, on sales of securities.
For the years ended December 31, 1994 and 1993 and the nine months ended
December 31, 1992, net gains included $7.3 million, $3.6 million and $1.9
million, respectively, on investment securities. For the year ended December
31, 1993 and for the nine months ended December 31, 1992, net gains included
$2.0 million and $2.2 million, respectively, on mortgage-backed securities.
Included in these gains, for the years ended December 31, 1994 and 1993, and the
nine months ended December 31, 1992 were $7.0 million, $2.9 million, and
$880,000, respectively, of realized capital gains allocated to the Association
by two limited partnerships in which the Association invested and which are held
in the available-for-sale portfolio. For further information related to sales
of investment securities and mortgage-backed securities, see Notes 5 and 6 to
the Consolidated Financial Statements.
Non-interest income for the year ended December 31, 1994 included net gains on
sale of loans of $13.8 million compared to $1.9 million for both the year ended
December 31, 1993, and the nine months ended December 31, 1992. For the year
ended December 31, 1994, total proceeds from sales of loans totaled $951.8
million, $108.2 million of which was due to sales of loans from the available-
for-sale portfolio. The remaining proceeds resulted primarily from the sale of
California adjustable rate mortgages. For the year ended December 31, 1993,
proceeds from sales of loans totaled $279.7 million, $231.2 million of which
resulted from sales of loans from the available-for-sale portfolio. For the
nine months ended December 31, 1992, proceeds from sales of loans totaled $192.4
million, $184.3 million of which was from the available-for-sale portfolio. The
remaining $8.1 million in proceeds resulted from the sale of a whole loan
participation which was serviced by another financial institution. The
participation was sold because of management's concern over the creditworthiness
of that servicer.
Non-Interest Expense
- --------------------
Total non-interest expense totaled $83.0 million, $93.2 million, and $124.5
million for the years ended December 31, 1994 and 1993 and the nine months ended
December 31, 1992, respectively. The decrease in total non-interest expense for
the year ended December 31, 1994 when compared to the same period in 1993 was
due to reductions in general and administrative expenses and expenses related to
REO. As discussed below, the substantial decrease in non-interest expense for
the year ended December 31, 1993 compared to the nine months ended December 31,
1992 was due to a $56.6 million reduction of supervisory goodwill recorded in
1992.
As a result of an analysis of the value of its remaining supervisory goodwill,
Northeast Savings reduced supervisory goodwill by $56.6 million in the quarter
ended September 30, 1992. This reduction was precipitated by several factors
that had diminished the value of the Association's Connecticut and Massachusetts
franchises. Accordingly, the Company 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.
General and administrative expenses (compensation and benefits, occupancy and
equipment, and other general and administrative expenses) continued to decline,
totaling $61.0 million, $67.2 million and $50.1 million for the years ended
December 31, 1994, and 1993 and the nine months ended December 31, 1992,
respectively. The decrease in 1994 compared to 1993 was due to the reduction in
branch offices and mortgage origination offices as well as management's
continued efforts to streamline operations offset by
68
$1.0 million of expenses related to the proposed acquisition of Northeast by
Shawmut National Corporation.
The following table summarizes general and administrative expense for the
periods indicated:
For the
For the Year Ended Nine Months Ended
December 31, December 31,
1994 1993 1992
-------------------- --------------------- ------------------------
(Dollars in Thousands)
Compensation and benefits............................ $ 29,436 $ 38,748 $ 28,798
Occupancy and equipment.............................. 16,168 15,399 11,057
Other general and administrative..................... 18,137 21,654 17,203
------- ------- -------
Gross general and administrative expenses. 63,741 75,801 57,058
Less capitalized direct costs of loan
originations*...................................... 2,702 8,642 7,003
------- ------- -------
Net general and administrative expenses.......... $ 61,039 $ 67,159 $ 50,055
======= ======= =======
Annualized net general and administrative
expenses as a percent of average total
assets............................................. 1.75% 1.70% 1.72%
======= ======= =======
* In accordance with generally accepted accounting principles, certain loan
origination costs are deferred and amortized as an adjustment of yield over
the life of the loans closed.
As a result of the previously discussed $56.6 million reduction of supervisory
goodwill, there was no amortization of supervisory goodwill for the years ended
December 31, 1994 and 1993 but there was $2.0 million for the nine months ended
December 31, 1992. Expenses relating to real estate and other assets acquired
in settlement of loans decreased to $13.2 million for the year ended December
31, 1994, compared to $17.6 million and $9.7 million for the year ended December
31, 1993 and for the nine months ended December 31, 1992, respectively. REO
expense for the year ended December 31, 1994 included a loss of $6.5 million on
the sale in a series of three transactions of substantially all of the Company's
California residential REO portfolio. REO expenses increased in the year ended
December 31, 1993 due primarily to a loss of $6.8 million on the sale in a
single transaction of a portion of the Company's residential REO portfolio.
Included in REO expense for the nine months ended December 31, 1992 were
writedowns of $1.0 million on a real estate brokerage operation and $1.5 million
on a hotel in Connecticut. With the stabilization of housing values in New
England, management anticipates that total REO expense will continue to
decrease.
Income Taxes/Cumulative Effect of a Change in Accounting for Income Taxes
- -------------------------------------------------------------------------
Income tax benefit for the years ended December 31, 1994 and 1993 and the nine
months ended December 31, 1992 of $442,000, $12.2 million and $5.1 million,
respectively, represent federal and state taxes or benefits. For the year ended
December 31, 1994, the effective tax rate of (4.2)% differs from the combined
federal and state statutory rates primarily as a result of the elimination of
the valuation allowance and refund of prior year state taxes (See Note 15:
Income Taxes).
In February 1992, the FASB issued SFAS 109, "Accounting for Income Taxes," which
established 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.
The Company implemented SFAS 109 for the fiscal year ended March 31, 1992. In
accordance with this implementation, the Company recorded $21.1 million in
deferred tax assets and $3.6 million in deferred tax liabilities, as well as an
additional $1.0 million in income. The additional income was reported
separately in the Consolidated Statement of Operations as the cumulative effect
of a change in accounting principle. In addition, a valuation allowance was
established which reduced the deferred tax assets as of April 1, 1991. Due to
the Company's utilization of all remaining net operating loss carryforwards, the
valuation reserve was eliminated as of December 31, 1992. Also in accordance
with SFAS 109, the Company applied tax benefits of approximately
69
$20.9 million at April 1, 1991 and another $1.0 million at December 31, 1992 to
reduce its supervisory goodwill. At 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. At
December 31, 1994, the valuaiton allowance of $4.0 million was eliminated due to
current evidence supporting the realization of the entire deferred tax asset.
At December 31, 1994 and 1993, the Company's deferred tax asset totaled $40.8
million and $41.7 million and the deferred tax liability totaled $2.0 million
and $3.2 million, respectively.
On January 20, 1993, the OTS issued Thrift Bulletin No. 56 (TB 56) entitled
"Regulatory Reporting of Net Deferred Tax Assets." In TB 56, the OTS adopted
the Federal Financial Institutions Examination Council (FFIEC) recommendations
with respect to SFAS No. 109 and the resulting deferred tax assets that may be
included in regulatory capital. Deferred tax assets that are unlimited in the
computation of regulatory capital are those tax assets that can be realized from
taxes paid in prior carryback years and future reversal of existing taxable
temporary differences. Conversely, to the extent that the realization of
deferred tax assets depends on an institution's future taxable income or its tax
planning strategies, such deferred tax assets are limited for regulatory capital
purposes to the lesser of: (1) the amount of future taxable income that can be
realized within one year of the quarter-end report date, or (2) ten percent
(10%) of core capital.
In addition, TB 56 adopted transitional provisions which allow regulatory
capital to include deferred tax assets that would be reportable under Accounting
Principle Board Opinion No. 11 (APB 11) or SFAS No. 96 as of December 31, 1992.
Accordingly, at December 31, 1994, 1993 and 1992, the deferred tax assets
included in the Association's regulatory capital ratios were calculated in
accordance with this transitional guidance.
Quarter Ended December 31, 1994
- -------------------------------
Net income for the quarter ended December 31, 1994 totaled $1.8 million, which
resulted in a primary and fully diluted net income per common share of $.06
after preferred stock dividend requirements. This compares with a net loss of
$2.9 million for the quarter ended December 31, 1993, which resulted in a
primary and fully diluted net loss per common share of $.28 after preferred
stock dividend requirements.
Net interest income totaled $15.0 million, compared with $15.7 million for the
quarter ended December 31, 1993. The interest rate spread increased to 1.86%
for the quarter ended December 31, 1994 from 1.75% for the same quarter last
year since the yields earned by the Association responded more to the increase
in interest rates during the quarter ended December 31, 1994 than the yields
paid by the Association.
Loan charge-offs for the quarter ended December 31, 1994 were $1.1 million, down
from $3.2 million for the quarter ended December 31, 1993. The quarterly
provision for loan losses was also down, $1.0 million for the quarter ended
December 31, 1994, compared to $3.0 million for the same quarter last year.
Based on the decreased credit risk in the single-family real estate loan
portfolio, management decreased the allowance for loan losses at December 31,
1994 to $11.7 million, compared to $28.3 million at December 31, 1993.
REGULATORY CAPITAL
The OTS capital requirements have three separate measures of capital adequacy:
the first is a tangible core capital requirement of 1.5% of tangible assets; the
second is a core capital requirement of 3% of adjusted total assets; and the
third is a risk-based capital requirement that is 8% of risk-weighted assets.
On April 22, 1991, the OTS issued a notice of proposed rulemaking which would
establish a minimum leverage ratio of 3% of adjusted total assets, plus an
additional 100 to 200 basis points, determined on a case-by-case basis for all
but the most highly-rated thrift institutions. The OTS has proposed this
requirement in order to fulfill its obligation pursuant to FIRREA to adopt
capital requirements no less stringent than those required for national banks by
the OCC, which adopted a similar increased leverage requirement effective
December 31, 1990. Although the April 22, 1991 proposed leverage requirement is
not yet final, under the prompt corrective action rule which was issued by the
federal banking agencies on September 29, 1992 and which became final on
December 19, 1992, an institution must have a leverage ratio of 4% or greater in
order to be considered
70
adequately capitalized.
The OTS final rule adding an interest rate risk component to its risk-based
capital rule became effective January 1, 1994. Under the rule, savings
associations are divided into two groups, those with "normal" levels of interest
rate risk and those with greater than "normal" levels of interest rate risk.
Associations with greater than normal levels are subject to a deduction from
total capital for purposes of calculating risk-based capital. Interest rate
risk is measured by the change in Net Portfolio Value under a 2.0% change in
market interest rates. The Net Portfolio Value is the economic value of an
association's assets less the economic value of its liabilities adjusted for the
economic value of off-balance-sheet contracts. If an association's change in
Net Portfolio Value under a 2.0% change in market interest rates exceeds 2.0% of
the estimated economic value of its assets, it will be considered to have
greater than normal interest rate risk, and its total capital for risk-based
capital purposes will be reduced by one-half of the difference between its
measured interest rate risk and the normal level of 2.0%. The rule adjusts the
interest rate risk measurement methodology when interest rates are low. In the
event that the 3-month Treasury rate is below 4.0%, interest rate risk will be
measured under a 2.0% increase in interest rates and under a decrease in
interest rates equal to one-half the value of the 3-month Treasury rate.
Northeast Savings is required to implement this rule on June 30, 1995.
The following table reflects the regulatory capital position of the Association
as well as the current regulatory capital requirements at December 31, 1994 and
1993:
December 31, 1994 December 31, 1993
-------------------------------------- ------------------------------------
Fully Phased-in Fully Phased-In
Regulatory Capital Actual Regulatory Actual Regulatory
Requirement Regulatory Capital Capital Required Regulatory Capital Capital Required
------------------ ------------------- ---------------- ------------------ ----------------
(Dollars In Thousands)
Tangible core capital $177,291 $ 50,120 $167,244 $ 58,750
Percent 5.31% 1.50% 4.27% 1.50%
Core capital $177,419 $133,659 $167,795 $156,688
Percent 5.31% 4.00% 4.28% 4.00%
Risk-based capital $189,165 $ 96,425 $189,330 $137,287
Percent 15.69% 8.00% 11.03% 8.00%
71
The following table reconciles the Association's capital as calculated in
accordance with generally accepted accounting principles to tangible, core,
and risk-based capital as calculated in accordance with OTS regulations in
effect at December 31, 1994.
December 31, 1994
-------------------------------------------------------------
Capital-to- Required
Assets* Capital Assets Ratio Capital Excess
----------- -------- ------------- -------- ---------
(Dollars in Thousands)
Assets/capital........................... $3,341,798 $177,754
Adjustments to tangible assets/capital:
Core deposit intangibles............... (128) (128)
Nonincludable purchased mortgage
servicing rights..................... (335) (335)
---------- --------
Tangible assets/capital.................. 3,341,335 177,291 5.31% $ 50,120 $127,171
Adjustments to core assets/capital:
Core deposit intangibles............... 128 128
---------- --------
Core assets/capital...................... $3,341,463 177,419 5.31% $133,659 $ 43,760
========== ========
Adjustments to risk-based capital:
General valuation allowances**....... 11,746
--------
Risk-based assets/capital................ $1,205,317 $189,165 15.69% $ 96,425 $ 92,740
========== ========
* Total assets as reported to the OTS
** Subject to risk-based capital limitations of 1.25% of risk-based assets
before general valuation allowance adjustment
FINANCIAL CONDITION
Total assets were $3.3 billion at December 31, 1994 compared to $3.9 billion at
both December 31, 1993 and 1992. Asset size and composition have generally been
determined by seeking an optimal balance among regulatory capital requirements,
liquidity, yield, and risk.
Since 1989, the Company has pursued the operating strategy of providing
traditional thrift banking services, namely gathering retail deposits and
investing those deposits in adjustable rate residential mortgages. In 1993,
however, the Company adjusted this strategy in consideration of the prevailing
interest rate and economic environment. The low interest rate environment of
1993 brought with it high prepayments on existing mortgages, extremely
competitive rates on adjustable rate mortgages in some markets, and deposit
disintermediation as bank deposits were transferred into alternative investments
such as mutual funds.
As a result of these factors, beginning in the third quarter of 1993, the
Company modified its operating strategy both with regard to lending and to
balance sheet structure. This modified strategy was intended to reduce the
Company's loan concentration in California, to reduce credit costs, and to
increase the net interest margin. In September of 1993, the Association changed
its strategy by sharply reducing the volume of adjustable rate mortgages
originated for portfolio in California and by replacing the California
adjustable rate mortgage originations with the purchase of both adjustable rate
and 15 year fixed rate mortgage-backed securities. California portfolio
production was sharply curtailed in order to lower the concentration of
California loans in the loan portfolio due to the fact that initial discounts on
adjustable rate mortgage rates in California exceeded the Association's pricing
guidelines. Fixed rate mortgages with terms of 15 years or less were added to
the portfolio in order to increase the net interest spread and to reduce the
degree to which the Association's interest rate risk profile had become asset
sensitive. MBSs were added to meet the remaining asset generation needs of the
Company. Displacing whole loans, particularly those originated in California,
with MBSs reduced credit risk and increased the risk-based capital ratio. In
September 1993, the Company closed its loan origination office in Oregon and in
February 1994, the Company closed its loan origination offices in California and
Colorado. In March 1994, the
72
Company sold $876.1 million of single-family adjustable rate residential
mortgage loans, $40.5 million of which were non-performing and 93% of which were
secured by California properties. Finally, in a series of three transactions
totaling $27.2 million,during April and May 1994, the Company sold virtually all
of its foreclosed assets in California. These transactions reduced the level of
the Company's exposure to the California real estate market to 6% of the total
loan portfolio at December 31, 1994 from 47% of the total loan portfolio at
December 31, 1993.
Wholesale liabilities were $750.0 million or 23.4% of total liabilities at
December 31, 1994. These liabilities are generally more rate-sensitive and a
more costly source of funds for the Association than retail deposits. At
December 31, 1993 and 1992, wholesale liabilities comprised 19.3% and 13.0%,
respectively, of total liabilities. The increase in wholesale liabilities at
December 31, 1994 and 1993 was necessary for the Association to offset the
decrease in retail deposits, as discussed below.
Retail deposits, the Association's least expensive source of funds, decreased to
$2.4 billion at December 31, 1994, compared to $3.0 billion at December 31, 1993
and $3.2 billion at December 31, 1992. The decrease in deposits was due
primarily to the aforementioned sale of fifteen of the Association's branches
during 1994, a total of $513 million in deposits.
The following table shows the components of change in customer account balances:
For the Year Ended For the
December 31, Nine Months Ended
1994 1993 December 31, 1992
------------- ------------------- ------------------
(In Thousands)
Brokered deposits.................. $ (25,135) $ - $ (573)
Regular savings.................... (114,063) (67,513) 22,934
NOWs, Super NOWs and money market
savings.......................... (88,408) (51,409) 22,588
Certificates....................... 156,281 (100,067) (322,834)
-------- -------- --------
(71,325) (218,989) (277,885)
Acquisitions of deposits........... - - 314,668
Sales of Deposits.................. (512,808) - -
Withdrawals of accounts included
in acquisitions.................. - (34,583) (294,041)
-------- -------- --------
$(584,133) $(253,572) $(257,258)
======== ======== ========
Transaction accounts (regular savings, NOWs, SuperNOWs and money market
savings) comprised 34.0% of total customer account balances at December 31,
1994, compared to 40.9% at December 31, 1993 and 1992, respectively. In
response to the general market interest rate increases experienced in 1994,
there has been a shift from transaction accounts to certificates for the year
ended December 31, 1994.
CAPITAL RESOURCES AND LIQUIDITY
The primary source of funds for the Association is retail deposits, while
secondary sources include FHLB advances, repurchase agreements, debentures,
and internally-generated cash flows resulting from the maturity, amortization,
and prepayment of assets as well as sales of loans and securities from the
available-for-sale portfolios.
The Association's ongoing principal use of capital resources remains the
origination of single-family residential mortgage loans. However, with the
reduction in loan originations due to the market conditions and change in the
Association's operating strategy, capital resources were also used to purchase
mortgage-backed securities.
Total loans originated during the year ended December 31, 1994 were $223.3
million compared
73
to $758.6 million and $614.2 million for the year ended December 31, 1993 and
the nine months ended December 31, 1992, respectively. Total purchases of
mortgage-backed securities during the years ended December 31, 1994 and 1993,
and the nine months ended December 31, 1992, were $812.3 million, $361.5
million and $383.4 million, respectively. At December 31, 1994, the
Association was committed to fund mortgage loans totaling $15.1 million,
including $10.7 million in adjustable rate mortgages and to purchase $13.5
million of mortgage-backed securities. The Association expects to fund such
loans and mortgage-backed securities from its liquidity sources in 1995.
Net cash provided by operations during the year ended December 31, 1994
totaled $30.8 million. Adjustments to the net income of $11.0 million
provided $20.8 million of net cash, including proceeds from sales of loans
available-for-sale of $108.2 million. These proceeds resulted principally
from the sale of fixed rate loans which were originated by the Association
with the intent to sell in the secondary market. In addition, loans
originated and purchased for the available-for-sale portfolio utilized $70.2
million in cash. Remaining adjustments to net income utilized $17.1 in cash.
Net cash provided by investing activities during the year totaled $426.1
million. Loans originated and purchased used $155.1 million of cash, while
purchases of mortgage-backed securities and investment securities used cash of
$812.3 million and $518.2 million, respectively. Principal collected on loans
and mortgage-backed securities generated cash of $220.1 million and $386.8
million, respectively, while maturities of investment securities provided
$79.4 million in cash. Proceeds from sales of loans were $843.7 million,
while proceeds from sales of investment securities available-for-sale totaled
$294.8 million. Proceeds from REO sales generated $63.0 million in cash. All
other investing activities provided net cash of $23.9 million.
Net cash used in financing activities during the years ended December 31, 1994
totaled $536.2 million and resulted primarily from a decrease of $548.6
million in retail deposits. As noted previously, this decrease in deposits
was a consequence of the sale of 15 branch offices. Net decreases in FHLB
advances used $169.5 million in cash and the increase in securities sold under
agreements to repurchase provided cash of $209.4 million. Remaining financing
activities used $27.5 million in cash.
The Association has pledged certain of its assets as collateral for certain
borrowings. By utilizing collateralized funding sources, the Association is
able to access a variety of cost effective sources of funds. The assets
pledged consist of investment securities, mortgage-backed securities, and
loans. Management monitors its liquidity requirements by assessing assets
pledged, the level of assets available for sale, additional borrowing capacity
and other factors. Management does not anticipate any negative impact to its
liquidity from its pledging activities. Assets pledged totaled $1.0 billion
at December 31, 1994, compared to $902.7 million and $903.0 million at
December 31, 1993 and 1992, respectively. The following table details assets
pledged by the Association at December 31, 1994:
Summary of Pledged Collateral
--------------------------------------
Mortgage-backed Total
Securities Loans Collateral
--------------- --------- ----------
(In Thousands)
Borrowings:
FHLB advances..................... $209,881 $212,524 $ 422,405
Securities sold under agreements
to repurchase................... 557,709 - 557,709
Other obligations:
ESOP letter of credit............. 14,053 - 14,053
Other miscellaneous obligations... 17,466 - 17,466
------- ------- ---------
Total pledged collateral...... $799,109 $212,524 $1,011,633
======= ======= =========
74
The liquidity of the Association is measured by the ratio of its liquid assets
to the net withdrawable deposits and borrowings payable in one year or less. A
portion of these liquid assets are in the form of non-interest bearing reserves
required by Federal Reserve Board regulations. For total transaction account
deposits of $54.0 million or less, regulations require a reserve of 3%. For
total transaction account deposits in excess of $54.0 million, a 10% reserve is
required. The Federal Reserve Board may adjust the latter reserve percentage
within a range of 8-14%. The Association is also subject to OTS regulations
which require the maintenance of a daily average balance of liquid assets equal
to 5%. The ratio averaged 5.78% for the year ended December 31, 1994, compared
to 5.67% and 9.88% for the year ended December 31, 1993 and the nine months
ended December 31, 1992, respectively. In addition to the regulatory
requirements, the average liquidity ratio reflects management's expectations of
future loan fundings, operating needs, and the general economic and regulatory
climate. In addition, the Association is required by OTS regulations to
maintain a daily average balance of short-term liquid assets of 1%. The ratio
averaged 3.01%, 2.34%, and 5.00% for the years ended December 31, 1994 and 1993,
and the nine months ended December 31, 1992, respectively.
Each of the Company's sources of liquidity is vulnerable to various
uncertainties beyond the control of the Company. Scheduled loan payments are a
relatively stable source of funds, while loan prepayments and deposit flows vary
widely in reaction to market conditions, primarily prevailing interest rates.
Asset sales are influenced by general market interest rates and other unforeseen
market conditions. The Company's ability to borrow at attractive rates is
affected by its credit rating and other market conditions.
The ability of the Company to make capital distributions is restricted by the
limited cash resources of the Company and the ability of the Company to receive
dividends from the Association. The Association's payment of dividends is
subject to regulatory limitations, particularly the prompt corrective action
regulation, which prohibits the payment of a dividend if such payment would
cause the Association to become undercapitalized. Also, the Company and the OTS
entered into a Dividend Limitation Agreement as a part of the holding company
approval process which prohibited the payment of dividends to the holding
company without prior written OTS approval if the Association's capital is below
its fully phased-in capital requirement or if the payment of such dividends
would cause its capital to fall below its fully phased-in capital requirement.
The Company has declared and paid dividends on its $8.50 Cumulative Preferred
Stock, Series B in the form of one share of Series B preferred stock for each
$100 of the amount of dividends payable. The amount of dividends payable for
the second quarter of 1993 included accumulated and unpaid dividends from the
date of issuance (May 8, 1992) through June 30, 1993. The stock dividends
declared and paid have been as follows:
1994 1993
------------------ --------------------
Shares Amount Shares Amount
------ -------- ------ ----------
First quarter...... 8,555 $855,000 - $ -
Second quarter..... 8,737 874,000 34,296 3,429,700
Third quarter...... 8,923 892,000 8,203 820,000
Fourth quarter..... 9,112 911,200 8,377 838,000
In addition, the interest and principal repayment obligations on the 9%
Debentures constitute an impediment to the Company's ability to pay cash
dividends. The $42.2 million net balance of 9% Debentures at December 31, 1994
require annual interest payments of $3.8 million. In addition, the Company is
required to repurchase 6 2/3% of the 9% Debentures outstanding as of March 1,
1998 in each year commencing on May 1, 1998. Prior to May 1, 1997, the Company
may fulfill its interest payment obligation by the issuance of additional 9%
Debentures. In meeting this interest obligation, the Company has issued an
additional $8.8 million in 9% Debentures, which are included in the outstanding
principal at December 31, 1994. Any such issuance, however, increases the
aggregate annual interest obligation and also the amount of 9% Debentures
required to be repurchased annually commencing May 1, 1998.
75
INTEREST RATE RISK MANAGEMENT
Northeast Savings' net interest income is the difference between interest earned
on its loans and investment securities and interest paid on its deposits and
borrowings. Net interest income is subject to fluctuations due to changes in
interest rates. Such changes can affect the Association's net interest income
in several ways.
First, the cost of interest-bearing liabilities may respond more or less quickly
than the yield on earning assets to changes in interest rates if the volume of
liabilities maturing or repricing in any period is greater or less than the
volume of earning assets maturing or repricing in the same period. To the
extent that the volume of liabilities maturing or repricing in any period is not
matched by a corresponding volume of assets, the Association has a repricing gap
or mismatch, and net interest income is subject to change as interest rates
change. The Association's maturity and repricing mismatches are measured by the
asset/liability gap report. Unlike the traditional position of many thrift
institutions which have a larger volume of liabilities maturing or repricing
within one year than assets maturing or repricing, Northeast Savings has a
larger volume of assets maturing or repricing than liabilities for all time
frames from one to ten years on a cumulative basis. As a consequence, over any
period of one year or longer, excluding all other factors, the Association's
interest-earning assets can be expected to respond more to changes in interest
rates than its interest-bearing liabilities resulting in an increase in net
interest income when interest rates rise and a decrease when interest rates
fall. For periods shorter than one year, however, net interest income may
decrease when interest rates rise due to the larger volume of liabilities
maturing or repricing within six months than assets maturing or repricing.
76
The Company's gap results at December 31, 1994, are reported in the following
table. The one year gap as a percentage of total assets was a positive 3.41% at
December 31, 1994, compared to a positive 13.06% and 10.54% at December 31, 1993
and 1992, respectively.
Interest Sensitivity Period
---------------------------------------------------------------------------
Within 6 Months- Over 1- Over 5- Over 10
6 Months 1 Year 5 Years 10 Years Years Total
----------- ---------- ---------- ---------- ----------- -----------
(Dollars in Thousands)
December 31, 1994
Interest-earning assets:
Interest-bearing deposits, federal funds
sold and investment securities, net..... $ 70,194 $ 34,005 $188,181 $ 41,670 $ 33,786 $ 367,836
Mortgage-backed securities, net........... 834,862 537,437 176,646 215,066 15,526 1,779,537
Loans, net:
Single-family residential real estate
loans:
Adjustable rate....................... 363,352 324,762 27,050 - - 715,164
Fixed rate............................ 8,948 4,490 30,503 40,189 15,333 99,463
Consumer loans.......................... 20,071 2,280 13,188 2,441 - 37,980
Income property loans................... 41,560 2,063 14,923 15,181 87 73,814
Residential construction loans.......... 8,708 - - - - 8,708
Rhode Island covered assets............. 47,538 8,032 11,148 7,780 - 74,498
---------- -------- -------- -------- --------- ----------
Total interest-earning assets............... $1,395,233 $913,069 $461,639 $322,327 $ 64,732 $3,157,000
========== ======== ======== ======== ========= ==========
Interest-bearing liabilities:
Deposits:
NOW and Super NOW accounts.............. $ 43,010 $ 2,861 $ 20,431 $ 20,294 $ 69,416 $ 156,012
Money market deposit accounts........... 275,489 - - - - 275,489
Regular savings......................... 119,781 5,905 42,165 41,883 143,263 352,997
Certificates of deposit................. 647,605 442,089 431,849 57,722 - 1,579,265
---------- -------- -------- -------- --------- ----------
Total deposits 1,085,885 450,855 494,445 119,899 212,679 2,363,763
---------- -------- -------- -------- --------- ----------
Borrowings:
FHLB advances.......................... 162,127 - 40,000 1,400 - 203,527
Securities sold under agreements
to repurchase........................ 504,245 - - - - 504,245
Long term borrowings................... - - - - 42,243 42,243
Advance payment by borrowers for
taxes and insurance..................... - - - - 22,586 22,586
---------- -------- -------- -------- --------- ----------
Total borrowings.................... 666,372 - 40,000 1,400 64,829 772,601
---------- -------- -------- -------- --------- ----------
Total interest-bearing liabilities.......... $1,752,257 $450,855 $534,445 $121,299 $ 277,508 $3,136,364
========== ======== ======== ======== ========= ==========
Total interest-earning assets less
interest-bearing liabilities for
the period.............................. $ (357,024) $462,214 $(72,806) $201,028 $(212,776) $ 20,636
Cumulative total interest-earning
assets less interest-bearing
liabilities............................. $ (357,024) $105,190 $ 32,384 $233,412 $ 20,636 $ 20,636
Cumulative total interest-earning assets
less interest-bearing liabilities as
a percent of total assets............... (10.67)% 3.41% .97% 6.98% .62% .62%
For purposes of the above Interest Rate Sensitivity Analysis:
* Fixed rate assets are scheduled by contractual maturity; adjustable rate
assets are scheduled by the next repricing date; in both cases, assets that
have prepayment options are adjusted for the Company's estimate of
prepayments.
* NOW accounts are assumed to decay at a rate of 5% per year.
* Regular savings account decay assumptions used have the effect of repricing
$113.7 million funds in excess of the historical average balance within six
months. The historical average balance is assumed to decay at a rate of 5%
per year.
* Loans do not include the allowance for loan loss of $11.7 million.
* Loans do not include non-accrual loans of $29.3 million.
Second, net interest income is also subject to fluctuations due to changes in
interest rates if asset yields and liability costs are tied to different indexes
and the relationship or basis between the indexes changes. Since the large
majority of the Association's earning assets are indexed to United States
treasury rates, the Association relies predominantly on retail deposits for a
funding source and minimizes its reliance on
77
wholesale funding sources tied to the London Interbank Offered Rate in order to
minimize basis risk. Although retail deposit costs are not directly tied to
treasury rates, retail deposit costs bear a generally predictable relationship
to treasury rates. The proportion of total funding provided by retail deposits
was 77.2% at December 31, 1994 compared to 81.0% and 87.5% at December 31, 1993
and 1992, respectively.
Third, net interest income may also fluctuate if asset yields and liability
costs are not equally responsive to changes in interest rates as a result of
pricing by competitors. Competition for deposits and loans from other financial
institutions may require the Association to respond more quickly to changes in
interest rates on new loans and more slowly to changes in interest rates on new
deposits or vice versa. Typically, market competition has been slow to respond
to changing rates on deposit products and fast to respond to changing rates on
loan products. This difference in responsiveness can cause an expansion or
contraction of the interest rate spread between loans and deposits and a change
in net interest income.
In addition to maturity/repricing mismatch risk, basis risk, and competitive
pricing risk, Northeast Savings' net interest income is also subject to
fluctuations due to changes in asset and liability cash flows resulting from
changes in interest rates. Significant increases or decreases in interest rates
will change the rate at which current borrowers prepay their loans which will
result in higher rate loans prepaying more rapidly in low rate environments and
lower rate loans prepaying more slowly in high rate environments. These changes
in prepayments will generally affect the Association's net interest income in an
adverse fashion. Deposit cash flows may also be affected by changes in interest
rates. Significant increases in interest rates can induce depositors to make
premature withdrawals from certificates of deposit in order to receive the
higher current interest rate. Higher interest rates can also induce depositors
to shift funds from more liquid core deposit accounts into higher paying
alternatives. These changes in deposit cash flows when interest rates increase
generally have an adverse effect on the Association's net interest income
although the magnitude of the impact can be wholly or partially offset by
premature withdrawal penalties.
Significant changes in interest rates can also affect the Association's net
interest income due to the effect of interest rate caps on adjustable rate
loans. Interest rate caps which may be either period caps (such as annual or
semiannual) or lifetime caps limit the amount by which the interest rate may
change on a loan. If interest rates change in such a way that interest rate
caps prevent a loan from repricing to the fully indexed rate, net interest
income may be favorably or unfavorably impacted depending upon whether interest
rates have declined or increased.
In order to measure the effects of changes in cash flows and the impact of
interest rate caps and also to measure the full effects of all of the other
factors on net interest income, the Association performs a set of simulations
each quarter in order to quantify the effects of a wide range of interest rate
changes on the Association's net interest income. The effect of instantaneous
and sustained rate shocks of +/- 1%, +/- 2%, +/- 3%, and +/- 4% are simulated
along with the effects of quarterly rate changes of +/- 0.25%, +/- 0.50%, +/-
.75%, +/- 1.00% and the effects of changes in the slope of the yield curve of
+/- 1.50%. The results of these simulations at December 31, 1994 show that the
Association's interest rate risk exposure is liability sensitive. That is, net
interest income increases when rates decrease, and decreases when rates
increase. The decreases in net interest income under rising rates is due to the
combined effect of annual rate caps on adjustable rate mortgages and the
potential impact of premature withdrawals from certificates of deposit and the
transfer of those funds into higher rate certificates. Since the simulations on
which these results are based assume instantaneous and sustained rate changes,
the results exaggerate the impact of rate changes on net interest income since
interest rates do not typically increase or decrease by such magnitudes
instantaneously.
A comparison of these results at December 31, 1994 with the results of
simulations at December 31, 1993 and 1992 (see the table that follows) shows
that the Association's interest rate risk exposure has shifted from being
marginally asset sensitive at December 31, 1993 to being liability sensitive at
December 31, 1994. There was little change in the Association's interest rate
risk exposure between December 31, 1992 and December 31, 1993. The shift to a
liability sensitive interest rate risk position from December 31, 1993
78
to December 31, 1994 was primarily the result of the sale of 15 retail branch
offices with deposits totaling $512.8 million dollars. These retail deposits
were replaced by more volatile wholesale borrowings, the effect of which being
that the ratio of retail deposits to funding liabilities declined to 77.2% at
December 31, 1994 from 81.0% at December 31, 1993.
NORTHEAST SAVINGS, F.A.
Simulated Changes in Net Interest Income
For a Twelve Month Period From
--------------------------------------------------
Rate December 31, December 31, December 31,
Shock 1994 1993 1992
------- -------------- ---------------- -------------
4.0% (62.6)% (36.5)% (27.2)%
3.0 (41.4) (16.8) (10.8)
2.0 (23.7) 4.2 .5
1.0 (11.2) 0.9 1.3
(1.0) 6.58 4.1 (2.4)
(2.0) 7.42 (5.7) (9.5)
(3.0) 6.56 N/A* N/A*
(4.0) 5.56 N/A* N/A*
------------
* Rate changes of this magnitude result in negative short
term rates and simulated results that are not meaningful.
The Association also performs an analysis of the sensitivity of its portfolio
equity to changes in interest rates. Simulations on the effect of instantaneous
rate shocks of +/- 1%, +/- 2%, +/- 3%, and +/- 4% are performed and the results
are used to evaluate the long-term impact of interest rate changes on the
theoretical market value of the Association and its financial performance. The
results of the portfolio equity analyses indicate that the Association is more
liability sensitive than indicated by the net interest income analysis. Since
the portfolio equity analyses are static analyses and do not take into account
the effect of projected changes in the balance sheet such as a reduction in the
level of wholesale borrowings, the portfolio equity analyses indicate that
Northeast Savings' interest rate risk exposure is more strongly liability
sensitive.
The results of the simulations just noted are also used to measure compliance
with Northeast Savings' stated interest rate risk management policy. The
Association has a stated policy of limiting its exposure to interest rate
changes. Should the Association's exposure to plausible changes in interest
rates exceed the limits set by policy, the Association would be required to
hedge its exposure in such a way as to reduce it to less than the stated limits.
In general, the Association has relied on the implementation of its overall
strategy to manage interest rate risk rather than relying on the use of
financial hedging vehicles. The Association's investment and interest rate risk
management policies do permit the use of vehicles such as standard interest rate
swaps and interest rate caps to manage its interest rate risk exposure.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment
of a Loan," and SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities."
SFAS 114 addresses the accounting by creditors for impairment of certain loans.
It is applicable to all creditors and to all loans, uncollateralized as well as
collateralized, except large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, loans that are measured at fair value
or at the lower of cost or fair value, leases, and debt securities as defined in
SFAS 115. It applies to all loans that are restructured in a troubled debt
restructuring involving a modification of terms.
SFAS 114 requires that impaired loans that are within its scope be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient,
79
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent.
SFAS 114 amends SFAS 5, "Accounting for Contingencies," to clarify that a
creditor should evaluate the collectibility of both contractual interest and
contractual principal of all receivables when assessing the need for a loss
accrual. SFAS 114 also amends SFAS 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," to require a creditor to measure all loans that
are restructured in a troubled debt restructuring involving a modification of
terms in accordance with SFAS 114.
In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income recognition and Disclosures," that amends SFAS 114
and eliminates its provisions regarding how a creditor should report income on
an impaired loan. Originally, SFAS 114 would have required creditors to apply
one of two allowable methods. As a result of the amendment, creditors may now
continue to use existing methods for recognizing income on impaired loans,
including methods that are required by certain industry regulators. SFAS 118
also clarified SFAS 114's disclosure requirements.
SFAS 118 requires creditors to disclose additional information about its
impaired loans including disclosure of the recorded investment in impaired
loans, activity in the allowance for credit losses account, the creditor's
policy for recognizing interest income on impaired loans, and how the creditor
records cash receipts.
SFAS 114 and SFAS 118 apply to financial statements for fiscal years beginning
after December 15, 1994. Earlier application is encouraged. Management
implemented SFAS 114 for the year ended December 31, 1993. Since the Company
was previously in compliance with SFAS 114, the statement did not impact the
Company's results of operations or financial condition.
SFAS 115 addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Those investments are to be classified in three categories and
accounted for as follows:
* Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
* Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings.
* Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
equity.
SFAS 115 does not apply to unsecuritized loans. However, after mortgage loans
are converted to mortgage-backed securities, they are subject to its provisions.
SFAS 115 supersedes SFAS 12, "Accounting for Certain Marketable Securities," and
related Interpretations and amends SFAS 65, "Accounting for Certain Mortgage
Banking Activities," to eliminate mortgage-backed securities from its scope.
SFAS 115 is effective for fiscal years beginning after December 15, 1993. It is
to be initially applied as of the beginning of an enterprise's fiscal year and
cannot be applied retroactively to prior years' financial statements. However,
an enterprise may elect to initially apply SFAS 115 as of the end of an earlier
fiscal year for which annual financial statements have not previously been
issued. Correspondingly, the Company adopted SFAS 115 as of the end of the year
ended December 31, 1993. As a result, unrealized gains of $9.5 million, net of
tax effect, were recognized in stockholders' equity as of December 31, 1993 and
increased the Association's core capital by 22 basis points.
80
On November 28, 1994, the OTS adopted a revised policy that will no longer
require savings associations to include unrealized gains and losses on
available-for-sale debt securities in regulatory capital. This decision
reverses the interim OTS policy issued in August 1993, under which associations
computed their regulatory capital in accordance with SFAS 115. Under the
revised OTS policy, associations must value available-for-sale debt securities
at amortized cost for regulatory capital purposes. The revised policy is
effective for the quarterly reporting period ending June 30, 1995, however,
associations may elect to begin following the revised policy at December 31,
1994. The Association expects to apply this policy to its regulatory capital as
of June 30, 1995
On October 4, 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119 is
effective for financial statements issued for fiscal years ending after December
15, 1994. Management implemented SFAS 119 for the year ended December 31, 1994.
Since SFAS 119 is a disclosure document only, it has no impact on the Company's
results of operations of financial position. SFAS No. 119:
* Defines a "derivative financial instrument as a futures, forward, swap, or
option contract, or other financial instrument with similar characteristics.
Excluded from this definition are all on-balance-sheet receivables and
payables (such as mortgage-backed securities).
* Amends the existing requirements of SFAS No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," and SFAS 107, "Disclosures
about Fair Value of Financial Instruments." It requires disclosures about
amounts, nature, and terms of derivative financial instruments that are not
subject to SFAS No. 105 because they do not result in off-balance-sheet risk
of accounting loss.
* Requires that a distinction be made between financial instruments held or
issued for trading purposes (including dealing and other trading activities
measured at fair value with gains and losses recognized in earnings) and
financial instruments held or issued for purposes other than trading.
* Requires disclosure of average fair value and of net trading gains or losses
for entities that hold or issue derivative financial instruments for trading
purposes. For entities that hold or issue derivative financial instruments
for purposes other than trading, it requires disclosure about those purposes
and about how the instruments are reported in financial statements. For
entities that hold or issue derivative financial instruments, and account for
them as hedges of anticipated transactions, it requires disclosure about the
anticipated transactions, the classes of derivative financial instruments
used to hedge those transactions, the amounts of hedging gains and losses
deferred, and the transactions or other events that result in recognition of
the deferred gains or losses in earnings.
* Encourages, but does not require, quantitative information about market risks
of derivative financial instruments, and also of other assets and liabilities
that is consistent with the way the entity manages or adjusts risks and that
is useful for comparing the results of applying the entity's strategies to
its objectives for holding or issuing the derivative financial instruments.
* Amends SFAS No. 105 to require disaggregation of information about financial
instruments with off-balance-sheet risk of accounting loss by class, business
activity, risk, or other category that is consistent with the entity's
management of those instruments.
* Amends SFAS No. 107 to require that fair value information be presented
without combining, aggregating, or netting the fair value of derivative
financial instruments with the fair value of nonderivative financial
instruments and be presented together with the related carrying amounts in
the body of the financial statements, a single footnote, or a summary table
in a form that makes it clear whether the amounts represent assets or
liabilities.
81
On June 30, 1993, the FASB issued a proposed Statement of Financial Accounting
Standards, "Accounting for Stock-based Compensation" (the proposed Statement).
The proposed Statement would establish financial accounting and reporting
standards for stock-based compensation paid to employees. It would supersede
APB 25, "Accounting for Stock Issued to Employees." The proposed requirements
also would apply to other transactions in which equity instruments are issued to
suppliers of goods or services.
The proposed Statement would require recognition of compensation cost for the
fair value of stock-based compensation paid to employees for their services.
Although this proposed Statement would apply to all forms of stock-based
compensation, its most notable effect would be to significantly reduce the
anomalous results of the current accounting for fixed and performance stock
options under APB 25. Performance stock options usually are less valuable than
fixed stock options, but application of the requirements of APB 25 typically
results in recognition of compensation cost for performance stock options and
none for fixed stock options.
Since June 1994, the FASB has been re-deliberating the issues in the proposed
Statement with a focus on the measurement of the value of stock option grants.
The FASB has explored alternative measurement dates, including the vesting date,
as well as additional modifications to the grant date approach in the proposed
Statement that might help resolve some of the measurement concerns.
In December 1994, the FASB decided to work toward improving disclosures about
stock-based employee compensation rather than requiring an expense charge in the
income statement. The FASB expects to encourage, but not require, companies to
adopt a new method that accounts for stock compensation awards based on their
estimated fair value at the date they are granted. Companies would be
permitted, however, to continue accounting under Opinion 25. Those companies
that do not recognized expense would have to disclose in a footnote the effect
on net income had the company recognized expense for them based on FASB-
specified guidelines.
The elective accounting approach would apply the same method to both fixed and
variable or performance-based plans, which was one of the objectives of the
project. The proposed disclosures will permit comparability between those
companies that elect the new accounting with those that do not.
On November 22, 1993, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 93-6 (SOP 93-6), "Employers' Accounting for
Employee Stock Ownership Plans." This SOP supersedes AICPA SOP 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans," which was
issued in December 1976. SOP 93-6 applies to all employers with ESOPs, both
leveraged and nonleveraged and requires the following:
. Employers should report the issuance of new shares or the sale of treasury
shares to the ESOP when the issuance or sale occurs and should report a
corresponding charge to unearned ESOP shares, a contra-equity account.
. For ESOP shares committed to be released in a period to compensate employees
directly, employers should recognize compensation cost equal to the fair
value of the shares committed to be released.
. For ESOP shares committed to be released in a period to settle or fund
liabilities for other employee benefits, such as an employer's match of
employees' 401(k) contributions or an employer's obligation under a formula
profit-sharing plan, employers should report satisfaction of the liabilities
when the shares are committed to be released to settle the liabilities.
Compensation cost and liabilities associated with providing such benefits to
employees should be recognized the way they would be if an ESOP had not been
used to fund the benefit.
. For ESOP shares committed to be released to replace dividends on allocated
shares used for debt service, employers should report satisfaction of the
liability to pay dividends when the shares are
82
committed to be released for that purpose.
. Employers should credit unearned ESOP shares as the shares are committed to
be released based on the cost of the shares to the ESOP. The difference
between the fair value of the shares committed to be released and the cost of
those shares to the ESOP should be charged or credited to additional paid-in
capital.
. Employers should charge dividends on allocated ESOP shares to retained
earnings. Employers should report dividends on unallocated shares as a
reduction of debt or accrued interest or as compensation cost, depending on
whether the dividends are used for debt service or paid to participants.
. Employers should report redemptions of ESOP shares as purchases of treasury
stock.
. Employers should report loans from outside lenders to ESOPs as liabilities in
their balance sheets and should report interest cost on the debt. Employers
with internally leveraged ESOPs should not report the loan receivable from
the ESOP as an asset and should not report the ESOP's debt from the employer
as a liability.
. For earnings-per-share (EPS) computations, ESOP shares that have been
committed to be released should be considered outstanding. ESOP shares that
have not been committed to be released should not be considered outstanding.
SOP 93-6, although it does not change the existing accounting for nonleveraged
ESOPs, contains guidance for nonleveraged ESOPs. SOP 93-6 also addresses issues
concerning pension reversion ESOPs, ESOPs that hold convertible preferred stock,
and terminations, as well as issues related to accounting for income taxes. SOP
93-6 also contains disclosure requirements for all employers with ESOPs,
including those that account for ESOP shares under the grandfathering
provisions.
SOP 93-6 is effective for fiscal years beginning after December 15, 1993.
Employers are required to apply the provisions of SOP 93-6 to shares purchased
by ESOPs after December 31, 1992, that have not been committed to be released as
of the beginning of the year of adoption. Employers are permitted, but not
required, to apply the provisions of SOP 93-6 to shares purchased by ESOPs on or
before December 31, 1992, that have not been committed to be released as of the
beginning of the year of adoption. The Company adopted SOP 93-6 as of January
1, 1994 for all shares that were not committed to be released as of January 1,
1994.
On December 28, 1994, the Accounting Standards Executive Committee of the AICPA
issued SOP 94-6, "Disclosures of Certain Significant Risks and Uncertainties,"
which requires all reporting entities other than state and local governments
that prepare financial statements in conformity with generally accepted
accounting principles to include in their financial statements disclosures about
the nature of their operations and use of estimates in the preparation of
financial statements. In addition, if specified disclosure criteria are met, it
requires such entities to include in their financial statements disclosures
about certain significant estimates, current vulnerability due to
concentrations.
The provisions of SOP 94-6 are effective for financial statements issued for
fiscal years ending after December 15, 1995, and for financial statements for
interim periods in fiscal years subsequent to the year for which the SOP is
first applied. Early application is encouraged but not required. Since SOP 94-
6 is a disclosure document only, it has no impact on the Company's results of
operations or financial position.
83
CONSOLIDATED AVERAGE BALANCE SHEETS
The following tables reflect the Company's consolidated average balance sheets
for the periods indicated as well as interest income and expense and average
rates earned and paid on each major category of interest-earning assets and
interest-bearing liabilities. Average balances are calculated predominantly on
a daily basis. Average balances of loans include non-accrual loans. The
interest rate spread is calculated as the average rate earned on total interest-
earning assets less the average rate paid on total interest-bearing liabilities.
The interest rate margin is calculated by dividing net interest income by total
interest-earning assets.
For the Year Ended
December 31,
-------------------------------------------------------------------------------
1994 1993
---------------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Rate Average Income/ Rate
Balance Expense % Balance Expense %
----------- ------------- -------- ----------- --------- -------
(Dollars in Thousands)
ASSETS
Interest-earning assets:
Interest-bearing deposits
and federal funds sold.... $ 43,761 $ 2,378 5.43% $ 32,608 $ 1,085 3.33%
Investment securities,
net....................... 304,199 16,176 5.32 223,303 10,970 4.91
Mortgage-backed
securities, net.......... 1,677,593 89,946 5.36 1,052,528 54,205 5.15
Loans, net:
Single-family
residential real
estate.................. 1,080,712 68,111 6.30 2,193,138 134,814 6.15
Consumer.................. 36,137 3,194 8.84 42,406 3,719 8.77
Residential construction.. 5,695 534 9.38 4,737 362 7.64
Income property........... 68,929 5,778 8.38 74,200 6,232 8.40
--------- ------- --------- -------
Total loans............ 1,191,473 77,617 6.51 2,314,481 145,127 6.27
--------- ------- --------- -------
Rhode Island covered
assets.................... 93,322 6,594 7.07 122,358 8,989 7.35
--------- ------- --------- -------
Total interest-earning
assets.................... 3,310,348 192.711 5.82% 3,745,278 220,376 5.88%
------- -------
All other assets............. 171,932 216,192
--------- ---------
Total Assets........... $3,482,280 3,961,470
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Brokered deposits.......... $ 9,047 860 9.51% $ 25,301 2,419 9.56%
Retail deposits:
Regular savings........... 461,141 10,030 2.18 637,835 15,146 2.37
NOWs, Super NOWs and
money market savings.... 544,370 11,539 2.12 656,134 15,399 2.35
Certificates............. 1,638,411 79,457 4.85 1,762,078 88,199 5.01
--------- ------- --------- -------
Total deposits............ 2,652,969 101,886 3.84 3,081,348 121,163 3.93
--------- ------- --------- -------
Borrowings:
FHLB advances............. 235,350 10,956 4.66 351,267 13,230 3.77
Securities sold under
agreements to
repurchase.............. 362,865 16,927 4.66 290,112 9,866 3.40
Other borrowings.......... 65,349 4,190 6.41 65,483 3,709 5.66
--------- ------- --------- -------
Total borrowings.......... 663,564 32,073 4.83 706,862 26,805 3.79
--------- ------- --------- -------
Total interest-bearing
liabilities............... 3,316,533 133.959 4.04% 3,788,210 147,968 3.91%
-------
All other liabilities........ 32,460 40,095
Stockholders' Equity......... 133,287 133,165
--------- ---------
Total Liabilities and
Stockholders'
Equity............... $3,482,280 $3,961,470
========= =========
Deficiency of interest-
earning assets over
interest-bearing
liabilities................ $ 6,185 $ 42,932
========= =========
Net Interest Income.......... $ 58,752 $72,408
======= ========
Interest Rate Spread......... 1.78% 1.97%
====== =====
Interest Rate Margin......... 1.77% 1.93%
====== =====
Ratio of average interest-
earning assets to
interest-
bearing liabilities........ 99.81% 98.87%
====== =====
For the Nine Months Ended
December 31,
-------------------------------
1992
-------------------------------
Interest Average
Average Income/ Rate
Balance Expense %
----------- --------- -------
..........................
ASSETS
Interest-earning assets:
Interest-bearing deposits
and federal funds sold... $ 51,858 $ 4,138 10.64%
Investment securities,
net....................... 377,806 15,31 5.40
Mortgage-backed
securities, net.......... 754,475 37,924 6.70
Loans, net:
Single-family
residential real
estate.................. 2,162,684 118,844 7.33
Consumer.................. 57,670 3,883 8.98
Residential construction.. 3,797 173 6.07
Income property........... 85,834 6,138 9.53
--------- ---------
Total loans............ 2,309,985 129,038 7.45
--------- ---------
Rhode Island covered
assets.................... 162,792 9,932 8.13
--------- ---------
Total interest-earning
assets.................... 3,656,916 196,345 7.16%
---------
All other assets............. 233,508
---------
Total Assets........... $3,890,424
=========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Brokered deposits.......... $ 25,292 1,816 9.53%
Retail deposits:
Regular savings........... 732,331 18,694 3.39
NOWs, Super NOWs and
money market savings.... 670,556 15,356 3.04
Certificates............. 2,003,288 88,058 5.83
--------- ---------
Total deposits............ 3,431,467 123,924 4.79
--------- ---------
Borrowings:
FHLB advances............. 54,242 3,056 7.48
Securities sold under
agreements to
repurchase.............. 153,149 4,111 3.56
Other borrowings.......... 52,744 1,819 4.58
--------- ---------
Total borrowings.......... 260,135 8,986 4.58
--------- ---------
Total interest-bearing
liabilities............... 3,691,602 132,910 4.78%
---------
All other liabilities........ 27,072
Stockholders' Equity......... 171,750
---------
Total Liabilities and
Stockholders'
Equity............... 3,890,424
=========
Deficiency of interest-
earning assets over
interest-bearing
liabilities................ 34,686
=========
Net Interest Income.......... $ 63,435
=========
Interest Rate Spread......... 2.38%
======
Interest Rate Margin......... 2.34%
======
Ratio of average interest-
earning assets to
interest-
bearing liabilities........ 99.06%
======
84
CONSOLIDATED RATE/VOLUME TABLES.
The following tables present the degree to which changes in the Association's
interest income, interest expense, and net interest income are due to changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities. The change due to average balance or volume is
computed by multiplying the change in the average balance of funds employed in
the current period by the interest rate for the prior period. The change due to
average rate is computed by multiplying the change in interest rates by the
average balance of funds in the prior period. The change due to rate/volume is
computed by multiplying the change in the average balance by the change in the
interest rate. The change due to timing results from the difference in the
length of the reporting periods.
Year Ended December 31, 1994 versus
Year Ended December 31, 1993
------------------------------------------------
Amount of Increase
(Decrease) Due to Change in:
------------------------------------------------
Volume Rate Rate/Volume Total
---------- --------- ----------- ---------
(In Thousands)
INTEREST INCOME:
Interest-bearing deposits
and federal funds sold.......... $ 371 $ 687 $ 235 $ 1,293
Investment securities, net........ 3,974 904 328 5,206
Mortgage-backed securities, net... 32,191 2,227 1,323 35,741
Loans, net:
Single-family residential real
estate........................ (68,382) 3,407 (1,728) (66,703)
Consumer........................ (550) 29 (4) (525)
Residential construction........ 73 82 17 172
Income property................. (443) (12) 1 (454)
-------- ------- ------- --------
Total loans................. (69,302) 3,506 (1,714) (67,510)
-------- ------- ------- --------
Rhode Island covered assets....... (2,133) (343) 81 (2,395)
-------- ------- ------- --------
Total interest income..... (34,899) 6,981 253 (27,665)
-------- ------- ------- --------
INTEREST EXPENSE:
Deposits:
Brokered deposits............... (1,554) (14) 9 (1,559)
Retail deposits:
Regular savings............... (4,196) (1,273) 353 (5,116)
NOWs, Super NOWs and money
market savings.............. (2,623) (1,491) 254 (3,860)
Certificates.................. (6,190) (2,745) 193 (8,742)
-------- ------- ------- --------
Total deposits.............. (14,563) (5,523) 809 (19,277)
-------- ------- ------- --------
Borrowings:
FHLB advances................... (4,366) 3,122 (1,030) (2,274)
Securities sold under
agreements to repurchase...... 2,474 3,667 920 7,061
Other borrowings................ (8) 490 (1) 481
-------- ------- ------- --------
Total borrowings............ (1,900) 7,279 (111) 5,268
-------- ------- ------- --------
Total interest expense.... (16,463) 1,756 698 (14,009)
-------- ------- ------- --------
Change in net interest income....... $(18,436) $ 5,225 $ (445) $(13,656)
======== ======= ======= ========
85
Year Ended December 31, 1993 versus
Nine Months Ended December 31, 1992
--------------------------------------------------------------
Amount of Increase
(Decrease) Due to Change in:
--------------------------------------------------------------
Volume Rate Rate/Volume Timing Total
---------- --------- ----------- --------- -----------
(In Thousands)
INTEREST INCOME:
Interest-bearing deposits
and federal funds sold.......... $ (2,048) $ (3,792) $ 1,408 $ 1,379 $(3,053)
Investment securities, net........ (8,350) (1,857) 760 5,104 (4,343)
Mortgage-backed securities, net... 19,976 (11,710) (4,626) 12,641 16,281
Loans, net:
Single-family residential real
estate........................ 2,231 (25,517) (359) 39,615 15,970
Consumer........................ (1,370) (120) 32 1,294 (164)
Residential construction........ 43 117 29 - 189
Income property................. (1,109) (975) 132 2,046 94
------- -------- -------- ------- -------
Total loans................. (205) (26,495) (166) 42,955 16,089
------- -------- -------- ------- -------
Rhode Island covered assets....... (3,289) (1,283) 319 3,310 (943)
------- -------- -------- ------- -------
Total interest income..... 6,084 (45,137) (2,305) 65,389 24,031
------- -------- -------- ------- -------
INTEREST EXPENSE:
Deposits:
Brokered deposits............... 1 8 - 594 603
Retail deposits:
Regular savings............... (3,202) (7,422) 958 6,118 (3,548)
NOWs, Super NOWs and money
market savings.............. (438) (4,644) 100 5,025 43
Certificates.................. (14,073) (16,604) 1,999 28,819 141
------- -------- -------- ------- -------
Total deposits.............. (17,712) (28,662) 3,057 40,556 (2,761)
------- -------- -------- ------- -------
Borrowings:
FHLB advances................... 22,211 (2,013) (11,024) 1,000 10,174
Securities sold under
agreements to repurchase...... 4,880 (248) (222) 1,345 5,755
Other borrowings................ 583 573 138 596 1,890
------- -------- -------- ------- -------
Total borrowings............ 27,674 (1,688) (11,108) 2,941 17,819
------- -------- ------- -------
Total interest expense.... 9,962 (30,350) (8,051) 43,497 15,058
------- -------- -------- ------- -------
Change in net interest income....... $(3,878) $(14,787) $ 5,746 $21,892 $ 8,973
======= ======== ======== ======= =======
86
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Management's Report 88
Reports of Independent Accountants 90
Consolidated Statement of Operations 92
Consolidated Statement of Financial Condition 93
Consolidated Statement of Changes in Stockholders' Equity 94
Consolidated Statement of Cash Flows 95
Notes to the Consolidated Financial Statements 96
87
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 accountants during their audit were valid and appropriate. The
independent accountants' report is presented on page 90.
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, 1994. 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, 1994.
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.
88
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, 1994.
/s/ Kirk W. Walters January 20, 1995
- -------------------------------------------
KIRK W. WALTERS
President and Chief Executive Officer
/s/ Lynne Carcia Wilson January 20, 1995
- -------------------------------------------
LYNNE CARCIA WILSON
Controller and Principal Accounting Officer
89
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. and subsidiaries (the Company) as of December 31,
1994 and 1993, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
represent fairly, in all material respects, the consolidated financial position
of Northeast Federal Corp. and subsidiaries at December 31, 1994 and 1993 and
the consolidated results of their operations and their cash flows for the years
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 LLP
Hartford, Connecticut
January 20, 1995
90
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Northeast Federal Corp.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Northeast Federal Corp. for the nine
months ended December 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 audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash
flows of Northeast Federal Corp. for the nine months ended December 31, 1992 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Hartford, Connecticut
January 18, 1993
91
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Nine Months Ended
Year Ended December 31, December 31,
------------------------------------- -----------------
1994 1993 1992
--------------- -------------- -----------------
Interest income:
Loans............................................. $ 77,617 $ 145,127 $ 129,038
Mortgage-backed securities........................ 89,946 54,205 37,924
Investment securities............................. 16,176 10,970 15,313
Rhode Island covered assets....................... 6,594 8,989 9,932
Other............................................. 2,378 1,085 4,138
---------- ---------- ----------
Total interest income.......................... 192,711 220,376 196,345
---------- ---------- ----------
Interest expense:
Deposits.......................................... 101,886 121,163 123,924
Federal Home Loan Bank advances................... 10,956 13,230 3,056
Other borrowings.................................. 21,117 13,575 5,930
---------- ---------- ----------
Total interest expense......................... 133,959 147,968 132,910
---------- ---------- ----------
Net interest income.......................... 58,752 72,408 63,435
Provision for loan losses............................ 4,900 23,300 16,300
---------- ---------- ----------
Net interest income after provision
for loan losses............................. 53,852 49,108 47,135
---------- ---------- ----------
Non-interest income:
Fees for services................................. 9,040 10,181 7,112
Gain on sale of securities, net................... 7,283 5,625 4,100
Gain on sale of loans, net........................ 13,813 1,939 1,870
Other non-interest income (loss).................. 9,537 (6) (41)
---------- ---------- ----------
Total non-interest income...................... 39,673 17,739 13,041
---------- ---------- ----------
Non-interest expenses:
Compensation and benefits......................... 27,459 32,324 23,126
Occupancy and equipment, net...................... 16,168 15,399 11,057
Other general and administrative.................. 17,412 19,436 15,872
Amortization of supervisory goodwill.............. - - 2,002
Supervisory goodwill valuation adjustment......... - - 56,568
SAIF insurance fund and OTS assessments........... 8,759 8,414 6,222
Real estate and other assets acquired in settle-
ment of loans................................... 13,203 17,606 9,652
---------- ---------- ----------
Total non-interest expenses.................... 83,001 93,179 124,499
---------- ---------- ----------
Income (loss) before income taxes........... 10,524 (26,332) (64,323)
Income tax benefit................................... (442) (12,193) (5,089)
---------- ---------- ----------
Net income (loss)........................... $ 10,966 $ (14,139) $ (59,234)
========== ========== ==========
Preferred stock dividend requirements................ $ 3,532 $ 4,501 $ 4,652
Net income (loss) applicable to common stockholders $ 7,434 $ (18,640) $ (63,886)
Net income (loss) per common share, primary and
fully diluted...................................... $ .52 $ (1.75) $ (11.16)
See accompanying Notes to the Consolidated Financial Statements
92
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
December 31,
----------------------------
1994 1993
------------ ------------
ASSETS
Cash and due from banks........................... $ 34,145 $ 51,705
Federal funds sold................................ 22,725 23,510
Securities purchased under agreements to resell... - 60,000
Investment securities, net (market value of
$190,269 and $42,502)........................... 202,376 42,589
Investment securities, available-for-sale, net.... 142,735 162,877
Mortgage-backed securities, net (market value of
$1,686,417 and $1,336,970)...................... 1,758,179 1,330,886
Mortgage-backed securities, available-for-sale,
net............................................. 21,358 12,886
Loans, net........................................ 947,902 1,876,181
Loans available-for-sale, net..................... 4,812 46,076
Rhode Island covered assets....................... 82,236 105,625
Interest and dividends receivable................. 17,828 17,540
Real estate and other assets acquired in settle-
ment of loans................................... 13,192 74,962
Premises and equipment, net....................... 27,401 32,368
Prepaid expenses and other assets................. 70,683 82,822
--------- ---------
Total assets............................... $3,345,572 $3,920,027
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits..................................... $2,393,084 $2,952,082
Brokered deposits................................... - 25,135
Federal Home Loan Bank advances..................... 203,527 373,000
Securities sold under agreements to repurchase...... 504,245 294,809
Uncertificated debentures........................... 42,243 38,442
Advance payments by borrowers for taxes and
insurance......................................... 22,586 28,337
Other liabilities................................... 40,987 75,709
--------- ---------
Total liabilities............................ 3,206,672 3,787,514
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
15,000,000 shares authorized:
$8.50 Cumulative Preferred Stock, Series B,
428,791 shares at December 31, 1994 and
394,199 shares at December 31, 1993 issued
and outstanding................................ 4 4
Common stock, $.01 par value, 25,000,000 shares
authorized: 14,353,996 shares at December 31,
1994 and 13,499,078 shares at December 31, 1993
issued and outstanding........................... 144 135
Additional paid-in capital......................... 191,756 185,960
Net unrealized gains on debt and equity
securities available-for-sale.................... 1,888 9,462
Accumulated deficit................................ (52,123) (59,557)
Stock dividend distributable....................... 911 838
Unallocated employee stock ownership plan
shares........................................... (3,680) (4,329)
---------- ----------
Total stockholders' equity................... 138,900 132,513
---------- ----------
$3,345,572 $3,920,027
========= =========
See accompanying Notes to the Consolidated Financial Statements
93
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, 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 Cumulative Pre-
ferred 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 Cumula-
tive Convertible Pre-
ferred Stock, Series A
into 7,647,500 shares
of common stock.......... (16) 77 (1,463) - - - - (1,402)
Stock dividend distri-
butable, 50,876 shares
of $8.50 Cumulative Pre-
ferred Stock, Series B... - - - - (5,088) 5,088 - -
Preferred stock dividend
payment in kind.......... - - 4,250 - - (4,250) - -
Unallocated employee stock
ownership plan shares.... - - - - - - 649 649
Net unrealized gains on
debt and equity secur-
ities 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
Net income................. - - - - 10,966 - - 10,966
Purchase of shares by
401-K plan............... - - 115 - - - - 115
Proceeds from exercise of
stock options............ - 1 134 - - - - 135
Proceeds from exercise of
stock warrants........... - 8 2,342 - - - - 2,350
Stock dividend distri-
butable, 35,327 shares
of $8.50 Cumulative Pre-
ferred Stock, Series B... - - - - (3,532) 3,532 - -
Preferred stock dividend
payment in kind.......... - - 3,459 - - (3,459) - -
Unallocated employee stock
ownership plan shares.... - - - - - - 649 649
Difference between fair
value and cost of re-
leased ESOP shares....... - - (254) - - - - (254)
Change in unrealized gains
on debt and equity secur-
ities available-for-sale. - - - (7,574) - - - (7,574)
-- --- ------- ------ ------- ----- ------ -------
Balance at December 31, 1994... $ 4 $144 $191,756 $ 1,888 $(52,123) $ 911 $ (3,680) $138,900
== === ======= ====== ======= ===== ====== =======
* 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
94
NORTHEAST FEDERAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year Ended Nine Months Ended
December 31, December 31,
-------------------------------
1994 1993 1992
-------------- -------------- -----------------
Cash flows from operating activities:
Net income (loss)............................................... $ 10,966 $ (14,139) $ (59,234)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization............................... 5,394 4,860 3,361
Amortization of fees, discounts, and premiums, net.......... 7,915 1,697 (6,820)
Amortization of and other adjustments to supervisory
goodwill.................................................. - - 59,553
Provision for loan losses................................... 4,900 23,300 16,300
Provision for losses on REO................................. 9,673 9,493 3,823
Gain on sale of securities.................................. (7,283) (5,651) (4,100)
Gain on sale of loans....................................... (13,813) (1,939) (1,870)
(Gain) loss on sale of other assets......................... 44 466 (253)
Gain on sale of branches.................................... (9,695) - -
Decrease (increase)in interest and dividends receivable..... (288) 3,802 2,792
Loans available-for-sale originated and purchased........... (70,204) (244,950) (148,397)
Proceeds from sales of loans available-for-sale............. 108,154 231,153 184,325
Decrease in accrued interest payable on deposits............ (1,041) (1,078) (3,185)
Decrease (increase) in prepaid expenses and other assets.... 12,329 (8,099) (14,347)
Increase (decrease) in other liabilities.................... (25,258) 19,125 (10,259)
--------- ---------- ----------
Total adjustments........................................ 20,827 32,179 80,923
--------- ---------- ----------
Net cash provided by operating activities.............. 31,793 18,040 21,689
--------- ---------- ----------
Cash flows from investing activities:
Loans originated and purchased.............................. (155,062) (513,239) (461,063)
Net decrease in loans due to sale of branches............... 1,805 -
Proceeds from sales of loans................................ 843,669 48,541 8,116
Principal collected on loans................................ 220,143 412,166 398,469
Net decrease in Rhode Island covered assets................. 23,389 46,203 26,308
Purchases of mortgage-backed securities..................... (798,212) (361,464) (383,401)
Purchases of mortgage-backed securities
available-for-sale........................................ (14,131) - -
Proceeds from sales of mortgage-backed securities
available-for-sale........................................ - 39,831 44,727
Principal collected on mortgage-backed securities........... 386,783 237,339 136,995
Purchases of investment securities.......................... (167,611) - (64,667)
Proceeds from sales of investment securities................ - 16,347 506
Proceeds from redemption of FHLB stock...................... (487) 554 8,283
Proceeds from maturities of investment securities........... 8,149 12,580 19,404
Purchases of investment securities available-for-sale....... (350,636) (239,426) (204,458)
Proceeds from sales of investment securities
available-for-sale........................................ 294,819 142,592 158,033
Proceeds from maturities of investment securities
available-for-sale....................................... 71,220 121,347 71,622
Proceeds from sales of real estate and other assets
acquired in settlement of loans.......................... 63,044 76,549 23,563
Net purchases of premises and equipment..................... (829) (3,294) (7,086)
--------- ---------- ----------
Net cash provided by (used in) investing activities 426,053 36,626 (224,649)
--------- ---------- ----------
Cash flows from financing activities:
Net decrease in retail deposits............................. (45,471) (252,494) (568,741)
Acquisition of Rhode Island deposits........................ - - 136,319
Sale of deposits............................................ (503,113)
Net decrease in brokered deposits........................... (24,813) - -
Increase (decrease) in advance payments by borrowers for
taxes and insurance...................................... (5,751) 6,603 1,461
Increase in securities sold under agreements to repurchase 209,436 3,795 278,267
Net increase (decrease) in short-term FHLB advances......... (24,273) 40,000 99,250
Proceeds from long-term FHLB advances....................... 7,800 228,000 -
Repayments of long-term FHLB advances....................... (153,000) (35,000) (2,500)
Proceeds from issuance of uncertificated sinking fund
debentures................................................ - - 33,450
Retirement of convertible subordinated debentures........... - (560) -
Reduction of ESOP debt guarantee............................ 394 649 4,147
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
Exercise of warrants........................................ 2,350
Issuance of 401K stock shares............................... 115 223 -
Proceeds from exercise of stock options..................... 135 147 16
--------- ---------- ----------
Net cash used in financing activities.................. (536,191) (10,039) (16,711)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........ (78,345) 44,627 (219,671)
Cash and cash equivalents at beginning of period............ 135,215 90,588 310,259
--------- ---------- ----------
Cash and cash equivalents at end of period.................. $ 56,870 $ 135,215 $ 90,588
========= ========== ==========
See accompanying Notes to the Consolidated Financial Statements
95
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.
(the Association). 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 1994 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 $54.0 million or less, regulations require
a reserve of 3%. For total transaction account deposits in excess of $54.0
million, a 10% reserve is required.
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 positive 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 positive 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 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
96
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.
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.
97
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. Interest received on
non-accrual loans generally is either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal. 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 SFAS No. 87, "Employers' Accounting for Pensions."
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
98
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, SFAS 109, "Accounting For Income Taxes" was issued,
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.
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. 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 of
accumulated and unpaid preferred dividends for the nine-month period ended
December 31, 1992. There were no accumulated and unpaid preferred dividends at
December 31, 1994 or December 31, 1993. Accumulated and unpaid dividends
totaled $12,802,000 at December 31, 1992. 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 FSLIC Resolution Fund (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.
99
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, 1994, 1993 and 1992. 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,
----------------------------------------------
1994 1993 1992
------------ ---------- ----------
(unaudited) (unaudited)
Interest income:
Loans............................................. $ 50,234 $ 106,574 $ 129,038
Mortgage-backed securities........................ 73,121 41,357 37,924
Investment securities............................. 13,960 7,494 15,313
Rhode Island covered assets....................... 4,870 6,743 9,932
Other............................................. 1,836 886 4,138
---------- ---------- ----------
Total interest income.......................... 144,021 163,054 196,345
---------- ---------- ----------
Interest expense:
Deposits.......................................... 75,023 88,812 123,924
Federal Home Loan Bank advances................... 7,847 11,127 3,056
Other borrowings.................................. 17,611 10,334 5,930
---------- ---------- ----------
Total interest expense......................... 100,481 110,273 132,910
---------- ---------- ----------
Net interest income.......................... 43,540 52,781 63,435
Provision for loan losses............................ 2,700 18,450 16,300
---------- ---------- ----------
Net interest income after provision
for loan losses............................. 40,840 34,331 47,135
---------- ---------- ----------
Non-interest income:
Fees for services................................. 9,531 7,346 7,112
Gain on sale of securities, net................... 2,919 1,764 4,100
Gain on sale of loans, net........................ 264 1,617 1,870
Other non-interest income (loss).................. 9,680 (23) (41)
---------- ---------- ----------
Total non-interest income...................... 22,394 10,704 13,041
---------- ---------- ----------
Non-interest expenses:
Compensation and benefits......................... 19,776 24,124 23,126
Occupancy and equipment, net...................... 9,990 11,370 11,057
Other general and administrative.................. 12,828 14,519 15,872
Amortization of supervisory goodwill.............. - - 2,002
Supervisory goodwill valuation adjustment......... - - 56,568
SAIF insurance fund and OTS assessments........... 6,403 6,631 6,222
Real estate and other assets acquired in settle-
ment of loans................................... 2,863 14,979 9,652
---------- ---------- ----------
Total non-interest expenses.................... 51,860 71,623 124,499
---------- ---------- ----------
Income (loss) before income taxes........... 11,374 (26,588) (64,323)
Income tax expense (benefit)......................... 1,415 (12,308) (5,089)
---------- ---------- ----------
Net income (loss)........................... $ 9,959 $ (14,280) $ (59,234)
========== ========== ==========
Preferred stock dividend requirements................ $ 2,677 $ 2,848 $ 4,652
Net income (loss) applicable to common stockholders.. $ 7,282 $ (17,128) $ (63,886)
Net income (loss) per common share:
Primary and fully diluted......................... $ 0.51 $ (1.40) $ (11.16)
100
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 Nine Months
For the Year Ended Ended
December 31, December 31,
------------------------------
1994 1993 1992
------------- ------------- -------------------
(In Thousands)
CASH PAID DURING THE PERIODS FOR:
Interest on retail deposits........................ $101,746 $119,822 $124,720
Interest on brokered deposits...................... 1,182 2,419 2,389
Interest on borrowings............................. 28,864 23,695 6,704
Income taxes....................................... 551 2,180 1,352
Cash received during the periods for:
Interest and dividends............................. 192,422 224,178 178,862
Non-cash items:
Loans securitized into mortgage-backed securities 20,402 376,551 -
Loans securitized into mortgage-backed securities
available-for-sale............................... - - 2,564
Transfers of loans to (from) available-for-sale.... (1,839) (964) 6,106
Transfers of mortgage-backed securities to
available-for-sale............................... - 81 97,697
Transfers of investment securities to
available-for-sale............................... 121 40,832 112,045
Real estate and other assets acquired in
settlement of loans.............................. 10,800 62,086 65,245
Payment in kind on uncertificated debentures....... 3,769 3,452 1,540
Payment in kind on Series B preferred stock........ 3,459 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.................... (13,057) 16,312 -
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
There were no securities purchased under agreements to resell at December 31,
1994. The securities purchased under agreements to resell at December 31, 1993
were collateralized by federal agency mortgage-backed securities. The following
table provides additional information on the agreements.
December 31, December 31,
1994 1993
------------- -------------
(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
Average amounts of outstanding agreements................... 1,411 644
Weighted average interest rate for the year................. 3.26% 3.22%
Weighted average interest on year-end balances.............. - % 3.39%
Weighted average maturity of outstanding agreements (days).. - 6
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.
101
NOTE 5: INVESTMENT SECURITIES
Investment securities consisted of the following:
At December 31, 1994 At December 31, 1993
------------------------------------ ----------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
---------------- ------------------
Cost Gains Losses Value Cost Gains Losses Value
--------- ------- ------- -------- --------- -------- ------ --------
(In Thousands)
Obligations of states and political
subdivisions........................ $ 398 $ - $ 15 $ 383 $ 432 $ - $ 4 $ 428
Corporate securities:
Fixed............................. 3,703 - 279 3,424 4,254 56 - 4,310
Available-for-sale................ - - - - 60 2 - 62
Asset-backed securities:
Available-for-sale................ 15,443 - 50 15,393 38,299 - 100 38,199
Collateralized mortgage obligations:
Fixed............................. 165,167 - 11,777 153,390 4,784 - 155 4,629
Variable.......................... 821 - 36 785 1,319 16 - 1,335
Available-for-sale................ 73,640 - 2,881 70,759 66,915 217 249 66,883
Federal Home Loan Bank stock.......... 32,287 - - 32,287 31,800 - - 31,800
Marketable equity securities:
Available-for-sale................ 49,717 6,866 - 56,583 42,125 15,608 - 57,733
-------- ------- ------- -------- -------- -------- ------ --------
Total investment securities........... $341,176 $6,866 $15,038 $333,004 $189,988 $15,899 $508 $205,379
======== ======= ======= ======== ======== ======= ====== ========
At December 31, 1994 and 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 $2,282,000 and $8,978,000, respectively,
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
December 31, December 31,
------------------------------------------------------------------
1994 1993 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
Investment securities
available-for-sale........ 294,819 7,360 77 142,592 2,138 42 158,033 1,395 337
-------- ------ --- -------- ------ ---- -------- ------ ----
Total.................... $294,819 $7,360 $77 $158,939 $3,767 $188 $158,539 $2,912 $970
======== ====== === ======== ====== ==== ======== ====== ====
* Sales were due to credit concerns.
For the periods ended December 31, 1994, 1993, and 1992, gains and losses on
investment securities resulted primarily from the recognition of realized
capital gains and losses allocated to the Association by two limited
partnerships in which the Association has invested.
The weighted average interest yields on investment securities were 5.84% and
5.13% at December 31, 1994 and 1993, respectively. Accrued interest and
dividends receivable related to investment securities outstanding at December
31, 1994 and 1993 were $1,660,000 and $1,680,000, respectively.
102
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, 1994 December 31, 1993
------------------------------------- -----------------------------------
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....................................... $ 2,205 1.09% $ 2,122 $ 2,506 5.88% $ 2,530
5-10 years...................................... 18 .01 18 271 .64 274
10-20 years..................................... 36,267 17.92 33,812 1,909 4.48 1,934
Over 20 years................................... 131,599 65.03 122,030 6,103 14.33 5,964
Federal Home Loan Bank stock.................... 32,287 15.95 32,287 31,800 74.67 31,800
------- ------ ------- ------- ------ -------
Total held-to-maturity investment securities.... $ 202,376 100.00% $ 190,269 $ 42,589 100.00% $ 42,502
======= ====== ======= ======= ====== =======
The contractual maturities of the Association's available-for-sale investment
securities are summarized below. 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, 1994 December 31, 1993
------------------------------------- -----------------------------------
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......................................... $ 753 .54% $ 753 $ 18,038 12.24% $ 18,035
1-5 years........................................ 88,330 63.64 85,399 87,236 59.18 87,109
5-10 years....................................... - - - - - -
10-20 years...................................... - - - - - -
Over 20 years.................................... - - - - - -
Marketable equity securities..................... 49,717 35.82% 56,583 42,125 28.58 57,733
------- ------ ------- ------- ------ -------
Total available-for-sale investment securities. $138,800 100.00% $142,735 $147,399 100.00% $162,877
======= ====== ======= ======= ====== =======
103
NOTE 6: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
December 31,
------------------------------------------------------------------------------------------
1994 1993
------------------------------------------ -------------------------------------------
Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
----------------- ----------------
Cost Gains Losses Value Cost Gains Losses Value
--------- ------ ------ ------ --------- ----- ------ ------
(In Thousands)
Government National Mortgage
Association (GNMA):
Adjustable................ $ 29,880 $ - $1,778 $ 28,102 $ 33,583 $ 46 $ 188 $ 33,441
Available-for-sale........ 7,317 270 468 7,119 9,855 744 34 10,565
Federal Home Loan Mortgage
Corporation (FHLMC):
Fixed..................... 253,293 17 21,181 232,129 3,184 154 - 3,338
Adjustable................ 241,109 2 5,438 235,673 171,675 2,142 602 173,215
Available-for-sale........ 1,320 53 44 1,329 2,197 129 5 2,321
Federal National Mortgage
Association (FNMA):
Fixed..................... 174,941 87 12,609 162,419 29,650 546 - 30,196
Adjustable................ 210,439 247 6,046 204,640 142,904 2,542 1,529 143,917
Available-for-sale........ 13,400 - 490 12,910 - - - -
Private Issuers:
Fixed..................... 4,957 10 8 4,959 8,323 191 - 8,514
Adjustable................ 843,560 28 25,093 818,495 941,567 5,547 2,765 944,349
--------- ------ ------ --------- --------- ------ ----- ---------
Total mortgage-backed
securities. $1,780,216 $ 714 $73,155 $1,707,775 $1,342,938 $12,041 $5,123 $1,349,856
========= ====== ====== ========= ========= ====== ===== =========
At December 31, 1994 , the net unrealized holding loss on available-for-sale
mortgage-backed securities that was included in the separate section of
stockholders' equity was $394,000, net of tax effect, exclusive of investment
securities available-for-sale compared to a net unrealized holding gain of
$484,000 at December 31, 1993. Proceeds, gains, and losses from sales of
mortgage-backed securities were as follows:
For the Year Ended For the Year Ended For the Nine Months Ended
December 31, December 31, December 31,
-------------------------------
1994 1993 1992
------------------------------- ------------------------------- -------------------------------
Gross Realized Gross Realized Gross Realized
---------- ---------------- -------------------- ---------- ------------------
Proceeds Gains Losses Proceeds Gains Losses Proceeds Gains Losses
---------- ------- -------- -------- -------- -------- ---------- ------ ----------
(In Thousands)
Mortgage-backed securities $ - $ - $ - $39,831 $2,046 $ - $ 44,727 $2,158 $ -
available-for-sale....... --------- ------ ------ ------ ----- ----- ------- ------- -----
-
Total proceeds........... $ - $ - $ - $ 39,831 $2,046 $ - $ 44,727 $2,158 $ -
========= ------ ------ ======= ===== ----- ======= ======= -----
The weighted average yields on mortgage-backed securities were 6.27% and
5.30% at December 31, 1994 and 1993, respectively. Accrued interest
receivable related to mortgage-backed securities outstanding at December 31,
1994 and 1993 was $10,541,000, and $6,783,000, respectively.
At December 31, 1994, mortgage-backed securities having a carrying value of
$799,109,000 and a market value of $759,115,000 were pledged to collateralize
securities sold under agreements to repurchase and other items.
NOTE 7: LOANS
The Association's primary lending business is the origination of single-
family residential mortgage loans in the northeastern United States. These
loans are collateralized by residential properties and are made with
104
strict adherence to Association policy which limits the loan-to-value ratio on
residential mortgage loans to 80%, or 95% (97% on certain community lending
products) 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,
----------------------------------
1994 1993
----------- -------------
(In Thousands)
Single-family residential real estate loans:
Adjustable rate...................................... $ 736,603 $1,695,527
Fixed rate........................................... 102,062 104,187
Available-for-sale................................... 4,812 46,076
---------- ---------
Total single-family residential real estate loans.. 843,477 1,845,790
---------- ---------
Consumer loans:
Equity loans......................................... 14,122 15,507
Collateralized by deposits........................... 5,553 8,709
Equity lines of credit............................... 15,753 5,886
Overdraft protection................................. 1,786 2,110
Education............................................ 34 43
Other personal....................................... 1,254 2,424
---------- ---------
Total consumer loans............................... 38,502 34,679
---------- ---------
Residential construction loans......................... 20,805 10,138
---------- ---------
Income property loans.................................. 75,835 69,146
---------- ---------
Total loans, gross............................... 978,619 1,959,830
---------- ---------
Less:
Allowance for loan losses............................ 11,746 28,271
Undisbursed portion of loans in process.............. 11,990 6,097
Unearned discounts................................... 2,191 2,822
Deferred origination (costs), fees net............... (22) 383
---------- ---------
25,905 37,573
---------- ---------
Total loans, net................................. $ 952,714 $1,922,257
========== =========
Accrued interest receivable related to loans outstanding at December 31, 1994
and 1993 was $5,627,000 and $9,076,000, respectively. For the years ended
December 31, 1994, and 1993 and the nine months ended December 31, 1992, the
Association recognized net gains on sales of loans of $13,813,000, $1,939,000
and $1,870,000, respectively.
At December 31, 1994, there was no recorded investment in loans for which
impairment has been recognized under the guidance of SFAS 114 compared to $1.6
million at December 31, 1993. 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. The average
recorded investment in impaired loans during the year ended December 31, 1993
was approximately $1.6 million. For the year ended December 31, 1993, the
Association recognized interest income on those impaired loans of $41,000 (there
was no interest income recognized using the cash basis method of income
recognition). At December 31, 1994 and 1993, loans totaling $29,331,000 and
$67,462,000, 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, 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, and the amount of interest income which was included in interest
income on those loans for the indicated periods are summarized below:
For the Years Ended For the Nine Months Ended
December 31, December 31,
-------------------------- -------------------------
1994 1993 1992
------------ ------------ -------------------------
(In Thousands)
Gross amount of interest that would have been
recorded during the period at the original rate.. $ 2,296 $ 4,869 $ 5,752
Interest recorded in income........................ 379 1,382 1,365
------- ------- ------
Interest income not recognized..................... $ 1,917 $ 3,487 $ 4,387
======= ======= ======
105
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, 1994:
Single-Family
Residential Residential
Real Estate Consumer Construction Income Property 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)
Connecticut $ 239,379 2.46% $ 6,522 1.48% $ 13,661 - % $ 19,723 1.35 % $ 279,286 2.24%
New York 203,283 5.34 22,310 2.62 6,096 - 18,309 - 249,998 4.58
Massachusetts 149,862 2.36 6,731 2.33 105 - 12,558 7.19 169,256 2.72
California 40,854 6.47 726 - - - 15,792 - 57,371 4.61
Florida 36,613 1.18 244 .97 - - - - 36,857 1.18
New Jersey 16,338 14.41 169 - - - - - 16,507 4.26
New Hampshire 3,315 - 253 - - - 3,033 - 6,601 -
Other 153,833 .99 1,547 4.08 943 - 6,420 - 162,743 .98
--------- ------ ------- ------- --------
Total $ 843,477 3.23% $38,502 2.34% $ 20,805 - % $ 75,835 1.54% $ 978,619 3.00%
========= ====== ======= ======= ========
Loans serviced for others by Northeast Savings totaled approximately
$1,489,037,000 and $1,888,863,000 at December 31, 1994 and 1993, respectively,
which includes loans serviced with recourse to Northeast Savings of $51,399,000
and $69,124,000 at the same respective dates. In connection with loans serviced
for others, at December 31, 1994 and 1993, respectively, Northeast Savings had
$3,028,000 and $3,623,000 in excess servicing assets and $1,686,000 and
$5,794,000 in capitalized purchased mortgage servicing. Loan servicing fees
totaled $2,972,000, $2,627,000, and $793,000 for the years ended December 31,
1994, 1993, and the nine months ended December 31, 1992, respectively.
The following summarizes activity in the allowance for loan losses.
Year Ended Nine Months Ended
December 31, December 31,
-------------------- ------------------
1994 1993 1992
--------- --------- ------------------
(In Thousands)
Balance, beginning of period................... $ 28,271 $ 21,020 $ 17,084
Provision for loan losses...................... 4,900 23,300 16,300
Charge-offs:
Single-family residential real estate loans.. (5,514) (14,835) (12,305)
Consumer loans............................... (328) (393) (373)
Income property loans........................ (105) (1,395) -
------- ------- -------
Total charge-offs.......................... (5,947) (16,623) (12,678)
------- ------- -------
Recoveries:
Single-family residential real estate loans.. 210 176 8
Consumer loans............................... 309 398 306
Income property loans........................ 3 - -
------- ------- -------
Total recoveries........................... 522 574 314
------- ------- -------
Net charge-offs................................ (5,425) (16,049) (12,364)
------- ------- -------
Other*......................................... (16,000) - -
------- ------- -------
Balance, end of period......................... $ 11,746 $ 28,271 $ 21,020
======= ======= =======
* Represents reduction of allowance allocated to loans sold in March 1994.
106
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, 1994 and 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,
------------------------------------------------
1994 1993
---------------------- -----------------------
Non-accrual Non-accrual
Assets Asset Ratio Assets Asset Ratio
--------- ------------ -------- -------------
(Dollars in Thousands)
Single-family residential real estate loans:
Adjustable rate............................. $ 10,515 5.21% $12,607 8.00%
Fixed rate.................................. 15,878 8.26 22,112 7.73
-------- -------
Total single-family residential real
estate loans............................ 26,393 7.04 34,719 7.83
-------- -------
Consumer loans:
Equity lines of credit...................... 10,474 2.18 12,805 4.36
Equity loans................................ 4,782 9.45 7,025 6.23
Collateralized by deposits.................. 22 - 36 -
Overdraft protection........................ 134 - 168 -
Education................................... 7 - 8 -
Other personal.............................. 697 .29 1,534 3.19
-------- -------
Total consumer loans...................... 16,116 4.23 21,576 4.84
-------- -------
Income property loans......................... 29,141 9.86 39,135 10.59
-------- -------
Commercial.................................... 577 .17 893 3.25
-------- -------
Total loans, gross...................... 72,227 7.50 96,323 8.24%
-------- -------
Adjustments:
Contra accounts............................. 590 340
Interest rate adjustment.................... 833 1,060
Credit adjustment........................... 5,772 1,082
-------- --------
Total loans, net........................ 79,422 98,805
-------- --------
Real estate owned............................. 2,814 6,820
-------- --------
Total Rhode Island covered assets........... $ 82,236 $ 105,625
======== ========
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, the Rhode Island Depositors
Economic Protection Corporation (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
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
107
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.
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,
------------------------
1994 1993
----------- -----------
(Dollars in Thousands)
Single-family residential.............. $11,196 $57,165
Hotels................................. - 6,453
Apartment buildings.................... - 5,270
Office, retail, industrial complexes,
land................................. 1,376 3,357
Real estate brokerage operations....... - 1,744
Residential subdivisions............... 620 973
------ ------
REO, net............................. $13,192 $74,962
====== ======
Percent of total assets................ .39% 1.91%
====== ======
108
The activity in the Association's REO is presented in the following table:
For the Year Ended
December 31,
1994 1993
---------- ----------
(In Thousands)
Beginning balance.............. $ 74,962 $ 99,376
Foreclosures, net.............. 12,075 61,228
Capitalized expenses........... 1,389 2,226
Less:
Sales........................ (63,896)* (77,120)**
Valuation adjustments........ (9,581) (10,082)
Mortgage insurance receipts.. (303) (558)
Other........................ (1,454) (108)
------- -------
Ending balance................. $ 13,192 $ 74,962
======= =======
* During the quarter ended June 30, 1994, $27.2 million of REO
was sold in a series of three transactions. The total loss
on the sale was $6.5 million. Excluding this sale, sales of
REO in the normal course of business for the year ended
December 31, 1994 totaled $43.2 million.
** 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. Excluding this sale, sales of REO
in the normal course of business for the year ended December
31, 1993 totaled $52.8 million.
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
----------------------
1994 1993
---------- ----------
(In Thousands)
Land........................................ $ 2,882 $ 3,371
Office building and leasehold improvements.. 34,759 37,522
Furniture, fixtures, and equipment.......... 19,272 22,728
------ ------
56,913 63,621
Less accumulated depreciation and
amortization.............................. 29,512 31,253
------ ------
$27,401 $32,368
====== ======
At December 31, 1994, 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 years ended December 31, 1994 and 1993, and
the nine months ended December 31, 1992 was $7,498,000, $7,717,000 and
$5,440,000, 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 $3,199,000 and $3,319,000 for the years ended December 31, 1994 and
1993, respectively, and $2,555,000 for the nine months ended December 31, 1992.
109
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, 1994 are as follows:
Years Ending December 31: Amount
------------------------- --------------
(In Thousands)
1995............................................ 3,814
1996............................................ 2,620
1997............................................ 1,841
1998............................................ 1,662
1999............................................ 1,250
Thereafter...................................... 1,028
------
Total......................................... $12,215
======
In February 1992, the Association purchased an office building in Farmington,
Connecticut for $9.6 million 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.
NOTE 11: DEPOSITS
Deposits consisted of the following:
December 31,
---------------------------------------------------------------------
1994 1993
---------------------------------- --------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
----------------- ------------- ---------- -------------
(Dollars in Thousands)
Demand deposits............................ $ 28,407 - % $ 35,865 - %
NOW accounts............................... 115,930 1.25 145,655 1.22
Super NOWs................................. 40,074 1.49 51,040 1.47
Regular savings............................ 353,012 2.33 583,209 2.20
Money market savings....................... 275,489 3.02 401,135 2.67
---------- ---------
Total non-certificate
accounts............................. 812,912 2.29 1,216,904 2.14
---------- ---------
Certificates maturing in the year ending:
1994........................... - - 1,218,031 4.37
1995........................... 1,012,378 5.11 193,092 5.00
1996........................... 265,987 5.76 46,249 5.85
1997........................... 67,300 5.57 56,834 5.80
1998........................... 42,496 6.10 51,438 6.10
Thereafter..................... 192,011 6.61 194,669 6.85
--------- ---------
Total certificates..................... 1,580,172 5.45 1,760,313 4.85
--------- ---------
Total deposits......................... $2,393,084 4.37% $2,977,217 3.74%
========= =========
There were no brokered deposits at December 31, 1994. At December 31, 1993,
certificates include brokered deposits of approximately $25,135,000. Included in
deposits is accrued interest payable of $923,000 and $1,965,000 at December 31,
1994 and 1993, respectively. Interest expense on deposits consisted of the
following:
Year Ended Year Ended Nine Months Ended
December 31, December 31, December 31,
------------ ------------ -----------------
1994 1993 1992
------------ ------------ -----------------
(In Thousands)
Brokered deposits............................ $ 860 $ 2,419 $ 1,816
Retail deposits:
Regular savings............................ 10,030 15,146 18,694
NOWs, Super NOWs and money market savings.. 11,539 15,399 15,356
Certificates............................... 79,457 88,199 88,058
------- ------- -------
Total interest expense on deposits........... $101,886 $121,163 $123,924
======= ======= =======
110
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
FHLB advances and other borrowings are summarized as follows:
December 31,
------------------------
1994 1993
----------- ----------
(In Thousands)
FHLB advances................................... $ 203,527 $ 373,000
Securities sold under agreements to repurchase.. 504,245 294,809
Uncertificated debentures....................... 42,243 38,442
--------- ---------
Total FHLB advances and other borrowings........ $ 750,015 $ 706,251
========= =========
Federal Home Loan Bank Advances
- -------------------------------
FHLB advances consisted of the following:
December 31,
-----------------------------------------------------
1994 1993
----------------------- -------------------------
Weighted Weighted
Due in years ending Average Average
December 31: Amount Interest Rate Amount Interest Rate
------------------- -------- ------------- -------- -------------
(Dollars in Thousands)
1994................. $ - - % $165,000 3.43%
1995................. 140,727 6.05 55,000 3.63
1996................. 6,400 6.38 98,000 3.53
1997................. 15,000 5.73 15,000 3.38
1998................. 40,000 6.05 40,000 6.05
Thereafter........... 1,400 8.55 - -
------- -------
$203,527 6.05% $373,000 3.76%
======= =======
At December 31, 1994, $36,400,000 of the outstanding advances were variable rate
advances. Accrued interest payable on advances outstanding at December 31, 1994
and 1993 was $944,000 and $1,135,000, respectively. At December 31, 1994,
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, 1994, mortgage-backed
securities having a carrying value of $209,881,000 and a market value of
$203,736,000 and mortgage loans having a carrying value of $212,524,000 and a
collateral value of $159,393,000 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, 1994, the Association's remaining
borrowing capacity from the FHLB totaled $1.8 billion.
Securities Sold Under Agreements to Repurchase
- ----------------------------------------------
Securities sold under agreements to repurchase were wholesale repurchase
agreements and consisted of the following:
December 31,
-----------------------------------------------------------------------------------------
1994 1993
------------------------------------------- -------------------------------------------
(Dollars in Thousands)
Weighted Collateral Weighted Collateral
Average ------------------- Average --------------------
Repurchase Borrowing Book Market Repurchase Borrowing Book Market
Liability Rate Value* Value Liability Rate Value* Value
---------- --------- --------- -------- ---------- --------- -------- --------
Wholesale... $489,541 5.56% $545,975 $509,985 $294,809 3.43% $308,471 $308,839
Dollar...... 14,704 3.41 15,384 14,695 - - - -
------- ---- ------- ------- ------- ---- ------- -------
$504,245 5.50% $561,359 $524,680 $294,809 3.43% $308,471 $308,839
======= ==== ======= ======= ======= ==== ======= =======
* Book value includes accrued interest of $3,650,000 and $2,126,000 at December
31, 1994 and 1993, respectively.
111
Wholesale repurchase agreements mature or reprice on average every 44 days and
were collateralized at December 31, 1994 and 1993 by mortgage-backed securities.
Dollar repurchase agreements mature in 18 days and were secured by mortgage-
backed securities at December 31, 1994. All wholesale repurchase agreements were
to repurchase the same securities and all dollar repurchase agreements were to
repurchase substantially the same securities. The maturities of securities sold
under agreements to repurchase are summarized in the following table.
December 31,
-----------------------------------------------------------
1994 1993
---------------------------- ----------------------------
Wholesale Dollar Total Wholesale Dollar Total
--------- ------- -------- --------- ------- --------
(in thousands)
Within 30 days.. $129,708 $14,704 $144,412 $197,541 $ - $197,541
31-90 days...... 338,400 - 338,400 97,268 - 97,268
91-182 days..... 21,433 - 21,433 - - -
------- ------ ------- ------- ------ -------
$489,541 $14,704 $504,245 $294,809 $ - $294,809
======= ====== ======= ======= ====== =======
Securities sold under agreements to repurchase are considered short-term
borrowings. The average balance of repurchase agreements outstanding during the
years ended December 31, 1994 and 1993 was $362,864,000 and $290,112,000,
respectively. The maximum amount outstanding at any month-end was $504,479,000
for the year ended December 31, 1994 and $311,385,000 for the year ended
December 31, 1993. Interest expense on repurchase agreements totaled $16,949,000
for the year ended December 31, 1994, and $9,866,000 and $4,111,000 for the year
ended December 31, 1993 and the nine months ended December 31, 1992,
respectively. Accrued interest payable on repurchase agreements outstanding at
December 31, 1994 and 1993 was $7,060,000 and $3,693,000, respectively. The
weighted average interest rates during the year ended December 31, 1994 and 1993
were 4.67% and 3.40%, 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). These debentures are also subject to mandatory redemption in part through
a sinking fund which requires that the Company redeem on May 1, 1998, and on
each May 1 thereafter to and including the maturity date, the outstanding
principal amount of the 9% Debentures equal to 1/15 of the principal amount of
such debentures on March 1, 1988. 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, the Company has issued an additional $8.8 million and $5.0
million of 9% Debentures for the years ended December 31, 1994 and 1993,
respectively, which are included in the debentures outstanding at December 31,
1994. 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.
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
112
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, 1994
and 1993 was 5.37% and 3.40%, 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, 1994
and 1993, 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, 1994 or 1993. Mandatory redemptions of the ESOP notes in the
amounts of $1,110,000 are due each fiscal year from 1995 through 2000. See Note
14: Employee Benefit Plans.
At December 31, 1994, mortgage-backed securities having a carrying value of
$14,053,000 and a market value of $13,399,000 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, 1994.
NOTE 13: STOCKHOLDERS' EQUITY
Regulatory Matters
- ------------------
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA), 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 (FDICIA), 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 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
113
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.
The following table reflects the regulatory capital requirements and the
Association's regulatory capital.
December 31, December 31,
------------------------------------- --------------------------------------
1994 1993
------------------------------------- --------------------------------------
Fully Phased-in Fully Phased-in
Regulatory Capital Actual Regulatory Actual Regulatory
Requirement Regulatory Capital Capital Required Regulatory Capital Capital Required
- ------------------ ------------------ ---------------- ------------------ ----------------
(Dollars In Thousands)
Tangible core capital $177,291 $ 50,120 $167,244 $ 58,750
Percent 5.31% 1.50% 4.27% 1.50%
Core capital $177,419 $133,659 $167,795 $156,688
Percent 5.31% 4.00% 4.28% 4.00%
Risk-based capital $189,165 $ 96,425 $189,330 $137,287
Percent 15.69% 8.00% 11.03% 8.00%
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, 1994.
$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
114
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.
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 nominated by the
RISIC and elected by the directors on July 24, 1992. There is one director
currently seated.
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.
115
The Company has declared and paid dividends on its $8.50 Cumulative Preferred
Stock, Series B in the sum of one share of Series B preferred stock for each
$100 of the amount of dividends payable. The amount of dividend payable for the
second quarter of 1993 included accumulated and unpaid dividends from the date
of issuance (May 8, 1992) through June 30, 1993. The stock dividends declared
were as follows:
1994 1993
---------------- ------------------
Shares Amount Shares Amount
------ -------- ------ ----------
First quarter......... 8,555 $855,000 - $ -
Second quarter........ 8,737 874,000 34,296 3,429,700
Third quarter......... 8,923 892,000 8,203 820,000
Fourth quarter........ 9,112 911,200 8,377 838,000
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. On
December 9, 1994, DEPCO exercised the warrants, which increased stockholders'
equity by $2,350,000. The common stock received by DEPCO 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
116
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 Years Ended Nine Months Ended
December 31, December 31,
------------------- -----------------
1994 1993 1992
--------- --------- -----------------
(In Thousands)
Service cost (benefits earned during the period).. $ 447 $ 431 $ 235
Interest cost on projected benefit obligation..... 361 380 249
Actual return on Plan assets...................... 6 (297) (345)
Net amortization and deferrals.................... (383) (80) 88
Adjustment due to curtailment..................... 143 - -
---- ---- ----
$ 574 $ 434 $ 227
==== ==== ====
According to the Association's actuary, the following table sets forth the
Plan's funded status at the dates indicated.
December 31, December 31,
------------------- -------------------
1994 1993
------------------- -------------------
(In Thousands)
Actuarial present value of benefit obligations:
Vested benefits...................................... $4,697 $4,680
Nonvested benefits................................... 277 287
----- -----
Accumulated benefit obligation......................... 4,974 4,967
Effect of future compensation increases................ 33 94
----- -----
Projected benefit obligation........................... 5,007 5,061
Plan assets at fair value.............................. 5,157 5,215
----- -----
Projected benefit obligation in excess of (less than)
Plan assets.......................................... (150) (154)
Unrecognized net transition asset...................... 198 214
Unrecognized prior service cost........................ (84) (130)
Unrecognized net loss.................................. (783) (592)
----- -----
Prepaid pension costs................................ $ (819) $ (662)
===== =====
Assumptions used in actuarial computations were:
1994 1993
-------- --------
Discount rate................................... 7.75% 7.00%
Rate of increase in future compensation levels.. 6.06 5.00
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 $463,000, $524,000 and
$318,000 for the year ended December 31, 1994 and 1993, and the nine months
ended December 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
117
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 years ended December 31, 1994 and 1993,
respectively, Northeast Savings' contribution to the ESOP amounted to $1,222,000
and $1,512,000, of which $289,000 and $267,000 was interest expense on the ESOP
notes. For the nine months ended December 31, 1992, the contribution totaled
$383,000 of which $260,000 was interest expense. As the debt is repaid, shares
are released from collateral and allocated to active employees, based on the
proportion of debt and interest paid in the year. Further information regarding
these notes may be found in Note 12: Federal Home Loan Bank Advances and Other
Borrowings.
The Company adopted SOP 93-6, "Employees' Accounting for Stock Ownership Plans"
on January 1, 1994. Accordingly, the shares pledged as collateral are reported
as unallocated ESOP shares in the stockholders' equity. As shares are released
from collateral, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for earnings per
share computations. The ESOP shares as of December 31, 1994 were as follows:
For the Year
Ended December 31,
1994
------------------
Allocated shares........................... 310,011
Shares released for allocation............. 96,892
Unallocated shares......................... 497,196
---------
904,099
=========
Market value of unallocated shares at
December 31, 1994...................... $4,164,000
=========
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, 1994 and 1993, respectively, there were
1,462,292 and 571,613 shares which were fully vested and exercisable.
Changes in the status of stock options are summarized as follows:
For the Year For the Year
Ended December 31, Ended December 31,
1994 1993
------------------------------ ------------------------------
Weighted Weighted
Number Average Number Average
of Shares Option Price of Shares Option Price
----------- -------------- ----------- --------------
Balance, beginning of year.. 1,372,292 $ 4.08 453,317 $ 1.91
Issued.................... 155,000 6.59 1,006,676 4.86
Exercised................. (35,000) (4.33) (81,701) (1.80)
Canceled.................. (10,000) (3.84) (6,000) 1.69
--------- ---------
Balance, end of year........ 1,482,292 $ 4.35 1,372,292 $ 4.08
========= =========
118
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. The plan includes a change in control provision and
at December 31, 1994, this provision applied. Therefore, the plan was terminated
and the participants were paid their vested account balance.
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 market value of the Company's stock. The plan includes a
change in control provision and at December 31, 1994, this provision applied.
Therefore, the plan was terminated and the participants' account balances were
paid in 1995.
The Deferred Compensation Plan and the Deferred Fee Plan provided for a total of
250,000 common shares of Company stock to be purchased.
Curtailment of Employees' Benefit Plans
- ---------------------------------------
During 1994, the Company's Retirement, 401(K) Thrift and Profit Sharing and
Employee Stock Ownership plans incurred a significant reduction in the number of
active participants. The Board of Directors, upon the advice of legal counsel,
has determined that there has been a Partial Termination of each employee
benefit plan. The Company estimates the cost of the Partial Termination to be
approximately $150,000 and the Company has fully provided for the anticipated
additional cost at December 31, 1994.
119
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 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, 1994 and 1993 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 Years Ended For the Nine Months Ended
December 31, December 31,
---------------------------------------------------- -------------------------
1994 1993 1992
------------------------ ------------------------ -------------------------
(Dollars In Thousands)
Federal income tax expense (benefit)
at statutory rate.................... $ 3,578 34.00 % $ (8,953) (34.00)% $(21,870) (34.00)%
Increase (decrease) resulting from:
Supervisory goodwill................. - - - - 19,994 31.08
State taxes, net of federal tax
benefit............................. (20) (.19) (3,290) (12.49) (461) (.72)
Changes to the valuation allowance... (4,000) (38.01) 4,000 15.19 (2,752) (4.27)
Other, net........................... - - (3,950) (15.00) - -
-------- ------ ------ ------ ------ ------
Income tax benefit per
financial statements................. $ (442) (4.20)% $(12,193) (46.30)% $ (5,089) (7.91)%
======== ====== ======= ====== ====== ======
The components of the income tax expense (benefit) are as follows:
For the Years Ended For the Nine Months Ended
December 31, December 31,
------------------------------------------------ -----------------------------------
1994 1993 1992
----------------------- ---------------------- -----------------------------------
(In Thousands)
Current provision:
State............................... $ (862) $ 184 $ 2,454
Net change in valuation allowance... (4,000) 4,000 (2,752)
Net change in temporary differences... 4,420 (16,377) (4,791)
-------- -------- -------
Total income tax benefit.......... $ (442) $(12,193) $(5,089)
======== ======== =======
120
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities are as follows:
December 31,
-------------------------------------------------------------
1994 1993
--------------------------- ---------------------------
Asset Liability Asset Liability
---------- --------- ------------ ---------
(In Thousands)
Allowance for loan losses........... $26,241 $ - $36,075 $ -
Reserve for uncollected interest.... 1,609 - 2,305 -
Purchase accounting discount........ 949 - 1,339 -
Net operating loss carryforward..... 5,443 - - -
Deferred service fee................ - 1,271 - 1,522
Other............................... 6,567 770 2,006 1,670
------ ------ ------ -----
Total deferred income taxes....... $40,809 $ 2,041 $41,725 $3,192
====== ====== ====== =====
At 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. At December 31, 1994, the
valuation allowance of $4.0 million was eliminated due to current evidence
supporting the realization of the entire deferral tax asset. Also, the Company
has recorded deferred tax assets at December 31, 1994 related to alternative
minimum tax credit carryforwards and the ESOP guarantee of $3.4 million and $2.6
million, respectively. At December 31, 1994, Northeast Federal had a $13.0
million net operating loss carryforward , which expires at December 31, 2002.
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, 1994, Northeast Savings' base year tax bad debt reserve equaled
zero. 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, 1994, Northeast Federal Corp.
and subsidiaries did not have 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.
121
NOTE 16: GAIN ON SALE OF INTEREST-EARNING ASSETS, NET
Gains (losses) are summarized in the following table. For the years ended
December 31, 1994 and 1993, 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 Years For the Nine Months
Ended December 31, Ended December 31,
-------------------------------------- -------------------
1994 1993 1992
-------------- ------------------ -------------------
(In Thousands)
Net gain on sales of:
Investment securities............... $ 7,283 $ 3,579 $ 1,942
Mortgage-backed securities.......... - 2,046 2,158
Loans............................... 13,813 1,939 1,870
------- ------- -------
Total............................. $ 21,096 $ 7,564 $ 5,970
======= ======= =======
NOTE 17: 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)
========== ==========
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 out-
standing 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 18: COMMITMENTS AND CONTINGENCIES
Outstanding commitments to originate adjustable rate and fixed rate mortgage
loans amounted to $10,740,000 and $4,368,000, respectively, at December 31,
1994. With respect to residential mortgage loans, commitments generally expire
within 10 to 180 days, depending upon the type and purpose of the
122
loan. Also at December 31, 1994, commitments to originate $2,607,000 and
$11,997,000 were outstanding on home equity loans and residential construction
loans, respectively. In addition, at December 31, 1994, the Association had
outstanding commitments to fund $18,568,000 in unused consumer credit lines and
$11,990,000 in undisbursed residential construction loans. At December 31, 1994,
the Association had entered into firm commitments to sell $1,459,000 of mortgage
loans from the available-for-sale portfolio. Finally, at December 31, 1994, the
Association had entered into firm commitments to purchase $13,530,000 of
mortgage-backed securities.
On December 9, 1989, Northeast Savings filed suit in the United States District
Court for the District of Columbia claiming that the government has breached its
contract with Northeast Savings as well as violated Northeast Savings'
constitutional rights as a result of the denial of core capital treatment to
supervisory goodwill acquired by Northeast Savings as a result of its 1982
acquisitions from the Federal Savings and Loan Insurance Corporation (FSLIC) of
three insolvent thrifts. The district court dismissed this action on July 16,
1991 for lack of jurisdiction and indicated that proper jurisdiction lay in an
action for money damages in the United States Claims Court. (The name of the
United States Claims Court subsequently was changed to the United States Court
of Federal Claims, such court hereinafter is referred to as the Claims Court).
Northeast Savings appealed this ruling to the United States Court of Appeals for
the District of Columbia Circuit (the Court of Appeals for D.C.), and then on
July 8, 1992, filed a motion to voluntarily dismiss its appeal. On July 9, 1992,
the Court of Appeals for D.C. granted this motion to dismiss. Northeast Savings
then filed its claim for damages in the Claims Court on August 12, 1992. This
action is still pending. The Claims Court has indicated that it is deferring
action on the Northeast Savings case, as well as on over 30 other supervisory
goodwill cases pending before the Claims Court, until three cases (the Test
Cases), currently on appeal to the Unite States Court of Appeals for the Federal
Circuit (Federal Circuit Court of Appeals), are finally ruled upon. In the Test
Cases, including Winstar v. United States, the government has vigorously
------------------------
defended itself. Among other things, the government has contended that the
"supervisory goodwill" that was created in connection with the resolution by the
Federal Home Loan Bank Board (the Bank Board), which was the predecessor agency
to the OTS, of supervisory problems existed "under the Bank Board's regulatory
function and represents a statement of compliance with then-existing statutory
and regulatory requirements which requirements, however, were subject to
change." Thus, the government contends that Congress was entitled to override
the existing regulatory requirements which recognized supervisory goodwill by
new legislation directed at the general public welfare. The government then
contends that it cannot be obligated to measure regulatory capital in a manner
inconsistent with what Congress has mandated under FIRREA, and therefore, it is
absolved of any and all contract liability based on the elimination of
supervisory goodwill under the "Sovereign Acts Doctrine." In support of its
arguments, the government cites, among other things, the 1992 holding of the
Court of Appeals for D.C. in Transohio Savings Bank v. Director (Transohio) in
----------------------------------
which that court rejected the attempt of a savings institution to obtain
injunctive relief against the application of the FIRREA capital standards.
In each of the Test Cases, the Claims Court determined that plaintiffs had
contracts with the United States governing long-term regulatory treatment of
goodwill, and that those contracts had been breached by FIRREA's new
restrictions on use of goodwill to meet statutory capital mandates. The Claims
Court consolidated its rulings in the Test Cases for immediate interlocutory
appeal. On May 25, 1993, a divided panel of the Federal Circuit Court of Appeals
reversed the Claims Court's finding that the government was liable for breach of
contract in the Test Cases. The Federal Circuit Court of Appeals, among other
things, based its decision on its conclusion that "... the plaintiffs had no
contract right to have the goodwill generated by their acquisitions treated as
regulatory capital." According to the Federal Circuit Court of Appeals, "all of
the subject contracts left the Bank Board (and OTS) free to regulate in
accordance with subsequent acts of Congress, specifically FIRREA. Thus, there
was no contractual promise by the government which could be breached."
Approximately one and one-half months later, on July 7, 1993, in Hughes
------
Communications Galaxy, Inc. v. United States (Hughes) a different panel of the
- --------------------------------------------
Federal Circuit Court of Appeals issued what has generally been interpreted as
an opposite ruling from that given in the Test Cases on another government
breach
123
of contract dispute. In Hughes, which was not a case involving depository
institutions, the Federal Circuit Court of Appeals determined that there was a
breach of contract by the government, and in doing so, apparently rejected some
of the same arguments advanced by the government and accepted by the Federal
Circuit Court of Appeals in the Test Cases. Although the government in Hughes
petitioned the Federal Circuit Court of Appeals for a rehearing and an en banc
hearing, on October 26, 1993, both were denied. The Federal Circuit Court of
Appeals, however, did vacate the panel decision in the Test Cases, which
decision was in favor of the government's position, and ordered an en banc
hearing. Briefing for that hearing has been completed and oral arguments took
place in February 1994. No decision on such rehearing has been rendered by the
Federal Circuit Court of Appeals at this time. Recently, a panel of the Court of
Appeals for D.C. issued a clarification of its Transohio decision indicating
that its analysis in that decision was solely directed at an action for
injunctive relief and did not address the merits of a claim for money damages in
the Claims Court.
Another supervisory goodwill case, Resolution Trust Corporation v. FSLIC (the
-------------------------------------
Resolution Trust Corporation), was recently decided by the Court of Appeals of
the 10th Circuit (the 10th Circuit Court of Appeals) in favor of the purchasers
of Security Federal from the FSLIC, which purchase was made prior to FIRREA.
Pursuant to an arrangement with the FSLIC, the purchasers infused $6 million in
Security Federal, an insolvent institution, and thereby saved the FSLIC the cost
of liquidating Security Federal. Even with such capital infusion, were it not
for the treatment of supervisory goodwill as capital, Security Federal would
have remained significantly under-capitalized at the time, and thereby would
have had to have been liquidated by the FSLIC.
As a result of the restriction on the use of supervisory goodwill as capital
pursuant to FIRREA and resulting OTS regulations, the OTS determined that
Security Federal was insolvent and in February 1990 ordered the purchasers to
infuse additional capital into it. In March of 1990, the purchasers notified the
OTS that they were rescinding the agreement to acquire the institution, tendered
their stock to the OTS, and requested the return of their capital contribution.
The OTS refused the tender, and the purchasers filed suit seeking rescission and
restitution for breach of contract. In Resolution Trust Corporation, the FDIC
and the OTS appealed a district court's summary judgment ruling in favor of the
purchasers for breach of contract, which held that the treatment of goodwill as
regulatory capital was an express term of the overall contractual agreement. The
10th Circuit Court of Appeals affirmed the lower court's ruling and stated that
"because the Agencies breached their agreement to treat supervisory
goodwill...as assets for regulatory purposes, we [the Court] agree that the
investors [i.e., purchasers] properly rescinded the agreement and thus are
entitled to restitution." The Government has decided not to seek Supreme Court
review of the decision of the 10th Circuit Court of Appeals.
Northeast cannot predict when the Federal Circuit Court of Appeals will render
any decision on the Test Cases, or the nature of any such decision and its
effect on Northeast Savings' pending goodwill litigation in the Claims Court. In
addition, the Claims court's initial decision in the Test Cases did not address
the amount of damages, if any; therefore, questions regarding the amount of
damages are not subject to the current appeal pending in the Federal Circuit
Court of Appeals. Northeast anticipates that even if the Federal Circuit Court
of Appeals renders a decision in the Test Cases that is favorable to the claims
made by Northeast Savings in its goodwill litigation, a final judicial
determination, if any, as to Northeast Savings' pending goodwill litigation,
after addressing the issue of damages and the resolution of all appeals,
including likely appeals to the Supreme Court, will not occur for an extended
period of time; and even if Northeast Savings attains a final money judgment in
its goodwill litigation, as to which no prediction can be made, the amount of
any such judgment is highly uncertain. No amount has been recorded on
Northeast's financial statements based on any possible recovery by Northeast
under the litigation.
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
124
financial position of the Company.
NOTE 19: 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 which are held or issued for
purposes other than trading. 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,
-----------------------------
1994 1993
------------- -------------
(In Thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit:
Single-family residential real estate
loans.................................. $ 15,108 $ 49,078
Consumer loans.......................... 21,175 10,125
Residential construction loans.......... 23,987 3,497
Loans serviced for others with recourse... 51,400 69,124
------- -------
Total commitments to extend credit.... $111,670 $131,824
======= =======
Financial instruments whose notional or
contract amounts exceed the amount of
credit risk:
Interest rate swap agreements............. $ 12,305 $ 15,739
======= =======
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.
At December 31, 1994, the Association's interest rate swap agreements on a
market value basis were in a net loss position of $399,000. 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, 1994 and 1993, outstanding interest rate swaps totaled
$12,305,000 and $15,739,000, respectively. Interest payments related to interest
rate swaps are charged or credited to interest expense on other borrowings.
Accrued interest receivable on swaps outstanding at December 31, 1994 and 1993,
respectively, was $31,000 and $70,000.
The Association grants residential loans to customers primarily in the
Northeast. In early 1994, the Association closed its loan origination offices in
California and Colorado. 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.
125
NOTE 20: 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.
. 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
residential construction and income property loan portfolios, due to the
immateriality, i.e. approximately 2.9% 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.
126
. 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, fixed rate loans, home equity loans and
residential construction 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.
The following table presents certain of the Company's assets, liabilities, and
unrecognized financial instruments at both their respective carrying amounts and
fair value.
December 31,
-------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ----------- --------------- -----------
(In Thousands)
Financial assets:
Cash and due from banks............... $ 34,145 $ 34,145 $ 51,705 $ 51,705
Federal funds sold.................... 22,725 22,725 23,510 23,510
Securities purchased under agreements
to resell........................... - - 60,000 60,000
Investment securities, net............ 202,376 190,269 42,589 42,502
Investment securities,
available-for-sale, net............. 142,735 142,735 162,877 162,877
Mortgage-backed securities, net....... 1,758,179 1,686,417 1,330,886 1,336,970
Mortgage-backed securities,
available-for-sale, net............. 21,358 21,358 12,886 12,886
Loans, net............................ 947,902 943,464 1,876,181 1,908,259
Loans available-for-sale, net......... 4,812 4,801 46,076 46,119
Rhode Island covered assets........... 82,236 82,236 105,625 105,625
Interest and dividends receivable (1). 17,797 17,797 17,470 17,540
Financial liabilities:
Retail deposits....................... 2,393,084 2,351,748 2,952,082 2,985,050
Brokered deposits..................... - - 25,135 25,414
Federal Home Loan Bank advances....... 203,527 201,046 373,000 374,340
Securities sold under agreements to
repurchase.......................... 504,245 504,245 294,809 294,809
Uncertificated debentures............. 42,243 28,781 38,442 29,942
Unrecognized financial instruments:
Interest rate swaps (notional amount
of $12.3 million):
In a net receivable (payable) position 31 (399) 70 (231)
Commitments to extend credit.......... 60,270 60,270 62,400 62,400
Loan servicing rights (2)............. - 5,551 - 4,980
(1) Excludes $31,000 and $70,000 at December 31, 1994 and 1993, 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.
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.
127
NOTE 21: 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 Income (Loss)
-------------------------------- --------------------------------------------
December 31, For the Years Ended December 31,
--------------------------------
1994 1993 1994 1993
-------------------------------- ------------------- -----------------------
(In Thousands)
Balance reported to the OTS for Northeast
Savings.................................... $177,754 $169,670 $ 13,113 $(11,980)
Holding company net income (loss)............ 10,966 (14,139) 10,966 (14,139)
Equity in undistributed income of Northeast
Savings.................................... (13,113) 11,980 (13,113) 11,980
Additional investment in Northeast Savings. (36,950) (34,800) - -
Exercise of warrants......................... 2,350 - - -
Preferred stock conversion costs............. (1,402) (1,402) -
Holding company paid-in capital and
retained earnings.......................... (955) 834 -
Exercised stock options...................... 135 147 -
401K shares issued........................... 115 223 -
Balance per accompanying consolidated ------- ------- ------- -------
financial statements....................... $138,900 $132,513 $ 10,966 $(14,139)
======= ======= ======= =======
NOTE 22: 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 million.
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.
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. 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
128
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
Ended December 31,
1992
-------------------
(In Thousands)
Balance, beginning of period................. $ 59,553
Amortization............................... (2,002)
Reduction for acquired net operating loss
carryforward............................. (983)
Valuation adjustment....................... (56,568)
-------
Balance, end of period....................... $ -
=======
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. On December 9, 1994, DEPCO exercised its warrants, which
generated net proceeds of $2.4 million. 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).
129
. 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 value of $4.5 million, which was based on the value
attributed to those debentures by the FRF, as determined by its
investment banker.
Note 23: 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
December 31, December 31,
------------------------------------------ -----------------
1994 1993 1992
------------------ ------------------- -----------------
Interest income................................. $ 156 $ 57 $ 43
Interest expense................................ (3,858) (3,503) (2,103)
Equity in undistributed income (loss) of
Northeast Savings.............................. 13,113 (11,980) (57,858)
-------- ------- ------
Total income (loss).......................,... 9,411 (15,426) (59,918)
Operating expenses.............................. - 276 314
Income (loss) before income taxes and -------- ------- ------
extraordinary items........................... 9,411 (15,702) (60,232)
Income tax benefit.............................. (1,555) (1,563) (998)
-------- -------- -------
Net income (loss)............................. $ 10,966 $(14,139) $(59,234)
======== ======== =======
STATEMENT OF FINANCIAL CONDITION
(In Thousands)
December 31,
-------------------------
1994 1993
-------- --------
ASSETS
Cash and interest-bearing deposits....... $ 4,925 $ 2,210
Investment in Northeast Savings.......... 177,754 169,670
Other assets............................. 131 685
------- -------
Total assets........................... $182,810 $172,565
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Uncertificated debentures................ $ 42,243 $ 38,442
Other liabilities........................ 1,667 1,610
Stockholders' equity..................... 138,900 132,513
------- -------
Total liabilities and stockholders'
equity............................. $182,810 $172,565
======= =======
130
STATEMENT OF CASH FLOWS
(In Thousands)
Year Ended Nine Months Ended
December 31, December 31,
-------------------------- -----------------
1994 1993 1992
------------ ------------ -----------------
Cash flows from operating activities:
Net income (loss)......................... $ 10,966 $(14,139) $(59,234)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of discount on
uncertificated debentures........... 32 - -
Interest accrued and paid in kind
on debentures....................... 3,769 3,452 2,103
Equity in undistributed (income)
loss of Northeast Savings........... (13,113) 11,980 57,858
(Increase) decrease in other assets. 554 (685) 135
Increase (decrease) in other
liabilities....................... 57 218 802
------- ------- -------
Net cash provided by operating
activities........................ 2,265 826 1,664
------- ------- -------
Cash flows used in investing activities -
increase in investment in Northeast
Savings................................. (2,150) - (34,800)
------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options. 135 147 16
Proceeds from issuance of 401K stock...... 115 223 -
Exercise of warrants...................... 2,350 - -
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 uncerti-
ficated debentures...................... - - 33,450
------- ------- -------
Net cash provided by (used in)
financing activities.............. 2,600 (1,032) 35,086
------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 2,715 (206) 1,950
Cash and cash equivalents at beginning of
period.................................... 2,210 2,416 466
------- ------- -------
Cash and cash equivalents at end of
period.................................... $ 4,925 $ 2,210 $ 2,416
======= ======= =======
This information should be read in conjunction with other Notes to the
Consolidated Financial Statements.
131
Note 24: Quarterly Financial Information (Unaudited)
December 31,
1994 and for the year then ended Q1 Q2 Q3 Q4
- ---------------------------------------------- ---------- ---------- ---------- ----------
(In Thousands Except Per Share Amounts)
Total assets.................................. $3,628,442 $3,311,016 $3,349,705 $3,345,572
Interest income............................... 48,690 44,571 47,993 51,457
Net interest income........................... 15,212 13,660 14,903 14,977
Provision for loan losses..................... 2,200 600 1,000 1,100
Gain on sale of securities, net............... 4,364 (77) 2,362 634
Gain on sale of loans, net.................... 13,549 356 (56) (36)
Non-interest income........................... (634) 12,555 3,217 3,439
Non-interest expenses......................... 31,141 18,950 16,698 16,212
Net income.................................... 1,007 5,528 2,582 1,849
Preferred stock dividend requirements......... 855 874 892 911
Net income applicable to common shareholders.. 152 4,654 1,690 938
Net income per common share:
Primary and fully diluted.................. .01 .33 .12 .06
Market prices of common stock:
High....................................... 7 1/2 10 1/2 10 1/8 10 1/8
Low........................................ 4 3/8 6 3/4 9 3/8 7 5/8
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
132
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
133
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will appear in the Proxy
Statement for the Annual Meeting of Stockholders, and is incorporated herein by
this reference. In addition, information required by Item 405 of Regulation S-K
disclosing any delinquent filing required under Section 16(a) of the Securities
Exchange Act of 1934 by any of the Company's directors, executive officers or
any person holding ten percent or more of the Company's common or convertible
preferred stock will appear in the Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by reference. The Proxy Statement will
be filed with the SEC within 120 days of December 31, 1994. As required by
Instruction 3 to Item 401(b) of Regulation S-K, information regarding executive
officers of the Company is contained in Part I of this report under
Supplementary Item, Executive Officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the Proxy Statement
for the Annual Meeting of Stockholders, and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will appear in the Proxy Statement for the Annual Meeting of
Stockholders, and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relations and related transactions will appear in
the Proxy Statement for the Annual Meeting of Stockholders, and is incorporated
herein by this reference
134
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated Financial
Statements under Item 8.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K Filed During the Quarter Ended December 31, 1994
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit Number
- --------------
3 Certificate of Incorporation and Bylaws
4 Instruments evidencing Northeast Savings' long-term debt to the Federal
Home Loan Bank of Boston are not filed as an exhibit hereto pursuant to
Regulation S-K, Item 601(b)(4)(iii). Instruments evidencing Northeast
Savings' long-term debt are not filed as an exhibit hereto pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K. Northeast Savings will furnish a
copy of these instruments to the SEC upon its request.
4.1 Indenture dated May 8, 1992 between Northeast Federal Corp. and
Manufacturers Hanover Trust Company for 9% Sinking Fund Uncertificated
Debentures, Due May 8, 2012. See (a) below.
4.2 Acquisition agreement dated April 21, 1992 by and among Northeast Savings,
F.A. and Maurice C. Paradis as Receiver for East Providence Credit Union,
Providence Teachers Credit Union and Columbian Credit Union, and Edward D.
Pare, Jr., as Receiver for Greater Providence Deposit Corporation, Greater
Providence Trust Company and Community Loan & Investment Bank and the
Rhode Island Depositors Economic Protection Corporation and the State of
Rhode Island and Providence Plantation without exhibits and schedules.
Northeast Federal will furnish a copy of exhibits and schedules to the SEC
upon its request. See (a) below.
4.3 Stock and Warrant Purchase Agreement dated April 21, 1992 by and between
the Rhode Island Depositors Economic Protection Corporation and Northeast
Federal Corp. See (a) below.
4.4 Certificate of Designation Governing the $8.50 Cumulative Preferred Stock,
Series B (See Exhibit 3 above). See (a) below.
4.5 Warrants to Purchase Common Stock Issued to the Rhode Island Depositors
Economic Protection Corporation. See (a) below.
135
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
4.6 Debenture Purchase Agreement dated April 21, 1992 by and between Maurice
C. Paradis as Receiver for East Providence Credit Union, Providence
Teachers Credit Union, and Columbian Credit Union, and Edward D. Pare,
Jr., as Receiver for Greater Providence Deposit Corporation, Greater
Providence Deposit and Trust Company and Community Loan & Investment Bank
and Northeast Federal Corp. See (a) below.
4.7 Stock Repurchase and Debenture Purchase Agreement dated as of April 22,
1992 among Northeast Federal Corp., Northeast Savings, F.A., and the
Federal Deposit Insurance Corporation as Manager of the FSLIC Resolution
Fund. See (a) below.
10.1 1983 Stock Option Plan of Northeast Federal Corp. See (b) below.
10.2 The 1986 Stock Option Plan of Northeast Federal Corp. See (c) below.
10.3 Northeast Federal Corp. 1993 Stock Option Plan. See (d) below.
10.4 Northeast Federal Corp. 1993 Stock Option Plan for Three-Year Term Outside
Directors. See (e) below.
10.5 Employment Agreement entered into by Northeast Savings and Northeast
Federal Corp. and its Chairman of the Board. See (f) below.
10.6 Employment Agreement entered into by Northeast Savings and Northeast
Federal Corp. and its Chief Executive Officer, President, Chief Operating
Officer, and Chief Financial Officer. See (f) below.
10.7 Amendments to Change of Control Agreement entered into by Northeast
Savings and Northeast Federal Corp. and its Chairman of the Board. See (f)
below.
10.8 Amendments to Change of Control Agreement entered into by Northeast
Savings and by Northeast Federal Corp. and its Chief Executive Officer,
President, Chief Operating Officer, and Chief Financial Officer. See (f)
below.
10.9 Executive Disability Plan established for senior officers of Northeast
Savings and Principal Subsidiaries. See (a) below.
10.10 Executive Life Insurance Plan established for senior officers of
Northeast Savings and Principal Subsidiaries. See (a) below.
10.11 Executive Supplemental Medical Reimbursement Plan for senior officers of
Northeast Savings and Principal Subsidiaries. See (a) below.
10.12 Agreement and Plan of Merger dated June 11, 1994 by and between Shawmut
National Corporation and the Company. See (g) below.
11.1 Computation of net loss per common share.
136
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
21 Subsidiaries of Northeast Savings, F.A.
23.1 Consent of Independent Accountants, Deloitte & Touche LLP
23.2 Consent of Independent Accountants, Coopers & Lybrand LLP
24 Powers of Attorney
27.0 Article 9 Financial Data Schedule
99.1 Calculation of Book Value and Tangible Book Value per Common Share
______________________________________
(a) Incorporated by reference to Northeast Federal Corp. Annual Report on Form
10-K for the fiscal year ended March 31, 1992.
(b) Incorporated herein by reference to such plan in Exhibit 4.3 of Form S-8
Registration as filed with the SEC on September 19, 1990, Registration
Number 33-36907.
(c) Incorporated herein by reference to such plan in Exhibit 4.4 of Form S-8
Registration Statement as filed with the SEC on September 19, 1990,
Registration Number 33-36907.
(d) Incorporated by reference to such plan in Exhibit 4.3 of Form S-8
Registration Statement as filed with the SEC on December 21, 1993,
Registration Number 33-51641.
(e) Incorporated by reference to such plan in Exhibit 4.3 of Form S-8
Registration Statement as filed with the SEC on December 21, 1993,
Registration Number 33-51643.
(f) Incorporated by reference to Northeast Federal Corp. Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(g) Incorporated by reference to the Form 8-K filed, June 15, 1994.
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 7, 1995 By: /s/ Kirk W. Walters
--------------------
Kirk W. Walters
Chairman of the Board, Chief Executive Officer,
President, Chief Operating Officer, and Chief
Financial Officer
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/ Kirk W. Walters
---------------------
Kirk W. Walters
Chairman of the Board, 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. Gordon
Beverly L. Hamilton
Barbara C. Lawrence
John F. McJennett, III
Thomas P. O'Neill, III
George W. Sarney
Raymond T. Schuler
John R. Silber
Kirk W. Walters
Frederick W. Zuckerman
By: /s/ Kirk W. Walters
---------------------
Kirk W. Walters
Attorney-in-Fact