First Fidelity Bancorp. said Monday that it had agreed to acquire Northeast Bancorp, an ailing Connecticut banking company, for about $29 million in stock.

The deal, valued at a deeply discounted $4 a share, would give First Fidelity a major presence in the affluent Fairfield County suburbs of New York City.

Northeast, based in Stamford, Conn., has $2.8 billion in assets and 68 branches, including 41 in Fairfield County.

Shares Lose Half Their Value

Northeast's stock, which had risen to $8.625 last Thursday in anticipation of a buyout announcement, had lost more than half its value by midday Monday, to $4.125, and stayed at that level into late afternoon. First Fidelity's stock rose $1.75, to $45.

"The pricing looks pretty attravtive," said John Heffern, an analyst at Alex. Brown & Sons in Baltimore.

Lawrenceville, N.J.-based First Fidelity, which has $29 billion in assets, said the deal would dilute its per-share earnings by a penny in 1993, and result in a 4.5% increase in 1994. The per-share earnings were $2.76, fully diluted, through Sept. 30.

Cease-and-Desist Order

Northeast, parent of Union Trust Co., said it faces a cease-and-desist order in January, the most severe form of regulatory enforcement short of seizure. Northeast had been operating under a milder memorandum of

Northeast has been struggling with high levels of bad assets stemming from overzealous real estate lending. It lost $43.6 million in the first nine months of the year and was having minimal success shrinking its bad assets, which, were 12.3% of loans and foreclosed real estate at the end of the third quarter.

First Fidelity agreed to pay a purchase price substantially below Northeast's third-quarter book value of $17.14 a share. Northeast said the price was the best it could fetch after a five-month search for a buyer and was preferable to risking potential closure by regulators.

"The transaction eliminates the substantial risk of regulatory action that could significantly reduce or wipe out all shareholder value," said Frank J. Kugler Jr., Northeast's chairman and chief executive, in a press release.

No Formal Offer from Shawmut

But a source said Monday that Shawmut National Corp., which was reportedly close to a deal with Northeast last week, was prepared to pay $9 to $12 a share.

Northeast spokesman John C. Kline said Shawmut never made a "formal" offer, but he didn't know whether a preliminary purchase price had been discussed. A Shawmut spokesman declined to comment.

"It looked like [Northeast] could have failed," said Norman Jaffe, an analyst at Fox Pitt Kelton. "I guess Northeast decided that half a loaf was better than no loaf."

First Boston to Buy Bad Loans

First Fidelity took steps to limit its risk in the deal, which is expected to close in April.

Northeast is to sell 60% of its bad assets, or $140 million, to First Boston Corp. before it is acquired. First Fidelity, as a result, will acquire no more than $100 million in bad assets.

Also, First Fidelity expects to unload $100 million in bad assets of its own by the time the deal closes, according to spokesman Paul J. Levine.

He said First Fidelity will not have to issue stock to pay for the deal, which would lower the company's leverage capital ratio by 22 basis points, to 6.52%.

The agreement concludes a tumultuous three-year period in which Northeast, once a topper-forming banking company, saw its profits turn to a steady stream of red ink and its stock price fall from a high of $62.50 a share in early 1990.

Stakeout Deal in '80s

Northeast was profitable enough in the 1980s to be courted by Bank of New York Co., which in a mid-1980s stakeout deal agreed to pay 2.5 times book value. The deal fell apart in 1990 when New England real estate values began declining, hurting Northeast's earnings and asset quality and leading Bank of New York to balk at the purchase price. Northeast sued Bank of New York for allegedly reneging on their acquisition agreement.

Fidelity's Turnaround

As part of its deal with First Fidelity, the pending lawsuit against Bank of New York will be handled by a litigation trust, which Northeast will fund with $2 million.

First Fidelity itself is recovering from serious earnings troubles in the 1980s, but has undergone a significant turnaround under the leadership of Anthony Terracciano, chairman and chief executive. He has made numerous acquisitions, nearly doubling First Fidelity's multistate branch network to 569 locations.

In 1991, the company did five deals totaling $5.4 billion in deposits and $2.5 billion in assets. So far this year, it has acquired or expects to acquire $3.7 billion in deposits and $3 billion in assets.

The coming years should be just as busy, according to Mr. Levine of First Fidelity. He said Mr. Terracciano hopes to build a superregional network from Boston to Baltimore.

First Fidelity already is the largest bank in New Jersey and the third largest in the Philadelphia area.

Last summer First Fidelity made its first foray into New York State, buying five branches of the failed American Savings Bank in Westchester and Bronx counties.

In October it bought the failed Howard Savings Bank in northern New Jersey, which added 70 branches.

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