Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number (1-14588)
Northeast Bancorp
(Exact name of registrant as specified in its charter)
Maine 01-0425066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
232 Center Street, Auburn, Maine 04210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207)777-6411
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $1.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of September 13, 2000, was $19,997,728 based on the last
reported sales price of the Company's common stock on the American Stock
Exchange as of the close of business on such date. Although directors and
executive officers of the registrant and its subsidiaries were assumed to
be "affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such status.
There were 2,678,579 shares of the registrant's common stock outstanding as
of September 13, 2000.
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
Document Form 10-K Part into Which the Document is
Incorporated
----------------------- ------------------------------------------
Proxy Statement for the III
2000 Annual Meeting of
Shareholders
PART I
Item 1. Business
_________________
General
- -------
Northeast Bancorp (the "Company"), a Maine corporation chartered in April 1987,
is a unitary savings and loan holding company registered with the Office of
Thrift Supervision ("OTS") its primary regulator. Prior to 1996, the Company
operated under the name Bethel Bancorp. The Company's primary subsidiary and
principal asset is its wholly-owned banking subsidiary, Northeast Bank, FSB
(the "Bank"), which has branches located in Auburn, Augusta, Bethel, Harrison,
South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond, Lewiston, and
Lisbon Falls, Maine. The Bank also maintains a facility on Fundy Road in
Falmouth, Maine, from which loan applications are accepted and investment,
insurance and financial planning products and services are offered.
At the beginning of the fiscal year ended June 30, 2000, the Bank had two
separate branch offices in Augusta, Maine; the Western Avenue and the Bangor
Street branches. During the third quarter ending March 31, 2000, the Bank
consolidated its loan and deposit customers to the Western Avenue branch and
closed the Bangor Street location. The merging of these two branches allows the
Bank to continue to serve the Augusta, Maine community with greater efficiency
with little or no disruption. The Bangor street branch had been subject to a
lease agreement, which had expired during the recently completed fiscal year.
The relocation expenses were not material and the employees were absorbed into
other available positions within the Bank or decreased through attrition. The
closure of the branch did not have a material impact on the financial condition
or operations of the Company.
Northeast Bancorp through its subsidiary, Northeast Bank and the Bank's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western, midcoast and south-
central Maine. Although historically the Bank has been primarily a residential
mortgage lender, during the past few years the Bank has expanded its commercial
loan business, increased its line of financial products and services, and
expanded its market area. Management believes that this strategy will increase
core earnings in the long term by providing stronger interest margins,
additional non-interest income, and increased loan volume. The Bank believes
that the local character of its business and its "community bank" management
philosophy allows it to compete effectively in its market area. As of June 30,
2000, the Company, on a consolidated basis, had total assets of approximately
$434 million, total deposits of approximately $260 million, and stockholders'
equity of approximately $28 million. Unless the context otherwise requires,
references herein to the Company include the Company and its subsidiaries on a
consolidated basis.
The Bank (which was formerly known as Bethel Savings Bank F.S.B. ("Bethel")) is
a federally chartered savings bank, which was originally organized in 1872 as a
Maine-chartered mutual savings bank. The Bank received its federal charter in
1984. In 1987, Bethel converted to a stock form of ownership and in subsequent
years has engaged in a strategy of both geographic and product expansion. The
Bank has broad powers, including the power to engage in non-residential lending
activities. In connection with its conversion into a federal savings bank in
1983, the Bank retained its then-authorized powers as a Maine-chartered mutual
savings bank. Under applicable regulations, except as otherwise determined by
the OTS, the Bank retains the authority that it was permitted to exercise as a
mutual savings bank under the state law existing at the time of the conversion.
Historically, Maine-chartered savings banks have had certain lending,
investment, and other powers that have only recently been granted to federal
savings institutions, including commercial lending authority and the ability to
offer personal checking and negotiable order of withdrawal ("NOW") accounts.
Strategy
- --------
Northeast Bancorp's corporate philosophy is to offer a wide array of financial
products and services with an emphasis on a high level of personalized service.
This strategy is designed to attract profitable long-term banking relationships
with its customers which will increase the Bank's core earnings by developing
strong interest margins, non-interest free income, and increasing the volume of
banking products and services as its market area expands. In keeping with this
strategy, the Bank is making a concerted effort to become an all-inclusive
financial center that is able to provide its customers with virtually any
financial product and service that will meet their needs. In this regard, the
Bank assists its clients in assessing their financial needs through its
personalized financial planning services. Once the customer's financial needs
have been identified, the Bank provides the customer with financial product or
service solutions designed to meet their needs. Management believes that the
ability to deliver such personalized service and advice will be one of the
primary competitive factors in the financial institutions industry in the
future. Accordingly, over the past few years the Bank has invested a
substantial amount of resources in developing its ability to offer a high level
of personalized service with an emphasis on financial planning and delivery of
financial advisory services that are responsive to a broad range of customer
needs.
To further support the corporate philosophy, the Bank has recently expanded the
scope of lending and other financial services that it provides to its
customers. In the past, the Bank has focused primarily on its residential
mortgage lending business. As a result, its business has historically
consisted of attracting deposits from the general public through its retail
banking offices and applying those funds principally to the origination,
retention, servicing, investing in and selling first mortgage loans on single
and multi-family residential real estate. However, during the past several
years, the Bank has expanded the scope of its services by placing additional
emphasis on:
* consumer lending and small business, home equity, and commercial loans;
* lending funds to retail banking customers by means or home equity and
installment loans;
* originating loans secured by commercial property and multi-family dwellings;
and
* generating indirect dealer consumer loans used for the purchase of mobile
homes and automobiles.
Northeast Bancorp also offers to its customers financial planning, investment
services and all lines of insurance products through the Bank's subsidiary,
Northeast Financial Services Corporation. Northeast Financial Services
Corporation, which is located at Northeast Bancorp's headquarters in Auburn,
Maine, offers customers access to investment, insurance and annuity products
through an arrangement with Commonwealth Equity Services, Inc., an
unaffiliated, fully licensed New York securities firm, which licenses the
brokers who sell such products and services. It also offers all lines of
insurance products to customers through its relationships with several
insurance agencies, including one owned by Mr. Kendall who is a director of the
Company.
Trust services and employee benefit products are provided to Northeast Bancorp
customers through Northeast Trust, a division of the Bank. Since 1993,
employee benefit products were provided to Northeast Bancorp's customers
through First New England Benefits, a division of the Bank ("FNEB"). During
fiscal 1999, Northeast Bancorp dissolved FNEB because it could not attain
sufficient growth revenue. These services are now provided to customers
through the Bank's trust department. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Results of
Operations."
The community banking strategy of Northeast Bancorp emphasizes the development
of long-term full banking relationships with customers at each branch location
by providing consistent, high quality service from:
* employees with local decision-making authority;
* employees who are familiar with the customers' needs, their business
environment and competitive demands; and
* employees who are able to develop and customize personalized financial
solutions that are tailored to the customer's needs.
With the goal of providing a full range of banking services to its customers
and in an effort to develop strong long-term primary banking relationships with
businesses and individuals, the Bank has expanded its commercial banking
operations by selectively making commercial loans to small and medium sized
companies. In this regard, the Bank's business development efforts have been
directed towards full service credit packages and financial services, as well
as competitively priced mortgage packages. At June 30, 2000, the Bank's loan
portfolio consisted of 52% residential real estate mortgages, 17% commercial
real estate mortgages, 11% commercial loans, and 20% consumer loans. At June
30, 2000, the Bank's lending limit was approximately $4.2 million. To the
extent that customer's credit needs exceed the bank's lending limits, the Bank
may seek participations in such loans with other banks. In addition, the Bank
invests in certain U.S. government and agency obligations and other investments
permitted by applicable law and regulations.
The Bank is subject to examination and comprehensive regulation by the OTS and
its deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC") to the extent permitted by law. The Bank also is a member of the
Federal Home Loan Bank ("FHLB") of Boston. Although the Bank's deposits are
primarily insured through the Bank Insurance Fund, deposits at the Brunswick
branch, which represent approximately 20% of the Bank's total deposits, are
insured through the Savings Association Insurance Fund.
The principal executive offices of Northeast Bancorp and the Bank are located
at 232 Center Street, Auburn, Maine, 04210, and their telephone number is
(207) 777-6411.
Market Area and Competition
- ---------------------------
The Bank is headquartered in Auburn, Maine with full service branches in
Augusta, Bethel, Harrison, South Paris, Buckfield, Mechanic Falls, Brunswick,
Richmond, Lewiston, and Lisbon Falls, Maine. In addition, the Company maintains
a facility in Falmouth, Maine from which it accepts loan applications and
offers investment services, insurance, and financial planning products and
services. As a result of its recent acquisitions and expansion, the Company's
market areas cover western, central and mid-coastal regions of the State of
Maine. The Bank's market area is characterized by a diverse economy that has
experienced moderate growth in recent years.
Market for Services and Competition
- -----------------------------------
Management believes that the Bank's principal markets are: (i) the residential
real estate market within its primary market areas, (ii) the commercial market
and small-to-medium sized businesses within its primary market areas; and (iii)
the growing consumer loan market, including indirect automobile dealer loans,
as well as a wide range of other consumer-oriented financial services and
products such as financial planning services, investments, insurance trust
services, college loans and other similar products.
Businesses are solicited through the personal efforts of the directors and
officers of both Northeast Bancorp and the Bank. Management believes a
locally-based independent bank is often perceived by the local business
community as possessing a clearer understanding of local commerce and its
needs. Consequently, Northeast Bancorp believes that it is able to make
prudent lending decisions quickly and more equitably than its competitors
without compromising asset quality or profitability.
In an effort to attract a broader base of long-term customer relationships and
diversity in its banking operations, Northeast Bancorp has recently expanded
its focus from primarily seeking residential loan customers to becoming a
"one-stop shopping" destination point for our customers' full financial needs.
Accordingly, during the past few years the Bank has significantly increased
the number and type of financial products, loans, and services that it makes
available to its customers.
Northeast Bancorp encounters strong competition in its market areas, both in
making loans and attracting deposits. The deregulation of the banking industry
and the widespread enactment of state laws which permit multi-bank holding
companies, as well as the availability of nationwide interstate banking, has
created a highly competitive environment for financial services providers. In
one or more aspects of its business, the Bank competes with other savings
banks, commercial banks, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, finance
companies, and other financial intermediaries operating in Maine and elsewhere.
Many of the Bank's primary competitors, some of which are affiliated with large
bank holding companies or other larger financial-based institutions, have
substantially greater resources and have higher lending limits.
The principal factors in competing for deposits are convenient office
locations, flexible hours, interest rates and services, while the principal
competitive factors relating to loans are interest rates, the range of lending
services offered and lending fees. Additionally, Northeast Bancorp believes
that an emphasis on personalized financial planning and advice tailored to
individual customer needs, together with the local character of the Bank's
business and its "community bank" management philosophy will enhance its
ability to compete successfully in its market areas. Further, Northeast
Bancorp now offers a wide range of financial services to its customers,
including not only basic loan and deposit services, but also investment
services, trust services, and insurance products. We believe that our ability
to provide such services and advice, and to provide the financial services and
products required by our customers, will be an attractive alternative to
consumers in our market area.
Subsidiaries
- ------------
On October 4, 1999, the Company formed NBN Capital Trust, a Delaware statutory
trust and a wholly-owned subsidiary of the Company (the "Trust"), for the
purpose of (i) issuing and selling its common securities to the Company and its
trust preferred securities to the public, and (ii) using the proceeds therefrom
to purchase 9.60% Junior Subordinated Deferrable Interest Debentures ("Junior
Subordinated Debentures") from the Company. Accordingly, the Junior
Subordinated Debentures are, and will be, the sole asset of the Trust. In the
quarter ended December 31, 1999, the Trust sold $7,172,998 of its trust-
preferred securities to the public and $221,851 of its common securities to the
Company. The Trust used the proceeds to purchase $7,394,849 in principal amount
of the Junior Subordinated Debentures issued by the Company. The Company will
pay interest on the Junior Subordinated Debentures at a rate of 9.60% to the
Trust at the end of each quarter, which is equal to the dividend rate payable
to the holders of the Trust's preferred securities. The cost of the issuance
of the preferred securities was approximately $491,000 and is treated as a
deferred asset and will be amortized over the life of the securities. Following
the offer and sale of the Trust's securities, the Company owned and currently
holds all of the outstanding common securities of the Trust, its only voting
securities, and as a result the Trust is a subsidiary of the Company. Through
the end of the fiscal year ending June 30, 2000, the Company had used the net
proceeds of the offering, approximately $6,700,000, for the following purposes:
(i) contributed $4,000,000 as additional capital for the Bank, (ii) allocated
$1,000,000 for the Company's stock buy-back program, (iii) paid off the
remaining principal balance of $535,000 on its note payable, and (iv) retained
the remaining $1,200,000 for general corporate requirements as they may arise
from time to time. Since January 1, 2000 through September 15, 2000, the
Company has utilized an additional $1,000,000 of the remaining funds for
general corporate needs.
The Company acquired a wholly-owned subsidiary, ASI Data Services, Inc. (ASI)
through two stock purchases during 1993-1994. ASI initially provided data
processing services to the Company and its subsidiaries. The Company's board of
directors voted to transfer the assets and operations of ASI to the Bank as of
July 1, 1996. ASI continues to exist as a separate legal entity, but is now
inactive.
Northeast Financial Services Corporation, a Maine Corporation, and a wholly-
owned subsidiary of the Bank was originally formed in 1982 as a vehicle through
which the Bank could participate in certain real estate development projects.
At June 30, 2000, investment in and loans to its subsidiary constituted 0.14%
of the Company's total assets. Generally, any proposed development project
will be examined for its profit potential and its ability to enhance the
communities served by the Bank. At the present time, there are no definitive
plans for additional real estate development projects. Northeast Financial also
supports the Bank's non-banking financial services through its relationship
with Commonwealth Financial Services, Inc., ("Commonwealth"), a fully licensed
New York securities firm, and a variety of insurance agencies, including
Kendall Insurance Agency, which allows the Bank to deliver insurance products
to its customers, and for which the Bank receives a flat fee from the various
relationships for referrals. Northeast Financial has not invested in any assets
in its business relationship with Commonwealth.
Employees
- ---------
As of June 30, 2000, the Company and the Bank together employed 132 full-time
and 26 part-time employees. The Company's employees are not represented by any
collective bargaining unit. The Company believes that its relations with its
employees are good.
SUPERVISION AND REGULATION
- --------------------------
General
- -------
Northeast Bancorp is a savings and loan holding company that is regulated and
subject to examination by the OTS. The Bank is a federally chartered savings
bank and is subject to the regulations, examinations, and reporting
requirements of the OTS. The Bank is a member of the Federal Home Loan Bank of
Boston and the Bank's deposits are insured by the FDIC. As the administrator of
the deposit insurance fund, the FDIC has certain regulatory and full
examination authority over OTS regulated savings associations.
The Bank also is subject to regulation by the Board of Governors of the Federal
Reserve System governing reserves to be maintained against deposits and certain
other matters. The Bank's relationship with its depositors and borrowers also
is regulated to a great extent by both federal and state laws. Any change in
applicable laws or regulations, or a change in the ways these laws and
regulations are interpreted by regulatory agencies or courts, may have a
material adverse impact on the business of Northeast Bancorp and the Bank.
The following information is a summary of some of the laws and regulations
applicable to Northeast Bancorp and the Bank. The applicable statutes and
regulations are summarized and do not purport to be complete, and are qualified
in their entirety by reference to the particular statutes and regulations.
Federal Regulation of Savings and Loan Holding Companies
- --------------------------------------------------------
General Limitations.
- --------------------
Northeast Bancorp is a unitary savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA") and is registered with
the OTS. Northeast Bancorp is subject to OTS regulations, examinations,
supervision and reporting requirements. Further, the OTS has enforcement
authority over Northeast Bancorp and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
As a unitary savings and loan holding company, Northeast Bancorp generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a qualified thrift
lender. See "Supervision and Regulation Federal Regulations of Savings
Associations Qualified Thrift Lender Test." Nevertheless, various activities
conducted by savings and loan holding companies require OTS authorization.
The HOLA prohibits a savings and loan holding company from directly or
indirectly acquiring control (including through an acquisition by merger,
consolidation or purchase of assets) of any savings association, or any other
savings and loan holding company, without prior OTS approval. In considering
whether to grant approval for any such transaction, the OTS will take into
consideration a number of factors, including:
* competitive effects of the transaction;
* financial and managerial resources;
* future prospects of the holding company and its bank or thrift subsidiaries
following the transaction;
* the effect of the acquisition on the risk to the insurance fund; and
* compliance history of such subsidiaries with the Community Reinvestment Act.
Further, a savings and loan holding company may not acquire more than 5% of the
voting shares of any savings association unless by merger, consolidation or
purchase of assets, each of which requires prior OTS approval. In addition,
under other provisions of HOLA, a savings and loan holding company may acquire
up to 15% of the voting shares of certain undercapitalized savings
associations.
Multiple Savings and Loan Holding Companies. At the present time, Northeast
Bancorp is a unitary savings and loan holding company. Upon acquisition by
Northeast Bancorp of a separate subsidiary savings association, Northeast
Bancorp would become a multiple savings and loan holding company and would be
subject to extensive limitations on the types of business activities in which
it could engage. A holding company that acquires another institution and
maintains it as a separate subsidiary or whose sole subsidiary fails to meet
the qualified thrift lender test will become subject to the activities
limitations applicable to multiple savings bank holding companies. In general,
a multiple savings bank holding company (or subsidiary thereof that is not an
insured institution) may not commence, or continue for more than a limited
period of time after becoming a multiple savings bank holding company (or a
subsidiary thereof), any business activity other than:
* furnishing or performing management services for a subsidiary insured
institution;
* conducting an insurance agency or an escrow business;
* holding, managing or liquidating assets owned by or acquired from a
subsidiary insured institution;
* holding or managing properties used or occupied by a subsidiary insured
institution;
* acting as trustee under deeds of trust;
* those activities previously directly authorized by the OTS by regulation as
of March 5, 1987 to be engaged in by multiple savings bank holding
companies; or
* subject to prior approval of the OTS, those activities authorized by the
Federal Reserve Board as permissible investments for bank holding companies.
These restrictions do not apply to a multiple savings bank holding company if
(a) all, or all but one, of its insured institution subsidiaries were acquired
in emergency thrift acquisitions or assisted acquisitions and (b) all of its
insured institution subsidiaries are qualified thrift lenders.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (a) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (b) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary with regard to the extent to which they permit interstate savings
and loan holding company acquisitions. Northeast Bancorp currently is not a
party to any discussions with any acquisition targets, which would make
Northeast Bancorp a multiple savings and loan holding company.
Safety and Soundness.
- ---------------------
Under federal law, the Director of the OTS is authorized to take action when it
determines that there is reasonable cause to believe that the continuation by a
savings bank holding company of any particular activity constitutes a serious
risk to the financial safety, soundness or stability of a savings bank holding
company's subsidiary savings institution. The Director of the OTS has
oversight authority for all holding company affiliates, not just the insured
institution. Specifically, the Director of the OTS may, as necessary:
* limit the payment of dividends by the savings institution to its parent
holding company;
* limit transactions between the savings institution, the holding company and
the subsidiaries or affiliates of either; or
* limit any activities of the savings institution that might create a serious
risk that the liabilities of the holding company and its affiliates may be
imposed on the savings institution.
Federal Regulation of Savings Institutions
- ------------------------------------------
Business Activities.
- --------------------
The activities of savings institutions are governed by the HOLA and, in certain
respects, the Federal Deposit Insurance Act and the rules and regulations
issued by the OTS and the FDIC pursuant to these acts. These laws and
regulations delineate the nature and extent of the activities in which savings
associations may engage.
Capital Requirements.
- ---------------------
The OTS capital regulations have three components: a leverage limit, a
tangible capital requirement, and a risk-based capital requirement. The OTS
has broad discretion to impose capital requirements in excess of minimum
applicable ratios.
The leverage limit requires that a savings association maintain core capital of
at least 3% of its adjusted total assets. For purposes of this requirement,
total assets are adjusted to exclude intangible assets and investments in
certain subsidiaries, and to include the assets of certain other subsidiaries,
certain intangibles arising from prior period supervisory transactions, and
permissible mortgage servicing rights. Core capital includes common
shareholders' equity and retained earnings, noncumulative perpetual preferred
stock and related surplus and minority interests in consolidated subsidiaries,
minus intangibles, plus certain mortgage servicing rights and certain goodwill
arising from prior regulatory accounting practices.
Certain mortgage servicing rights are not deducted in computing core and
tangible capital. Prior to August 10, 1998, generally, the lower of 90% of
the fair market value of readily marketable mortgage servicing rights, or the
current unamortized book value as determined under GAAP could be included in
core and tangible capital up to a maximum of 50% of core capital computed
before the deduction of any disallowed qualifying intangible assets. Effective
August 10, 1998, the OTS increased the maximum amount of mortgage servicing
rights that are includable in regulatory capital from 50% to 100% of core
capital.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks, which are generally
more limited than activities permissible for savings associations and their
subsidiaries, must be deducted. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association.
The tangible capital requirement mandates that a savings association maintain
tangible capital of at least 1.5% of adjusted total assets, provided, however,
that savings institutions may include up to 90% of the fair market value of
readily marketable purchased mortgage servicing rights included in core capital
as tangible capital (subject to certain conditions, including any limitations
imposed by the FDIC on the maximum percentage of the tangible capital
requirement that may be satisfied with such servicing rights). For purposes of
the tangible capital requirement, adjusted total assets are calculated on the
same basis as the leverage limit. As of June 30, 2000, the Bank was in
compliance with these requirements. The balances maintain the same manner as
core capital, except that all intangible assets must be deducted.
The risk-based requirement promulgated by the OTS pursuant to the HOLA, tracks
the standard applicable to national banks, except that the OTS may determine to
reflect interest rate and other risks not specifically included in the national
bank standard. However, such deviations from the national bank standard may
not result in a materially lower risk-based requirement for savings
associations than for national banks. The risk-based standard adopted by the
OTS is similar to the Office of the Comptroller of the Currency standard for
national banks. The risk-based standards of the OTS require maintenance of
core capital equal to at least 4% of risk-weighted assets and total capital
equal to at least 8% of risk-weighted assets. Total capital includes core
capital plus supplementary capital (to the extent it does not exceed core
capital). Supplementary capital includes (a) cumulative perpetual preferred
stock; (b) mutual capital certificates, income capital certificates and net
worth certificates; (c) nonwithdrawable accounts and pledged deposits to the
extent not included in core capital; (d) perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements; and (e) general loan and lease loss allowances, up to a maximum
of 1.25% of risk-weighted assets. See Item 8. "Financial Statements and
Supplementary Data - Footnote 10."
In determining the amount of risk-weighted assets, savings associations must
assign balance sheet assets to one of four risk-weight categories, reflecting
the relative credit risk inherent in the asset. Off-balance-sheet items are
assigned to one of the four risk-weight categories after a credit conversion
factor is applied.
OTS regulations add an interest rate risk component to the 8% risk-based
capital requirement discussed above. Only savings associations with more than
a normal level of interest rate risk are subject to these requirements.
Specifically, savings associations with interest rate risk exposure in excess
of 2% (measured in accordance with an OTS Model and Guidelines) must deduct an
interest rate risk component from total capital prior to calculating their
risk-based capital ratios. The interest rate risk component is calculated
as one-half of the difference between the institution's measured interest rate
risk and 2%, multiplied by the market value of the institution's assets. This
deduction will have the effect of requiring savings associations with interest
rate risk exposure of more than 2% to hold more capital than those with less
than 2% exposure. On August 21, 1995, the OTS adopted and approved an appeal
process, but delayed the interest rate risk capital deduction indefinitely.
Loans to One Borrower.
- ----------------------
Under the HOLA, savings institutions are generally subject to the national bank
limits on loans to a single or related group of borrowers. Generally, a
savings association may lend to a single borrower or group of related
borrowers, on an unsecured basis, in an amount not greater than 15% of its
unimpaired capital and unimpaired surplus. An additional amount, not greater
than 10% of the savings association's unimpaired capital and unimpaired
surplus, may be loaned if the loan is secured by readily marketable collateral,
which is defined to include certain financial instruments and bullion, but
generally does not include real estate. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. The OTS also may impose more stringent limits on an
association's loans to one borrower, if it determines that such limits are
necessary to protect the safety and soundness of the institution.
Qualified Thrift Lender Test.
- -----------------------------
All savings associations, including the Bank, are required to meet a qualified
thrift lender ("QTL") test for, among other things, future eligibility for FHLB
advances. A savings association that fails to satisfy the QTL test is subject
to substantial restrictions on its activities and to other significant
penalties. A savings association is a QTL if it meets either (a) has invested
at least 65% of its "portfolio assets" in qualified thrift investments and
maintains this level of "qualified thrift investments" on a monthly average
basis in the nine of every twelve months, or (b) the test for being a domestic
building and loan association, as that term is defined in Section 7701(a) (19)
of the Internal Revenue Code of 1986, as amended.
The term "portfolio assets" under the QTL test is defined as savings
institutions total assets less (i) intangibles, (ii) properties used to conduct
business, and (iii) liquid assets (up to 20% total assets). The following
asset may be included as "qualified thrift investments" without limit: (1)
domestic residential housing or manufactured housing loans, (2) home equity
loans and mortgage backed securities backed by residential housing and
manufactured housing loans, (3) FHLB stock, (4) certain obligations of the FDIC
and certain other related entities, and (5) education, small business, and
credit card loans. In addition, the following assets, which may be included
in the aggregate amount of up to 20% of portfolio assets, also constitute
qualified thrift investments: (i) 50% of originated residential mortgage loans
sold within 90 days of origination, (ii) investments in debt or equity of
service corporations that derive 80% of their gross revenues from
hosing-related activities, (iii) 200% of certain loans to, and investment in,
low cost one-to-four family housing, (iv) 200% of loans for residential real
property, churches, nursing homes, schools, and small businesses in areas where
the credit needs of low-and moderate- income families are not met, (v) other
loans for churches, schools, nursing homes and hospitals, and (vi) personal,
family, or household loans (other than education, small business, or credit
card loans).
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies. A savings association may
requalify the next time it meets the requirement in nine of the preceding
twelve months, but it may requalify only one time. If an institution that
fails the QTL test and has not yet requalified or converted to a national bank
charter, the savings institution is immediately ineligible to receive any new
FHLB advances, and is subject to national bank limits for payment of dividends.
Further, it may not establish a branch office at any location at which a
national bank located in the savings association's state could not establish a
branch. In addition, within one year of the loss of QTL status, the holding
company of the savings association that does not convert to a bank charter must
register as a bank holding company and will be subject to all statutes
applicable to bank holding companies.
These penalties do not apply to a federal savings association, such as the
Bank, which existed as a federal savings association on August 9, 1989 but was
chartered before October 15, 1982 as a savings bank under state law.
Limitation on Capital Distributions.
- ------------------------------------
OTS regulations impose limitations upon all capital distributions by savings
institutions, including:
* cash dividends;
* payments to repurchase or otherwise acquire its shares;
* payments to stockholders of another institution in a cash-out merger; and
* other distributions charged against capital.
OTS rules establish three tiers of institutions, which are based primarily on
an institution's capital level. An institution, such as the Bank, that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of: (i) 100% of its net earnings to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75% of its net earnings for the previous four quarters;
provided that the institution would not be undercapitalized, as the term is
defined in the OTS Prompt Corrective Action regulations, following the capital
distribution. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its fully
phased-in requirement or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity.
- ----------
The Bank is required to maintain an average daily balance of "liquid assets"
equal to a certain percentage of net withdrawable deposit accounts and
borrowings payable in one year or less. Liquid assets are cash, certain time
deposits, bankers' acceptances, highly rated corporate debt securities and
commercial paper, securities of certain government mutual funds, reserves
maintained pursuant to Federal Reserve Board requirements, and specified
government, state or federal agency obligations. The liquidity requirement may
vary from time to time, between 4% and 10%, depending on economic conditions
and savings flows of all savings associations. At June 30, 2000, OTS
regulations required savings associations, such as the Bank, to maintain liquid
assets equal to not less than 4% of its net withdrawable deposit accounts and
borrowing payable in one year or less.
Simply meeting the minimum liquidity requirement does not automatically mean a
thrift institution has sufficient liquidity for safe and sound operation. OTS
rules include a separate additional requirement that each thrift must maintain
sufficient liquidity to ensure its safe and sound operation. Adequate
liquidity may vary from institution to institution depending on thrift's
asset/liability structure, market conditions, the activities of financial
service competitors and the requirements of its own deposit and loan customers.
At June 30, 2000, the Bank was in compliance with the liquidity ratio
regulatory requirements.
Community Reinvestment Act and Fair Lending Laws.
- -------------------------------------------------
Savings associations have a responsibility under the Community Reinvestment
Act and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. A savings institution's failure to comply with
the provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities. Failure of a savings association to
comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the OTS, as well as other federal regulatory
agencies and the Department of Justice. The Bank received a satisfactory
Community Reinvestment Act rating under the current regulations in its most
recent federal examination by the OTS.
The Bank Secrecy Act and Money Laundering Laws.
- -----------------------------------------------
The Bank Secrecy Act was enacted by Congress in 1970. This act requires every
financial institution within the United States to file a Currency Transaction
Report with the Internal Revenue Service for each transaction in currency of
more than $10,000 not exempted by the United States Treasury Department.
The Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's checks,
traveler's checks, or money orders involving $3,000 or more in cash.
Institutions also must verify and record the identity of the originator and
beneficiary of certain funds transfers.
Branching.
- ----------
Subject to certain statutory restrictions in the HOLA and the Federal Deposit
Insurance Act, the Bank is authorized to branch on a nationwide basis.
Branching by savings associations also is subject to other regulatory
requirements, including compliance with the Community Reinvestment Act and its
implementing regulations.
Transactions with Related Parties.
- ----------------------------------
The Bank's authority to engage in transactions with related parties or
"affiliates" (i.e., any company that controls or is under common control with
the Bank, including Northeast Bancorp and any non-savings institution
subsidiaries) or to make loans to certain insiders of the Bank or Northeast
Bancorp, is limited by Sections 23A and 23B of the Federal Reserve Act.
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 Section 23A 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 non-affiliated companies.
Loans to Officers, Directors, and Principal Stockholders.
- ---------------------------------------------------------
Sections 22(g) and 22(h) of the Federal Reserve Act and the rules and
regulations issued under that act are applicable to loans from a savings
association to any of the following persons:
* an executive officer of a savings association;
* a director of a savings association;
* a principal stockholder of a savings association (i.e., any person who
directly or indirectly, or acting through or in concert with one or more
persons, owns, controls, or has power to vote more than 10% of any class of
voting securities of a savings association);
* any company controlled by an executive officer, director or principal
stockholder of a savings association; and
* any political or campaign committee which is controlled by, or which will
benefit any executive officer, director or principal stockholder.
Among other things, such loans must be made on terms substantially the same as
those prevailing on comparable transactions made to unaffiliated individuals,
and may not involve more than the normal risk of repayment or present other
unfavorable features. Certain extensions of credit to such persons must first
be approved in advance by a disinterested majority of a savings association's
entire board of directors. Section 22(h) of the Federal Reserve Act prohibits
loans to any such individuals where the aggregate amount exceeds an amount
equal to 15% of an insured institution's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus in the case of loans that
are fully secured by readily marketable collateral, or when the aggregate
amount on all such extensions of credit outstanding to all such persons would
exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g)
establishes additional limitations on loans to executive officers.
Changes in Directors and Senior Executive Officers.
- ---------------------------------------------------
Section 32 of the Federal Deposit Insurance Act, as amended by the 1996 Act,
requires a depository institution or holding company of a depository
institution to give 30 days prior written notice to its primary federal
regulator of any proposed appointment of a director or senior executive officer
if the institution is not in compliance with the minimum capital requirements
or otherwise is in a troubled condition. The regulator then has the opportunity
to disapprove the proposed appointment.
Permissible Loans and Investments.
- ----------------------------------
Federally chartered savings banks, such as the Bank, are authorized to
originate, invest in, sell, purchase, service, participate, and otherwise deal
in: (1) loans made on the security of residential and nonresidential real
estate, (2) commercial loans (up to 20% of assets, the last 10% of which must
be small business loans), (3) consumer loans (subject to certain percentage of
asset limitations), and (4) credit card loans. The lending authority of
federally chartered associations is subject to various OTS requirements,
including, as applicable, requirements governing loan-to-value ratio,
percentage-of-assets limits, and loans to one borrower limits. In September
1996, the OTS substantially revised its investment and lending regulations
eliminating many of their specific requirements in favor of a more general
standard of safety and soundness.
Federally chartered savings associations may invest, without limitation, in the
following assets: (1) obligations of the United States government or certain
agencies thereof; (2) stock issued or loans made by FHLB or the FNMA; (3)
obligations issued or guaranteed by the FNMA, the Student Loan Marketing
Association, the GNMA, or any agency of the United States Government; (4)
certain mortgages, obligations, or other securities that have been sold by the
FHLMC; (5) stock issued by a national housing partnership corporation; (6)
demand, time, or savings deposits, shares, or accounts of any insured
depository institution; (7) certain "liquidity" investments approved by the OTS
to meet liquidity requirements; (8) shares of registered investment companies,
the portfolios of which are limited to investments that a federal association
is otherwise authorized to make; (9) certain MBS; (10) general obligations of
any state of the United States or any political subdivision or municipality
thereof, provided that not more than 10% of a savings association's capital may
be invested in the general obligations of any one issuer; (11) loans secured by
residential real property; (12) credit card loans; and (13) educational loans.
Federally chartered savings associations may invest in secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, up to 20%
of assets, provided that the last 10% is invested in small business loans. The
HOLA also limits a federal savings association's aggregate nonresidential real
property loans to 400% of the savings association's capital as determined
pursuant to the OTS's capital requirements. See "Supervision and Regulation
Federal Regulation of Savings Associations Capital Requirements." The OTS may
allow a savings association to exceed the aggregate limitation, if the OTS
determines that exceeding the limitation would pose no significant risk to the
safe and sound operations of the association and would be consistent with
prudent operating practices. Federally chartered savings associations also
are authorized by the HOLA to make investments in consumer loans, business
development credit corporations, certain commercial paper and corporate debt
securities, service corporations, and small business investment companies. All
of these types of investments are subject to percentage-of-assets and various
other limitations.
Service Corporations.
- ---------------------
The HOLA authorizes fderally chartered savings associations, such as the Bank,
to invest in the capital stock, obligations, or other securities of service
corporations. The HOLA authorizes a savings association to invest up to a
total of 3% of its assets in service corporations. The last 1% of the 3%
statutory investment limit applicable to service corporations must be primarily
invested in community development investments drawn from a broad list of
permissible investments that include, among other things: (1) government
guaranteed loans, (2) loans for investment in small businesses, (3) investments
in revitalization, and rehabilitation projects, and (4) investments in low- and
moderate-income housing developments.
Service corporations are authorized to engage in a variety of preapproved
activities, some of which (e.g., securities brokerage and real estate
development) are ineligible activities for the parent savings association.
The OTS regulations implementing the service corporation authority contained in
the HOLA also provide that activities reasonably related to the activities of a
federally chartered savings association may be approved on a case-by-case basis
by the Director of the OTS.
Operating Subsidiaries.
- -----------------------
All federal savings associations are authorized to establish or acquire one or
more operating subsidiaries. Operating subsidiaries are subject to examination
and supervision by the OTS to the same extent as the parent thrift. An
operating subsidiary is a corporation that meets all of the following
requirements: (1) it engages only in activities that a federal savings
association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total
assets, OTS regulations do not limit the amount that a parent savings
association may invest in its operating subsidiaries. Operating subsidiaries
may be incorporated and operated in any geographical location where its parent
may operate. An operating subsidiary that is a depository institution may
accept deposits in any location, provided that the subsidiary has federal
deposit insurance.
Enforcement.
- ------------
Under the Federal Deposit Insurance Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related 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. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. 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. Under the act, the FDIC has the authority to recommend to the Director of
OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority
to take such actions under certain circumstances.
Standards for Safety and Soundness.
- -----------------------------------
The Federal Deposit Insurance Act requires each federal banking agency to
prescribe for all insured depository institutions standards relating to, among
other things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
and compensation fees and benefits and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness to implement the safety and soundness standards required
under the act. These 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. Further, the
guidelines address (a) internal controls and information systems; (b) internal
audit system; (c) credit underwriting; (d) loan documentation; (e) interest
rate risk exposure; (f) asset growth; and (g) compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by these 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 Federal Deposit Insurance Act. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Prompt Corrective Regulatory 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 institution's degree of capitalization. Generally, a
savings institution that has total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 core capital ratio that is less than 3.0% is
considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 1.5% is deemed to be "critically
undercapitalized."
Subject to a narrow exception, the OTS is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notices that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors. As
of June 30, 2000, the Bank was considered to be well-capitalized.
Insurance of Deposit Accounts and Assessments.
- ----------------------------------------------
The Bank's deposits are insured by the FDIC through the bank insurance fund
("BIF") and the savings association insurance fund ("SAIF") for up to $100,000
for each insured account holder, the maximum amount currently permitted by law.
The FDIC establishes premium assessment rates for BIF and SAIF deposit
insurance. There is no statutory limit on the maximum assessment and the
percent of increase in the assessment that the FDIC may impose in any one year,
provided, however, that the FDIC may not collect more than is necessary to
reach or maintain the BIF's and SAIF's designated reserve ration and must
rebate any excess collected. Under the FDIC's risk-based insurance system, BIF
and SAIF-assessable deposits are now subject to premiums of between 0 to 27
cents per $100 of deposits, depending upon the institution's capital position
and other supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC places
the institution in one of nine risk categories using a two-step process based
first on capital ratios and then on relevant supervisory information. Each
institution is assigned to one of three groups (well-capitalized, adequately
capitalized, or undercapitalized) based on its capital ratios. A
well-capitalized institution is one that has at least a 10% total risk-based
capital ratio (the ratio of total capital to risk-weighted assets), a 6% tier 1
risk-based capital ratio (the ratio of tier 1 core capital to risk-weighted
assets), and a 5% leverage capital ratio (the ratio of core capital to adjusted
total assets). An adequately capitalized institution has at least an 8% total
risk-based capital ratio, a 4% tier 1 core risk-based capital ratio, and a 4%
leverage capital ratio. An undercapitalized institution is one that does not
meet either the definition of well-capitalized or adequately capitalized.
The FDIC also assigns each institution to one of three supervisory subgroups
based on an evaluation of the risk posed by the institution. These supervisory
evaluations modify premium rates within each of the three capital groups. The
nine risk categories and the corresponding SAIF assessment rates are as
follows:
Supervisory Subgroup
--------------------
Meets numerical standards for: A B C
- - -
Well-capitalized 0 3 17
Adequately capitalized 3 10 24
Undercapitalized 10 24 27
For purposes of assessments of FDIC insurance premiums, the Bank is a
well-capitalized institution as of June 30, 2000. FDIC regulations prohibit
disclosure of the supervisory subgroup to which an insured institution is
assigned.
Brokered Deposits.
- ------------------
Only a well-capitalized depository institution may accept brokered deposits
without prior regulatory approval. Under implementing regulations,
well-capitalized banks may accept brokered deposits without restriction,
adequately capitalized banks may accept brokered deposits without a waiver from
the FDIC (subject to certain restrictions on payments of rates), while
undercapitalized banks may not accept brokered deposits.
Federal Home Loan Bank System.
- ------------------------------
The Bank is a member of the Federal Home Loan Bank System, which consists of 12
regional banks. FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Boston, is required to
acquire and hold shares of capital stock in that institution in an amount at
least equal to 1% of the aggregate principal amount of the Bank's unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB of Boston, whichever is greater.
Federal Reserve System.
- -----------------------
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transactions (primarily NOW and
regular checking accounts). As of June 30, 2000, the Bank was in compliance
with these requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
Federal Securities Laws.
- ------------------------
Northeast Bancorp's common stock is registered with the SEC under the
Securities Exchange Act of 1934. Accordingly, Northeast Bancorp is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act.
Maine Law.
- ----------
Northeast Bancorp and the Bank are headquartered in, and qualified to do
business in the State of Maine. Accordingly, the Maine Bureau of Banking has
the authority to impose certain regulations and the power to examine both the
Bank and Northeast Bancorp. In addition to approvals from federal regulatory
agencies, Northeast Bancorp may be required to seek approval of the Maine
Bureau of Banking prior to engaging in certain extraordinary transactions.
Legislation.
- ------------
Federal legislation and regulation have significantly affected the operations
of federally insured savings associations, such as the Bank, and other
federally regulated financial institutions in the past several years and have
increased competition among savings associations, commercial banks, and other
financial institutions. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Bank cannot determine
whether, or in what form, such legislation may eventually be enacted, and there
can be no assurance of the effect that any legislation that is enacted would
have on Northeast Bancorp, the Bank, and its affiliates. The operations of
regulated depository institutions will continue to be subject to changes in
applicable statutes and regulations from time to time and could adversely
affect Northeast Bancorp, the Bank, and its affiliates.
Statistical Disclosure.
- -----------------------
The additional statistical disclosure describing the business of the Company
and the Banks required by Industry Guide 3 under the Securities Exchange Act of
1934, as amended, is provided in Item 8b.
Forward-Looking Statements.
- ---------------------------
This Annual Report on Form 10-K (including the Exhibits hereto) contains
certain statements that are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, simulation of
changes in interest rates, prospective results of operations, capital spending
and financing sources, and revenue sources. These statements relate to
expectations concerning matters that are not historical facts. Forward-looking
statements, which are based on various assumptions (some of which are beyond
the Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology such as "believe",
"expect", "estimate", "anticipate", "continue", "plan", "approximately",
"intend", or other similar terms or variations on those terms, or the future or
conditional verbs such as "will", "may", "should", "could", and "would". Such
forward-looking statements reflect the current view of management and are based
on information currently available to them, and upon current expectations,
estimates, and projections regarding the Company and its industry, management's
belief with respect there to, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors. Accordingly, actual results
could differ materially from those set forth in forward-looking statements due
to a variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
U.S. Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, changes in
technology, changes in the securities markets, and the availability of and the
costs associated with sources of liquidity. In addition, the Company may from
time to time make such written or oral "forward-looking statements" in future
filings with the Securities and Exchange Commission (including exhibits
thereto), in its reports to shareholders, and in other communications made by
or with the approval of the Company.
These forward-looking statements reflect the current views of the Company at
the time they are made and are based on information currently available to the
management of the Company and upon current expectations, estimates, and
projections regarding the Company and its industry, management's beliefs with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors (many of which are outside
the control of the Company), which could cause actual results to differ
materially from those expressed or implied by such forward-looking statements.
Potential risks, uncertainties, and other factors which could cause the
Company's financial performance or results of operations to differ materially
from current expectations or such forward-looking statements include, but are
not limited to:
(a)general economic conditions becoming less favorable than expected, either
nationally or in the markets where the Company or its subsidiaries offer
their financial products or services, resulting in, among other things, a
deterioration of credit quality or in a decreased demand for the
Company's products or services;
(b)competitive pressure in the banking and financial services industry
increasing significantly and, more particularly, competition in the
Company's market areas as described under "Business Market for Services
and Competition";
(c)changes in the interest rate environment which reduces margins, including
those described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations "Financial Condition" and may also
have a negative impact on the Company's interest rate exchange agreements;
(d)the adequacy of the allowance for loan losses and the Bank's asset
quality, including those matters described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations Financial
Conditions," and "Results of Operations" as well as the federal income
tax impact for recapture of pre-1988 tax bad debt reserve in the event
the Bank's assets exceed $500 million;
(e)changes in political conditions or changes occurring in the legislative
or regulatory environment, including the impact of any changes in laws
and regulations relating to banking, securities, taxes, and insurance;
(f)the ability to increase market share and to control expenses, and changes
in consumer spending, borrowing, and saving habits;
(g)changes in trade, tax, monetary, or fiscal policies, including the
interest rate policies of the FRB;
(h)money market and monetary fluctuations, and changes in inflation or in
the securities markets;
(i)future acquisitions and the integration of acquired businesses and
assets;
(j)changes in the Company's organizational structure and in its compensation
and benefit plans, including those necessitated by pressures in the labor
market for attracting and retaining qualified personnel;
(k)the effect of changes in accounting policies and practices, as may be
adopted by regulatory agencies as well as the Financial Accounting
Standards Board;
(l)unanticipated litigation, regulatory, or other judicial proceedings;
(m)the success of the Company at managing the risks involved in the
foregoing;
(n)other one-time events, risks and uncertainties detailed from time to time
in the filings of the Company with the Securities and Exchange
Commission.
Such forward-looking statements speak only to the date that such statements are
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
The Company's results are strongly influenced by general economic conditions in
its market areas in the western, central, and mid-coastal regions of the State
of Maine. A deterioration in these conditions could have a material adverse
effect on the quality of the Bank's loan portfolio and the demand for its
products and services. In particular, changes in the real estate or service
industries, or a slow-down in population growth may adversely impact the
Company's performance. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
All forward-looking statements presume a continuation of the existing
regulatory environment and monetary policy. The banking industry is subject
to extensive state and federal regulation, and significant new laws or
regulations, or changes in or repeals of existing laws or regulations may cause
results of the Company to differ materially. Further federal monetary policy,
particularly as implemented by the FRB, significantly affect credit conditions
for the Bank and its customers. Such changes could adversely impact the
Company's financial results. See "Item 1. Business Supervision and
Regulation."
A significant source of risks arise from the possibility that losses will be
sustained because borrowers, guarantors, and related parties fail to perform in
accordance with the terms of their loans. The Bank has adopted underwriting
and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that management
believes are appropriate to minimize the risks in assessing the likelihood of
nonperformance, tracking loan performance, and diversifying the Bank's loan
portfolio. However, such policies may not prevent unexpected losses that could
adversely affect the Company's results and the allowance for loan losses may
not be adequate in all instances. Further, certain types of lending
relationships carry greater risks of nonperformance and collectability, such as
commercial and consumer loans. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Financial Condition,"
"Results of Operations," and "Market Risk."
Item 2. Properties
- -------------------
The principal executive and administrative offices of the Company and the Bank
are located at 232 Center Street, Auburn, Maine and consist of two floors,
containing a lobby, executive and customer service offices, teller stations,
and vault operations. These office facilities are subject to a lease, which
expires in 2007, with an option to renew the lease for 2 additional 10-year
terms. The lease requires rental payments of $96,072 per year.
The Bank has 11 branching locations, including the banking facility located at
its executive offices. The branches located in Bethel, Harrison, Buckfield,
Mechanic Falls, Brunswick, Augusta (Western Avenue), and Lisbon, Maine, are
owned by the Bank in fee simple. In addition to the Auburn facilities, the
branches located in South Paris and Lewiston, Maine are leased by the Bank.
The Bank also owns in fee simple certain real property and improvements located
in Auburn and Falmouth, Maine at which various loan and non-banking services as
well as accounting and operations functions of the Company and the Bank are
performed. The facilities owned or occupied under lease by the Bank and its
subsidiaries are considered by management to be adequate.
Item 3. Legal Proceedings
- --------------------------
There are no pending legal proceedings to which the Company is a party or any
of its property is the subject. There are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of banking, to which the Bank is a party or of which any of the Bank's property
is the subject. There are no material pending legal proceedings to which any
director, officer or affiliate of the Company, any owner of record beneficially
of more than five percent of the common stock of the Company, or any associate
of any such director, officer, affiliate of the Company or any security holder
is a party adverse to the Company or has a material interest adverse to the
Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of the Company's securities-holders
during the fourth quarter of the fiscal year ended June 30, 2000.
Item 4a. Executive Officers of the Registrant
- -----------------------------------------------
Pursuant to the Instructions of Form 10-K and Item 401(b) of Regulation S-K,
the name, age, and position of each executive officer of the Company and the
Bank are set forth below along with such officer's business experience during
the past five years. Officers are elected annually by the respective Boards of
Directors of the Company and the Bank to hold office until the earlier of their
death, resignation, or removal.
Name Age Position with Company and/or Bank
---- --- ---------------------------------
James D. Delamater 48 President and Chief Executive Officer(1)
A. William Cannan 58 Executive Vice President and Chief Operating
Officer (1)
Philip C. Jackson 56 Senior Vice President of Bank Trust Operations
Richard E. Wyman, Jr. 44 Chief Financial Officer (1)
Gary Berlucchi 54 Senior Vice President of Bank - Operations
A. Daniel Keneborus 59 Senior Vice President of Bank - Commercial Lending
Marcel Blais 41 Senior Vice President of the Bank - Sales Manager
Suzanne Carney 33 Clerk
________________
(1) Each of these individuals serves both the Company and the Bank in the same
capacities as indicated above.
James D. Delamater has been President, Chief Executive Officer, and a director
of the Company and the Bank since 1987.
A. William Cannan has been Executive Vice President and Chief Operating Officer
of the Company and the Bank since 1993, and a director of the Company and the
Bank since 1996. From 1991 to 1993 Mr. Cannan served as President of Casco
Northern Bank, N.A., located in Portland, Maine.
Philip C. Jackson has been a director of the Company and the Bank since 1987.
Mr. Jackson also has served as the Senior Vice President of the Bank's Trust
Operations since 1997. From 1991 to 1994, Mr. Jackson served as President of
Bethel Savings, the predecessor to the Bank.
Richard E. Wyman, Jr. has been the Chief Financial Officer of the Company and
the Bank since 1992.
Gary Berlucchi has been the Senior Vice President of the Bank - Operations
since January 1999. From 1972 to 1995, Mr. Berlucchi was a Vice President of
Casco Northern Bank, N.A., in operations and credit policy. Previous to
joining Northeast Bank, Mr. Berlucchi was self-employed as a financial
consultant.
A. Daniel Keneborus has been the Senior Vice President of the Bank - Commercial
Lending since October 1998. Mr. Keneborus served as Vice President, Casco
Northern Bank from 1976 to 1990, Vice President Commercial Lending of Peoples
Heritage from 1990 to 1992, and Vice President Commercial Lending for Shawmut
Bank from 1993 to 1997.
Marcel Blais has been the Senior Vice President of the Bank - Retail Lending
since 1998. Mr. Blais joined the Company in 1997 as the Vice President of the
Bank - Branch Administration. Prior to joining the Company he served as Vice
President of Atlantic Bank from 1995 to 1997, and as Vice President - Branch
Manager of Casco Bank from 1977 until 1995.
Suzanne Carney has been Clerk of the Bank since March 1999 and has been with
the company since 1994 in the Accounting Division.
Part II
Item 5. Market Prices of Common Stock and Dividends Paid
________________________________________________
The Common Stock of Northeast Bancorp trades on the American
Stock Exchange ("AMEX") under the symbol NBN. As of the close of
business on September 14, 2000, there was approximately 2,682,527
of shares of common stock outstanding held by approximately 470
stockholders of record.
The following table sets forth the high and low closing sales
prices of the Company's Common Stock as reported on AMEX, and
dividends paid during each quarter for fiscal years ending June
30, 2000 and 1999.
1999 - 00 High Low Div Pd
______________ _____________________ __________
Jul 1 - Sep 30 10.13 8.00 .053
Oct 1 - Dec 31 9.81 7.00 .053
Jan 1 - Mar 31 9.50 7.88 .063
Apr 1 - Jun 30 9.13 8.00 .063
1998 - 99 High Low Div Pd
______________ _____________________ __________
Jul 1 - Sep 30 16.13 9.75 .053
Oct 1 - Dec 31 11.25 8.00 .053
Jan 1 - Mar 31 11.50 9.88 .053
Apr 1 - Jun 30 11.00 9.50 .053
The amount and timing of future dividends payable on the
Company's Common Stock will depend on, among other things, the
financial condition of the Company, regulatory considerations,
and other factors, including the ability of the Bank to pay
dividends to the Company, the amount of cash on hand, and any
obligations to pay dividends to holders of its preferred stock.
Item 6. Selected Financial Data
_______________________
At or for the Year Ended June 30,
________________________________________________
2000 1999 1998 1997 1996
________ ________ ________ ________ ________
(Dollars in thousands except for Per Share Data)
Selected Operations Data:
Interest income $ 32,406 $ 26,857 $ 24,283 $ 21,936 $ 20,105
Interest expense 18,352 14,550 12,810 11,291 10,087
Net interest income 14,054 12,307 11,473 10,645 10,018
Provision for loan losses 1,072 610 706 614 639
Other operating income (1) 2,451 2,621 2,384 1,827 1,909
Net securities gains 84 95 288 259 279
Other operating expenses (2) 10,543 10,570 9,732 9,718 9,536
________ ________ ________ ________ ________
Income before income taxes 4,974 3,843 3,707 2,399 2,031
Income tax expense 1,764 1,433 1,303 909 738
________ ________ ________ ________ ________
Net income $ 3,210 $ 2,410 $ 2,404 $ 1,490 $ 1,293
Consolidated Per Share Data(3):
Net income:
Basic $ 1.17 $ 0.88 $ 1.00 $ 0.63 $ 0.56
Diluted $ 1.17 $ 0.86 $ 0.86 $ 0.56 $ 0.50
Cash dividends $ 0.23 $ 0.21 $ 0.21 $ 0.21 $ 0.16
Selected Balance Sheet Data:
Total assets $433,852 $364,383 $322,533 $284,077 $244,782
Loans receivable 381,824 318,986 282,031 222,682 187,210
Deposits 259,982 219,364 184,024 172,921 164,855
Borrowings 129,801 104,569 105,433 81,793 54,140
Total stockholders' equity 28,126 26,683 25,140 22,096 20,364
Other Ratios:
Return on average assets 0.79% 0.71% 0.83% 0.57% 0.55%
Return on average equity 11.59% 9.18% 10.35% 7.05% 6.31%
Average equity to average
total assets 6.85% 7.73% 7.99% 8.09% 8.67%
Common dividend payout
ratio (3) 19.66% 24.42% 24.42% 37.50% 32.00%
(1) Includes fees for services to customers and sale of loans.
(2) Includes salaries, employee benefits, occupancy, equipment and other
expenses .
(3) Per share data include restatement to reflect (a) a 50% stock dividend paid
in 1997 and (b) adoption of FASB No. 128 "Earnings Per Share" and its
retroactive application to periods prior to and including 1997. The
selected financial data for the years 1997 and 1996 have been restated to
include Cushnoc Bank's financial information in accordance with the pooling
of interests accounting method due to a merger.
Item 7. Management's Discussion of Financial Condition and Results of
_____________________________________________________________
Operations
__________
Management's Discussion and Analysis
____________________________________
DESCRIPTION OF OPERATIONS
_________________________
Northeast Bancorp (the "Company") is a unitary savings and loan holding
company registered with the Office of Thrift Supervision ("OTS") its primary
regulator. The Company's principal asset is its wholly-owned banking
subsidiary, Northeast Bank, FSB (the "Bank"), which has branches located in
Auburn, Augusta, Bethel, Harrison, South Paris, Buckfield, Mechanic Falls,
Brunswick, Richmond, Lewiston, and Lisbon Falls, Maine. The Bank also
maintains a facility on Fundy Road in Falmouth, Maine, from which loan
applications are accepted and investment, insurance and financial planning
products and services are offered. The Bank's deposits are primarily BIF-
insured. Deposits at the Brunswick branch are SAIF-insured and represent
approximately 20% of the Bank's total deposits at June 30, 2000.
Northeast Bancorp through its subsidiary, Northeast Bank and the Bank's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western, midcoast and
south-central Maine. Although historically the Bank has been primarily a
residential mortgage lender, during the past few years the Bank has expanded
its commercial loan business, increased its line of financial products and
services, and expanded its market area. Management believes that this
strategy will increase core earnings in the long term by providing stronger
interest margins, additional non-interest income, and increased loan volume.
Substantially all of the Bank's current income and services are derived from
banking products and services in Maine.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations presents a review of the financial condition of the Company for
the years ended June 30, 1999 and June 30, 2000, and the results of operations
for the fiscal years ended June 30, 2000, 1999, and 1998. This discussion and
analysis is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. Accordingly, this section
should be read in conjunction with the consolidated financial statements and
the related notes and other statistical information contained herein.
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, simulation of
changes in interest rates, prospective results of operations, capital
spending and financing sources, and revenue sources. These statements relate
to expectations concerning matters that are not historical facts.
Forwardlooking statements, which are based on various assumptions (some of
which are beyond the Company's control), may be identified by reference to a
future period or periods, or by the use of forward-looking terminology such
as "believe", "expect", "estimate", "anticipate", "continue", "plan",
"approximately", "intend", or other similar terms or variations on those
terms, or the future or conditional verbs such as "will", "may", "should",
"could", and "would". Such forward-looking statements reflect the current view
of management and are based on information currently available to them, and
upon current expectations, estimates, and projections regarding the Company and
its industry, management's belief with respect there to, and certain
assumptions made by management. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties, and
other factors. Accordingly, actual results could differ materially from those
set forth in forward-looking statements due to a variety of factors, including,
but not limited to, those related to the economic environment, particularly
in the market areas in which the Company operates, competitive products and
pricing, fiscal and monetary policies of the U.S. Government, changes in
government regulations affecting financial institutions, including regulatory
fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk
management, asset/liability management, changes in technology, changes in the
securities markets, and the availability of and the costs associated
with sources of liquidity.
FINANCIAL CONDITION
___________________
The overall strategy of the Company is to increase the core earnings of the
Bank by the development of strong net interest margins and noninterest fee
income, by increasing deposit and loan volume through a larger market area as
well as increasing sales in the Company's financial service departments.
The state of Maine's economy, in which the Company operates, including the
south central and mid-coast region of Cumberland, Androscoggin and Sagadahoc
counties, has experienced moderate growth over the previous three years. The
banking business has become increasingly competitive over the past several
years. The Bank's major competitors for deposits and loans consist primarily
of other Maine-based banks, regional and money center banks, and non-bank
financial institutions. Many of the Bank's competitors are larger in size
and, consequently, possess greater financial resources. The principal factors
in competing for deposits are convenient office locations, flexible hours,
interest rates and services, while those relating to loans are interest
rates, the range of lending services offered and lending fees. The Bank
believes that the local character of its business and its "community bank"
management philosophy enhances its ability to compete in its market areas.
The Company has continuously enhanced its product lines and now provides a
wide range of financial services such as loans and deposits, investments
through its relationship with Commonwealth Financial Services, Inc., employee
retirement benefits and trust services through the Bank's trust department,
and provides insurance products through its affiliation with local insurance
agencies. The Company believes that its level of capital is adequate and with
its current capital plan will support future growth and development. As of June
30, 2000, the Company's total equity represents 6.48% of its total assets.
The Company's assets totaled $433,852,446 as of June 30, 2000; an increase of
$69,469,541 from June 30, 1999, primarily due to loan growth. Loan volume was
enhanced during the 2000 fiscal year due to an increase in real estate
mortgage loans; indirect mobile home and automobile dealer finance loans, and
commercial loans. The increase in loans was primarily funded with increased
deposits, securities sold under repurchase agreements and Federal Home Loan
Bank ("FHLB") advances. The Company has focused its business development
efforts on full service credit packages and financial services, as well as
competitively priced mortgage packages.
The Bank's loan portfolio had a balance of $381,824,101 as of June 30, 2000,
which represents an increase of $62,837,854 compared to June 30, 1999. From
June 30, 1999 to June 30, 2000, the loan portfolio increased by $24,635,226
in real estate mortgage loans, $31,315,452 in consumer and other loans, and
by $6,887,176 in commercial loans. During fiscal 2000, the Bank purchased
approximately $3,200,000 of residential whole loans on the secondary market.
The purchase consisted of 1-4 family adjustable rate mortgages secured by
property located primarily in the State of Tennessee. The Bank continues to
grow the indirect auto loan portfolio and it is the Bank's intent to build
relationships with other institutions for future sales of indirect auto
loans. The growth in indirect automobile and mobile home loans has resulted
in a shift of the Bank's loan portfolio mix and as a result residential real
estate mortgages have decreased, and consumer and other loans have increased,
as a percentage of the Bank's total loan portfolio. The Bank's local market,
as well as the secondary market, continues to be very competitive for loan
volume. The local competitive environment and customer response to favorable
secondary market rates will have an adverse affect on the Bank's ability to
increase the loan portfolio. In an effort to increase loan volume, the
Bank's interest rates for its loan products have been reduced to compete in
the various markets. The Bank has experienced margin compression due to
decreased loan rates as well as increased rates on its cost of funds. The Bank
anticipates that the margin compression will continue for the foreseeable
future until loan volume increases in the current rising interest rate
environment.
The loan portfolio contains elements of credit and interest rate risk. The
Bank historically has loaned within its local market areas, which management
believes helps it to better evaluate credit risk. As the Bank expands its
purchase of loans in other states, management researches the strength of the
economy in the respective state and underwrites every loan before purchase.
These steps are taken to better evaluate and minimize the credit risk of out-
of-state purchases.
At June 30, 2000, residential real estate mortgages made up 52% of the total
loan portfolio, of which 37% of the residential loans are variable rate
products. At June 30, 1999, residential real estate mortgages made up 58% of
the total loan portfolio, of which 40% of the residential loans were variable
rate products. Variable rate residential loans have decreased during fiscal
2000, when compared to 1999, due to the increased market demand for fixed
rate loans. It has traditionally been management's intent to increase the
proportion of variable rate residential real estate loans during a rising
rate environment to reduce the interest rate risk in this area. The Bank has
historically purchased adjustable rate residential loans and sold fixed rate
residential loans. However, during fiscal 1999, the Bank purchased fixed rate
residential loans. This purchase improved the Company's asset/liability
management position during the declining rate environment earlier in the 1999
fiscal year. Interest rates began to rise late in the 1999 fiscal year and into
the current fiscal 2000 year. Due to the changing interest rate environment,
management will again pursue its strategy of increasing the percentage of
variable rate loans as a percentage of the total loan portfolio to help manage
interest rate risk.
At June 30, 2000, 17% of the Bank's total loan portfolio is commercial real
estate mortgages. Commercial real estate loans have minimal interest rate
risk as 89% of the portfolio consists of variable rate products. At June 30,
1999, commercial real estate mortgages made up 17% of the total loan
portfolio, in which 84% of the commercial real estate loans were variable
rate products. The Bank tries to mitigate credit risk by lending in its local
market areas as well as maintaining a wellcollateralized position in real
estate.
Commercial loans made up 11% of the total loan portfolio at June 30, 2000.
Variable rate loans comprise 43% of this loan portfolio at June 30, 2000. At
June 30, 1999 commercial loans made up 11% of the total loan portfolio, of
which 43% of the balance was variable rate instruments. The credit loss
exposure on commercial loans is highly dependent on the cash flow of the
customers' business. The Bank mitigates losses by strictly adhering to the
Company's underwriting and credit policies.
Consumer and other loans make up 20% of the total loan portfolio as of June
30, 2000, which compares to 14% at June 30, 1999. Since these loans are
primarily fixed rate products, they have interest rate risk when market rates
increase. These loans also have credit risk. The increase in consumer loans
was primarily due to increased volume in indirect automobile and mobile home
loans, which together comprise approximately 87% of the total consumer loans.
The consumer loan department underwrites all the automobile dealer finance
and mobile home loans to protect credit quality. The Bank typically pays a
nominal one-time origination fee on the loans. The fees are deferred and
amortized over the life of the loans as a yield adjustment. Management
attempts to mitigate credit and interest rate risk by keeping the products
offered short-term, receiving a rate of return commensurate with the risk,
and lending to individuals in the Bank's known market areas.
The Bank's allowance for loan losses was $3,498,000 as of June 30, 2000
versus $2,924,000 as of June 30, 1999, representing 0.92% and 0.93% of total
loans, respectively. The Bank had non-performing loans totaling
$1,178,000 and $1,144,000 at June 30, 2000 and 1999, which was 0.31% and
0.36% of total loans, respectively. Non-performing loans and assets acquired
through foreclosure represented 0.34% and 0.37% of total assets at June 30,
2000 and 1999, respectively. Non-performing loans are generally loans ninety
days delinquent or greater for which the Bank does not accrue interest
income. The Bank's allowance for loan losses was equal to 297% and 256% of
total non-performing loans at June 30, 2000 and 1999, respectively. The
following table represents the Bank's non-performing loans as of June 30,
2000 and 1999:
Description June 30, 2000 June 30,1999
_____________________ _________________ _________________
1-4 Family Mortgages $ 191,000 $ 293,000
Commercial Mortgages 650,000 654,000
Commercial Loans 152,000 197,000
Consumer and Other 185,000 0
_________________ _________________
Total non-performing $ 1,178,000 $ 1,144,000
================= =================
At June 30, 2000, the Bank had approximately $2,426,000 of loans classified
substandard, exclusive of the non-performing loans stated above, that could
potentially become non-performing due to delinquencies or marginal cash
flows. As of June 30, 2000, the amount of such loans has increased from the
June 30, 1999 amount by $1,685,000. The increase was primarily due to
management downgrading a single commercial real estate loan with an
outstanding principal balance of approximately $1,500,000 during its internal
review process. The commercial real estate loan is well collaterallized and
management does not anticipate any financial loss on this loan. The Bank's
delinquent loans, as a percentage of total loans, increased slightly during
the 2000 fiscal year and in an effort to control the amount of such loans
management continues to allocate substantial resources to the collection
area. The increase in delinquencies was primarily in the 30-day delinquent
category. Although delinquencies and non-performing loans increased during
the fiscal year, management does not consider this to be a potential trend at
this time.
The following table reflects the annual trend of total delinquencies 30 days
or more past due, including nonperforming loans, for the Bank as a percentage
of total loans:
06/30/00 06/30/99 06/30/98 06/30/97
________ ________ ________ ________
0.85% 0.76% 1.09% 1.93%
At June 30, 2000, loans classified as non-performing included $71,919 of loan
balances that are current and paying as agreed, but which the Bank maintains
as non-performing until the borrower has demonstrated a sustainable period of
performance. Excluding these loans, the Bank's total delinquencies 30 days or
more past due, as a percentage of total loans, would be 0.83% as of June 30,
2000.
The level of the allowance for loan losses as a percentage of total
loans remained essentially the same at June 30, 2000 compared to June 30,
1999 and the level of the allowance for loan losses as a percentage of total
non-performing loans increased at June 30, 2000 compared to June 30, 1999. The
Company has experienced good loan growth during fiscal 2000 particularly in
the commercial and consumer loan portfolio. However, these types of loans have
additional credit risk as compared to real estate mortgage loans. Due to the
increase in these types of loans, the Bank increased its provision for loan
losses during fiscal 2000. Management believes that the increases in the
provision for loan losses during fiscal 2000 were prudent due to the growth in
commercial and consumer loans as well as the general growth of the total loan
portfolio. Classified loans are also considered in management's analysis of the
adequacy of the allowance for loan losses. Based on reviewing the credit risk
and collateral of classified loans, management has considered the risks of the
classified portfolio and believes the allowance for loan losses is adequate.
Net charge-offs for the Bank were $497,949, $664,017, and $469,909, for the
years ended June 30, 2000, June 30, 1999, and June 30, 1998, respectively.
At June 30, 2000, total impaired loans were $1,164,349, of which $81,341 had
related allowances of $30,000. This compares to total impaired loans of
$612,867, of which $241,420 had related allowances of $77,200, at June 30,
1999. During the year ended June 30, 2000, the income recognized related to
impaired loans was $22,648 and the average balance of outstanding impaired
loans was $914,493. This compares to income recognized related to impaired
loans of $66,030 and the average balance of impaired loans of $1,229,987 at
June 30, 1999. The Bank recognizes interest on impaired loans on a cash basis
when the ability to collect the principal balance is not in doubt; otherwise,
cash received is applied to the principal balance of the loan.
On a regular and ongoing basis, management actively monitors the Bank's asset
quality to evaluate the adequacy of the allowance for loan losses and, when
appropriate, to charge-off loans against the allowance for loan losses,
provide specific loss allowances when necessary, and change the level of loan
loss allowance. The process of evaluating the allowance involves a high
degree of management judgment. The methods employed to evaluate the allowance
for loan losses are quantitative in nature and consider such factors as the
loan mix, the level of non-performing loans, delinquency trends, past charge-
off history, loan reviews and classifications, collateral, and the current
economic climate.
Management believes that the allowance for loan losses is adequate
considering the level of risk in the loan portfolio. While management
believes that it uses the best information available to make its
determinations with respect to the allowance, there can be no assurance that
the Company will not have to increase its provision for loan losses in the
future as a result of changing economic conditions, adverse markets for real
estate or other factors. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance for loan losses based on their judgments about
information available to them at the time of their examination. The Bank's
most recent examination by the Office of Thrift Supervision was on March 7,
2000. At the time of the exam the regulators proposed no additions to the
allowance for loan losses.
At June 30, 2000, the Bank had a total of $278,010 in acquired assets as
compared to $193,850 as of June 30, 1999. The Bank has an allowance for losses
that was established to provide for declines in values and to consider
estimated selling costs. The allowance for losses on acquired assets totaled
$28,455 at June 30, 2000 versus $27,725 at June 30, 1999. The Company provided
for this allowance through a charge against earnings of $24,000 and $47,000 for
the years ended June 30, 2000 and 1999, respectively. In 2000 and 1999,
write-downs of acquired assets totaled $23,270 and $24,375, respectively.
Management periodically receives independent appraisals to assist in its
valuation of other real estate owned properties. As a result of its review of
the independent appraisals and the other real estate owned portfolio, the
Company believes the allowance for losses on other real estate owned is
adequate to state the portfolio at lower of cost, or fair value less estimated
selling costs.
At June 30, 2000 and 1999, the Company's investment portfolio totaled
$23,159,039 and $18,054,317, respectively. The investment portfolio consists
of federal agency securities, mortgage-backed securities, bonds, and equity
securities. Funds retained by the Bank as a result of increases in deposits
or decreases in loans, which are not immediately used by the Bank, are
invested in securities held in its investment portfolio. The investment
portfolio is used as a source of liquidity for the Bank. The investment
portfolio is structured so that it provides for an ongoing source of funds
for meeting loan and deposit demands and for reinvestment opportunities to
take advantage of changes in the interest rate environment. Equity securities
and debt securities, which may be sold prior to maturity, are classified as
available for sale and are carried at market value.
The Company's investment portfolio is primarily classified as available for
sale at June 30, 2000 and 1999. Equity securities, and debt securities which
may be sold prior to maturity, are classified as available for sale and are
carried at market value. Changes in market value, net of applicable income
taxes, are reported as a separate component of stockholders' equity. Gains
and losses on the sale of securities are recognized at the time of the sale
using the specific identification method. The amortized cost and market value
of available for sale securities at June 30, 2000 was $24,335,060 and
$23,159,039, respectively. The increase of $5,104,722 in securities available
for sale, from June 30, 1999 to June 30, 2000, was primarily due to the
Company purchasing mortgage-backed securities for collateral for the
increased volume of securities sold under repurchase agreements and to take
advantage of the higher yields on these investments during the current
increasing rate environment. The difference between the carrying value and
the cost of the securities of $1,176,021 was primarily attributable to the
decline in the market value of mortgage-backed securities due to rising
interest rates. The net unrealized loss on mortgage-backed securities was
$904,688 at June 30, 2000. Substantially all of the mortgage-backed
securities are high-grade government backed securities. As in any long term
earning asset in which the earnings rate is fixed, the market value of
mortgage-backed securities will fluctuate based on changes in market interest
rates from the time of purchase. Since these mortgage-backed securities are
backed by the U.S. Government, there is virtually no risk of loss of
principal. Management believes that the yields currently received on this
portfolio are satisfactory and intends to hold these securities for the
foreseeable future. Management attributes the reduction of $262,263 in the
market value of equity securities to the decline on the market value of the
Company's investments in preferred equity securities. Management reviews the
portfolio of investments on an ongoing basis to determine if there has been an
other-than-temporary decline in value. Some of the considerations management
makes in the determination are market valuations of particular securities and
economic analysis of the securities' sustainable market values based on the
underlying companies' profitability. Based on management's assessment of the
securities portfolio in fiscal 2000, 1999 and 1998, there have been other than
temporary declines in values of individual equity securities in the amounts of
$60,000, $95,728, and $172,235, respectively. Such securities have been written
down through an adjustment against earnings and are included in other expenses
in the statements of income.
The Company's premises and equipment decreased by $639,258 during fiscal 2000
when compared to 1999. The decrease was due to normal depreciation.
The Bank increased its investment in FHLB stock by $964,000, compared to June
30, 1999, due to the increase in FHLB borrowings. The Bank increased FHLB
borrowings to fund loan growth. The FHLB requires institutions to hold a
certain level of FHLB stock based on advances outstanding.
Other assets increased by $1,098,604 from June 30, 1999 to June 30, 2000. The
increase was primarily due to the increase in deferred tax assets, the
purchase of non-marketable investments and the deferred costs associated with
the issuance of the Company's trust preferred security offering.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered C.D.'s when national
deposit interest rates are less than the interest rates on local market
deposits. Brokered C.D.'s are also used to supplement the growth in earning
assets. Brokered C.D.'s carry the same risk as local deposit C.D.'s, in that
both are interest rate sensitive with respect to the Bank's ability to retain
the funds. The Bank also utilizes FHLB advances, as alternative sources of
funds, when the interest rates of the advances are less than market deposit
interest rates. FHLB advances are also used to fund short-term liquidity
demands.
Total deposits were $259,981,812 and securities sold under repurchase
agreements were $13,110,165 as of June 30, 2000. These amounts represent an
increase of $40,617,777 and $1,242,326, respectively, as compared to June 30,
1999. The increase in deposits was primarily due to the increase in time
deposits. Time deposits increased due to various special offerings as well as
normal growth from the branch market areas. The Bank has devoted additional
staffing to increase its balances in repurchase agreements. Repurchase
agreements enhance the Bank's ability to attain additional municipal and
commercial deposits, improving the Bank's overall liquidity position in a
cost-effective manner. Brokered CD's represented $37,505,141 of total
deposits at June 30, 2000, which increased by $24,046,884 compared to June
30, 1999's $13,458,257 balance. During the June 30, 2000 quarter, the Bank
issued two structured brokered CD's at $10 million each. The first CD
offering was for a ten-year term with a one-year call option at a fixed rate
of 7.75%. The Bank then entered into an interest rate exchange agreement with a
third party to receive a fixed rate of interest at 7.75% and pay a variable
rate at the one-month Libor rate. The second CD offering was for a five year
six month term with a one-year call option at a fixed rate of 7.50%. The Bank
then entered into an interest rate exchange agreement with a third party to
receive a fixed rate of interest at 7.50% and pay a variable rate at the
three-month Libor rate. The Bank entered into these transactions as an
alternative to short-term borrowings at the FHLB. These brokered CD's were
utilized to fund loan growth as well as decrease FHLB short term advances.
Total borrowings from the FHLB were $122,627,805 as of June 30, 2000, for an
increase of $18,746,089 compared to June 30, 1999. The cash received from the
increase in FHLB advances were utilized to fund loan growth. Certain mortgage
loans, free of liens, pledges and encumbrances, investment securities not
otherwise pledged, FHLB overnight deposits and the Company's FHLB stock have
been pledged under a blanket agreement to secure these borrowings.
At the beginning of fiscal 2000, the Company had a note payable for $687,500.
The note payable was a loan from an unrelated financial institution. This
note payable was paid off in fiscal 2000.
The Bank served its Augusta, Maine location with two branch offices. In the
March 31, 2000 quarter, the Bank consolidated its loan and deposit
customers to the Western Avenue branch and closed the Bangor Street location.
The merging of these two branches allows the Bank to continue to serve the
Augusta, Maine community with greater efficiency with little or no
disruption. The Bangor Street branch was under a lease agreement, which had
expired. The relocation expenses were not material and the employees were
absorbed into other available positions within the Bank or decreased through
attrition. The closure of the branch did not have a material impact on the
financial condition or operations of the Company.
Other liabilities were $2,833,188 as of June 30, 2000, which was an increase
of $934,488 when compared to June 30, 1999. The increase in other liabilities
was due to higher escrow account balances and accrued interest and other
operating expenses.
CAPITAL RESOURCES & LIQUIDITY
_____________________________
Liquidity is defined as the ability of the Bank to generate sufficient cash
to fund current loan demand, deposit withdrawals, other cash demands and
disbursement needs, and otherwise operate on an ongoing basis. The Bank's
primary sources of funds are its interest bearing deposits, cash and due from
banks, deposits with the FHLB, certificates of deposit, loan payments and
prepayments and other investments maturing in less than two years as well as
securities available for sale. In addition, the Bank has unused borrowing
capacity from the FHLB through its advances program. The Bank's current
advance availability, subject to the satisfaction of certain conditions, is
$20,740,000 over and above the 2000 end-of-year advances. The Company's
ability to access the principal sources of liquid funds listed above is
immediate and adequate to support the Company's needs.
Cross selling strategies are employed by the Bank to develop deposit growth.
Even though deposit interest rates increased during fiscal 2000, the rate of
return was still higher in other financial instruments such as mutual funds
and annuities. Like other companies in the banking industry, the Bank will be
challenged to maintain and or increase its core deposit base.
Total equity of the Company was $28,126,478 at June 30, 2000 compared to
$26,683,115 at June 30, 1999. During the quarter ended December 31, 1999, the
Company generated additional liquidity and funding through the issuance of
certain debt instruments. In this regard, on October 4, 1999, the Company
formed NBN Capital Trust, a Delaware statutory trust and a wholly-owned
subsidiary of the Company (the "Trust"), for the purpose of (i) issuing and
selling its common securities to the Company and its trust preferred
securities to the public, and (ii) using the proceeds therefrom to purchase
9.60% Junior Subordinated Deferrable Interest Debentures ("Junior
Subordinated Debentures") from the Company. Accordingly, the Junior
Subordinated Debentures are, and will be, the sole asset of the Trust. In
the quarter ended December 31, 1999, the Trust sold $7,172,998 of its
trust-preferred securities to the public and $221,851 of its common securities
to the Company. The Trust used the proceeds to purchase $7,394,849 in
principal amount of the Junior Subordinated Debentures issued by the Company.
The Company will pay interest on the Junior Subordinated Debentures at a rate
of 9.60% to the Trust at the end of each quarter, which is equal to the
dividend rate payable to the holders of the Trust's preferred securities. The
cost of the issuance of the preferred securities was approximately $491,000
and is treated as a deferred asset and will be amortized over the life of the
securities. Following the offer and sale of the Trust's securities, the
Company owned and currently holds all of the outstanding common securities of
the Trust, its only voting securities, and as a result the Trust is a
subsidiary of the Company. The Company used the net proceeds of the offering,
approximately $6,700,000, for the following purposes: (i) contributed
$4,000,000 as additional capital for the Bank, (ii) allocated $1,000,000 for
the Company's stock buy-back program, (iii) paid off the remaining principal
balance of $535,000 on its note payable, and (iv) retained the remaining
$1,200,000 for general corporate requirements as they may arise from time to
time.
The Company made an equity contribution of $4,000,000 of the funds received
from the Junior Subordinated Debentures to the Bank. The funds are allowed
under the Office of Thrift Supervision regulations to be used as capital at
the Bank. These funds have increased the regulatory capital position at the
Bank. The increase in regulatory capital will allow the Bank to fund loan
growth for the immediate future.
In December 1999, the Board of Directors of Northeast Bancorp approved a plan
to repurchase up to $2,000,000 of its common stock. Under the common stock
repurchase plan, Northeast Bancorp may purchase shares of its common stock
from time to time in the open market at prevailing prices. Repurchased shares
will be held in treasury and may be used in connection with employee benefits
and other general corporate purposes. The Company does not believe that the
current market price for its common stock adequately reflects full value and
believes that the purchase of its common stock from time to time in the
market is a good investment and use of its funds. As of June 30, 2000, the
Company has repurchased $871,826 of its common stock.
In November 1998, Square Lake Holding Corporation converted its Series A
preferred stock into 136,362 shares of common stock. Square Lake Holding
Corporation is a Maine corporation and a subsidiary of a Canadian corporation
of which Ronald Goguen is a 95% stockholder and director. Mr. Goguen, also is
a director, and, through the ownership of his affiliates, a principal
stockholder of the Company. In fiscal 1998, Square Lake Holding Corporation
exercised the remaining 163,146 warrants at an aggregate price of $761,433.
Various employees exercised company stock options during fiscal 2000 and
1999, in the amount of 16,500 in each year. The proceeds from the exercised
options were utilized as general working capital and contributed to the
growth of the Company's total equity. As of June 30, 2000, 238,000 shares of
unissued common stock were reserved for issuance pursuant to stock options.
The total equity to total assets ratio of the Company was 6.48% as of June
30, 2000, 7.32% as of June 30, 1999 and 7.79% at June 30, 1998. Book value
per common share was $10.49 as of June 30, 2000, $9.64 as of June 30, 1999
and $9.23 at June 30, 1998.
The Company's net cash provided by operating activities was $5,296,729 during
fiscal 2000, which was a $2,760,745 increase when compared to fiscal 1999.
The increase was primarily attributable to the increase in net income, other
liabilities and provision for loan losses. Cash provided by financing
activities also increased the Company's net cash during fiscal 2000 due to
the growth in the Company's deposits and FHLB advances. The increase in net
cash provided by the Company's operating and finance activities was offset by
the cash used by investing activities due to the increase in net loans.
Overall, the Company's cash position increased by $684,373 in fiscal 2000
when compared to fiscal 1999.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
contains various provisions intended to recapitalize BIF and also affects a
number of regulatory reforms that impact all insured depository institutions,
regardless of the insurance fund in which they participate. Among other
things, FDICIA grants the OTS broader regulatory authority to take prompt
corrective action against insured institutions that do not meet capital
requirements, including placing undercapitalized institutions into
conservatorship or receivership. FDICIA also grants the OTS broader
regulatory authority to take corrective action against insured institutions
that are otherwise operating in an unsafe and unsound manner.
FDICIA defines specific capital categories based on an institution's capital
ratios. The OTS has issued regulations requiring a minimum regulatory
tangible capital equal to 1.5% of adjusted total assets, Tier 1 core capital
of 4.0% and a risk-based capital standard of 8.0%. The prompt corrective
action regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". As of
June 30, 2000, the most recent notification from the OTS categorized the Bank
as well capitalized. There are no conditions or events since that notification
that management believes has changed the institution's category. Regulatory
capital requirements are also discussed and illustrated in footnote 10 of the
consolidated financial statements.
RESULTS OF OPERATIONS
_____________________
Net income for the year ended June 30, 2000 was $3,209,722 as compared to
$2,410,452 for the year ended June 30, 1999 and $2,403,783 for the year ended
June 30, 1998. Basic and diluted earnings per share were $1.17 for the year
ended June 30, 2000. Basic and diluted earnings per share were $0.88 and
$0.86, respectively, for the year ended June 30, 1999 and $1.00 and $0.86,
respectively for the year ended June 30, 1998. In 1999, the decrease in basic
earnings per share was primarily attributable to the conversion of
outstanding preferred stock into common. The increase in net income for the
year ended June 30, 2000, when compared to June 30, 1999, was primarily due
to the increase in net interest income, which was offset, in part, by the
decrease in non-interest income and the increase in provision for loan losses.
Net income in 1999 was approximately the same as fiscal 1998 although the
components of net income changed. While net income was up only $6,669, or
0.3% for the year ended June 30, 1999 as compared to the 1998 fiscal year,
net interest income increased by $833,611, or 7.3% relative to the 1998
fiscal year. The increase in net interest income was primarily the result of
increased loan volume, which was offset, in part, by a decrease in loan
rates. In addition, non-interest income increased in 1999 as compared to 1998
and net operating income in 1999 benefited from a reduction in the provision
for loan losses. The Company's overall return on average assets ("ROAA") was
0.79% for the year ended June 30, 2000, 0.71% for the year ended June 30,
1999, and 0.83% for the year ended June 30, 1998.
Total interest income for the fiscal years ended June 30, 2000, 1999 and 1998
was $32,405,984, $26,856,793, and $24,283,011, respectively. The Company's
net interest income for the years ended June 30, 2000, 1999 and 1998 was
$14,053,532, $12,306,551, and $11,472,940, respectively. Net interest income
for fiscal 2000 increased $1,746,981, or 14.20%, compared to the amount at
June 30, 1999. Total interest and dividend income increased $5,549,191 for
the year ended June 30, 2000 compared to the year ended June 30, 1999,
resulting primarily from an increase in the volume of loans and investments
offset in part by a decrease in the volume of FHLB deposits. The increase in
total interest expense of $3,802,210 for the twelve months ended June 30,
2000 resulted primarily from the increased volume of borrowings and deposits.
The changes in net interest income, as explained above, are also presented in
the schedule that follows.
Northeast Bancorp
Rate/Volume Analysis for the Year Ended
June 30, 2000 versus June 30, 1999
Difference Due to
Volume Rate Total
____________ ____________ ____________
Investments $ 454,986 $ 136,967 $ 591,953
Loans, net 4,985,554 62,917 5,048,471
FHLB Deposits & Other (124,193) 32,960 (91,233)
____________ ____________ ____________
Total Interest Earning Assets 5,316,347 232,844 5,549,191
Deposits 1,715,372 (50,086) 1,665,286
Repurchase Agreements 230,254 (246) 230,008
Borrowings 1,460,113 446,803 1,906,916
____________ ____________ ____________
Total Interest-Bearing
Liabilities 3,405,739 396,471 3,802,210
____________ ____________ ____________
Net Interest Income $ 1,910,608 $ (163,627) $ 1,746,981
============ ============ ============
Rate/Volume amounts are spread proportionately between Volume and Rate.
Borrowings in the table above include trust-preferred securities, FHLB advances
and note payable.
Net interest income for fiscal 1999 increased $833,611, or 7.27%, compared to
the amount at June 30, 1998. Total interest and dividend income increased
$2,573,782 for the year ended June 30,1999 compared to the year ended June 30,
1998, resulting primarily from an increase in the volume of loans offset in
part by a decrease in loan rates as well as investment volume and rates. The
increase in total interest expense of $1,740,171 for the twelve months ended
June 30, 1999 resulted primarily from the increased volume of borrowings and
deposits. The changes in net interest income, as explained above, are also
presented in the schedule that follows.
Northeast Bancorp
Rate/Volume Analysis for the Year Ended
June 30, 1999 versus June 30, 1998
Difference Due to
Volume Rate Total
____________ ____________ ____________
Investments $ (331,743) $ (108,142) $ (439,885)
Loans, net 4,897,423 (1,707,700) 3,189,723
FHLB Deposits & Other (140,613) (35,443) (176,056)
____________ ____________ ____________
Total Interest Earning Assets 4,425,067 (1,851,285) 2,573,782
Deposits 1,185,979 (92,399) 1,093,580
Repurchase Agreements 136,042 (3,137) 132,905
Borrowings 755,980 (242,294) 513,686
____________ ____________ ____________
Total Interest-Bearing
Liabilities 2,078,001 (337,830) 1,740,171
____________ ____________ ____________
Net Interest Income $ 2,347,066 $(1,513,455) $ 833,611
============ ============ ============
Rate/Volume amounts are spread proportionately between Volume and Rate.
Borrowings in the table above include FHLB advances and note payable.
The Company's business primarily consists of the savings and loan
activities of the Bank. Accordingly, the success of the Company is
largely dependent on its ability to manage interest rate risk. This is
the risk that represents the potential changes in interest rates and
those changes in interest rates may adversely affect net interest
income. Generally, interest rate risk results from differences in
repricing intervals or maturities between interest-earning assets and
interest-bearing liabilities, the components of which comprise the
interest rate spread. When such differences exist, a change in the level
of interest rates will most likely result in an increase or decrease in
net interest income. The Bank has shifted to a slightly liability
sensitive position based on its own internal analysis which categorizes
its core deposits as long term liabilities which are then matched to
long term assets. As a result, the Bank will generally experience a
contraction in its net interest margins during a period of increasing
rates. Management is currently addressing the asset/liability mix to
reposition the Bank to a slightly asset sensitive position.
Approximately 20% of the Bank's loan portfolio is comprised of floating
rate loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as approximately 19% of
other loans in the Bank's portfolio that are based on short-term rate indices
such as the one-year treasury bill. An increase in short-term interest rates
will also increase deposit and FHLB advance rates, increasing the Company's
interest expense. Although the Company has experienced net interest
margin compression, the impact on net interest income will depend on,
among other things, actual rates charged on the Bank's loan portfolio,
deposit and advance rates paid by the Bank, and loan volume.
The provision for loan losses as recorded for the fiscal year ended June
30, 2000 was $1,071,949 as compared to $610,017 and $706,100 for 1999
and 1998, respectively. As discussed above, the Company has experienced
good loan growth during fiscal 2000 particularly in the commercial and
consumer loan portfolios. However, these types of loans have additional
credit risk as compared to real estate mortgage loans. Due to the
increase in these types of loans, the Bank increased its provision for
loan losses during fiscal 2000 to maintain its allowance for loan losses
as a percentage of total loans, when compared to fiscal 1999. Net charge
offs amounted to $497,949 during fiscal 2000 versus $664,017 and
$469,909 for 1999 and 1998, respectively. The Bank intends to continue
to aggressively manage the non-performing assets, through sales, work-outs and
charge-offs, to reduce the amount of non-performing assets.
Non-interest income was $2,534,945 for the year ended June 30, 2000 and
was a decrease of $181,407 when compared to the $2,716,352 balance at
June 30, 1999. Non-interest income for June 30, 1998 was $2,671,531,
which was a decrease of $44,821 when compared to fiscal 1999. The
decrease in non-interest income in fiscal 2000, when compared to fiscal
1999 was primarily due to the decrease in gain on sales of loans which
was offset, in part, by the increase in service fees and other income.
Non-interest income increased in fiscal 1999 when compared to fiscal
1998 due to the increase in gain on sales of loans and service fee
income.
Included in non-interest income were service charges and fees for other
services, which totaled $1,034,617 for the year ended June 30, 2000, $948,765
for the year ended June 30, 1999 and $803,071 for June 30, 1998. The increase
in service charges and fees at June 30, 2000, when compared to June 30, 1999
and at June 30, 1999, when compared to June 30, 1998, was primarily due to fees
generated from loan and deposit growth.
Net securities gains were $84,022, $94,865 and $287,513 for fiscal 2000, 1999
and 1998, respectively. Net security gains were higher in fiscal 1998 than
fiscal 2000 and 1999. The primary reason for the increase in net security gains
during fiscal 1998 was that the Company sold more of its available for sale
securities in fiscal 1998 than fiscal 2000 and 1999, taking advantage of the
fluctuation in higher market prices.
Gains on the sale of loans amounted to $220,954 for fiscal 2000 and were a
decrease of $596,130 compared to the $817,084 balance in fiscal 1999. Gains on
the sale of loans amounted to $817,084 for fiscal 1999 and were an increase of
$90,485 compared to $726,599 for fiscal 1998. The decrease in gain on sale of
loans in fiscal 2000, when compared to 1999 was due to decreased sales of
approximately $13,133,000 in qualified 1-4 family mortgage loans to Freddie
Mac. The decrease in loan sale volume was due to the Federal Reserve increasing
its rates during fiscal 2000. The increase in gain on sale of loans in fiscal
1999, when compared to 1998 was due to increased sales of $10,224,848 in
qualified 1-4 family mortgage loans to Freddie Mac. In addition in fiscal 1999,
loans were sold from the Bank's portfolio to improve its asset/liability
management position while at the same time taking advantage of market prices,
which also accounted for part of the increase in gain on sale of loans in
fiscal 1999 and 1998. The Company's loan sales activity is dependent on market
interest rates as well as local competition. The Company receives income from
servicing mortgage loans for others that the Bank originated and sold. The
outstanding balance of such loans decreased from approximately $64,690,000 at
June 30, 1999 to $52,410,000 at June 30, 2000.
Other income was $1,053,738 at June 30, 2000 and was an increase of $358,911,
when compared to June 30, 1999. Other income was $694,827 at June 30, 1999 for
an increase of $67,888, when compared to June 30, 1998. The increase in other
income for fiscal 2000 and 1999 was primarily due to income generated from the
Bank's trust department, insurance division and revenue from the sale of
investments to customers through the Bank's relationship with Commonwealth
Financial Services, Inc..
Total non-interest expense for the Company was $10,543,085 for fiscal 2000,
$10,569,843 for fiscal 1999, and $9,731,717 for fiscal 1998. Total non-interest
expense decreased by $26,758 for fiscal 2000 compared to fiscal 1999 due, in
part, to the following items: (I) compensation expense increased by $435,204
primarily due to the increased commission paid to brokers in the investment
sales division due to growth in sales revenue as well as increased costs
associated with the Company's normal growth and health insurance and benefit
plans and (II) equipment expense increased by $83,556 due to the expenses
associated with opening the new Lewiston branch as well as the conversion of
the mainframe hardware and software and tele-communication system. These
increases were offset, in part, by the decrease in occupancy expense by $63,183
due to the closing of the Bangor Street branch in Augusta, Me. Other expenses
decreased by $473,626 during fiscal 2000, when compared to fiscal 1999. The
decrease in fiscal 2000 was primarily due to the additional one-time expenses
the Company incurred during fiscal 1999 for professional fees and other various
expenses incurred in expanding the Company's operations and upgrading its
technology resources. The Company decided in the fourth quarter of fiscal 1999
to dissolve the First New England Benefits (FNEB) division. FNEB was a pension
and 401k administration company and was purchased by the Company in 1993. The
FNEB division was dissolved because the division could not attain sufficient
growth to meet revenue expectations. Due to the closure of FNEB the Company
experienced onetime pretax expenses of $290,133 for goodwill, receivables and
fixed asset write-offs as well as approximately $140,000 in pretax other
general business expenses related to the operations of FNEB during fiscal 1999.
The increase in non-interest expense of $838,126 for fiscal 1999 compared to
1998 was due, in part, to the following items: (I) compensation expense
increased by $250,359 primarily due to the additional staffing for the new
branch opened in Lewiston, Maine, the increased commission paid to brokers in
the investment sales division due to growth in sales revenue and increased
costs associated with the Company's health insurance and benefit plans, (II)
occupancy expense increased by $71,108 due to the additional lease expense in
opening the new Lewiston branch as well as the Company relocating its benefit
administration department and in doing so paid a one time lease penalty to
terminate the existing lease contract for that location, (III) equipment
expense increased by $24,843 due to the expenses associated with opening the
new Lewiston branch as well as the conversion of the mainframe hardware and
software and tele-communication system.
Other expenses increased by $488,472 during fiscal 1999, when compared to
fiscal 1998. The increase in fiscal 1999 was primarily due to the following: an
increase in professional fees of $160,493 due to increased legal services,
courier services, trust consulting services and data operations services; an
increase in supplies expense of $34,934 due to the opening of the Lewiston and
Falmouth locations; an increase in check item and data processing of $175,043
due to the Company's growth in checking accounts and data-communication lines;
an increase in advertising expense of $39,129 due to the opening of the
Lewiston branch and to support the growth of the Company; an increase in
loan servicing fees of $108,246 due to the growth in loans purchased and the
fees paid for servicing those loans; a goodwill write-off of $165,195 due to
the closing of the First New England Benefits division and merging the
administrative function into the trust department; and an increase of $66,650
in telephone, postage, education and other general expenses. These increases
were offset, in part, by the reduction of the merger expenses associated with
Cushnoc Bank.
The Company's income tax expense increased by $331,130 for the year ended June
30, 2000, when compared to the year ended June 30, 1999. The increase in income
tax expense is due to increased earnings before tax. The Company's income tax
expense increased by $129,720 for the year ended June 30, 1999, when compared
to the year ended June 30, 1998. The increase in income tax expense is due to
increased earnings before tax and that the goodwill write-off of $165,195 for
FNEB was not a tax deductible expense.
MARKET RISKS
____________
The Company's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of the Company's
net interest income to adverse movements in interest rates. Although the
Company regularly manages other risks, such as credit and liquidity risk, in
the normal course of its business, management considers interest rate risk to
be its most significant market risk and could potentially have the largest
material effect on the Company's financial condition and results of operations.
Because the Company's portfolio of trading assets is immaterial, the Company
does not believe that it is exposed to significant market risk from trading
activities. The Company has utilized interest rate exchange agreements as a
derivative to manage interest rate risk.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. ALCO establishes policies that monitor and coordinate the
Company's sources, uses and pricing of funds. The ALCO is also involved in
formulating the economic projections for the Company's budget and strategic
plan.
The Company continues to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. To accomplish this, management undertakes steps to
increase the percentage of variable rate assets, as a percentage of its total
earning assets. In recent years, the focus has been to originate adjustable
rate residential and commercial real estate loans, which reprice or mature more
quickly than fixed-rate real estate loans. The Company also originates
adjustable-rate consumer loans and commercial business loans. The Company's
adjustable-rate loans are primarily tied to published indices, such as the Wall
Street Journal prime rate and one year U.S. Treasury Bills. During the 1999 and
early 2000 fiscal year the Company increased its fixed rate assets, as a
percentage of total earning assets to protect the Company against the
continuation of declining interest rates. In the later part of the fiscal 2000-
year interest rates started to increase and due to that fact the Company
intends to again focus on the origination of variable rate assets. During
fiscal 2000 the Company entered into two interest rate exchange agreements to
hedge against interest rate movements. The interest rate exchange agreement, as
explained in the management discussion and analysis, was utilized to replace
short-term FHLB advances.
The table that follows presents in tabular form contractual balances of the
Company's on balance sheet and off balance sheet financial instruments that are
interest rate sensitive, in U.S. dollars, at the expected maturity dates as
well as the fair value of those on balance sheet and off balance sheet
financial instruments that are interest rate sensitive for the period ended
June 30, 2000, with comparative summary balances for 1999. The expected
maturity categories take into consideration historical prepayment speeds as
well as actual amortization of principal and do not take into consideration
reinvestment of cash. Principal prepayments are the amounts of principal
reduction, over and above normal amortization, that the Company has experienced
in the past twenty-four months. The Company's assets and liabilities that do
not have a stated maturity date, as in cash equivalents and certain deposits,
are considered to be long term in nature by the Company and are reported in the
"Thereafter" column. The Company does not consider these financial instruments
materially sensitive to interest rate fluctuations and historically the
balances have remained fairly constant over various economic conditions. The
interest rate table for loans reflects contractual maturity and does not
indicate repricing in variable rate loans. Variable rate loans reprice in the
fiscal years as follows: fiscal year 2001 $85,214,641, fiscal year 2002
$22,837,061, fiscal year 2003 $11,627,262, fiscal year 2004 $13,158,344, fiscal
year 2005 $13,004,301, and fiscal years thereafter $3,419,226. The weighted
average interest rates for the various assets and liabilities presented are
actual as of June 30, 2000.
The fair value of interest bearing deposits at other banks and interest
receivable approximate their book values due to their short maturities. The
fair value of available for sale securities are based on bid quotations from
security dealers or on bid prices published in financial newspapers. FHLB stock
does not have a market and the fair value is unknown. The fair value of loans
are estimated in portfolios with similar financial characteristics and takes
into consideration discounted cash flows through the estimated maturity or
repricing dates using estimated market discount rates that reflect credit risk.
The fair value of loans held for sale is based on bid quotations from loan
dealers. The fair value of demand deposits, NOW, money market, and savings
accounts is the amount payable upon demand. The fair value of time deposits is
based upon the discounted value of contractual cash flows, which is estimated
using current rates offered for deposits of similar remaining terms. The fair
value of repurchase agreements approximate the carrying value due to their
short maturity. The fair value of FHLB borrowings is estimated by discounting
the cash flows through maturity or the next repricing date based on current
rates offered by the FHLB for borrowings with similar maturities. The fair
value of the note payable approximates the carrying value due to the note
payables interest rate approximating market rates. The fair value of trust
preferred securities are based on comparisons to similar contracts at year end.
There have been no substantial changes in the Company's market risk from the
preceding year, other than the fair value of the Company's loans and the
assumptions are consistent with prior year assumptions. The fair value of the
Company's loans decreased by approximately $22,000,000, when compared to the
carrying value at June 30, 2000. A large percentage of the Company's loan
portfolio growth was in fixed rate loans during fiscal 2000. As interest rates
increased at the end of the fiscal year, the loan portfolio decreased in value
due to the fixed coupon rates in the portfolio being below current market
rates.
Market Risk
June 30, 2000
($ In Thousands)
Expected Maturity Date 2000 1999
There- 2000 Fair 1999 Fair
6/30/01 6/30/02 6/30/03 6/30/04 6/30/05 after Total Value Total Value
________ ________ ________ ________ ________ ________________ ________ ________ ________
Financial Assets:
Interest Bearing Deposits
Variable Rate $ - $ - $ - $ - $ - $ 4,782$ 4,782 $ 4,782 $ 7,130 $ 7,130
Weighted Average
Interest Rate - - - - - 6.72% 6.72% - 5.54% -
Available for Sale
Securities 3,972 2,464 2,709 3,152 3,389 8,649 24,335 23,159 18,720 18,054
Weighted Average Interest
Rate 7.13% 6.87% 6.87% 6.82% 6.89% 6.87% 6.91% - 6.52% -
FHLB Stock (1) - - - - - 6,645 6,645 6,645 5,681 5,681
Weighted Average Interest
Rate - - - - - 7.50% - - 6.55% -
Loans Held For Sale
Fixed Rate 82 - - - - - 82 84 312 315
Weighted Average Interest
Rate 7.00% - - - - - 7.00% - 7.53% -
Loans
Fixed Rate Loans 19,311 20,135 25,494 35,660 39,583 89,771 229,954 208,367 182,153 172,834
Weighted Average Interest
Rate 8.89% 9.12% 9.46% 9.27% 9.34% 8.54% 8.97% - 8.75% -
Variable Rate Loans 23,091 13,009 16,081 18,916 21,555 55,720 148,372 147,882 136,833 135,853
Weighted Average Interest
Rate 9.95% 9.37% 9.10% 9.29% 9.41% 8.84% 9.23% - 8.58% -
Interest Receivable 2,404 - - - - - 2,404 2,404 1,991 1,991
Financial Liabilities:
NOW/Money Market/Savings - - - - - 56,592 56,592 56,592 60,359 60,359
Weighted Average Interest
Rate - - - - - 2.74% 2.74% - 2.41% -
Time Deposits 86,715 60,713 11,050 976 2,096 20,068 181,618 181,094 141,113 141,352
Weighted Average Interest
Rate 5.69% 6.35% 6.01% 5.41% 6.59% 7.62% 6.15% - 5.37% -
Repurchase Agreements
Fixed Rate 13,111 - - - - - 13,111 13,111 11,868 11,868
Weighted Average Interest
Rate 4.18% - - - - - 4.18% - 4.07% -
FHLB Advances
Fixed Rate 91,580 11,472 6,833 2,743 2,000 8,000 122,628 121,484 103,882 99,986
Weighted Average Interest
Rate 6.55% 6.73% 6.41% 5.95% 6.65% 5.62% 6.47% - 5.36% -
Note Payable
Fixed Rate - - - - - - - - 688 688
Weighted Average Interest
Rate - - - - - - - - 8.00% -
Junior Subordinated
Debentures
Fixed Rate - - - - - 7,173 7,173 6,660 - -
Weighted Average Interest
Rate - - - - - 9.60% 9.60% - - -
Off Balance Sheet
Instruments:
Interest rate exchange
agreements in a net
receivable position
Fixed Rate 140 - - - - - 140 296 - -
Weighted Average Interest
Rate 7.74% - - - - - 7.74% - - -
(1) FHLB stock does not have a market; therefore, its fair value is unknown.
Impact of Inflation
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, substantially all of the assets and virtually all of the
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Year 2000
_________
The Company addressed the Year 2000 issue and believes it has been successful.
The Company has not experienced any adverse affects to date regarding the
century rollover period. There also have been no adverse implications from the
Company's borrowers or depositors. The Company continued to monitor for any
affects of the Year 2000 issue during the March 31, and June 30, 2000 quarters
and did not incur any adverse implications. As of June 30, 2000, the Company
had incurred approximately $39,000 of capitalized purchases and $111,800 of
cumulative Year 2000 expenses.
RECENT ACCOUNTING DEVELOPMENTS
______________________________
In June of 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that Companies
recognize all derivatives as other assets or liabilities in the statements of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the internal use of
the derivative and the resulting designation. Statement 133 is scheduled to be
effective in fiscal 2001. Management of the Company does not expect this
statement to have a significant effect on the Company's financial position or
results of operations based on the Company's current activities.
Item 7A. Quantiture and Qualitative Disclosure about Market Risk
_______________________________________________________
See " - Market Risks" and accompanying table set forth in Item 7
above.
Item 8. Financial Statements and Supplementary Data
___________________________________________
a. Financial Statements Required by Regulation S-X
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northeast Bancorp and Subsidiaries
We have audited the consolidated statements of financial condition of
Northeast Bancorp and Subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended June 30, 2000.
These financial statements are the responsibility of Northeast Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northeast
Bancorp and Subsidiaries as of June 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended June 30, 2000, in conformity with generally accepted
accounting principles.
Portland, Maine Baker Newman & Noyes
August 4, 2000 Limited Liability Company
NORTHEAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
ASSETS
2000 1999
_____________ _____________
Cash and due from banks $ 7,996,321 $ 4,963,985
Interest bearing deposits 488,622 345,585
Federal Home Loan Bank overnight
deposits (note 7) 4,293,000 6,784,000
_____________ _____________
Total cash and cash equivalents 12,777,943 12,093,570
Available for sale securities, at market
value (notes 2, 7 and 9) 23,159,039 18,054,317
Loans held for sale 81,890 311,600
Loans receivable (notes 3 and 7):
Mortgage loans:
Residential real estate 194,287,520 182,244,336
Construction loans 10,999,414 3,187,642
Commercial real estate 61,924,339 55,437,983
_____________ _____________
267,211,273 240,869,961
Undisbursed portion of construction loans (3,593,553) (1,501,993)
Net deferred loan origination costs 605,811 220,337
_____________ _____________
Total mortgage loans 264,223,531 239,588,305
Commercial loans 41,701,428 34,814,252
Consumer and other loans 75,899,142 44,583,690
_____________ _____________
381,824,101 318,986,247
Less allowance for loan losses (3,498,000) (2,924,000)
_____________ _____________
Net loans 378,326,101 316,062,247
Premises and equipment - net (note 4) 4,397,768 5,037,026
Acquired assets - net (note 5) 278,010 193,850
Accrued interest receivable - loans 2,149,846 1,803,379
Accrued interest receivable - investments 253,868 187,281
Federal Home Loan Bank stock, at cost (note 7) 6,644,500 5,680,500
Goodwill, net of accumulated amortization
of $1,936,846 in 2000 and $1,662,588 in 1999 1,188,088 1,462,346
Other assets (notes 14 and 21) 4,595,393 3,496,789
_____________ _____________
Total assets $433,852,446 $364,382,905
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
_____________ _____________
Liabilities:
Deposits (note 6):
Demand $ 21,772,073 $ 17,891,552
NOW 29,250,094 31,203,347
Money market 6,339,360 7,156,424
Regular savings 21,002,599 21,999,615
Brokered time deposits 37,505,141 13,458,257
Certificates of deposit under $100,000 116,080,981 103,302,505
Certificates of deposit $100,000 or more 28,031,564 24,352,335
_____________ _____________
Total deposits 259,981,812 219,364,035
FHLB borrowings (note 7) 122,627,805 103,881,716
Note payable (note 8) - 687,500
Securities sold under repurchase
agreements (notes 2 and 9) 13,110,165 11,867,839
Other liabilities 2,833,188 1,898,700
_____________ _____________
Total liabilities 398,552,970 337,699,790
Guaranteed Preferred Beneficial
Interest in the Company's Junior
Subordinated Debentures (note 21) 7,172,998 -
Commitments and contingent
liabilities (notes 16 and 17)
Stockholders' equity (notes 2, 10,
12, 14 and 16):
Preferred stock, cumulative, $1 par
value, 1,000,000 shares authorized and
none issued and outstanding - -
Common stock, $1 par value, 15,000,000
shares authorized; 2,786,095 and 2,768,624
shares issued and 2,682,527 and 2,768,624
shares outstanding at June 30, 2000 and
1999, respectively 2,786,095 2,768,624
Additional paid-in capital 10,265,909 10,208,299
Retained earnings 16,722,474 14,145,720
Accumulated other comprehensive income (loss) (776,174) (439,528)
Treasury stock, 103,568 shares at
June 30, 2000, at cost (871,826) -
_____________ _____________
Total stockholders' equity 28,126,478 26,683,115
_____________ _____________
Total liabilities and stockholders' equity $433,852,446 $364,382,905
============= =============
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999 and 1998
2000 1999 1998
____________ ____________ ____________
Interest and dividend income:
Interest on loans $30,227,058 $25,178,587 $21,988,864
Interest on Federal Home Loan
Bank overnight deposits 242,386 328,981 514,113
Interest and dividends on
available for sale securities 1,485,774 957,558 1,461,024
Dividends on Federal Home
Loan Bank stock 427,982 364,245 300,664
Other interest and dividend income 22,784 27,422 18,346
____________ ____________ ____________
Total interest and dividend
income 32,405,984 26,856,793 24,283,011
Interest expense:
Deposits (note 6) 10,345,583 8,680,297 7,586,717
Repurchase agreements 569,564 339,556 206,651
Borrowed funds 7,010,715 5,530,389 5,016,703
Trust preferred securities 426,590 - -
____________ ____________ ____________
Total interest expense 18,352,452 14,550,242 12,810,071
____________ ____________ ____________
Net interest income before
provision for loan losses 14,053,532 12,306,551 11,472,940
Provision for loan losses (note 3) 1,071,949 610,017 706,100
____________ ____________ ____________
Net interest income after
provision for loan losses 12,981,583 11,696,534 10,766,840
Noninterest income:
Fees and service charges on loans 302,953 288,720 206,961
Fees for other services to customers 731,664 660,045 596,110
Net securities gains (note 2) 75,175 84,133 285,716
Gain on trading activities 8,847 10,732 1,797
Gain on sales of loans 220,954 817,084 726,599
Loan servicing fees 141,614 160,811 227,409
Other income 1,053,738 694,827 626,939
____________ ____________ ____________
Total noninterest income 2,534,945 2,716,352 2,671,531
Noninterest expense:
Salaries and employee benefits
(notes 15 and 16) 5,324,376 4,889,172 4,638,813
Occupancy expense (note 4) 911,903 975,086 903,978
Equipment expense (note 4) 971,979 888,423 863,580
FDIC insurance expense 54,732 63,441 60,097
Other (notes 2, 13 and 15) 3,280,095 3,753,721 3,265,249
____________ ____________ ____________
Total noninterest expense 10,543,085 10,569,843 9,731,717
____________ ____________ ____________
Income before income taxes 4,973,443 3,843,043 3,706,654
Income tax expense (note 14) 1,763,721 1,432,591 1,302,871
____________ ____________ ____________
Net income $ 3,209,722 $ 2,410,452 $ 2,403,783
============ ============ ============
Earnings per common share (notes
11 and 16):
Basic $ 1.17 $ .88 $ 1.00
Diluted $ 1.17 $ .86 $ .86
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2000, 1999 and 1998
Preferred Stock Common
Series A and B Stock
_______________ _______________
Balance at June 30, 1997 $ 1,999,980 $ 1,462,909
Net income - -
Other comprehensive income net of tax:
Net unrealized income on investments
available for sale, net of
reclassification adjustment (note 19) - -
Total comprehensive income - -
Issuance of common stock - 939
Conversion of preferred stock Series
B (note 12) (999,992) 214,284
Stock split in the form of a dividend - 740,807
Stock options exercised and treasury
stock purchased - 32,200
Treasury stock sold - -
Exercise of stock warrants - 163,146
Dividends on preferred stock - -
Dividends on common stock at $0.21 per share - -
_______________ _______________
Balance at June 30, 1998 999,988 2,614,285
Net income - -
Other comprehensive income net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 19) - -
Total comprehensive income - -
Issuance of common stock - 1,477
Stock options exercised - 16,500
Dividends on preferred stock - -
Dividends on common stock at $0.21 per share - -
Conversion of preferred stock Series
A (note 12) (999,988) 136,362
_______________ _______________
Balance at June 30, 1999 - 2,768,624
Net income - -
Other comprehensive income net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 19) - -
Total comprehensive income - -
Treasury stock purchased, 104,298 shares - -
Issuance of common stock and treasury stock
sold - 971
Stock options exercised - 16,500
Dividends on common stock at $0.23 per share - -
_______________ _______________
Balance at June 30, 2000 $ - $ 2,786,095
=============== ===============
See accompanying notes.
Accumulated
Additional Other
Paid-in Retained Comprehensive Treasury
Capital Earnings Income (Loss) Stock Total
______________ ______________ ______________ ______________ ______________
$ 7,699,882 $ 11,266,984 $ (334,175) $ - $ 22,095,580
- 2,403,783 - - 2,403,783
- - 269,727 - 269,727
_____________
- - - - 2,673,510
15,730 - - - 16,669
785,708 - - - -
- (741,902) - - (1,095)
158,500 - - (44,988) 145,712
- - - 44,988 44,988
598,287 - - - 761,433
- (125,827) - - (125,827)
- (471,443) - - (471,443)
______________ ______________ ______________ ______________ ______________
9,258,107 12,331,595 (64,448) - 25,139,527
- 2,410,452 - - 2,410,452
- - (375,080) - (375,080)
- - - - 2,035,372
14,780 - - - 16,257
71,786 - - - 88,286
- (25,667) - - (25,667)
- (570,660) - - (570,660)
863,626 - - - -
______________ ______________ ______________ ______________ ______________
10,208,299 14,145,720 (439,528) - 26,683,115
- 3,209,722 - - 3,209,722
- - (336,646) - (336,646)
______________
- - - - 2,873,076
- - - (878,532) (878,532)
7,765 - - 6,706 15,442
49,845 - - - 66,345
- (632,968) - - (632,968)
______________ ______________ ______________ ______________ ______________
$ 10,265,909 $ 16,722,474 $ (776,174) $ (871,826) $ 28,126,478
============== ============== ============== ============== ==============
NORTHEAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998
2000 1999 1998
_____________ _____________ _____________
Cash flows from operating activities:
Net income $ 3,209,722 $ 2,410,452 $ 2,403,783
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses 1,071,949 610,017 706,100
Provision for losses on
acquired assets 24,000 47,000 62,300
Write-down of investment
securities 60,000 95,728 172,235
Deferred income tax (benefit)
expense (154,576) 86,398 (14,949)
Depreciation of premises and
equipment 808,760 755,956 617,628
Amortization of goodwill 274,258 461,569 296,374
Net gain on sale of available
for sale securities (75,175) (84,133) (285,716)
Net gain on sales of loans (220,954) (817,084) (726,599)
Originations of loans held for
sale (4,343,694) (17,476,548) (7,251,700)
Proceeds from sale of loans
held for sale 4,672,871 17,908,553 7,287,744
Net change in trading account
securities - 50,000 (25,000)
Other (325,495) (213,899) (131,200)
Change in other assets and
liabilities:
Interest receivable (413,054) (56,962) (293,605)
Other assets and liabilities 708,117 (1,241,063) 466,597
____________ _____________ _____________
Net cash provided by operating
activities 5,296,729 2,535,984 3,283,992
Cash flows from investing activities:
Proceeds from the sale of
available for sale securities 341,815 6,930,743 27,974,991
Purchases of available for sale
securities (9,173,218) (15,992,030) (15,666,889)
Proceeds from maturities and
principal payments on available
for sale securities 3,291,786 4,086,624 3,588,092
Proceeds from sale of portfolio
loans 40,769 11,278,496 17,479,139
Purchases of loans (3,168,848) (27,913,995) (66,283,950)
Net increase in loans (60,039,333) (20,629,306) (10,509,720)
Additions to premises and equipment (325,814) (1,424,307) (363,562)
Proceeds from sale of acquired assets 246,124 422,787 214,884
Purchase of Federal Home Loan
Bank stock (964,000) - (1,559,500)
_____________ _____________ _____________
Net cash used by investing
activities (69,750,719) (43,240,988) (45,126,515)
Cash flows from financing
activities:
Net increase in deposits $ 40,617,777 $ 35,339,938 $ 11,102,811
Net borrowings (repayments) from
the Federal Home Loan Bank 18,746,089 (558,236) 23,945,481
Net increase in repurchase
agreements 1,242,326 6,662,245 106,972
Dividends paid (632,968) (596,327) (597,270)
Treasury stock purchased (878,532) - (44,988)
Treasury stock sold 6,706 - 44,988
Stock options exercised 66,345 88,286 190,700
Warrants exercised - - 761,433
Issuance of common stock 8,736 16,257 16,669
Stock split - payment for fractional
shares - - (1,095)
Principal payments on note payable (687,500) (305,555) (305,556)
Debt issuance costs paid (523,614) - -
Proceeds from issuance of interest
in Junior Subordinated Debentures 7,172,998 - -
_____________ _____________ _____________
Net cash provided by financing
activities 65,138,363 40,646,608 35,220,145
_____________ _____________ _____________
Net increase (decrease) in cash and
cash equivalents 684,373 (58,396) (6,622,378)
Cash and cash equivalents,
beginning of year 12,093,570 12,151,966 18,774,344
_____________ _____________ _____________
Cash and cash equivalents, end
of year $ 12,777,943 $ 12,093,570 $ 12,151,966
============= ============= =============
Supplemental schedule of cash
flow information:
Interest paid $ 18,145,911 $ 14,610,453 $ 12,727,917
Income taxes paid 1,872,000 1,524,000 972,000
Supplemental schedule of noncash
investing and financing activities:
Transfer from loans to acquired
assets $ 338,570 $ 301,537 $ 56,861
Change in valuation allowance
for unrealized losses on
available for sale securities,
net of tax 336,646 375,080 269,727
Net change in deferred taxes for
unrealized losses on available
for sale securities 173,424 193,222 138,949
Transfer of nonmarketable
investment security to other
assets - 45,000 -
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
1. Summary of Significant Accounting Policies
__________________________________________
The accounting and reporting policies of Northeast Bancorp and
Subsidiaries (the Company) conform to generally accepted accounting
principles and general practice within the banking industry.
Business
________
Northeast Bancorp provides a full range of banking services to individual
and corporate customers throughout south central and western Maine
through its wholly owned subsidiary, Northeast Bank, F.S.B. The bank is
subject to competition from other financial institutions. The bank is
subject to the regulations of the Federal Deposit Insurance Corporation
(FDIC) and the Office of Thrift Supervision (OTS) and undergoes periodic
examinations by these agencies.
Principles of Consolidation
___________________________
The accompanying consolidated financial statements include the accounts
of Northeast Bancorp, a savings and loan holding company, and two wholly-
owned subsidiaries, Northeast Bank, F.S.B. (including the Bank's wholly-
owned subsidiary, Northeast Financial Services, Inc.), and NBN Capital
Trust. NBN Capital Trust was created in fiscal year 2000 (see note 21).
All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
________________
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the balance sheet and
income and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties. A
substantial portion of the Company's loans are secured by real estate in
the State of Maine. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio is susceptible to
changes in market conditions in Maine.
Cash and Cash Equivalents
_________________________
For purposes of presentation in the consolidated statements of cash flow,
cash and cash equivalents consist of cash and due from banks, Federal
Home Loan Bank overnight deposits and interest bearing deposits. The
Company is required to maintain a certain reserve balance in the form of
cash or deposits with the Federal Reserve Bank. At June 30, 2000, the
reserve balance was approximately $1,459,000.
Available for Sale Securities
_____________________________
Marketable equity securities, and debt securities which may be sold prior
to maturity, are classified as available for sale and are carried at
market value. Market value is determined based on bid prices published
in financial newspapers or bid quotations received from securities
dealers. Changes in market value, net of applicable income taxes, are
reported as a separate component of stockholders' equity. When a decline
in market value of a security is considered other than temporary, the
loss is charged to other expense in the consolidated statements of income
and is treated as a writedown of the security's "cost". Realized gains
and losses on the sale of securities are recognized on the trade date
using the specific identification method.
Federal Home Loan Bank Stock
____________________________
Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale and Mortgage Banking Activities
___________________________________________________
Loans originated for sale are specifically identified and carried at the
lower of aggregate cost or market value, estimated based on bid
quotations from loan dealers. The carrying value of loans held for sale
approximates the market value at June 30, 2000 and 1999. Realized gains
and losses on sale of loans are determined using the specific
identification method and are reflected as gains on sale of loans in the
consolidated statements of income.
The Company recognizes as separate assets the rights to service mortgage
loans for others, and performs an assessment of capitalized mortgage
servicing rights for impairment based on the current fair value of those
rights. The Company capitalizes mortgage servicing rights at their
allocated cost (based on the relative fair values of the rights and the
related loans) upon the sale of the related loans.
The Company's mortgage servicing rights asset at June 30, 2000 and 1999
was approximately $524,000 and $569,000, respectively, and is included in
other assets in the consolidated statements of financial position.
Mortgage servicing rights are amortized over the estimated weighted
average life of the loans. The Company's assumptions with respect to
prepayments, which affect the estimated average life of the loans, are
adjusted periodically to reflect current circumstances. The Company
evaluates the estimated life of its servicing portfolio based on data
which is disaggregated to reflect note rate, type and term on the
underlying loans.
Loans
_____
Loans are carried at the principal amounts outstanding plus net premiums
paid and net deferred loan costs. Loan origination fees and certain
direct loan origination costs are deferred and recognized in interest
income as an adjustment to the loan yield over the life of the related
loans. Loan premiums paid to acquire loans are recognized as a reduction
of interest income over the estimated life of the loans. Loans are
generally placed on nonaccrual status when they are past due 90 days as
to either principal or interest, or when in management's judgment the
collectibility of interest or principal of the loan has been
significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months. Loans are
classified as impaired when it is probable that the Company will not be
able to collect all amounts due according to the contractual terms of the
loan agreement. Factors considered by management in determining
impairment include payment status and collateral value.
Allowance for Loan Losses
_________________________
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the
allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are
credited to the allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses based on evaluations of collectibility and
prior loss experience. The evaluation takes into consideration such
factors as changes in the nature and volume of the portfolio, overall
portfolio quality, specific problem loans, and current and anticipated
economic conditions that may affect the borrowers' ability to repay.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
changing economic conditions and the economic prospects of the borrowers
might necessitate future additions to the allowance. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment
______________________
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line and accelerated methods
over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense as incurred and the cost of major renewals and
betterments are capitalized.
Long-Lived Assets
_________________
Long-lived assets are evaluated periodically for impairment. An
assessment of recoverability is performed prior to any writedown of the
asset. If circumstances suggest that their value may be impaired, then
an expense would be charged in the then current period.
Income Taxes
____________
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the period that includes the enactment
date.
Acquired Assets
_______________
Acquired assets are carried at the lower of cost or fair value of the
collateral less estimated selling expenses.
Goodwill
________
Goodwill arising from acquisitions is being amortized on a straight-line
basis over ten to fifteen year periods. Goodwill is reviewed for
possible impairment when events or changed circumstances may affect the
underlying basis of the asset.
Advertising Expense
___________________
Advertising costs are expensed as incurred. Advertising costs were
approximately $194,000, $218,000 and $172,000 for the years ended June
30, 2000, 1999 and 1998, respectively.
Stock-Based Compensation
________________________
Compensation expense for the Stock Option Plans is accounted for in
accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. The Stock Option Plans are
noncompensatory plans and no expense is recognized. Shares reserved for
issuance under the Plans, but not yet awarded, are not considered
outstanding for purposes of computing earnings per share.
Comprehensive Income
____________________
In 1999, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. No
adjustments to recorded amounts were required by adoption of this
statement. Accumulated other comprehensive income or loss consists
solely of unrealized gains or losses on investment securities available
for sale net of related income taxes.
New Accounting Pronouncements Not Yet Implemented
_________________________________________________
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, is scheduled to be effective in fiscal 2001. Management of
the Company does not expect this statement to have a significant effect
on the Company's financial position or results of operations based on the
Company's current activities.
2. Available for Sale Securities
_____________________________
A summary of the cost and approximate fair values of available for sale
securities at June 30, 2000 and 1999 follows:
2000 1999
________________________ ________________________
Fair Fair
Cost Value Cost Value
___________ ___________ ___________ ___________
Debt securities issued
by the U.S. Treasury
and other U.S.
Government corporations
and agencies $ 347,573 $ 345,792 $ 596,626 $ 598,445
Corporate bonds 200,876 193,587 201,916 199,527
Mortgage-backed securitie 22,350,606 21,445,918 16,653,302 16,027,028
Equity securities 1,436,005 1,173,742 1,268,424 1,229,317
___________ ___________ ___________ ___________
$24,335,060 $23,159,039 $18,720,268 $18,054,317
=========== =========== =========== ===========
The gross unrealized gains and unrealized losses on available for sale
securities are as follows:
2000 1999
________________________ ________________________
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
___________ ___________ ___________ ___________
Debt securities issued by
The U. S. Treasury and
other U. S. Government
corporations and agencies $ - $ 1,781 $ 2,752 $ 933
Corporate bonds 164 7,453 681 3,070
Mortgage-backed securities 1,124 905,812 3,287 629,561
Equity securities 23,972 286,235 15,631 54,738
___________ ___________ ___________ ___________
$ 25,260 $ 1,201,281 $ 22,351 $ 688,302
=========== =========== =========== ===========
At June 30, 2000, mortgage-backed securities with a market value of
approximately $17,006,000 were pledged as collateral to secure
outstanding repurchase agreements.
At June 30, 2000 and 1999, included in accumulated other comprehensive
income (loss) as a reduction to stockholders' equity are net unrealized
losses of $1,176,021 and $665,951, respectively, net of the deferred tax
effect of $399,847 and $226,423, respectively.
The cost and fair values of available for sale securities at June 30,
2000 by contractual maturity are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
Fair
Cost Value
____________ ____________
Debt securities:
Due in one year $ 298,613 $ 298,777
Due after one year through five years 249,836 240,602
____________ ____________
548,449 539,379
Mortgage-backed securities (including
securities with interest rates ranging
from 5.15% to 9.0% maturing September
2003 to November 2029) 22,350,606 21,445,918
Equity securities 1,436,005 1,173,742
____________ ____________
$24,335,060 $23,159,039
============ ============
Realized gains and losses on sales of available for sale securities for
the year ended June 30, 2000 were $75,175 and $0, respectively, for the
year ended June 30, 1999 were $85,891 and $1,758, respectively, and for
the year ended June 30, 1998 were $288,196 and $2,480, respectively.
Based on management's assessment of available for sale securities, there
has been more than a temporary decline in fair value of certain
securities. During the years ended June 30, 2000, 1999 and 1998, write-
downs of available for sale securities were $60,000, $95,728 and
$172,235, respectively, and are included in other expense in the
consolidated statements of income.
3. Loans Receivable
________________
The Company's lending activities are predominantly conducted in south
central and western Maine. However, the Company does purchase
residential mortgage loans in the open market out of this geographical
area. The Company grants single-family and multi-family residential
loans, commercial real estate loans, commercial loans and a variety of
consumer loans. In addition, the Company grants loans for the
construction of residential homes, multi-family properties, commercial
real estate properties and for land development. Also, the Company
participates in indirect lending arrangements for automobile, equipment
and mobile home loans. The Company's indirect lending activities are
conducted in south central and western Maine. Most loans granted by the
Company are collateralized by real estate. The ability and willingness
of residential and commercial real estate, commercial and construction
loan borrowers to honor their repayment commitments is generally
dependent on the health of the real estate sector in the borrowers'
geographic area and/or the general economy.
In the ordinary course of business, the Company has loan transactions
with its officers, directors and their associates and affiliated
companies ("related parties") at substantially the same terms as those
prevailing at the time for comparable transactions with others. Such
loans amounted to $3,444,816 and $3,500,973 at June 30, 2000 and 1999,
respectively. In 2000, new loans granted to related parties totaled
$1,033,959 payments and reductions amounted to $1,090,116.
Included in the loan portfolio are unamortized premiums on purchased
loans of approximately $632,000 and $742,000 at June 30, 2000 and 1999,
respectively.
Activity in the allowance for loan losses was as follows:
Years Ended June 30,
________________________________________
2000 1999 1998
____________ ____________ ____________
Balance at beginning of year $ 2,924,000 $ 2,978,000 $ 2,741,809
Provision charged to operating
expenses 1,071,949 610,017 706,100
Loans charged off (763,979) (926,364) (785,111)
Recoveries on loans charged off 266,030 262,347 315,202
____________ ____________ ____________
Net loans charged off (497,949) (664,017) (469,909)
____________ ____________ ____________
Balance at end of year $ 3,498,000 $ 2,924,000 $ 2,978,000
============ ============ ============
Commercial and commercial real estate loans with balances greater than
$25,000 are considered impaired when it is probable that the Company will
not collect all amounts due in accordance with the contractual terms of
the loan. Loans that are returned to accrual status are no longer
considered to be impaired. Certain loans are exempt from individual
impairment evaluation, including large groups of smaller-balance
homogenous loans that are collectively evaluated for impairment, such as
consumer and residential mortgage loans and commercial loans with
balances less than $25,000.
The allowance for loan losses includes impairment reserves related to
loans that are identified as impaired, which are based on discounted cash
flows using the loan's effective interest rate, the fair value of the
collateral for collateral-dependent loans, or the observable market price
of the impaired loan. When foreclosure is probable, impairment is
measured based on the fair value of the collateral. Loans that
experience insignificant payment delays (less than 60 days) and
insignificant shortfalls in payment amounts (less than 10%) generally are
not classified as impaired. Restructured loans are reported as impaired
in the year of restructuring. Thereafter, such loans may be removed from
the impaired loan disclosure if the loans were paying a market rate of
interest at the time of restructuring and are performing in accordance
with their renegotiated terms.
At June 30, 2000, impaired loans were $1,164,349 of which $81,341 had
related allowances of $30,000. During the year ended June 30, 2000, the
income recognized related to impaired loans was $22,648 and the average
balance of outstanding impaired loans was $914,493. At June 30, 1999,
impaired loans were $612,867 of which $241,420 had related allowances of
$77,200. During the year ended June 30, 1999, the income recognized
related to impaired loans was $66,030 and the average balance of
outstanding impaired loans was $1,229,987. At June 30, 1998, impaired
loans were $1,623,720 of which $927,355 had related allowances of
$251,474. During the year ended June 30, 1998, the income recognized
related to impaired loans was $50,690 and the average balance of
outstanding impaired loans was $1,956,488. The Company recognizes
interest on impaired loans on a cash basis when the ability to collect
the principal balance is not in doubt; otherwise, cash received is
applied to the principal balance of the loan.
Loans on nonaccrual status, including impaired loans described above, at
June 30, 2000 and 1999 totaled approximately $1,178,000 and $1,144,000,
respectively. Interest income that would have been recorded under the
original terms of such loans, net of interest income actually recognized
for the years ended June 30, 2000, 1999 and 1998, totaled approximately
$89,000, $71,000 and $165,000, respectively.
The Company has no material outstanding commitments to lend additional
funds to customers whose loans have been placed on nonaccrual status or
the terms of which have been modified.
The Company was servicing for others mortgage loans of approximately
$52,410,000, $64,690,000 and $55,581,000 at June 30, 2000, 1999 and 1998,
respectively.
4. Premises and Equipment
______________________
Premises and equipment at June 30, 2000 and 1999 are summarized as follows:
2000 1999
____________ ____________
Land $ 1,025,440 $ 1,012,503
Buildings 2,348,507 2,586,996
Leasehold and building improvements 1,228,423 1,272,732
Furniture, fixtures and equipment 3,720,732 3,818,358
____________ ____________
8,323,102 8,690,589
Less accumulated depreciation 3,925,334 3,653,563
____________ ____________
Net premises and equipment $ 4,397,768 $ 5,037,026
============ ============
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense, was $808,760, $755,956 and $617,628 for
the years ended June 30, 2000, 1999 and 1998, respectively.
5. Acquired Assets
_______________
The following table summarizes the composition of acquired assets at June
30:
2000 1999
____________ ____________
Real estate properties acquired in settlement
of loans and other acquired assets $ 306,465 $ 221,575
Less allowance for losses 28,455 27,725
____________ ____________
$ 278,010 $ 193,850
============ ============
Activity in the allowance for losses on acquired assets was as follows:
2000 1999 1998
____________ ____________ ____________
Balance at beginning of year $ 27,725 $ 5,100 $ 50,839
Provision for losses on acquired
assets 24,000 47,000 62,300
Write-downs (23,270) (24,375) (108,039)
____________ ____________ ____________
Balance at end of year $ 28,455 $ 27,725 $ 5,100
============ ============ ============
6. Deposits
________
Deposits at June 30 are summarized as follows:
Weighted
Average
Rate 2000 1999
at June _____________________ _____________________
30, 2000 Amount Percent Amount Percent
________ _____________ _______ _____________ _______
Demand 0.00% $ 21,772,073 8.4% $ 17,891,552 8.2%
NOW 3.07 29,250,094 11.3 31,203,347 14.2
Money market 2.53 6,339,360 2.4 7,156,424 3.3
Regular savings 2.34 21,002,599 8.1 21,999,615 10.0
Certificates of deposit
and brokered time
deposits:
1.00 - 3.75% 1.19 54,349 0.0 1,093,801 .5
3.76 - 5.75% 5.33 53,790,708 20.7 103,086,863 47.0
5.76 - 7.75% 6.50 127,772,629 49.1 36,924,752 16.8
7.76 - 9.75% - - - 7,681 -
________ _____________ _______ _____________ _______
5.34% $259,981,812 100.0% $219,364,035 100.0%
============= ======= ============= =======
At June 30, 2000, scheduled maturities of certificates of deposit and
brokered time deposits are as follows:
2001 2002 2003 2004 2005 Thereafter
___________ ___________ __________ __________ __________ ___________
1.00-3.75% $ 8,056 $ 46,293 $ - $ - $ - $ -
3.76-5.75% 47,932,387 3,563,062 1,391,705 815,241 48,938 39,375
5.76-7.75% 38,774,487 57,103,077 9,658,503 160,730 2,046,879 20,028,953
Interest expense on deposits for the years ended June 30, 2000, 1999 and
1998 is summarized as follows:
2000 1999 1998
____________ ____________ ____________
NOW $ 915,018 $ 932,896 $ 269,412
Money market 144,388 209,733 466,453
Regular savings 493,861 514,917 569,901
Certificates of deposit and
brokered time deposits 8,792,316 7,022,751 6,280,951
____________ ____________ ____________
$10,345,583 $ 8,680,297 $ 7,586,717
============ ============ ============
7. Federal Home Loan Bank Borrowings
_________________________________
A summary of borrowings from the Federal Home Loan Bank are as follows:
June 30, 2000
_______________________________________________________
Principal Interest Maturity
Amounts Rates Dates
_______________ _______________ _______________
$ 91,579,611 4.98% - 6.98% 2001
11,471,802 5.38 - 7.05 2002
6,832,792 5.97 - 6.64 2003
2,743,600 5.55 - 6.67 2004
2,000,000 6.65 2005
8,000,000 5.59 - 5.68 2008
_______________
$ 122,627,805
===============
June 30, 1999
_______________________________________________________
Principal Interest Maturity
Amounts Rates Dates
_______________ _______________ _______________
$ 42,000,000 4.64% - 6.27% 2000
3,148,288 4.98 - 6.40 2001
2,815,780 5.38 - 6.49 2002
9,515,546 5.69 - 6.64 2003
3,402,102 5.55 - 6.67 2004
9,000,000 5.25 - 6.65 2005
34,000,000 4.89 - 5.68 2008
_______________
$ 103,881,716
===============
Several of the FHLB borrowings are subject to call provisions and may be
called prior to the stated maturity.
Certain mortgage loans, free of liens, pledges and encumbrances,
investment securities not otherwise pledged, FHLB overnight deposits and
the Company's FHLB stock have been pledged under a blanket agreement to
secure these borrowings. The Company is required to own stock of the
Federal Home Loan Bank of Boston in order to borrow from the Federal Home
Loan Bank. Several of the Federal Home Loan Bank borrowings held at June
30, 2000 are adjustable and, therefore, the rates are subject to change.
At June 30, 2000, the Company had approximately $2,100,000 available
under a line of credit arrangement with the FHLB. Also, in addition to
the FHLB advances outstanding at June 30, 2000, the Company had
approximately $20,740,000 available for long-term advances with the FHLB.
8. Note Payable
____________
The note payable at June 30, 1999 consisted of a loan from an unrelated
financial institution. The note was originally payable in eighteen equal
quarterly principal payments of $76,389. Interest was payable monthly at
8%. This note payable was paid off in fiscal 2000.
9. Securities Sold Under Repurchase Agreements
___________________________________________
During 2000 and 1999, the Company sold securities under agreements to
repurchase. The weighted average interest rate on repurchase agreements
was 4.18% and 4.07% at June 30, 2000 and 1999, respectively. These
borrowings, which were scheduled to mature within 180 days, were
collateralized by mortgage-backed securities with a market value of
$17,006,000 and amortized cost of $17,877,000 at June 30, 2000, and a
market value of $14,938,000 and amortized cost of $15,525,000 at June 30,
1999. The average balance of repurchase agreements was $13,768,000 and
$8,202,000 during the years ended June 30, 2000 and 1999, respectively.
The maximum amount outstanding at any month-end during 2000 and 1999 was
$18,675,000 and $11,868,000, respectively. Securities sold under these
agreements were under the control of the Company throughout 2000 and
1999.
10.Capital and Regulatory Matters
------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized."
As of June 30, 2000 and 1999, the most recent notification from the
Office of Thrift Supervision (OTS) categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized" the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 capital as set forth in
the table below. There are no conditions or events since that
notification that management believes have changed the institution's
category.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios as set
forth in the table below. At June 30, 2000 and 1999, the Bank ratios
exceeded the regulatory requirements. Management believes that the Bank
meets all capital adequacy requirements to which it is subject as of
June 30, 2000 and 1999.
The following tables illustrate the actual and required amounts and
ratios for the Bank at the dates indicated.
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
_______________ _________________ __________________
Amount Ratio Amount Ratio Amount Ratio
________ ______ __________ ______ __________ _______
(Dollars in Thousands)
As of June 30, 2000:
Tier 1 (Core) capital
(to risk weighted
assets) $ 33,140 10.60% >$ 12,504 > 4.0% >$ 18,756 > 6.0%
Tier 1 (Core) capital
(to total assets) $ 33,140 7.66% >$ 17,309 > 4.0% >$ 21,636 > 5.0%
Total capital (to risk
weighted assets) $ 35,434 11.34% >$ 25,008 > 8.0% >$ 31,261 > 10.0%
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
_______________ _________________ __________________
Amount Ratio Amount Ratio Amount Ratio
________ ______ __________ ______ __________ _______
(Dollars in Thousands)
As of June 30, 1999:
Tier 1 (Core) capital
(to risk weighted
assets) $ 25,615 10.1% >$ 10,159 > 4.0% >$ 15,239 > 6.0%
Tier 1 (Core) capital
(to total assets) $ 25,615 7.1% >$ 14,533 > 4.0% >$ 18,166 > 5.0%
Total capital (to risk
weighted assets) $ 27,233 10.7% >$ 20,318 > 8.0% >$ 25,398 > 10.0%
The Bank may not declare or pay a cash dividend on, or repurchase, any of
its capital stock from the Parent if the effect thereof would cause the
capital of the Bank to be reduced below the capital requirements imposed
by the regulatory authorities or if such amount exceeds the otherwise
allowable amount under OTS rules (approximately $2,000,000 is available
at June 30, 2000).
In December 1999, the Board of Directors of the Company approved a plan
to repurchase up to $2,000,000 of its common stock. Under the common
stock repurchase plan, the Company may purchase shares of its common
stock from time to time in the open market at prevailing prices.
Repurchased shares will be held in treasury and may be used in connection
with employee benefits and other general corporate purposes. As of June
30, 2000, the Company had approximately $872,000 of treasury stock, which
is carried at cost.
11.Earnings Per Common Share
_________________________
Basic earnings per share (EPS) are computed by dividing net income
available to common stockholders by the weighted average number of shares
outstanding. The following table shows the weighted average number of
shares outstanding for each of the last three years. Shares issuable
relative to stock options granted and outstanding warrants have been
reflected as an increase in the shares outstanding used to calculate
diluted EPS, after applying the treasury stock method. The number of
shares outstanding for Basic and Diluted EPS are presented as follows:
2000 1999 1998
____________ ____________ ____________
Average shares outstanding, used in
computing Basic EPS 2,739,966 2,710,117 2,277,165
Effect of Dilutive Securities:
Stock warrants and options
outstanding 7,537 26,188 41,797
Options and warrants exercised 6,090 8,177 167,116
Convertible preferred stock - 50,062 309,165
____________ ____________ ____________
Average equivalent shares
outstanding, used in computing
Diluted EPS 2,753,593 2,794,544 2,795,243
============ ============ ============
There is a difference in 1999 and 1998 between net income and net income
available to common stockholders which is used in the calculation of
Basic EPS. The following table illustrates the difference:
2000 1999 1998
____________ ____________ ____________
Net income $ 3,209,722 $ 2,410,452 $ 2,403,783
Preferred stock dividends - (25,667) (125,827)
____________ ____________ ____________
Net income available to common
Stockholders $ 3,209,722 $ 2,384,785 $ 2,277,956
============ ============ ============
12.Preferred Stock
_______________
In November of 1998, the preferred stock, Series A, was converted to
common stock at a three to one ratio. There were no warrants attached to
the Series A preferred stock. In April of 1998, the preferred stock,
Series B, was converted into common stock at a three to one ratio. The
Series B preferred stock was issued with warrants attached and during
1998, 163,146 warrants were exercised for a total capital contribution of
$761,443. No preferred stock is outstanding at June 30, 2000 and 1999.
13.Other Expenses
______________
Other expenses includes the following for the years ended June 30, 2000,
1999 and 1998:
2000 1999 1998
____________ ____________ ____________
Merger expense (note 15) $ - $ - $ 318,061
Professional fees 504,179 471,083 310,390
General insurance 77,810 81,830 104,391
Printing and office supplies 214,103 300,888 265,954
Real estate owned expenses 59,896 44,219 50,912
Provision for losses on acquired
assets 24,000 47,000 62,300
Goodwill amortization 274,258 461,569 296,374
Write-down of investment securities 60,000 95,728 172,235
Other 2,065,849 2,251,404 1,684,632
____________ ____________ ____________
$ 3,280,095 $ 3,753,721 $ 3,265,249
============ ============ ============
The goodwill amortization for 1999 included an impairment write-down of
approximately $165,000.
14.Income Taxes
____________
The current and deferred components of income tax (benefit) expense were
as follows for the years ended June 30, 2000, 1999 and 1998:
2000 1999 1998
____________ ____________ ____________
Federal:
Current $ 1,848,732 $ 1,290,783 $ 1,265,879
Deferred (154,576) 86,398 (14,949)
____________ ____________ ____________
1,694,156 1,377,181 1,250,930
State and local - current 69,565 55,410 51,941
____________ ____________ ____________
$ 1,763,721 $ 1,432,591 $ 1,302,871
============ ============ ============
Total income tax expense is different from the amounts computed by
applying the U.S. federal income tax rates in effect to income before
income taxes. The reasons for these differences are as follows for the
years ended June 30, 2000, 1999 and 1998:
2000 1999 1998
_________________ _________________ _________________
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
___________ ______ ___________ ______ ___________ ______
Expected income tax
expense at federal
tax rate $1,690,971 34.0% $1,306,635 34.0% $1,260,262 34.0%
State tax, net of
federal tax
benefit 45,913 .9 36,571 1.0 34,281 .9
Non-deductible
goodwill 34,671 .7 98,358 2.6 42,192 1.1
Dividend received
deduction (20,049) (.4) (19,367) (.5) (7,848) (.2)
Low income/
rehabilitation
credit (18,126) (.4) (20,000) (.5) (20,000) (.5)
Other 30,341 .6 30,394 .8 (6,016) (.2)
___________ ______ ___________ ______ ___________ ______
$1,763,721 35.4% $1,432,591 37.4% $1,302,871 35.1%
=========== ====== =========== ====== =========== ======
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2000 and 1999 are presented below:
2000 1999
____________ ____________
Deferred tax assets:
Loans, principally due to allowance for loan
losses $ 1,169,000 $ 994,000
Deferred gain on loan sales 29,000 46,000
Interest on nonperforming loans 33,000 24,000
Difference in tax and financial statement
bases of investments 475,000 331,000
Difference in tax and financial statement
amortization of deductible goodwill 132,000 107,000
Other 65,000 99,000
____________ ____________
Total deferred tax assets 1,903,000 1,601,000
Deferred tax liabilities:
Loan loss reserve - tax basis (59,000) (74,000)
Mortgage servicing rights (170,000) (193,000)
Other (53,000) (41,000)
____________ ____________
Total deferred tax liabilities (282,000) (308,000)
____________ ____________
Net deferred tax assets, included in
other assets $ 1,621,000 $ 1,293,000
============ ============
The Company has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax assets. Accordingly, no
valuation allowance has been recorded.
Tax legislation requires that all thrift institutions recapture all or a
portion of their tax bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Company has
previously recorded a deferred tax liability equal to the tax bad debt
recapture and as such, the rules will have no effect on net income or
federal income tax expense. Except as stated below, the unrecaptured
base year reserves will not be subject to recapture as long as the Bank
continues to carry on the business of banking. However, the balance of
the pre-1988 tax bad debt reserves is subject to provisions of present
law that require recapture in the case of certain excess distributions to
stockholders and recapture would also be required should the Bank's
assets exceed $500 million. For federal income tax purposes, the Company
has designated approximately $2,400,000 of net worth as a reserve for tax
basis bad debts on loans. No deferred taxes have been provided for base
year reserve recapture as management plans to avoid the events that would
cause such recapture.
15.Merger
______
In October 1997, the Company issued approximately 188,000 shares of its
common stock for all the outstanding common stock of Cushnoc Bank and
Trust Company of Augusta, Maine (Cushnoc). Cushnoc shareholders received
2.089 shares of the Company's common stock for each share of Cushnoc
common stock. The merger qualified as a tax-free reorganization and was
accounted for as a pooling of interests. Accordingly, the Company's
consolidated financial statements were restated for all periods prior to
the business combination to include the results of operations, financial
position and cash flows of Cushnoc. No adjustments were necessary to
conform Cushnoc's methods of accounting to the methods used by the
Company. There were no significant intercompany transactions prior to
consummation of the merger. The costs associated with the merger totaled
approximately $435,000, with $117,000 included in salaries and employee
benefits and $318,000 included in other expense in the 1998 consolidated
statement of income.
The results of operations previously reported by the separate companies
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below:
Through
October 24, 1997
________________
Interest Income:
Northeast Bancorp $ 7,280,300
Cushnoc Bank 613,733
________________
Combined $ 7,894,033
================
Net Income:
Northeast Bancorp $ 432,319
Cushnoc Bank 29,435
________________
Combined $ 461,754
================
There were no other changes in stockholders' equity prior to consummation
of the merger in fiscal 1998 that were material to the financial position
of the Company.
16.Employee Benefit Plans
______________________
Profit Sharing Plan
___________________
The Company has a profit sharing plan which covers substantially all full-
time employees. Contributions and costs are determined as a percent of
each covered employee's salary and are at the Board of Directors
discretion. Expenses related to the profit sharing plan for the years
ended June 30, 2000, 1999 and 1998 were $83,064, $53,590 and $43,500,
respectively.
401(k) Plan
___________
The Company offers a contributory 401(k) plan which is available to all
full-time salaried and hourly-paid employees who are regularly scheduled
to work 1,000 hours or more in a Plan year, have attained age 21, and
have completed one year of employment. Employees may contribute between
1% and 15% of their base compensation to which the Company will match 50%
up to the first 6% contributed. For the years ended June 30, 2000, 1999
and 1998, the Company contributed $86,984, $74,115 and $60,700,
respectively.
Stock Option Plans
__________________
The Company has adopted Stock Option Plans in 1989, 1992 and 1999. Both
"incentive stock options" and "nonqualified stock options" may be granted
pursuant to the Option Plans. Under the Option Plans, incentive stock
options may only be granted to employees of the Company and nonqualified
stock options may be granted to employees and nonemployee directors. All
options granted under the Option Plans will be required to have an
exercise price per share equal to at least the fair market value per
share of common stock on the date the option is granted. Options
immediately vest upon being granted. The options are exercisable for a
maximum of ten years after the options are granted in the case of all
incentive stock options and five years after the grant date for
nonqualified stock options.
In accordance with the Stock Option Plans, a total of 211,000 shares of
unissued common stock were reserved for issuance pursuant to incentive
stock options with 104,500 shares at June 30, 2000 available to be
granted and 27,000 shares of unissued common stock were reserved for
issuance pursuant to nonqualified stock options with 1,600 shares at June
30, 2000 available to be granted.
A summary of the qualified and non-qualified stock option activity for
the years ended June 30 follows:
2000 1999 1998
__________________ __________________ __________________
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
________ _________ ________ _________ ________ _________
Outstanding at
beginning of year 111,750 $ 10.69 123,000 $ 10.44 130,500 $ 6.01
Granted 38,000 8.32 11,500 9.94 41,250 18.50
Exercised (16,500) 4.02 (16,500) 5.35 (46,000) 5.11
Expired (5,000) 15.63 (6,250) 18.50 (2,750) 10.18
________ _________ ________ _________ ________ _________
Outstanding and
exercisable at
end of year 128,250 $ 10.66 111,750 $ 10.69 123,000 $ 10.44
======== ========= ======== ========= ======== =========
The following table summarizes information about stock options
outstanding at June 30, 2000:
Options Outstanding
______________________________________________________
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices June 30, 2000 Contractual Life Exercise Price
_________________ ________________ ________________ ________________
$7.50 42,000 4.2 years $ 7.50
$ 8.00 to $ 9.00 50,250 8.8 8.39
$10.00 to $18.50 36,000 7.7 17.50
________________ ________________ ________________
$ 7.50 to $18.50 128,250 7.0 $ 10.66
================ ================ ================
The per share weighted average fair value of stock options granted during
2000 and 1999 was $2.62 and $3.44, respectively, on the date of the
grants using the Black Scholes option-pricing model as a valuation
technique with the following average assumptions: expected dividend
yield, 2.85% and 2.13%; risk-free interest rate, 6.03% and 5.79%;
expected life, 8 years and 8 years; and expected volatility, 27.90% and
27.82%, respectively.
For financial statement purposes, the Company measures the compensation
costs of its stock option plans under Accounting Principles Board (APB)
Opinion No. 25, whereby no compensation cost is recorded if, at the grant
date, the exercise price of the options is equal to the fair market value
of the Company's common stock. Had the Company determined cost based on
the fair value at the grant date for its stock options under SFAS No.
123, Accounting for Stock-Based Compensation, the Company's net income
and earnings per share for the year ended June 30, 2000 and June 30, 1999
would have been reduced to the pro forma amounts indicated below.
Earnings Per Share
Net ________________________________
Income Basic Diluted
_______________ _______________ _______________
June 30, 2000:
______________
As reported $ 3,209,722 $ 1.17 $ 1.17
Pro forma $ 3,110,103 $ 1.14 $ 1.13
June 30, 1999:
______________
As reported $ 2,410,452 $ 0.88 $ 0.86
Pro forma $ 2,376,947 $ 0.87 $ 0.85
Stock Purchase Plan
___________________
The Company had a stock purchase plan which covered substantially all
full-time employees with one year of service. Offerings under the Plan
were made quarterly at the market value of the Company's common stock on
the offering termination date. The maximum number of shares which could
be purchased under the plan was 156,000 shares. This plan expired in
fiscal 2000.
17.Commitments, Contingent Liabilities and Other Off-Balance-Sheet Risks
_____________________________________________________________________
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit,
interest rate exchange agreements and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The contract amounts of those
instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as it does for on-
balance-sheet instruments.
Financial instruments with contract amounts which represent credit risk:
2000 1999
_______________ _______________
Commitments to originate loans:
Residential real estate mortgages $ 2,898,000 $ 9,392,000
Commercial real estate mortgages,
including multi-family residential
real estate 3,523,000 10,314,000
Commercial business loans 4,552,000 4,725,000
_______________ _______________
10,973,000 24,431,000
Unused lines of credit 24,839,000 18,941,000
Standby letters of credit 1,504,000 1,501,000
Unadvanced portions of construction loans 3,594,000 1,502,000
At June 30, 2000, $912,000 of the stand-by letters of credit have been
granted with respect to related parties.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are issued to support private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Interest Rate Exchange Agreements
_________________________________
During fiscal 2000, the Company entered into two interest rate exchange
agreements to manage and hedge its interest rate exposure with respect to
a portion of its certificates of deposit. The first agreement calls for
the Company to receive a fixed interest rate of 7.75% and pay a variable
rate based on the one month LIBOR rate. The second agreement calls for
the Company to receive a fixed interest rate of 7.50% and pay a variable
rate based on the three month LIBOR rate. The amounts potentially
subject to credit risk are the streams of payments under the agreements
and not the notional principal amount used to express the volume of these
transactions. At June 30, 2000, the Company had recorded a receivable of
approximately $140,000 with respect to these agreements. Entering into
interest rate exchange agreements involves not only the risk of default
by the other party, but also the interest rate risk if positions are not
matched.
The notional principal amount of the interest rate exchange agreements
outstanding at June 30, 2000 and 1999 was $20,000,000 and $0,
respectively. Each agreement has a notional principal amount of
$10,000,000. The termination dates of the agreements are April 28, 2010
and December 29, 2005.
Other Derivative Financial Instruments
______________________________________
The Company has only limited involvement with other derivative financial
instruments and they are used for trading and hedging purposes. The
derivative financial instruments used by the Company are covered call and
put contracts on its equity securities portfolio and interest rate
exchange agreements. Gains and losses from entering into covered call
and put contracts have been immaterial to the results of operations of
the Company. The total value of securities under call and put contracts
at any one time is immaterial to the Company's financial position,
liquidity, or results of operations.
Legal Proceedings
_________________
The Company and its subsidiary are parties to litigation and claims
arising in the normal course of business. Management believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the Company's consolidated financial position.
Lease Obligations
_________________
The Company leases certain properties and equipment used in operations
under terms of operating leases which include renewal options. Rental
expense under these leases approximated $312,000, $373,000 and $380,000
for the years ended June 30, 2000, 1999 and 1998, respectively.
Approximate future minimum lease payments over the remaining terms of the
leases at June 30, 2000 are as follows:
2001 $ 251,000
2002 251,000
2003 188,000
2004 182,000
2005 182,000
2006 and after 646,000
_____________
$ 1,700,000
=============
18.Condensed Parent Information
____________________________
Condensed financial statements for Northeast Bancorp at June 30, 2000 and
1999 and for each of the years in the three year period ended June 30,
2000 are presented below.
Balance Sheets
______________
June 30,
_________________________________
Assets 2000 1999
________________________________________ _______________ _______________
Cash (deposited with banking subsidiary) $ 257,258 $ 80,758
Investment in banking subsidiary 33,215,377 26,051,816
Investment in common securities
of Trust subsidiary 221,851 -
Goodwill, net 509,871 611,845
Other assets 1,321,860 632,094
_______________ _______________
Total assets $ 35,526,217 $ 27,376,513
=============== ===============
Liabilities and Stockholders' Equity
____________________________________
Note payable $ - $ 687,500
Junior Subordinated Debentures
issued to subsidiary 7,394,849 -
Other liabilities 4,890 5,898
_______________ _______________
7,399,739 693,398
Stockholders' equity 28,126,478 26,683,115
_______________ _______________
Total liabilities and stockholders'
equity $ 35,526,217 $ 27,376,513
=============== ===============
Statements of Income
____________________________________
Years Ended June 30,
___________________________________
2000 1999 1998
___________ ___________ ___________
Income:
Dividends from banking subsidiary $ - $ 98,314 $ -
Other income 14,304 758 76,556
___________ ___________ ___________
Total income 14,304 99,072 76,556
Expenses:
Amortization of goodwill 101,974 101,974 101,974
Interest on note payable 25,927 65,100 89,884
Interest on Junior Subordinated
Debentures paid to subsidiary 439,487 - -
Occupancy expense - - 46,611
General and administrative expenses 65,935 95,558 97,969
___________ ___________ ___________
Total expenses 633,323 262,632 336,438
___________ ___________ ___________
Loss before income tax benefit and
Equity in undistributed net income
of subsidiaries (619,019) (163,560) (259,882)
Income tax benefit 178,538 55,692 53,967
___________ ___________ ___________
Loss before equity in undistributed
net income of subsidiaries (440,481) (107,868) (205,915)
Equity in undistributed net income
of subsidiaries 3,650,203 2,518,320 2,609,698
___________ ___________ ___________
Net income $3,209,722 $2,410,452 $2,403,783
=========== =========== ===========
Years Ended June 30,
___________________________________
Statements of Cash Flows 2000 1999 1998
______________________________________ ___________ ___________ ___________
Cash flows from operating activities:
Net income $3,209,722 $2,410,452 $2,403,783
Adjustments to reconcile net income
to net cash used by operating
activities:
Amortization 111,574 101,974 110,658
Undistributed earnings of
subsidiaries (3,650,203) (2,518,320) (2,609,698)
Increase in other assets (175,752) (218,474) (46,502)
Decrease in other liabilities (1,008) (2,039) (4,911)
___________ ___________ ___________
Net cash used by operating activities (505,667) (226,407) (146,670)
Cash flows from investing activities:
Proceeds from sale of premises and
equipment to banking subsidiary - - 367,696
Purchase of premises and equipment - - (368)
Increase in investment in banking
subsidiary (3,850,004) - -
Purchase of common securities of
Trust subsidiary (221,851) - -
___________ ___________ ___________
Net cash (used) provided by investing
activities (4,071,855) - 367,328
Cash flows from financing activities:
Principal payments on note payable (687,500) (305,555) (305,556)
Stock options exercised 66,345 88,286 190,700
Proceeds from issuance of common stock 8,736 16,257 16,669
Treasury stock purchased (878,532) - (44,988)
Treasury stock sold 6,706 - 44,988
Dividends paid to stockholders (632,968) (596,327) (597,270)
Warrants exercised - - 761,433
Stock split - payment for fractional
shares - - (1,095)
Proceeds from issuance of Junior
Subordinated Debentures 7,394,849 - -
Payments for debt issuance costs (523,614) - -
___________ ___________ ___________
Net cash provided (used) by financing
activities 4,754,022 (797,339) 64,881
___________ ___________ ___________
Net increase (decrease) in cash 176,500 (1,023,746) 285,539
Cash, beginning of year 80,758 1,104,504 818,965
___________ ___________ ___________
Cash, end of year $ 257,258 $ 80,758 $1,104,504
=========== =========== ===========
Supplemental schedule of cash flow
information:
Interest paid $ 455,814 $ 67,100 $ 91,921
19.Other Comprehensive Income
__________________________
SFAS No. 130, Reporting Comprehensive Income, requires display in
financial statements of amounts of total comprehensive income and
accumulated other comprehensive income. The components of other
comprehensive income for the years ended 2000, 1999 and 1998 are as
follows:
2000 1999 1998
____________ ____________ ____________
Unrealized gains (losses) arising
during the period, net of tax effect
of $178,583 in 2000, $197,195 in
1999, and $177,534 in 1998 $ (346,662) $ (382,733) $ 344,624
Less: reclassification adjustment for
gains, net of write-downs, included
in net income, net of tax effect of
$5,159 in 2000, $3,942 in 1999 and
$38,584 in 1998 10,016 7,653 (74,897)
____________ ____________ ____________
Other comprehensive income $ (336,646) $ (375,080) $ 269,727
============ ============ ============
20.Segment Reporting
_________________
Northeast Bancorp through its banking subsidiary, Northeast Bank and it's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western and south
central Maine. These services include lending, demand, savings and time
deposits, cash management and trust services. While the Company's senior
management team monitors the operations of the subsidiaries, the
subsidiaries are primarily organized to operate in the banking industry.
Substantially all income and services are derived from banking products
and services in Maine. Accordingly, the Company's subsidiaries are
considered by management to be aggregated in one reportable operating
segment.
21.Guaranteed Preferred Beneficial Interests in the Company's Junior
_________________________________________________________________
Subordinated Debentures
_______________________
NBN Capital Trust ("NBNCT"), a Delaware statutory trust, was created in
October of 1999. NBNCT exists for the exclusive purpose of (i) issuing
and selling Common Securities to the Company and Preferred Securities to
the public (together the "Trust Securities"), (ii) using the proceeds of
the sale of Trust Securities to acquire 9.60% Junior Subordinated
Deferrable Interest Debentures ("Junior Subordinated Debentures") issued
by the Company, and (iii) engaging only in those other activities
necessary, convenient or incidental thereto (such as registering the
transfer of the Trust Securities). Accordingly, the Junior Subordinated
Debentures will be the sole assets of the NBNCT. The preferred
securities accrue and pay distributions quarterly at an annual rate of
9.60% of the stated liquidation amount of $7.00 per preferred security.
The Company has fully and unconditionally guaranteed all of the
obligations of the NBNCT. The guaranty covers the quarterly
distributions and payments on liquidation or redemption of the trust
preferred securities, but only to the extent of funds held by NBNCT. In
the second quarter of fiscal 2000, the NBNCT sold $7,172,998 of its trust
preferred securities to the public and $221,851 of its common securities
to the Company. The trust preferred securities are mandatory redeemable
upon the maturity of the Junior Subordinated Debentures on December 31,
2029 or upon earlier redemption as provided in the Indenture. The
Company has the right to redeem the Junior Subordinated Debentures, in
whole or in part on or after December 31, 2004 at a redemption price
specified in the Indenture plus any accrued but unpaid interest to the
redemption date. The costs of the issuance of the trust preferred
securities was approximately $524,000 and is included in other assets in
the Company's consolidated statement of financial condition at June 30,
2000, as a deferred financing cost. The costs will be amortized into
interest expense over the life of the securities. The Company owns all
of the common securities of NBNCT, the only voting security, and as a
result, NBNCT is a subsidiary of the Company.
22.Fair Value of Financial Instruments
___________________________________
Fair value estimates, methods and assumptions are set forth below for the
Company's significant financial instruments.
Cash and Cash Equivalents
_________________________
The fair value of cash, due from banks, interest bearing deposits and
FHLB overnight deposits approximates their relative book values, as these
financial instruments have short maturities.
Available for Sale Securities
_____________________________
The fair value of available for sale securities is estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. Fair values are calculated based on the value of one
unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. If these considerations
had been incorporated into the fair value estimates, the aggregate fair
value amounts could have changed.
Federal Home Loan Bank Stock
____________________________
This financial instrument does not have a market nor is it practical to
estimate the fair value without incurring excessive costs.
Loans
_____
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimates of maturity are based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic conditions, lending conditions and the effects of
estimated prepayments.
Fair value for significant non-performing loans is based on estimated
cash flows and is discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and historical information.
The fair value of loans held for sale is estimated based on bid
quotations received from loan dealers.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many
of these financial instruments, management has no basis to determine
whether the fair value presented would be indicative of the value
negotiated in an actual sale.
Accrued Interest Receivable
___________________________
The fair value of this financial instrument approximates the book value
as this financial instrument has a short maturity. It is the Company's
policy to stop accruing interest on loans past due by more than ninety
days. Therefore this financial instrument has been adjusted for
estimated credit loss.
Deposits
________
The fair value of deposits with no stated maturity, such as non-interest-
bearing demand deposits, savings, NOW accounts and money market accounts,
is equal to the amount payable on demand. The fair values of
certificates of deposit are based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market. If that value was considered, the fair
value of the Company's net assets could increase.
Borrowed Funds, Note Payable and Repurchase Agreements
______________________________________________________
The fair value of the Company's borrowings with the Federal Home Loan
Bank is estimated by discounting the cash flows through maturity or the
next repricing date based on current rates available to the Company for
borrowings with similar maturities. The fair value of the note payable
approximates the carrying value, as the interest rate approximates market
rates. The fair value of repurchase agreements approximates the carrying
value, as these financial instruments have a short maturity.
Junior Subordinated Debentures
______________________________
The fair value of the Company's Junior Subordinated Debentures is
estimated based on prices published in financial newspapers.
Interest Rate Exchange Agreements
_________________________________
The fair value of interest rate exchange agreements (used for hedging
purposes) is the estimated amount that the Company would receive or pay
to terminate the agreements at the reporting date, taking into account
current interest rates and the current credit-worthiness of the
counterparties.
Commitments to Originate Loans
______________________________
The Company has not estimated the fair value of commitments to originate
loans due to their short term nature and their relative immateriality.
Limitations
___________
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial instruments include the
deferred tax asset, premises and equipment and intangible assets,
including the customer base. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in any of the estimates.
The following table presents the estimated fair value of the Company's
significant financial instruments at June 30, 2000 and 1999:
June 30, 2000 June 30, 1999
_________________________ _________________________
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
____________ ____________ ____________ ____________
Financial assets:
Cash and cash equivalents $ 12,778,000 $ 12,778,000 $ 12,094,000 $ 12,094,000
Available for sale
securities 23,159,000 23,159,000 18,054,000 18,054,000
Loans held for sale 82,000 84,000 312,000 315,000
Loans 378,326,000 356,249,000 316,062,000 308,687,000
Interest receivable 2,404,000 2,404,000 1,991,000 1,991,000
Financial liabilities:
Deposits (with no stated
maturity) 78,364,000 78,364,000 78,251,000 78,251,000
Time deposits 181,618,000 181,094,000 141,113,000 141,352,000
Borrowed funds 122,628,000 121,484,000 103,882,000 99,986,000
Note payable - - 688,000 688,000
Repurchase agreements 13,111,000 13,111,000 11,868,000 11,868,000
Junior Subordinated
Debentures 7,173,000 6,660,000 - -
Off Balance Sheet Instruments:
Interest rate exchange
agreements in a net
receivable position 140,000 296,000 - -
Item 8. b Statistical Disclosures Required by Industry Guide 3
____________________________________________________
Northeast Bancorp Consolidated
Distribution of Assets, Liabilities and Net Worth (in thousands)
Interest Rates and Interest Differential
Years Ended June 30, 2000, 1999 and 1998
Interest Average
Average Income/ Yield/
June 30, 2000 Balance Expense Rate
___________ ___________ _________
Assets:
Interest earning-assets:
Investment Securities (1) $ 21,613 $ 1,486 6.88%
Loans (2)(3) 356,490 30,227 8.48%
FHLB Stock 6,157 428 6.95%
Short-term investments (4) 4,846 265 5.47%
___________ ___________ _________
Total interest-earning assets/interest
income/average rates earned 389,106 32,406 8.33%
___________ ___________ _________
Non-interest earning assets:
Cash & due from banks 6,061
Bank premises and equipment, net 4,787
Other assets 7,586
Allowance for loan losses (3,156)
___________
Total non-interest earning assets 15,278
___________
Total assets $ 404,384
===========
Liabilities & Net Worth:
Interest-bearing liabilities:
Now $ 31,462 $ 915 2.91%
Money Market 6,446 144 2.23%
Savings 20,391 494 2.42%
Time 157,164 8,792 5.59%
___________ ___________ _________
Total interest-bearing deposits 215,463 10,345 4.80%
Repurchase agreements 13,768 570 4.14%
Borrowed funds 119,472 7,011 5.87%
Junior Subordinated Debentures 4,321 426 9.86%
___________ ___________ _________
Total interest-earning liabilities/
interest expense/average rates paid 353,024 18,352 5.20%
___________ ___________ _________
Total non-interest bearing liabilities:
Demand deposits and escrow accounts 22,109
Other liabilities 1,563
___________
Total liabilities 376,696
___________
Stockholders' equity 27,688
Total liabilities and stockholders' equity $ 404,384
===========
Net interest income $ 14,054
===========
Interest rate spread 3.13%
Net yield on interest earning assets (5) 3.61%
Interest Average
Average Income/ Yield/
June 30, 1999 Balance Expense Rate
___________ ___________ _________
Assets:
Interest earning-assets:
Investment Securities (1) $ 15,413 $ 958 6.22%
Loans (2)(3) 297,690 25,179 8.46%
FHLB Stock 5,680 364 6.41%
Short-term investments (4) 7,157 356 4.97%
___________ ___________ _________
Total interest-earning assets/interest
income/average rates earned 325,940 26,857 8.24%
___________ ___________ _________
Non-interest earning assets:
Cash & due from banks 5,099
Bank premises and equipment, net 4,839
Other assets 6,912
Allowance for loan losses (2,955)
___________
Total non-interest earning assets 13,895
___________
Total assets $ 339,835
===========
Liabilities & Net Worth:
Interest-bearing liabilities:
Now $ 31,162 $ 933 2.99%
Money Market 8,938 210 2.35%
Savings 20,068 515 2.57%
Time 125,802 7,022 5.58%
___________ ___________ _________
Total interest-bearing deposits 185,970 8,680 4.67%
Repurchase agreements 8,202 340 4.15%
Borrowed funds 100,074 5,530 5.53%
Junior Subordinated Debentures 0 0 0.00%
___________ ___________ _________
Total interest-earning liabilities/
interest expense/average rates paid 294,246 14,550 4.94%
=========== =========== =========
Total non-interest bearing liabilities:
Demand deposits and escrow accounts 17,132
Other liabilities 2,194
___________
Total liabilities 313,572
___________
Stockholders' equity 26,263
___________
Total liabilities and stockholders' equity $ 339,835
===========
Net interest income $ 12,307
===========
Interest rate spread 3.30%
Net yield on interest earning assets (5) 3.78%
Interest Average
Average Income/ Yield/
June 30, 1998 Balance Expense Rate
___________ ___________ _________
Assets:
Interest earning-assets:
Investment Securities (1) $ 21,799 $ 1,461 6.70%
Loans (2)(3) 240,859 21,989 9.13%
FHLB Stock 4,647 301 6.48%
Short-term investments (4) 9,951 532 5.35%
___________ ___________ _________
Total interest-earning assets/interest
income/average rates earned 277,256 24,283 8.76%
___________ ___________ _________
Non-interest earning assets:
Cash & due from banks 4,516
Bank premises and equipment, net 4,597
Other assets 7,061
Allowance for loan losses (2,867)
___________
Total non-interest earning assets 13,307
___________
Total assets $ 290,563
===========
Liabilities & Net Worth:
Interest-bearing liabilities:
Now $ 15,400 $ 269 1.75%
Money Market 14,002 467 3.34%
Savings 21,289 570 2.68%
Time 108,580 6,281 5.78%
___________ ___________ _________
Total interest-bearing deposits 159,271 7,587 4.76%
Repurchase agreements 4,917 206 4.19%
Borrowed funds 85,686 5,017 5.86%
Junior Subordinated Debentures 0 0 0.00%
___________ ___________ _________
Total interest-earning liabilities/
interest expense/average rates paid 249,874 12,810 5.13%
___________ ___________ _________
Total non-interest bearing liabilities:
Demand deposits and escrow accounts 15,480
Other liabilities 1,983
___________
Total liabilities 267,337
___________
Stockholders' equity 23,226
___________
Total liabilities and stockholders' equity $ 290,563
===========
Net interest income $ 11,473
===========
Interest rate spread 3.63%
Net yield on interest earning assets (5) 4.14%
(1) Principally taxable. The yield information does not give effect to
changes in fair value that are reflected as a component of stockholders'
equity.
(2) Non-accruing loans included in computation of average balance.
(3) Interest income on loans includes costs of $698 in 2000, $590 in 1999, and
$10 in 1998.
(4) Short term investments include FHLB overnight deposits and other interest-
bearing deposits.
(5) The net yield on average earning assets is net interest income divided by
average interest-earning assets.
Northeast Bancorp Consolidated
Maturities and Repricing of Loans ($ in thousands)
As of June 30, 2000
1 Year 1 to 5 5 to 10 Over 10 Total
or Less Years Years Years Loans
__________ __________ __________ __________ __________
Mortgages:
Residential $ 49,755 $ 25,332 $ 12,321 $ 106,880 $ 194,288
Commercial 19,320 36,731 4,273 1,600 61,924
Construction 7,102 304 0 0 7,406
Non-Mortgage Loans :
Commercial 13,069 23,057 1,124 4,268 41,518
Consumer and other 1,623 27,396 8,676 36,333 74,028
__________ __________ __________ __________ __________
Total Loans 90,869 112,820 26,394 149,081 379,164
========== ========== ========== ========== ==========
Type of Interest Rate:
Predetermined rate,
maturity greater
than 1 year 224,250
Floating or adjustable
rate due one year 64,046
__________
Total due after 1 year: 288,296
==========
Scheduled repayments are reported in the maturity category in which the payment
is due. Demand loans and overdrafts are reported in one year or less.
Maturities are based upon contract terms.
Northeast Bancorp Consolidated
Investment Securities Portfolio
At June 30,
__________________________________
2000 1999 1998
__________ __________ __________
Available for Sale (1) ($ in thousands)
U.S. Government and Agency Obligations $ 346 $ 598 $ 4,698
Mortgage-backed Securities 21,446 16,027 7,714
Other Bonds 193 200 204
Equity Securities 1,174 1,229 993
__________ __________ __________
Total Available for Sale (2): $ 23,159 $ 18,054 $ 13,609
========== ========== ==========
(1) Carried at estimated market value. Northeast Bancorp does not have any
securities being held to maturity.
(2) Cost of such securities ($ in thousands) was $24,335 as of June 30, 2000,
$18,720 as of June 30, 1999, and $13,706 as of June 30, 1998.
Northeast Bancorp Consolidated
Investment Maturity
($ in thousands)
After One Year After Five Years
But Within But Within
Within One Year 5 Years 10 Years
_______________ _______________ ________________
Amount Yield Amount Yield Amount Yield
________ ______ ________ ______ ________ _______
At June 30, 2000
U. S. Government and
agencies obligations $ 248 5.89% $ 98 7.23% $ 0 0.00%
Mortgage -backed securities 0 0.00% 32 6.20% 434 7.00%
Other bonds 51 7.20% 142 5.95% 0 0.00%
Equity securities 1,174 7.75% 0 0.00% 0 0.00%
________ ______ ________ ______ ________ ______
$ 1,473 7.42% $ 272 6.44% $ 434 7.00%
======== ====== ======== ====== ======== ======
At June 30, 1999
U. S. Government and
agencies obligations $ 498 4.62% $ 100 7.23% $ 0 0.00%
Mortgage -backed securities 0 0.00% 44 5.15% 572 7.04%
Other bonds 0 0.00% 200 6.28% 0 0.00%
Equity securities 1,229 6.76% 0 0.00% 0 0.00%
________ ______ ________ ______ ________ ______
$ 1,727 6.14% $ 344 6.41% $ 572 7.04%
======== ====== ======== ====== ======== ======
After 10 Years Total
_______________ _______________
Amount Yield Amount Yield
________ ______ ________ ______
At June 30, 2000
U. S. Government and
agencies obligations $ 0 0.00% $ 346 6.27%
Mortgage -backed securities 20,980 6.88% 21,446 6.88%
Other bonds 0 0.00% 193 6.28%
Equity securities 0 0.00% 1,174 7.75%
________ ______ ________ ______
$20,980 6.88% $23,159 6.91%
======== ====== ======== ======
At June 30, 1999
U. S. Government and
agencies obligations $ 0 0.00% $ 598 5.06%
Mortgage -backed securities 15,411 6.55% 16,027 6.56%
Other bonds 0 0.00% 200 6.28%
Equity securities 0 0.00% 1,229 6.76%
________ ______ ________ ______
$15,411 6.55% $18,054 6.52%
======== ====== ======== ======
The average yield on investments held for sale is based on the amortized cost
of the security.
Northeast Bancorp Consolidated
Loan Portfolio
($ in thousands)
Percent of
June 30, 2000 Amount Total Loans
____________ _____________
Loan Portfolio
Residential Mortgage $ 194,288 51.24%
Commercial real estate 61,924 16.33%
Construction 7,406 1.95%
Commercial 41,518 10.95%
Consumer & Other 74,028 19.53%
____________ _____________
Total Loans 379,164 100.00%
_____________
Less:
Allowance for loan losses 3,498
Net Deferred fees (costs) (2,660)
____________
Net Loans $ 378,326
============
Percent of
June 30, 1999 Amount Total Loans
____________ _____________
Loan Portfolio
Residential Mortgage $ 182,244 57.37%
Commercial real estate 55,438 17.45%
Construction 1,686 0.53%
Commercial 34,647 10.91%
Consumer & Other 43,643 13.74%
____________ _____________
Total Loans 317,658 100.00%
_____________
Less:
Allowance for loan losses 2,924
Net Deferred fees (costs) (1,328)
____________
Net Loans $ 316,062
============
Percent of
June 30,1998 Amount Total Loans
____________ _____________
Loan Portfolio
Residential Mortgage $ 171,903 61.10%
Commercial real estate 47,053 16.73%
Construction 2,100 0.75%
Commercial 26,967 9.58%
Consumer & Other 33,305 11.84%
____________ _____________
Total Loans 281,328 100.00%
_____________
Less:
Allowance for loan losses 2,978
Net Deferred fees (costs) (703)
____________
Net Loans $ 279,053
============
Percent of
June 30, 1997 Amount Total Loans
____________ _____________
Loan Portfolio
Residential Mortgage $ 139,633 62.64%
Commercial real estate 46,443 20.84%
Construction 2,597 1.17%
Commercial 19,421 8.71%
Consumer & Other 14,792 6.64%
____________ _____________
Total Loans 222,886 100.00%
_____________
Less:
Allowance for loan losses 2,742
Net Deferred fees (costs) 204
____________
Net Loans $ 219,940
============
Percent of
June 30, 1996 Amount Total Loans
____________ _____________
Loan Portfolio
Residential Mortgage $ 116,273 61.98%
Commercial real estate 37,270 19.87%
Construction 2,769 1.48%
Commercial 16,761 8.94%
Consumer & Other 14,491 7.73%
____________ _____________
Total Loans 187,564 100.00%
_____________
Less:
Allowance for loan losses 2,761
Net Deferred fees (costs) 354
____________
Net Loans $ 184,449
============
Northeast Bancorp Consolidated
Allowance for Loan Losses
As of June 30, 2000
($ in thousands)
Percent of
Loans in Each
Category to
June 30, 2000 Amount Total Loans
_____________ _____________
Allowance for Loan Losses (thousands)
Real Estate $ 405 51.24%
Commercial Mortgage 499 16.33%
Construction 0 1.95%
Commercial 312 10.95%
Consumer 844 19.53%
Unallocated 1,438 0.00%
_____________ _____________
Total $ 3,498 100.00%
============= =============
Percent of
Loans in Each
Category to
June 30, 1999 Amount Total Loans
_____________ _____________
Allowance for Loan Losses (thousands)
Real Estate $ 378 57.37%
Commercial Mortgage 882 17.45%
Construction 0 0.53%
Commercial 508 10.91%
Consumer 497 13.74%
Unallocated 659 0.00%
_____________ _____________
Total $ 2,924 100.00%
============= =============
Percent of
Loans in Each
Category to
June 30, 1998 Amount Total Loans
_____________ _____________
Allowance for Loan Losses (thousands)
Real Estate $ 352 61.10%
Commercial Mortgage 762 16.73%
Construction 0 0.75%
Commercial 582 9.58%
Consumer 380 11.84%
Unallocated 902 0.00%
_____________ _____________
Total $ 2,978 100.00%
============= =============
Percent of
Loans in Each
Category to
June 30, 1997 Amount Total Loans
_____________ _____________
Allowance for Loan Losses (thousands)
Real Estate $ 308 62.64%
Commercial Mortgage 821 20.84%
Construction 0 1.17%
Commercial 436 8.71%
Consumer 159 6.64%
Unallocated 1,018 0.00%
_____________ _____________
Total $ 2,742 100.00%
============= =============
Percent of
Loans in Each
Category to
June 30, 1996 Amount Total Loans
_____________ _____________
Allowance for Loan Losses (thousands)
Real Estate $ 268 61.98%
Commercial Mortgage 799 19.87%
Construction 0 1.48%
Commercial 501 8.94%
Consumer 152 7.73%
Unallocated 1,041 0.00%
_____________ _____________
Total $ 2,761 100.00%
============= =============
This table shows how the allowance for loan losses was allocated for the
periods indicated.
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the
allowance.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses based on evaluations of collectibility and prior loss
experience. The evaluation takes into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, specific
problem loans, and current and anticipated economic conditions that may affect
the borrowers' ability to pay. Management also obtains appraisals when
considered necessary.
Northeast Bancorp Consolidated
Non-performing Ratios ($ in thousands)
As of June 30,
At June 30,
________________________________________________
2000 1999 1998 1997 1996
________ ________ ________ ________ ________
Non-accrual loans:
Residential mortgage $ 191 $ 235 $ 640 $ 1,023 $ 1,043
Commercial Real Estate 650 595 317 541 895
Commercial Loans 80 0 468 54 308
Consumer and other 185 197 0 41 76
________ ________ ________ ________ ________
Total non-accrual loans 1,106 1,027 1,425 1,659 2,322
Accruing loans contractually
past due 90 days or more 72 117 823 1,222 860
________ ________ ________ ________ ________
Total non-performing loans 1,178 1,144 2,248 2,881 3,182
Acquired assets 278 194 350 563 585
________ ________ ________ ________ ________
Total non-performing assets 1,456 1,338 2,598 3,444 3,767
======== ======== ======== ======== ========
Non-performing loans to total
loans 0.31% 0.36% 0.80% 1.29% 1.70%
Non-performing assets to total
assets 0.34% 0.37% 0.81% 1.21% 1.54%
See additional information concerning non-performing and impaired loans in
footnote 3 of the consolidated financial statements as well as in the
Management's Discussion and Analysis.
Northeast Bancorp Consolidated
Summary of Loan Losses Experience ($ in thousands)
As of June 30,
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996
________ ________ ________ ________ ________
Average net loans outstanding
during the period $353,142 $294,207 $237,791 $200,919 $183,947
======== ======== ======== ======== ========
Net loans at end of period (1) $378,326 $316,062 $279,053 $219,940 $184,449
======== ======== ======== ======== ========
Allowance at beginning of period $ 2,924 $ 2,978 $ 2,742 $ 2,761 $ 2,661
Loans charged-off during the period:
Residential mortgage 81 232 196 319 151
Commercial real estate 46 26 432 128 236
Commercial 10 272 42 154 125
Consumer and other 627 396 115 171 108
________ ________ ________ ________ ________
Total loans charged-off 764 926 785 772 620
======== ======== ======== ======== ========
Recoveries on loans previously
charged-off:
Residential Mortgage 14 12 87 43 10
Commercial Real Estate 64 109 83 49 34
Commercial 108 20 87 13 12
Consumer and other 80 121 58 34 25
________ ________ ________ ________ ________
Total Recoveries 266 262 315 139 81
======== ======== ======== ======== ========
Net loans charged off during
the period 498 664 470 633 539
Provision for loan losses 1,072 610 706 614 639
________ ________ ________ ________ ________
Allowance at end of period $ 3,498 $ 2,924 $ 2,978 $ 2,742 $ 2,761
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding 0.14% 0.23% 0.20% 0.32% 0.29%
Allowance as a percentage of
total portfolio loans 0.92% 0.93% 1.07% 1.25% 1.50%
Allowance as a percentage of non-
performing and non-accrual loans 296.94% 255.59% 132.47% 95.18% 86.77%
(1) Excludes loans held for sale.
The allowance for loan losses as a percentage of net loans decreased at the end
of each fiscal year from 1996 to 2000. The reduction in each fiscal year was
due to the purchase of residential mortgages as well as portfolio loan growth.
In the fiscal years 1996 to 1999, the decrease was supported by the Company's
lower delinquency levels and decreased non-performing and substandard loans.
In the fiscal year 2000, although the delinquency level and non-performing and
substandard loans increased slightly, management does not consider this to be
material or represents a future trend.
This table summarizes loans outstanding at the end of each period indicated,
net of unearned income, at the end of each period indicated and the average
amount of loans outstanding, changes in the allowance for loan losses and other
selected statistics during each period indicated.
Northeast Bancorp Consolidated
Average Deposits ($ in thousands) and Rates
As of June 30,
% of
June 30, 2000 Amount Rate Deposits
__________ __________ __________
Average Deposits:
Non-interest bearing demand deposits $ 22,109 0.00% 9.31%
Regular savings 20,391 2.42% 8.58%
NOW and Money Market 37,908 2.79% 15.96%
Time deposits 157,164 5.59% 66.15%
__________ __________ __________
Total Average Deposits $ 237,572 4.35% 100.00%
========== ========== ==========
% of
June 30, 1999 Amount Rate Deposits
__________ __________ __________
Average Deposits:
Non-interest bearing demand deposits $ 17,132 0.00% 8.44%
Regular savings 20,068 2.57% 9.88%
NOW and Money Market 40,100 2.85% 19.74%
Time deposits 125,802 5.58% 61.94%
__________ __________ __________
Total Average Deposits $ 203,102 4.27% 100.00%
========== ========== ==========
% of
June 30, 1998 Amount Rate Deposits
__________ __________ __________
Average Deposits:
Non-interest bearing demand deposits $ 15,481 0.00% 8.86%
Regular savings 21,289 2.68% 12.18%
NOW and Money Market 29,401 2.50% 16.82%
Time deposits 108,580 5.78% 62.14%
__________ __________ __________
Total Average Deposits $ 174,751 4.34% 100.00%
========== ========== ==========
This table shows the average daily amount of deposits and average rates paid on
such deposits for the periods indicated.
Northeast Bancorp Consolidated
Maturities of Time Deposits $100,000 & Over
As of June 30, 2000
($ in thousands)
Balance
____________
3 months or less $ 810
Over 3 through 6 months 1,242
Over 6 through 12 months 4,671
Over 12 months 21,309
____________
Total Time Deposits $100,000 & Over $ 28,032
============
Northeast Bancorp
Repurchase Agreements ($ in thousands)
For Years ended June 30,
_______________________________________________________
2000 1999 1998
_________________ _________________ _________________
Weighted Weighted Weighted
Balance Rate Balance Rate Balance Rate
________ ________ ________ ________ ________ ________
Balance at year end $ 13,110 4.18% $ 11,868 4.07% $ 5,206 4.20%
Average outstanding
during year 13,768 4.14% 8,202 4.15% 4,917 4.19%
Maximum Outstanding
at any month end 18,675 11,868 5,737
These borrowings, which were scheduled to mature within 180 days, were
collateralized by GNMA and FHLMC securities with the market value of
$17,006,000 and amortized cost of $17,877,000 at June 30, 2000, a market value
of $14,938,000 and amortized cost of $15,525,000 at June 30, 1999, and a market
value of $8,547,000 and amortized cost of $8,558,000 at June 30, 1998.
Securities sold under these agreements were under the control of the Company
during 2000, 1999 and 1998.
Northeast Bancorp Consolidated
Maturities and Repricing of Earning Assets & Interest-bearing Liabilities
As of June 30, 2000
($ in thousands)
Term to Repricing
_________________________________________________
Less Than 1-5 Over 5 % of
1 Year Years Years Total Total
_________ _________ _________ _________ _________
Interest Earning Assets:
Investment securities $ 1,473 $ 272 $ 21,414 $ 23,159 5.60%
FHLB stock 0 0 6,644 6,644 1.61%
Short -term investments (1) 4,864 0 0 4,864 1.17%
Mortgage Loans:
Residential mortgages:
Fixed rate loans 29 2,395 119,065 121,489 29.36%
Variable loans 49,726 22,937 136 72,799 17.59%
Commercial real estate 19,320 36,731 5,873 61,924 14.96%
Construction 7,102 304 0 7,406 1.79%
Other Loans:
Commercial 13,069 23,057 5,392 41,518 10.03%
Consumer and other 1,623 27,396 45,009 74,028 17.89%
_________ _________ _________ _________ _________
Total loans 90,869 112,820 175,475 379,164 91.62%
_________ _________ _________ _________ _________
Total interest-earning assets $ 97,206 $113,092 $203,533 $413,831 100.00%
========= ========= ========= ========= =========
Interest-bearing liabilities:
Customer deposits:
NOW Accounts 29,250 0 0 29,250 7.68%
Money market accounts 6,339 0 0 6,339 1.66%
Regular savings 21,003 0 0 21,003 5.51%
Certificates of deposit 86,715 74,835 20,068 181,618 47.65%
_________ _________ _________ _________ _________
Total Customer deposits 143,307 74,835 20,068 238,210 62.50%
_________ _________ _________ _________ _________
Borrowings:
Repurchase Agreements 13,110 0 0 13,110 3.44%
Other Borrowings 91,580 23,048 8,000 122,628 32.18%
Junior Subordinated Debenture 0 0 7,173 7,173 1.88%
_________ _________ _________ _________ _________
Total borrowings 104,690 23,048 15,173 142,911 37.50%
_________ _________ _________ _________ _________
Total interest-bearing
liabilities $247,997 $ 97,883 $ 35,241 $381,121 100.00%
_________ _________ _________ _________ _________
Interest sensitivity gap (150,791) 15,209 168,292 32,710
========= ========= ========= =========
Cumulative gap (150,791) (135,582) 32,710 32,710
========= ========= ========= =========
Cumulative gap ratio 39.20% 60.80% 108.58% 108.58%
========= ========= ========= =========
Cumulative gap as a
percentage of total assets -34.76% -31.25% 7.54% 7.54%
========= ========= ========= =========
(1) Includes FHLB overnight deposits, interest earning deposits and loans
held for sale.
This table summarizes the anticipated maturities and repricing of the Company's
earning assets and interest-bearing liabilities at June 30, 2000.
The Company's internal asset/liability analysis considers regular savings, NOW
and money market accounts core deposits. Due to this consideration, the
Company's internal asset/liability model has these core deposits designated in
a five year or greater maturity category and not one year or less as the above
schedule shows. Because of this difference, the Company does not consider its
position to be as negative as presented in the schedule above.
Northeast Bancorp Consolidated
Quarterly Data (Unaudited)
As of June 30, 2000
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1999 1999 2000 2000
____________ ____________ ____________ ____________
Interest Income
Interest on loans $ 7,010,975 $ 7,444,148 $ 7,671,932 $ 8,100,003
Interest & dividends on
investments & available
for sale securities 457,795 510,021 597,469 613,640
____________ ____________ ____________ ____________
Total Interest and Dividend
Income 7,468,770 7,954,169 8,269,401 8,713,643
____________ ____________ ____________ ____________
Interest Expense
Interest on Deposits 2,335,723 2,550,342 2,639,007 2,820,511
Interest on Repurchase
Agreements 126,207 168,791 136,368 138,198
Interest on Borrowings 1,516,348 1,658,679 1,820,771 2,014,916
Interest on Trust
Preferred Securities 0 73,932 176,336 176,323
____________ ____________ ____________ ____________
Total Interest Expens 3,978,278 4,451,744 4,772,482 5,149,948
____________ ____________ ____________ ____________
Net Interest Income 3,490,492 3,502,425 3,496,919 3,563,695
Provision for Loan Losses 295,229 195,885 195,147 385,688
____________ ____________ ____________ ____________
Net Interest Income after
Provision for Loan Losses 3,195,263 3,306,540 3,301,772 3,178,007
Securities Transactions 5,165 20,697 34,620 23,541
Other Operating Income 622,159 593,011 611,799 623,952
Other Operating Expense 2,587,545 2,617,708 2,591,467 2,746,362
____________ ____________ ____________ ____________
Income Before Income Taxes 1,235,042 1,302,540 1,356,724 1,079,138
Income Tax Expense 433,320 465,796 479,459 385,146
____________ ____________ ____________ ____________
Net Income $ 801,722 $ 836,744 $ 877,265 $ 693,992
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.29 $ 0.30 $ 0.32 $ 0.26
Diluted $ 0.29 $ 0.30 $ 0.32 $ 0.26
Northeast Bancorp Consolidated
Quarterly Data (Unaudited)
As of June 30, 1999
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1998 1998 1999 1999
____________ ____________ ____________ ____________
Interest Income
Interest on loans $ 6,309,260 $ 6,179,727 $ 6,140,300 $ 6,549,300
Interest & dividends on
investments & available
for sale securities 405,896 347,989 468,978 455,343
____________ ____________ ____________ ____________
Total Interest and Dividend
Income 6,715,156 6,527,716 6,609,278 7,004,643
____________ ____________ ____________ ____________
Interest Expense
Interest on Deposits 2,129,744 2,157,908 2,143,909 2,248,736
Interest on Repurchase
Agreements 52,744 86,531 95,483 104,798
Interest on Borrowings 1,437,078 1,379,940 1,340,474 1,372,897
____________ ____________ ____________ ____________
Total Interest Expense 3,619,566 3,624,379 3,579,866 3,726,431
____________ ____________ ____________ ____________
Net Interest Income 3,095,590 2,903,337 3,029,412 3,278,212
Provision for Loan Losses 204,931 164,491 120,007 120,588
____________ ____________ ____________ ____________
Net Interest Income after
Provision for Loan Losses 2,890,659 2,738,846 2,909,405 3,157,624
Securities Transactions 16,403 52,819 11,035 14,608
Other Operating Income 490,118 788,651 722,173 620,545
Other Operating Expense 2,402,657 2,485,079 2,488,839 3,193,268
____________ ____________ ____________ ____________
Income Before Income Taxes 994,523 1,095,237 1,153,774 599,509
Income Tax Expense 358,486 394,669 410,268 269,168
____________ ____________ ____________ ____________
Net Income $ 636,037 $ 700,568 $ 743,506 $ 330,341
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.24 $ 0.26 $ 0.27 $ 0.12
Diluted $ 0.23 $ 0.25 $ 0.27 $ 0.12
The decrease in net income and the increase in other operating expense for the
quarter ending June 30, 2000 is primarily due to the writedown of equity
securities, the increase in professional fees and the increase in the
provision for loan losses.
The decrease in net income and the increase in other operating expense for the
quarter ending June 30, 1999 is primarily due to the writedown of equity
securities and the write-off of goodwill, receivables and fixed assets due to
the Company's decision to dissolve 1st New England Benefits. Refer to
Management's Discussion and Analysis for further discussion.
Item 9. Changes in and Disagreements with Accountants on Accounting and
_______________________________________________________________
Financial Disclosure.
_____________________
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
___________________________________________________
Information relating to the name of each nominee or
director of the Company, that person's age, positions and
offices with the Company, business and principal
occupations, directorships in other public experience
companies, and service on the Company's board of directors
set forth under the caption "Election of Directors" in the
definitive 2000 proxy statement of the Company to be
furnished to shareholders in connection with the Company's
Annual Meeting to be held on November 14, 2000 (the "2000
Proxy Statement"), and information set forth under the
subcaption "Section 16(a) Beneficial Ownership
Requirements" relating to Section 16 matters, is
incorporated herein by reference. Information required by
this Item 10 regarding the executive officers of the
Company is set forth in Part I, Item 4A of this Form 10-K.
Item 11. Executive Compensation
______________________
Information with respect to current renumeration of
directors and executive officers under the headings of
"Election of Directors - Compensation of Directors" and
"Compensation of Executive Officers" in the 2000 Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________
Information regarding the beneficial ownership of equity
securities of the Company by all directors and named
executive officers, beneficial holders of 5% or more of
the outstanding Common Stock, and of all executive
officers and directors as a group set forth under the
heading "Security Ownership of Management and Certain
Beneficial Owners" in the 2000 Proxy Statement is
Incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
______________________________________________
Information regarding transactions and relationships
between the Company and its directors and executive
officers under the heading "Certain Relationships and
Related Transactions" in the 2000 Proxy is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
________________________________________________________________
(a) List of Financial Statements Filed as Part of This Report
_________________________________________________________
The following financial statements are submitted herewith
in response to Part II Item 8:
Consolidated Statements of Financial Condition as of June
30, 2000 and 1999
Consolidated Statements of Income for the years ended June
30, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998
(b) Reports on Form 8-K
___________________
Not applicable.
(c) Exhibits
________
The exhibits listed below are filed herewith or are
incorporated herein by reference to other filings.
2.1 Agreement for the Purchase and Sale of Assets and
Assumption of Liabilities dated as of May 4, 1994
between Bethel Savings Bank and Key Bank of Maine,
incorporated by reference to Exhibit 2.1 to Northeast
Bancorp's Current Report on Form 8-K dated May 4, 1994
2.2 Agreement for the Purchase and Sale of Assets and
Assumption of Liabilities dated as of May 4, 1994
between Brunswick Federal Savings Bank and Key Bank of
Maine, incorporated by reference to Exhibit 2.2 to
Northeast Bancorp's Current Report on Form 8-K dated May
4, 1994
2.3 Agreement and Plan of Merger dated as of May 9, 1997 by
and among Northeast Bancorp, Northeast Bank, FSB and
Cushnoc Bank and Trust Company, incorporated by reference
to Exhibit 2 to Northeast Bancorp's Registration
Statement on Form S-4 (No. 333-31797) filed with the
Securities and Exchange Commission
3.1 Conformed Articles of Incorporation of Northeast Bancorp,
incorporated by reference to Exhibit 3.1 to Northeast
Bancorp's Registration Statement on Form S-4 (No.333-
31797) filed with the Securities and Exchange Commission
3.2 Bylaws of Northeast Bancorp, incorporated by reference to
Exhibit 3.2 to amendment No.1 to Northeast Bancorp's
Registration Statement on Form S-4(No.333-31797) filed
with the Securities and Exchange Commission
10.1* 1987 Stock Option Plan of Northeast Bancorp (formerly
known as Bethel Bancorp), incorporated by reference to
Bethel Bancorp's Registration Statement on Form S-1 (No.
33-12815), filed with the Securities and Exchange Commission.
10.2* 1989 Stock Option Plan of Northeast Bancorp (formerly
known as Bethel Bancorp) is incorporated by reference to
Exhibit 10.6 to Bethel Bancorp's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994
10.3* 1992 Stock Option Plan of Northeast Bancorp (formerly
known as Bethel Bancorp), incorporated by reference to
Exhibit 10.7 to Bethel Bancorp's Annual Report on Form
10-K for the year ended June 30, 1992
10.4* 1999 Stock Option Plan of Northeast Bancorp
incorporated by reference to Exhibit 10 to Northeast
Bancorp's Quarterly Report on Form 10-Q for quarter ended
December 31, 1999
11 Statement regarding computation of per share earnings is
submitted herewith as Exhibit 11
21 A list of subsidiaries of Northeast Bancorp is filed
herewith as Exhibit 21
23 The Consent of Baker Newman & Noyes, Limited Liability
Company, is submitted herewith as Exhibit 23
27 A Financial Data Schedule is submitted herewith as Exhibit 27
* Management or compensation plan or arrangement required to
be filed as an Exhibit pursuant to Item 14(c) of Form 10-K
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 BANCORP
Date: September 22, 2000 By: /s/ James D. Delamater
_____________________________
James D. Delamater, President
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 and on the dates indicated.
Name Title Date
_________________________ _________________________ ___________________
/s/ John B. Bouchard Director September 22, 2000
- -------------------------
John B. Bouchard
/s/ A. William Cannan Director, September 22, 2000
- ------------------------- Executive Vice President
A. William Cannan
/s/ James D. Delamater Director, September 22, 2000
- ------------------------- President and Chief
James D. Delamater Executive Officer
(Principal Executive Officer)
/s/ Ronald J. Goguen Director September 22, 2000
- -------------------------
Ronald J. Goguen
/s/ Judith W. Hayes Director September 22, 2000
- ------------------------- Vice President
Judith W. Hayes
/s/ Philip C. Jackson Director September 22, 2000
- -------------------------
Philip C. Jackson
/s/ Ronald C. Kendall Director September 22, 2000
- -------------------------
Ronald C. Kendall
/s/ John Rosmarin Director September 22, 2000
- -------------------------
John Rosmarin
/s/ John Schiavi Director September 22, 2000
- -------------------------
John Schiavi
/s/ John W. Trinward, DMD Chairman of the Board September 22, 2000
- -------------------------
John W. Trinward, DMD
/s/ Stephen W. Wight Director September 22, 2000
- -------------------------
Stephen W. Wight
/s/ Dennis A. Wilson Director September 22, 2000
- -------------------------
Dennis A. Wilson
/s/ Richard E. Wyman, Jr. Chief Financial Officer September 22, 2000
- ------------------------- (Principal Financial and
Richard E. Wyman, Jr. Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
2.1 Agreement for the Purchase and Sale of Assets and Assumption
of Liabilities dated as of May 4, 1994 between Bethel Savings
Bank and Key Bank of Maine, incorporated by reference to Exhibit
2.1 to Bethel Bancorp's Current Report on Form 8-K dated May 4,
1994
2.2 Agreement for the Purchase and Sale of Assets and
Assumption of Liabilities dated as of May 4, 1994
between Brunswick Federal Savings Bank and Key Bank of
Maine, incorporated by reference to Exhibit 2.2 to
Bethel Bancorp's Current Report on Form 8-K dated May
4, 1994
2.3 Agreement and Plan of Merger dated as of May 9, 1997 by
and among Northeast Bancorp, Northeast Bank, FSB and
Cushnoc and Trust Company, incorporated by reference to
Exhibit 2 to Northeast Bancorp's Registration Statement
on Form S-4 (No. 333-31797) filed with the Securities and
Exchange Commission
3.1 Conformed Articles of Incorporation of Northeast
Bancorp, incorporated by reference to Exhibit 3.1 to
Northeast Bancorp's Registration Statement on Form S-4
(333-31797) filed with the Securities and Exchange
Commission
3.2 Bylaws of Northeast Bancorp, incorporated by reference
to Exhibit 3.2 to amendment No.1 to Northeast Bancorp's
Registration Statement on Form S-4(No.333-31797) filed
with the Securities and Exchange Commission
10.1* 1987 Stock Option Plan of Northeast Bancorp (formerly
known as Bethel Bancorp), incorporated by reference to
Bethel Bancorp's Registration Statement on Form S-1
(No. 33-12815), filed with the Securities and Exchange
Commission.
10.2* 1989 Stock Option Plan of Northeast Bancorp (formerly
known as Bethel Bancorp) is incorporated by reference
to Exhibit 10.6 to Bethel Bancorp's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994
10.3* 1992 Stock Option Plan of Northeast Bancorp (formerly
known as Bethel Bancorp), incorporated by reference to
Exhibit 10.7 to Bethel Bancorp's Annual Report on Form
10-K for the year ended June 30, 1992
10.4* 1999 Stock Option Plan of Northeast Bancorp
incorporated by reference to Exhibit 10 to Northeast
Bancorp's Quarterly Report on Form 10-Q for quarter
ended December 31, 1999
11 Statement regarding computation of per share earnings
is submitted herewith as Exhibit 11
21 A list of subsidiaries of Northeast Bancorp is filed
herewith as Exhibit 21
23.1 The Consent of Baker Newman & Noyes, Limited Liability
Company, is submitted herewith as Exhibit 23
27 A Financial Data Schedule is submitted herewith as Exhibit 27
* Management or compensation or plan arrangement required
to be filed as an Exhibit pursuant to Item 14 (c) of Form 10-K