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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, 1998
[ ] 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
2
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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of September 14, 1998, was $23,072,595 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 2,614,285 shares of the registrant's common stock issued and outstanding
as of September 14, 1998.
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:
Form 10-K Part into Which the Document is
Document Incorporated
-------- -----------------------------------------
Proxy Statement for the III
1998 Annual Meeting of
Shareholders
PART I
Item 1. Business
________
General
- -------
Northeast Bancorp, a Maine corporation chartered in April 1987, is a unitary
savings and loan holding company whose primary subsidiary and principal asset
is Northeast Bank, F.S.B. (the "Bank"). Prior to 1996, the Company operated
under the name Bethel Bancorp. The Company, through its ownership of the Bank,
is engaged principally in the business of originating and purchasing
residential and commercial real estate loans in the State of Maine and its
primary source of earnings is derived from the income generated by the Bank.
Although historically the Bank has been primarily a residential real estate
lender, it also generates other loans and provides other services and products
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traditionally furnished to customers by full service banks. The overall
strategy of the Company is to increase the core earnings of the Bank by
developing strong interest margins, non-interest fee income, and increasing
volume by expanding its market area. As of June 30, 1998, the Company, on a
consolidated basis, had total assets of approximately $323 million, total
deposits of approximately $184 million, and stockholders' equity of
approximately $25 million. Unless the context otherwise requires, references
herein to the Company include the Company and the Bank 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. In October 1997, the Company completed its merger of Cushnoc Bank &
Trust, a commercial bank located in Augusta, Maine ("Cushnoc"), with and into
the Bank. As a result of the merger, the Bank added two branches which have
expanded its market area to include Maine's capital city and surrounding
communities, an area that management believes offers significant growth
opportunities. With the addition of the two Augusta area branches, the Bank
now has a total of eleven banking branches.
From its eleven retail banking branches located throughout western, central,
and the mid-coastal regions of the State of Maine, and through the Bank's
subsidiaries and other affiliations, the Bank offers its customers access to a
broad range of real estate, commercial, and consumer financial products,
including, but not limited to loans, deposit and investment services, trust
services, credit cards, ATM access, debit cards, electronic transfer services,
leasing, and other services. 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. The Bank has branch locations in Auburn,
Augusta, Bethel, Brunswick, Buckfield, Harrison, Lisbon Falls, Richmond, and
South Paris, Maine.
In connection with its conversion into a federal savings bank in 1984, the
Bank retained its then-authorized powers as a Maine-chartered mutual savings
bank. Under applicable regulations, except as otherwise determined by the
Office of Thrift Supervision ("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. Accordingly, the Bank has had broad powers to
engage in non-residential lending activities. In addition, the unitary savings
and loan holding company charter is widely recognized for the broad range of
powers that is provided thereunder.
The Bank's corporate philosophy is to offer a wide array of financial
products and services with an emphasis on a high level of personalized service,
thereby enhancing its ability to generate significant income diversity. In the
past, the Bank has been primarily a residential mortgage lender. As a result,
the Bank's business has historically consisted of attracting deposits from the
general public through its retail banking offices and applying those funds
primarily to the origination, retention, servicing, investing in and selling
first mortgage loans on single and multi-family residential real estate.
During the past few years, the Bank has placed additional emphasis on consumer
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lending and small business, home equity, and commercial loans. The Bank also
lends funds to retail banking customers by means of home equity and installment
loans, and originates loans secured by commercial property and multi-family
dwellings. The Bank also has developed the ability to generate indirect dealer
consumer loans used for the purchase of mobile homes and automobiles.
Management's community banking strategy emphasizes the development of full
banking relationships with the Bank's customers by providing consistent, high
quality service. With the goal of providing a full range of banking services
to its customers and in an effort to develop strong 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, 1998,
the Bank's loan portfolio consisted of 61% residential real estate mortgages,
17% commercial real estate mortgages, 10% commercial loans, and 12% consumer
loans. At June 30, 1998, the Bank's lending limit was approximately $3.77
million. To the extent that customers 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.
Consistent with its goal of providing a full range of banking services, the
Bank also offers to its customers financial planning, trust, and employee
benefit services, and, through its subsidiary, Northeast Financial Services
Corporation, it offers investment services and access to any and all lines of
insurance products. Northeast Financial Services Corporation, which is located
at the Company's headquarters in Auburn, Maine, offers the Bank's customers
access to investment and annuity products. In order to make these services
available, Northeast Financial Services Corporation has affiliated with
Commonwealth Equity Services, Inc., a fully licensed New York securities firm,
which licenses the brokers who sell such products and services.
Trust services and products are provided to Bank customers through Northeast
Trust, a division of the Bank. First New England Benefits, which is a part of
the Bank's trust division, designs and administers qualified retirement plans,
such as profit sharing, pension, and 401(k) plans. Northeast Trust, working
with its First New England Benefits division, has made a significant investment
in the development of a "turn key" employee benefit product which is designed
to provide a high level of service and education to its participants at a
competitive price. In view of the nationwide popularity of employment
retirement programs, management anticipates growth in the revenues generated
from this product.
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 27% 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.
Recent Developments
5
- -------------------
On October 24, 1997, in accordance with the terms of an Agreement and Plan
of Merger, dated as of May 9, 1997 (the "Merger Agreement"), by and among the
Company, the Bank, and Cushnoc, the Company consummated its acquisition of
Cushnoc and merged it with and into the Bank. Pursuant to the merger,
stockholders of Cushnoc received 2.089 shares of the Company's common stock
("Common Stock") in exchange for each share of Cushnoc common stock
held by them. In lieu of the issuance of fractional common stock, cash was
paid for each such fraction. As a result of the merger, 187,940 shares of
Common Stock were issued to former Cushnoc stockholders. The merger was
accounted for under the pooling-of-interests method of accounting.
On December 15, 1997, the Company paid a 50% stock dividend on all
outstanding shares of Common Stock held of record as of November 26, 1997. As
a result of the stock dividend, the number of shares of outstanding Common
Stock increased from 1,481,734 shares to 2,222,541 shares. In addition, the
conversion rate at which Series A and Series B Preferred Stock may be converted
into Common Stock and all outstanding options and warrants pursuant to which
Common Stock could be purchased upon their exercise, also were automatically
adjusted in accordance with their terms to eliminate any dilutive effects of
the stock dividend.
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 and Lisbon Falls, Maine. The Bank's market area is characterized by a
diversified economy and a strong emphasis on the tourist industry.
The banking business in the Bank's market areas has become increasingly
competitive over the past several years. The Bank encounters strong
competition both in making loans and in attracting deposits. In one or more
aspect of its business, the Bank competes with other savings banks, commercial
banks, credit unions, finance companies, brokerage and investment banking
firms, asset-based nonbank lenders, and governmental organizations that offer
subsidized financing at lower rates than those offered by the Bank. Many of
the Banks' competitors are larger in size and possess greater resources
(financial and other) and have higher lending levels.
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. Additionally, the Bank believes that the local character of its business
and its "community bank" management philosophy will enhance its ability to
compete successfully in its market areas. Further, the Bank 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. Management believes that the availability of such a wide range of
financial services through a community bank oriented financial institution
which knows and caters to its clients will prove to be an attractive
alternative to consumers in its market area.
Regional Economic Environment
____________________________
6
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.
Subsidiaries
____________
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, the Company's only subsidiary other than the
Bank, continues to exist as a separate legal entity, but is now inactive.
The Bank itself has one wholly-owned subsidiary, Northeast Financial
Services Corporation, which was organized in 1982. Through Northeast Financial
Services Corporation, the Bank has participated in certain real estate
development projects. Any proposed development project is examined for its
profit potential and its ability to enhance the communities served by the Bank.
There are no definitive plans for additional real estate development projects
at the present time. At June 30, 1998, investment in and loans to its
subsidiary constituted 0.14% of the Company's total assets. This service
corporation 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. The service corporation receives
rental fee income, from Commonwealth, derived from the sales activity of local
in-house security sales people. The service corporation has not invested in any
assets in its business relationship with Commonwealth.
In 1994, Northeast Financial Services Corporation invested $375,000 of
capital and became the majority owner of First New England Benefits, Inc., a
New Hampshire corporation which specialized in the design and administration of
qualified retirement plans (such as profit sharing, pension, and 401(k) plans).
In fiscal 1997, Northeast Financial Services purchased the remaining 37.5% of
outstanding shares of First New England Benefits and merged it with and into
the Bank. It currently operates as part of the Bank's trust division.
Northeast Trust, working with its New England Benefits division, has made a
significant investment in the development of a "turn key" employee benefit
product which it offers to its business clients.
Employees
_________
As of June 30, 1998, the Company and the Bank together employed 126 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
_______
The banking industry is extensively regulated under both federal and state
law, and is undergoing significant change. These laws and regulations are
7
intended primarily to protect depositors and the federal deposit insurance
funds, and not for the protection of shareholders. The following discussion
summarizes certain aspects of the banking laws and regulations that affect the
Company or the Bank. Proposals to change the laws and regulations governing
the banking industry are frequently raised in Congress, in state legislatures,
and before various banking agencies. Although such proposals are actively
being considered and discussed by such legislative bodies, the likelihood and
timing of any changes, and the impact that such changes might have on the
Company or the Bank, are impossible to predict with any certainty. A change in
the applicable laws or regulations, or in the way such laws or regulations
are interpreted by regulatory agencies or the courts, may have a material
impact on the business or prospects of the Company and the Bank.
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
The Company is an unitary savings and loan holding company, subject to
regulation, examination, supervision, and reporting requirements of the OTS
and the State of Maine Department of Banking (the "Department"). The Bank is a
federally chartered savings and loan association under the Home Owners Loan
Act, as amended ("HOLA"), and is a member of the FHLB system, subject to
examination and supervision of the FDIC, and subject to the regulations of the
Federal Reserve Board governing reserve requirements. As a Maine financial
institution, the Company is registered with the Maine Superintendent of
Banking (the "Superintendent").
Recent Developments in Savings Institution Regulation
_____________________________________________________
On May 13, 1998, the House of Representatives passed the Financial Services
Act of 1997, H.R. 10, originally introduced in early 1997 by Representative Jim
Leach, Chairman of the Banking Committee of the United States House of
Representatives. The Act as approved by the House on May 13, 1998, will be
considered by the United States Senate. Unlike prior versions of H.R. 10, the
Act that was passed does not eliminate the thrift charter and the unitary
thrift holding company. Instead, the Act provides a "grandfather" provision
under which companies which are unitary thrift holding companies as of March
31, 1998 (or have an application to establish a federal savings association
before such date) may continue to engage in all activities which were permitted
prior to the Act. To be eligible for the "grandfather" provision, the Act
requires that the Bank comply with any lending restrictions which were imposed
on it as a savings and loan association, and that the Bank continue to meet the
qualified thrift lending test. See "--- Savings Institution Regulation ---
Qualified Thrift Lender Requirement." The Act also provides for the creation
of financial holding companies, which under certain circumstances may engage in
a broad variety of financial services activities not permitted for banking
holding companies under the current law. The Act provides for broader
insurance and securities powers for financial institutions, subject to the
implementation of regulations. The Act also instructs the Secretary of the
Treasury to formulate plans for consolidating the OTS with the Office of the
Comptroller of the Currency within two years after enactment.
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act which included, among other provisions, the
Deposit Insurance Funds Act of 1996 (the "DIFA"). The principal purpose of the
DIFA was to recapitalize the Savings Associate Insurance Fund (the "SAIF") so
8
that over time its deposit insurance assessments could be reduced to parity
with those of the Bank Insurance Fund (the "BIF"), and to provide for the
eventual merger of the SAIF and the BIF and the adoption of a single standard
federal charter. Specifically, the DIFA requires, in pertinent part: (i) a
one-time special assessment on all financial institutions holding SAIF deposits
on March 31, 1995, calculated at 65.7 basis points, to recapitalize the SAIF;
(ii) full pro rata sharing by BIF and SAIF members of the debt service
obligations of the Financing Corp. ("FICO") beginning no later than January 1,
2000, and non-pro rata sharing (with adjustable, semi-annual premiums of
approximately 6.44 basis points for SAIF members and 1.29 basis points for BIF
members) until that date; and (iii) a merger of the BIF and the SAIF into a new
Deposit Insurance Fund (the "DIF") on January 1, 1999, if bank and savings
association charters have been combined by that date. Commencing on January 1,
2000 and continuing through 2017, banks will be assessed a flat fee of 2.43
basis points on deposits.
The legislation mandates a Treasury Department study to develop a common
depository institution charter. It also contains environmental liability
provisions indicating that lenders who do not participate in the management of
environmentally contaminated property or who do not cause the contamination are
not liable for environmental clean-up costs. In addition, the legislation
contains over 40 regulatory burden relief provisions in various areas,
including truth in lending and other regulatory reform measures designed to
reduce the burden and costs imposed on financial institutions to comply with
consumer protection provisions.
The Small Business Job Protection Act of 1996 contained provisions requiring
the thrift industry to recapture tax deductions taken pursuant to the reserve
method for accounting for bad debts of savings institutions. Based upon the 14
provisions, bad debt reserves taken prior to January 1, 1988 would not be
recaptured, and bad debt reserves taken after January 1, 1988 would be
recaptured over a six-year period beginning with the 1996 tax year.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") allows bank holding companies to acquire existing
banks across state lines, regardless of state statutes. Further, under the
Interstate Banking Act, effective June 1, 1997, a bank holding company may
consolidate interstate bank subsidiaries into branches, and a bank may merge
with an unaffiliated bank across state lines to the extent that the applicable
states have not "opted out" of interstate branching prior to such effective
date. States were permitted to elect to allow interstate mergers prior to June
1, 1997. The Interstate Banking Act also permits de novo branching to the
extent that a particular state "opts into" the de novo branching provisions.
The Interstate Banking Act generally prohibits an interstate acquisition (other
than an initial entry into a state by a bank holding company), which would
result in either the control of more than (i) 10 percent of the total amount of
insured deposits in the United States, or (ii) 30 percent of the total insured
deposits in the home state of the target bank unless such 30 percent limitation
is waived by the home state on a basis which does not discriminate against out
of state institutions.
Federal Savings and Loan Holding Company Regulation
___________________________________________________
General.
________
As the owner of all of the outstanding capital stock of the Bank, the
9
Company is a savings and loan holding company subject to regulation by the OTS
under HOLA. As a unitary savings and loan holding company owning only one
savings institution, the Company generally is allowed to engage and invest in a
broad range of business activities not permitted to commercial bank holding
companies or savings and loan holding companies owning multiple savings
institutions (a "multiple savings and loan holding company"); provided, that,
the Bank continues to continue to qualify as a "qualified thrift lender".
See "---Savings Institution Regulation---Qualified Thrift Lender Requirements."
In the event of any acquisition by the Company of another savings association
subsidiary, except for a supervisory acquisition, the Company would become a
multiple savings and loan holding company and would be subject to limitations
on the types of business activities in which it could engage.
The HOLA prohibits a savings and loan holding company such as the Company,
directly or indirectly, or through one or more subsidiaries, from (i) acquiring
control of, or acquiring by merger with or purchase of the assets of, another
savings institution or a savings and loan holding company without the prior
written approval from the OTS; (ii) acquiring more than 5% of the issued and
outstanding shares of voting stock of another savings institution or savings
and loan holding company, except as part of an acquisition of control approved
by the OTS, as part of an acquisition of stock issued by an undercapitalized
savings institution or its holding company approved by the OTS or except under
certain specified conditions (such as an acquisition of stock in a fiduciary
capacity) which negate a finding of control; or (iii) acquiring or retaining
control of a financial institution that does not have SAIF or BIF insurance of
accounts. Control of a savings institution or a savings and loan holding
company is conclusively presumed to exist if, among other things, a person
acquires more than 25% or any class of voting stock of the institution or
holding company or controls in any manner the election of a majority of the
directors or the insured institution or the holding company. Control is
rebuttably presumed to exist if, among other things, a person acquires 10% or
more of any class of voting stock (or 25% of any class of stock) and is subject
to any of certain specified "control factors."
The HOLA also allows the OTS to approve transactions resulting in the
creation of multiple savings and loan holding companies controlling savings
institutions located in more than one state in both supervisory and
nonsupervisory transactions, subject to the requirement that, in nonsupervisory
transactions, the law of the state in which the savings institution to be
acquired is located must specifically authorize the proposed acquisition, by
language to that effect and not merely by implication. As a result, the
Company may, with the prior approval of the OTS, acquire control of a savings
institution located in a state other than Maine if the acquisition is expressly
permitted by the laws of the state in which the savings institution to be
acquired is located. No director, officer, or controlling shareholder of the
Company may, except with the prior approval of the OTS, acquire control of any
savings institution which is not a subsidiary of the Company. Restrictions
relating to service as an officer or director of an unaffiliated holding
company or savings institution are applicable to the directors and officers of
the Company and its savings institution subsidiaries under the Depository
Institution Management Interlocks Act.
Restrictions with Affiliates
____________________________
Pursuant to the HOLA, transactions engaged in by a savings association or
one of its subsidiaries with affiliates of the savings association generally
10
are subject to the affiliate transaction restrictions contained in Sections 23A
and 23B of the Federal Reserve Act in the same manner and to the same extent as
such restrictions now apply to transactions engaged in by a member bank or one
of its subsidiaries with affiliates of the member bank. Section 23A of the
Federal Reserve Act imposes both quantitative and qualitative restrictions on
transactions engaged in by a member bank or one of its subsidiaries with an
affiliate, while Section 23B of the Federal Reserve Act requires, among other
things, that all transactions with affiliates be on terms substantially the
same, and at least as favorable to the member bank or its subsidiary, as the
terms that would apply to, or would be offered in, a comparable transaction
with an unaffiliated party. Exemptions from, and waivers, of, the provisions
of Sections 23A and 23B of the Federal Reserve Act may be granted only by the
Federal Reserve Board, but the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRRE Act"), authorizes the OTS to impose additional
restrictions on transactions with affiliates if the Director determines such
restrictions are necessary to ensure the safety and soundness of any savings
institution.
Restrictions on Activities of Savings and Loan Holding Companies
________________________________________________________________
Under applicable federal regulations, savings and loan holding companies and
their noninsured subsidiaries are prohibited from engaging in any activities
other than (i) furnishing or providing management services for the savings
association; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing or liquidating assets owned or acquired from the savings
association; (iv) holding or managing properties used or occupied by the
savings association; (v) acting as trustee under deeds of trust; (vi) engaging
in any other activity in which savings and loan holding companies were
authorized by regulation to engage as of March 5, 1987; and (vii) engaging in
any activity which the Board of Governors of the Federal Reserve System has
permitted for bank holding companies under its regulations (unless the OTS, by
regulation, prohibits or limits any such activity for savings and loan holding
companies). The activities in which savings and loan holding companies were
authorized by regulation to engage as of March 5, 1987 consist of activities
similar to those permitted for service corporations of federally chartered
savings institutions and include, among other things, various types of lending
activities, furnishing or performing clerical, accounting and internal audit
services primarily for affiliates, certain real estate development and leasing
activities, underwriting credit life or credit health and accident insurance in
connection with extension of credit by savings institutions or their affiliates
and the performance of a range of other services primarily for their
affiliates, their savings association subsidiaries and service corporation
subsidiaries thereof. The activities which the Board of Governors of the
Federal Reserve System by regulation has permitted for bank holding companies
generally consist of those activities that the Board of Governors of the
Federal Reserve System has found to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto, and include,
among other things, various lending activities, certain real and personal
property leasing activities, certain securities brokerage activities, acting as
an investment or financial advisor subject to certain conditions, and providing
management consulting to depository institutions, subject to certain
conditions. OTS regulations do not limit the extent to which savings and loan
holding companies and their nonsavings institution subsidiaries may engage in
activities permitted for bank holding companies pursuant to the regulations
adopted by the Governors of the Federal Reserve System, although prior OTS
11
approval is required to commence such activity whether de novo or by an
acquisition (in whole or part) of a going concern.
The Company could be prohibited from engaging in any activity (including
those otherwise permitted under the HOLA) not allowed for bank holding
companies if the Bank fails to constitute a qualified thrift lender. See " --
Savings Institution Regulation --- Qualified Thrift Lender Requirement."
Savings Institution Regulation
______________________________
General.
________
As a federally chartered institution, the Bank is subject to supervision and
regulation by the OTS, the FHLB's successor under the FIRRE Act. As a result
of its conversion to a federal mutual savings bank in 1984, the Bank retains
the then-authorized powers of a Maine-chartered mutual savings bank. Under OTS
regulations, the Bank is required to obtain audits by independent accountants
and to be examined periodically by the OTS. These examinations must be
conducted no less frequently than every twelve (12) months. The Bank is
subject to assessments by the OTS and the FDIC to cover the costs of such
examinations. The OTS may revalue assets of the Bank, based upon appraisals,
and require the establishment of specific reserves in amounts equal to the
difference between such revaluation and the book value of the assets. The OTS
is also authorized to promulgate regulations to ensure the safe and sound
operations of savings institutions and may impose various requirements and
restrictions on the activities of savings institutions. The FIRRE Act requires
that all regulations and policies of the OTS for the safe and sound operations
of savings institutions be no less stringent than those established by the
Office of the Comptroller of the Currency (the "OCC") for national banks. The
Bank is also subject to regulation and supervision by the FDIC, in its capacity
as insurer of deposits in the Bank, to ensure the safety and soundness of the
BIF and the SAIF. See "--- Savings Institution Regulation --- Insurance of
Deposits."
Capital Requirements.
_____________________
General.
________
Since 1989, OTS capital regulations have established capital
standards applicable to all savings institutions, including a core capital
requirement (or leverage ratio), a tangible capital requirement and a risk-
based capital requirement. The OTS also has established pursuant to FDICIA five
classifications for institutions based upon the capital requirements: well
capitalized, adequately capitalized, under capitalized, significantly under
capitalized, and critically under capitalized. At June 30, 1998, the Bank was
"well capitalized". Failure to maintain an adequately capitalized status
would result in greater regulatory oversight or restrictions on the Bank's
activities. The capital requirements established by the OTS requires savings
institutions to maintain: (i) "core capital" in an amount of not less than 3%
of total assets, (ii) "tangible capital" in an amount not less than 1.5% of
adjusted total assets, and (iii) a level of risk-based capital equal to 8.0% of
risk-weighted assets. The capital standards established for savings
institutions must generally be no less stringent than those applicable to
national banks and must use all relevant substantive definitions used in the
capital standards for national banks. Since most national banks are required
to maintain a level of core capital of at least 100 to 200 basis points above
12
the 3% minimum, savings institutions are generally required to satisfy the
higher core capital standards.
Under the OTS regulations, the term "core capital" includes common
stockholders' equity, noncumulative perpetual preferred stock and related
surplus, nonwithdrawable accounts and pledged deposits of mutual savings
associations, and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangible assets, other than certain amounts
of supervisory goodwill, and up to 90% of the fair market value of readily
marketable mortgage servicing rights ("MSRs") (subject to certain conditions).
The term "tangible capital," for purposes of the HOLA, is defined as core
capital minus intangible assets (as defined by the OCC for national banks),
provided, however, that savings institutions may include up to 90% of the fair
market value of readily marketable purchased MSRs 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). In determining
compliance with capital standards, a savings institution must deduct from
capital its entire investment in and loans to any subsidiary engaged as
principal in activities not permissible for a national bank, other than
subsidiaries (i) engaged in such nonpermissible activities solely as agent for
their customers; (ii) engaged in mortgage banking activities, or (iii) that are
themselves savings institutions, or companies the only investment of which is
another savings institution.
In determining total risk-weighted assets for purposes of the risk-based
capital requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of
each such item by a credit conversion factor ranging from 0% to 100% (depending
upon the nature of the asset), (ii) the credit equivalent amount of each off-
balance sheet asset and the book value of each on-balance sheet asset must be
multiplied by a risk factor ranging from 0% to 100% (depending upon the nature
of the asset), and (iii) the resulting amounts are added together and
constitute total risk-weighted assets. Total capital, for purposes of the
risk-based capital requirement, equals the sum of core capital plus
supplementary capital (which, as defined, includes, among other items,
perpetual preferred stock, not counted as core capital, limited life preferred
stock, mandatorily convertible securities, subordinated debt, and general loan
and lease loss allowances up to 1.25% of risk-weighted assets), less certain
deductions. The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital, and OTS regulations require the maintenance of a minimum ratio of core
capital to total risk-weighted assets of at least 4.0%. As of June 30, 1998,
the Bank's total of risk-based capital to total risk-weighted assets was
11.20%.
See Item 8a. "Financial Statements and Supplementary Data - Footnote 10" for
a table reflecting the Bank's minimum regulatory capital requirements, actual
capital and the level of excess capital by category.
In addition, the OTS requires institutions with an "above-normal" degree of
interest rate risk to maintain an additional amount of capital. The test of
"above-normal" is determined by postulating a 200 basis point shift (increase
or decrease) in interest rates and determining the effect on the market value
of an institution's portfolio equity. If the decline is less than 2 percent, no
addition to risk-based capital is required (i.e., an institution has only a
normal degree of interest rate risk). If the decline is greater than 2
13
percent, the institution must add additional capital equity to one-half the
difference between its measured interest rate risk and 2 percent multiplied by
the market value of its assets. Management believes that the Bank's interest
rate risk is within the normal range.
In March 1998, the OTS issued a final rule which requires savings
associations to comply with an overlapping set of regulatory capital standards,
as follows: (i) Tangible equity: to be deemed other than "critically
undercapitalized", the minimum ratio, as a percentage of tangible assets, is
2%; (ii) Tier 1 or leverage capital: to be deemed "adequately capitalized" or
"well capitalized", the minimum ratios, as a percent of adjusted total assets,
are 4% or 5%, respectively; (iii) Tier 1 risk-based capital: to be deemed
"adequately capitalized" or "well capitalized", the minimum ratios, as a
percent of risk-weighted assets, are 4% or 6%, respectively; and (iv) Total
risk-based capital: to be deemed "adequately capitalized" or "well
capitalized", the minimum ratios, as a percent of risk-weighted assets, are 8%
or 10%, respectively.
Any insured depository institution which falls below minimum capital
standards must submit a capital restoration plan. In general, undercapitalized
institutions will be precluded from increasing their assets, acquiring other
institutions, establishing additional branches, or engaging in new lines of
business without an approved capital plan and an agency determination that such
actions are consistent with the plan. Savings institutions that are
significantly undercapitalized or critically undercapitalized are subject to
additional restrictions and may be required to (i) raise additional capital;
(ii) limit asset growth; (iii) limit the amount of interest paid on deposits to
the prevailing rate of interest in the region where the institution is located;
(iv) divest or liquidate any subsidiary which the OTS determines poses a
significant risk; (v) order a new election for members of the board of
directors; (vi) require the dismissal of a director or senior executive
officer, or (vii) take such other action as the OTS determines is appropriate.
Under FDICIA, the OTS is required to appoint a conservator or receiver for a
critically undercapitalized institution no later than 9 months after the
institution becomes critically undercapitalized, subject to a limited exception
for institutions which are in compliance with an approved capital plan and
which the OTS and the FDIC certify are not likely to fail.
FDICIA prohibits any depository institution that is not well capitalized
from accepting deposits through a deposit broker. Previously, only troubled
institutions were prohibited from accepting brokered deposits. The FDIC may
allow adequately capitalized institutions to accept brokered deposits for
successive periods of up to 90 days. FDICIA also prohibits undercapitalized
institutions from offering rates of interest on insured deposits that
significantly exceed the prevailing rate in their normal market area or the
area in which the deposits would otherwise be accepted.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. Individual minimum capital requirements may
be appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns.
Qualified Thrift Lender Requirement.
____________________________________
14
In order for the Bank to exercise the powers granted to federally chartered
savings institutions, and maintain full access to FHLB advances, it must
satisfy a "qualified thrift lender" ("QTL")test. In order to qualify as a QTL,
the Bank must maintain at least 65% of its total "Portfolio Assets" in
"Qualified Thrift Investments". This level must be maintained on a monthly
average basis in nine out of every twelve months. Qualified Thrift Investments
generally include (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile
home loans, home equity loans and mortgage-backed securities), (ii) certain
obligations issued by the federal deposit insurance agencies, and (iii) shares
of stock issued by any FHLB, the Federal Home Loan Mortgage Corporation, or the
Federal National Mortgage Association. In addition, the following assets may
be categorized as Qualified Thrift Investments in an amount not to exceed 20%
in the aggregate of Portfolio Assets: (i) 50% of the dollar amount of
residential mortgage loans originated and sold within 90 days of origination;
(ii) investments in securities of a service corporation that derives at least
80% of its income from residential housing finance; (iii) 200% of loans and
investments made to acquire, develop or construct starter homes or homes in
credit needy areas (subject to certain conditions); (iv) loans for the purchase
or construction of churches, schools, nursing homes and hospitals; and (v)
consumer loans (in an amount up to 20% of portfolio assets). For purposes of
the QTL test, Portfolio Assets means the savings institution's total assets
minus (i) goodwill and other intangible assets, (ii)the value of property used
by the savings institution to conduct its business, and (iii)liquid assets held
by the savings institution in an amount up to 20% of its total assets.
In December 1996, the Economic Growth and Regulatory Paperwork Reduction Act
of 1996 (EGRPRA) amended the QTL requirements to give thrifts a choice of
tests. A thrift must qualify either by meeting the HOLA QTL test described
above, as amended by the EGRPRA, or by meeting the Internal Revenue Service's
(IRS) domestic building and loan tax code (DBLA) test. The EGRPRA amended the
QTL test to allow (1) educational loans, small business loans and credit card
loans to count as Qualified Thrift Investments without limit, and (2) loans for
personal, family or household purposes (other than those included in the
without limit category) to count as Qualified Thrift Investments in the
category limited to 20 percent of Portfolio Assets.
OTS regulations provide that any savings institution that fails to meet the
new QTL test must either convert to a national bank charter or limit its future
investments and activities (including branching and payments of dividends) to
those permitted for both savings institutions and national banks. Additionally,
any such savings institution that does not convert to a bank charter will be
ineligible to receive further FHLB advances and, beginning three years after
the loss of QTL status, will be required to repay all outstanding FHLB
advances, and dispose of or discontinue any pre-existing investments and
activities not permitted for both savings institutions and national banks.
Further, within one year of the loss of QTL status, the holding company of a
savings institution 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.
Liquidity Requirements.
15
_______________________
Under OTS regulations, savings institutions are required to maintain average
daily balances of liquid assets (which includes cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly
rated commercial paper, securities of certain mutual funds, balances maintained
in FRB, and specified United States government, state, or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of the average daily balance of the savings institution's net withdrawable
deposit accounts plus short-term borrowings payable in one year or less. This
liquidity requirement may vary from time to time by the OTS to any amount
within the range of 4% to 10%, depending upon economic conditions and the
deposit flows of member institutions. Effective November 24, 1997, the OTS
amended its liquidity regulations to, among other things, provide that a
savings institution shall maintain liquid assets of not less than 4% of the
liquidity base at the end of the preceding calendar quarter. Prior to November
1997, the required liquid asset ratio was 5%. The amendment to the liquidity
rules also eliminated the requirement that institutions hold assets equal to
1% of the liquidity base in cash or short-term liquid assets. At June 30,
1998, the Bank was in compliance with the liquidity ratio regulatory
requirements. In addition, the 1997 amendment to the liquidity rules also
streamlined the calculations used to measure compliance with liquidity
requirements, expanded the types of investments considered to be liquid assets
to conform with provisions of FIRREA, and reduced the liquidity base by
modifying the definition of net withdrawable account to exclude accounts with
maturities exceeding one year. This rule permits savings associations to use
either the previously existing or the newly promulgated method of calculating
their liquidity base. The new method requires the calculation to be made once
each quarter rather than monthly. Another rule change removed the requirement
that certain obligations must mature in five years or less in order to qualify
as a liquid asset. Simply meeting the minimum liquidity requirement does not
automatically mean a thrift institution has sufficient liquidity for safe and
sound operation. The new rule includes 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 a thrift's asset/liability structure, market conditions, the
activities of financial service competitors and the requirements of its own
deposit and loan customers.
Loans to One Borrower Limitations.
__________________________________
Savings institutions generally are required to comply with the limitations
on loans to one borrower which are applicable to national banks. National
banks generally may not make loans to a single borrower in excess of 15% to 25%
of their unimpaired capital and unimpaired surplus (depending upon the type of
loans and the collateral therefor). Exceptions from the generally applicable
limits on loans to one borrower are available under any of the following
circumstances: (i) for any purpose, in an amount not to exceed $500,000; (ii)
to develop domestic residential housing units, in an amount not to exceed the
lesser of $30 million or 30% of the savings institution's unimpaired capital
and unimpaired surplus, provided other conditions are satisfied; or (iii) to
finance the sale of real property which it owns as a result of foreclosure, in
an amount not to exceed 50% of the savings institution's unimpaired capital and
unimpaired surplus. In addition, further restrictions on a savings
institution's loans to one borrower may be imposed by the OTS if necessary to
protect the safety and soundness of the savings institution.
Pursuant to its authority to impose more stringent requirements on savings
16
associations to protect safety and soundness, however, the OTS has promulgated
a rule limiting loans to one borrower to finance the sale of real property
acquired in satisfaction of debts to 15% of unimpaired capital and surplus. The
rule provides that purchase money mortgages received by a savings association
to finance the sale of such real property do not constitute "loans" (provided
that the savings association is not placed in a more detrimental position
holding the note than holding the real estate) and, therefore, are not subject
to the loan-to-one-borrower limitations.
Commercial Real Property Loans.
_______________________________
The aggregate amount of commercial real estate loans that a federal savings
institution may make is limited to an amount not in excess of 400% of the
savings institution's capital. The OTS has the authority to grant exceptions
to the limit if the additional amount will not pose a significant risk to the
safe or sound operation of the savings institution involved, and is consistent
with prudent operating practices.
Regulatory Restrictions on the Payment of Dividends by Savings Institutions.
____________________________________________________________________________
OTS regulations establish uniform treatment for all capital distributions by
savings associations (including dividends, stock repurchases and cash-out
mergers). Under the rules, a savings association is classified as a tier 1
institution, a tier 2 institution, or a tier 3 institution, depending on its
level of regulatory capital both before and after giving effect to a proposed
capital distribution. A tier 1 institution (i.e., one that both before and
after a proposed capital distribution has net capital equal to or in excess of
its fully phased-in regulatory capital requirement) is allowed, subject to any
otherwise applicable statutory or regulatory requirements or agreements entered
into with regulators, to make capital distributions in any calendar year up to
100% of its net income to date during the capital year plus the amount that
would reduce by one-half its surplus capital ratio (i.e., the percentage by
which (x) its ratio of capital to assets exceeds (y) the ratio of its fully
phased-in capital requirement to assets) as of the beginning of the calendar
year, adjusted to reflect current earnings. No regulatory approval of the
capital distribution is required, but prior notice has to be given to the OTS.
A tier 2 institution (i.e., one that both before and after a proposed capital
distribution has net capital equal to its then-applicable minimum capital
requirement but would fail to meet its fully phased-in capital requirement
either before or after the distribution) may make only limited capital
distributions without prior regulatory approval. A tier 3 institution (i.e.,
one that either before or after a proposed capital distribution fails to meet
its then-applicable minimum capital requirement) may not make any capital
distributions without prior OTS approval. In addition, the OTS may prohibit a
proposed capital distribution, which otherwise would be permitted by the
regulation, if the OTS determines that such a distribution would constitute an
unsafe or unsound practice. Also, an institution meeting the tier 1 criteria
which has been notified that it needs more than normal supervision will be
treated as a tier 2 or tier 3 institution, unless the OTS deems otherwise.
Activities of Subsidiaries.
___________________________
The FIRRE Act requires a savings institution seeking to establish a new
subsidiary, acquire control of an existing company (after which it would be a
subsidiary), or conduct a new activity through a subsidiary, to provide 30 days
prior notice to the FDIC and the OTS and conduct any activities of the
17
subsidiary in accordance with regulations and orders of the OTS. The OTS has
the power to require a savings institution to divest any subsidiary or
terminate any activity conducted by a subsidiary that the OTS determines is a
serious threat to the financial safety, soundness or stability of such savings
institution or is otherwise inconsistent with sound banking practices.
Insurance of Deposits.
______________________
General.
--------
Federal deposit insurance is required for all federal savings
institutions. Federal savings institutions' deposits are insured to a maximum
of $100,000 for each insured depositor by the BIF or the SAIF. As a FDIC-
insured institution, the Bank is subject to regulation and supervision by the
FDIC, to the extent deemed necessary by the FDIC to ensure the safety and
soundness of BIF and SAIF. The FDIC is entitled to have access to reports of
examination of the Banks made by the OTS and all reports of condition filed by
the Bank with the OTS, and may require the Bank to file such additional
reports as the FDIC determines to be advisable for insurance purposes. The
FDIC may determine by regulation or order that any specific activity poses a
serious threat to BIF or SAIF and that no BIF or SAIF member may engage in the
activity directly. The FDIC is also authorized to issue and enforce such
regulations or orders as it deems necessary to prevent actions of savings
institutions that pose a serious threat to BIF or SAIF.
Any insured institution which does not operate in accordance with or conform
to FDIC regulations, policies and directives may be sanctioned for non-
compliance.
The FDIC has the authority, after notice and hearing, to suspend or
terminate insurance of deposits upon the finding that the institution has
engaged in unsafe or unsound practices, is operating in an unsafe or unsound
condition, or has violated any applicable law, regulation, rule, order or
condition imposed by, or written agreement with, the FDIC. In addition, if
insurance termination proceedings are initiated against a savings institution,
under certain circumstances the FDIC has the authority to temporarily suspend
insurance on new deposits received by an institution. If insurance of deposits
is terminated by the FDIC, the deposits in the institution will continue to be
insured by the FDIC for a period of two years following the date of
termination. The FDIC requires an annual audit by independent accountants and
also periodically makes its own examinations of insured institutions.
Insured institutions are members of either the SAIF or the BIF. Pursuant to
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), an insured institution may not convert from one insurance fund to
the other without the advance approval of the FDIC. FIRREA also provides,
generally, that the moratorium on insurance fund conversions shall not be
construed to prohibit a SAIF member from converting to a bank charter during
the moratorium, as long as the resulting bank remains a SAIF member during that
period. When a conversion is permitted, each insured institution participating
in the conversion must pay an "exit fee" to the insurance fund it is leaving
and an "entrance fee" to the insurance fund it is entering.
Under applicable law, any company that controls an undercapitalized savings
institution is required, in connection with the submission of a capital
restoration plan by the savings institution, to guarantee that the institution
18
will comply with the plan and to provide appropriate assurances of performance.
The aggregate liability of any such controlling company under such guaranty is
limited to the lesser of (i) 5% of the savings institution's assets at the time
it became undercapitalized; or (ii) the amount necessary to bring the savings
institution into capital compliance as of the time the institution fails to
comply with the terms of its capital plan.
Insurance Premiums and Regulatory Assessments.
______________________________________________
As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. FDICIA directed
the FDIC to establish a risk-based premium system under which each premium
assessed against the Bank would generally depend upon the amount of the Bank's
deposits and the risk that it poses to the SAIF. The FDIC was further directed
to set semiannual assessments for insured depository institutions to maintain
the reserve ratio of the SAIF at 1.25 percent of estimated insured deposits.
The FDIC may designate a higher reserve ratio if it determines there is a
significant risk of substantial future loss to the particular fund. Under the
FDIC's risk-related insurance regulations, an institution is classified
according to capital and supervisory factors. Institutions are assigned to one
of three capital groups: "well capitalized," "adequately capitalized" or
"undercapitalized." Within each capital group, institutions are assigned to
one of three supervisory subgroups. There are nine combinations of groups and
subgroups (or assessment risk classifications) to which varying assessment
rates are applicable. During fiscal 1998, the Bank paid $60,097 to the FDIC
for such assessments. See "--Recent Developments in Savings Institution
Regulations."
In addition to deposit insurance premiums, savings institutions also must
bear a portion of the administrative costs of the OTS through an assessment
based on the level of total assets of each insured institution and which
differentiates between troubled and nontroubled savings institutions. During
fiscal 1998, the Bank paid $70,078 to the OTS for such assessments.
Additionally, the OTS assesses fees for the processing of various applications.
Federal Home Loan Bank System
_____________________________
General.
________
The Bank is a member of the FHLB system, which consists of 12 regional
FHLBs subject to supervision and regulation by the Federal Housing Finance
Board ("FHFB"). The FHLBs maintain central credit facilities 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 the FHLB of Boston in an amount at least equal to
the greater of: (i) 1% of the aggregate outstanding principal amount of its
unpaid residential mortgage loans, home purchase contracts, and similar
obligations as of the beginning of each year, (ii) 5% of its advances
(borrowings) from the FHLB of Boston, or (iii) $500. The Bank is in compliance
with these requirements with an investment in stock of the FHLB of Boston at
June 30, 1998 of $5,680,500.
Advances from Federal Home Loan Bank.
_____________________________________
Each FHLB serves as a reserve or central bank for its member institutions
19
within its assigned regions. It is funded primarily from proceeds derived from
the sale of obligations of the FHLB System. A FHLB makes advances (i.e.,
loans) to members in accordance with policies and procedures established by its
Board of Directors. The Bank is authorized to borrow funds from the FHLB of
Boston to meet demands for withdrawals of savings deposits, to meet seasonal
requirements, and for the expansion of its loan portfolio. Advances may be made
on a secured or unsecured basis depending upon a number of factors, including
the purpose for which the funds are being borrowed and existing advances.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the regional FHLB and the purpose of the borrowing. The maximum
amount which the FHLB will advance fluctuates from time to time in accordance
with changes in the policies of the FHLB and the FHLB of Boston, and the
maximum amount generally is reduced by borrowings from any other source. In
addition, the amount of FHLB advances that a savings institution may obtain
will be restricted in the event that the institution fails to qualify as a
"qualified thrift lender". See "--- Savings Institution Regulation ---
Qualified Thrift Lender Requirement."
Federal Reserve Board
_____________________
Pursuant to the Depository Institutions Deregulation and Monetary Control
Act of 1980 (the "Deregulation Act"), Federal Reserve Board regulations require
depository institutions to maintain non-interest bearing reserves against their
net transaction accounts (primarily NOW accounts), subject to certain
exemptions. Federal Reserve regulations currently require financial
institutions to maintain average daily reserves equal to 3% on all amounts from
$4.7 million to $47.8 million of net transactions, plus 10% on the remainder.
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.
Because required reserves must be maintained in the form of vault cash or a
non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the institution's interest-earning assets.
Members of the FHLB system also are authorized to borrow from the
appropriate Federal Reserve Bank's "discount window." However, current Federal
Reserve regulations require savings institutions to exhaust all FHLB sources
before borrowing from the Federal Reserve Bank. The FDICIA places limitations
upon a Federal Reserve Bank's ability to extend advances to undercapitalized
and critically undercapitalized depository institutions. The FDICIA provides
that a Federal Reserve bank generally may not have advances outstanding to an
undercapitalized institution for more than 60 days in any 120-day period.
Maine Law
_________
The Department interprets applicable Maine law as giving the Department the
authority to make examinations of the Company and any subsidiaries and to
require periodic and other reports. In addition, under Maine law, a Maine
financial institution holding company such as the Company may not engage in any
activity other than managing or controlling financial institutions, or other
activities deemed permissible by the Department. The Department has by
regulation determined that, with the prior approval of the Department, a
financial institution holding company may engage in those activities deemed
closely related pursuant to Section 408 of the National Housing Act, unless
that activity is prohibited by the Maine Banking Code or regulations.
20
The Maine Business Corporation Act permits the Company to pay dividends on
its capital stock only from its unreserved and unrestricted earned surplus or
from its net profits for the current fiscal year and the next preceding fiscal
year taken as a single period.
Applicable rules further prohibit the payment of a cash dividend by the
Company if the effect thereof would cause its net worth to be reduced below
either the amount required for the liquidation account or the net worth
requirements imposed by federal laws or regulations. The Company is prohibited
from paying dividends on their capital stock if it is in default in the payment
of any assessment to the FDIC.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the current income tax rates on the amount used.
Federal Securities Laws
_______________________
The Company has registered its common stock with the Securities and Exchange
Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as
amended. As a result of such registration, the proxy and tender offer rules,
periodic reporting requirements, insider trading restrictions and reporting
requirements, as well as certain other requirements, of such Act are
applicable.
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 8 b.
Item 2. Properties
__________
The 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 Bank has eleven 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 Augusta (Bangor Street) and South Paris,
Maine are leased by the Bank. The Bank also owns in fee simple certain real
property and improvements located in Auburn, Maine at which various 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
_________________
21
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, 1998.
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. . . .46 President and Chief Executive Officer (1)
A. William Cannan . . . .56 Executive Vice President and Chief Operating
Officer (1)
Philip C. Jackson . . . .54 Senior Vice President of Bank - Trust Operations
Richard E. Wyman, Jr. . .42 Chief Financial Officer (1)
Henry Korsiak . . . . . .55 Senior Vice President of Bank - Operations
Marilyn Wyman . . . . . .47 Senior Vice President of Bank - Human Resources
Sterling Williams . . . .47 Senior Vice President of Bank - Commercial
Lending
Marcel Blais. . . . . . .39 Senior Vice President of the Bank - Retail
Banking
Ariel Rose Gill . . . . .49 Clerk (1)
________________
(1) Each of these individuals serve 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
22
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.
Henry Korsiak has been the Senior Vice President of the Bank - Operations
since 1994. From 1993 to 1994, Mr. Korsiak was a Vice President of ASI Data
Services, Inc., a data processing subsidiary of the Company. He was a manager
of Systems Analysis for Fleet Services Corp. from 1991 to 1993. He served as
Vice President of Data Processing at Maine National Bank from 1978 until June
1991.
Marilyn Wyman has been the Senior Vice President of the Bank - Human
Resources since 1987. From 1982 to 1987, she served as the Executive Vice-
President and Administrative Vice-President of the Bank's predecessor, Bethel
Savings Bank.
Sterling Williams has been the Senior Vice President of the Bank -
Commercial Lending since 1994. From 1984 to 1994, Mr. Williams served as a
Vice President of Fleet Bank of Maine when he was a commercial loan officer and
officer in its Managed Assets Division. As of September 1998, the Company has
been informed that Mr. Williams will be resigning his position with the Bank.
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.
Ariel Rose Gill has been Clerk of the Company since joining the Company in
1994.
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,
1998, there were approximately 2,614,285 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 NASDAQ - NMS through April 13, 1997 and
thereafter on AMEX, and dividends paid during each quarter for fiscal years
ending June 30, 1997 and 1998. All information set forth on the table below
has been revised to reflect a 50% stock dividend paid December 15, 1997.
1997-98 High Low Div Pd
_______ ____________ ______
23
Jul 1- Sep 30 13.33 9.66 .053
Oct 1 - Dec 31 18.66 18.50 .053
Jan 1 - Mar 31 19.50 17.00 .053
Apr 1 - Jun 30 18.00 15.00 .053
1996-97 High Low Div Pd
_______ ____________ ______
Jul 1 - Sep 30 9.00 8.33 .053
Oct 1 - Dec 31 9.33 8.67 .053
Jan 1 - Mar 31 9.50 8.83 .053
Apr 1 - Jun 30 9.83 9.17 .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.
The Company has 45,454 shares of Series A preferred stock outstanding. The
Series A preferred stock is convertible into Common Stock on a three-for-one
basis and carries a dividend rate of two percent below the prime rate of the
First National Bank of Boston, but in no event to be less than 7% per annum.
There is only one holder of the Series A preferred stock, and there is no
trading market for the Series A preferred stock. Although convertible into
three shares of Common Stock, each share of Series A preferred stock is
entitled only to one vote on all matters submitted to a vote of the Company's
stockholders.
Item 6. Selected Financial Data
-----------------------
Years Ended June 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest income $ 24,283 $ 21,936 $ 20,105 $ 18,953 $ 15,668
Interest expense 12,810 11,291 10,087 8,841 7,124
-------- -------- -------- -------- --------
Net interest income 11,473 10,645 10,018 10,112 8,544
Provision for loan losses 706 614 639 691 1,045
Other operating income 1 2,384 1,827 1,909 1,760 2,209
Net securities gains 288 259 279 419 347
Other operating expenses 2 9,560 9,608 9,442 9,093 8,053
Writedowns on equity and
debt securities 172 110 94 0 84
-------- -------- -------- -------- --------
Income before income taxes 3,707 2,399 2,031 2,507 1,918
Income tax expense 1,303 909 738 878 697
24
Cumulative effect of change in
accounting principle - - - - 260
-------- -------- -------- -------- --------
Net income $ 2,404 $ 1,490 $ 1,293 $ 1,629 $ 1,481
======== ======== ======== ======== ========
Basic earnings per share 3 $ 1.00 $ 0.63 $ 0.56 $ 0.77 $ 0.76
Diluted earnings per share 3 $ 0.86 $ 0.56 $ 0.50 $ 0.66 $ 0.67
======== ======== ======== ======== ========
Cash dividends per common
share $ 0.21 $ 0.21 $ 0.16 $ 0.11 $ 0.11
======== ======== ======== ======== ========
Common dividend payout ratio 3 24.42% 37.49% 32.00% 16.66% 16.41%
======== ======== ======== ======== ========
At June 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Total assets $322,533 $284,077 $244,782 $231,856 $212,072
Total loans 282,031 222,682 187,210 187,777 175,687
Total deposits 184,024 172,921 164,855 168,682 142,972
Total borrowings 105,433 81,793 54,140 38,274 49,051
Total stockholders' equity 25,140 22,096 20,364 19,388 17,730
Return on assets
(net income/average assets) 0.83% 0.57% 0.55% 0.71% 0.73%
Return on equity
(net income/average equity) 10.35% 7.05% 6.31% 8.81% 8.73%
Average equity/average assets 7.99% 8.09% 8.67% 8.10% 8.34%
1 Includes fees for services to customers and gains on sale of loans.
2 Includes salaries, employee benefits and occupancy.
3 Per share data for the years prior to 1996 has been retroactively restated as
a result of the stock split in December 1995 and has been restated as a
result of the 50% stock split in December 1997. The 1994 through 1997
earnings per share calculations have been restated to comply with FASB No.
128 "Earnings Per Share". Also, the common dividend payout ratios, for 1994
through 1997 and dividends per share have been changed to correspond to the
change in the earnings per share calculations for the effect of adopting FASB
No. 128.
Item 7. Management's Discussion of Financial Condition and Results of
-------------------------------------------------------------
Operations
----------
DESCRIPTION OF OPERATIONS
- -------------------------
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company with the Office of Thrift Supervision ("OTS") as its primary regulator.
The Company has one 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 and Lisbon Falls, Maine.
25
The Bank's deposits are primarily BIF-insured. Deposits at the Brunswick
branch are SAIF-insured and represent approximately 27% of the Bank's total
deposits at June 30, 1998.
On October 24, 1997 the Company completed the merger of Cushnoc Bank and Trust
Company, a commercial bank located in Augusta, Maine ("Cushnoc"), with and into
the Bank. On October 24, 1997, Cushnoc had approximately $21,000,000 in total
assets and $2,200,000 in stockholders' equity. Under the terms of the merger,
the Company issued 187,940 shares of its common stock in exchange for all of
the outstanding common stock of Cushnoc (an exchange ratio of 2.089 shares of
the Company's common stock for each share of Cushnoc common stock). The merger
expanded the Company's geographic market area to Augusta, Maine, the State's
capital, and will increase the Company's ability to deliver its wide variety of
products for future growth. The Cushnoc acquisition was accounted for under the
pooling of interests method. In accordance with the pooling of interests
accounting method, the Company's financial statements and information provided
for previous reporting periods have been restated to include Cushnoc's
financial information and are more fully described in footnote 1 and 15 to the
financial statements.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations presents a review of the material changes in the financial condition
of the Company from June 30, 1997 to June 30,1998, and the results of
operations for the fiscal years ended June 30, 1998, 1997, and 1996. This
discussion and analysis is intended to assist in understanding the financial
condition and results of operations of the Company. Accordingly, this section
should be read in conjunction with the consolidated financial statements and
the related notes and other statistical information contained herein.
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, non-interest fee
income, and by increasing deposit and loan volume through a larger market area.
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. 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 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., trust services through the Bank's trust department, employee retirement
benefits through First New England Benefits ("FNEB"), a division of 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 that its capital
position will support future growth and development as well as allow for
26
additional provisions to the allowance for loan losses, if needed, without
significant impairment of the financial stability of the Company. As of June
30,1998, the Company's total equity represents 7.79% of its total assets. The
Company's assets totaled $322,532,594 as of June 30, 1998, an increase of
$38,455,163 compared to June 30, 1997, primarily due to loan growth. Loan
volume was enhanced during the 1998 fiscal year due to whole loan purchases on
the secondary market, increased commercial loans, and automobile dealer
finance loans. The increase in loans was funded with advances from the Federal
Home Loan Bank of Boston ("FHLB"), increased deposits, and the reduction in
available for sale securities. The Company has focused its business development
efforts on full service credit packages and financial services, as well as
competitively priced mortgage packages.
Cash and cash equivalents decreased by $6,622,378 at June 30, 1998 compared to
June 30, 1997. The decrease in cash equivalents was primarily due to the use
of excess cash to fund loan growth during fiscal 1998.
The Bank's loan portfolio had a balance of $282,030,950 as of June 30, 1998,
which represents an increase of $59,348,816 compared to June 30, 1997. From
June 30, 1997 to June 30, 1998, the loan portfolio increased by $32,594,000 in
real estate mortgage loans, $19,108,000 in consumer loans, and by $7,647,000 in
commercial loans. The Bank established a new automobile dealer finance
department during the fiscal 1998 and the increase in consumer loans was due
primarily to the volume generated from this new department. The Bank does not
anticipate that it will experience the same growth in real estate mortgage and
automobile dealer finance loans in the current fiscal year as was experienced
in 1998. During fiscal 1998, the Bank purchased approximately $66,284,000 of
residential whole loans on the secondary market. The purchase consisted of 1-4
family adjustable and fixed rate mortgages secured by property located
primarily in the State of Maine and certain Midwestern states. The expansion
into new markets diversifies the credit risk and the potential economic risks
of the credits held in the Bank's purchased loan portfolio, such that the
portfolio is not effected solely by the local State of Maine economy. 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 have affected the Bank's ability
to increase the loan portfolio. In the effort to increase loan volume, the
Bank's interest rates for its loan products have been reduced to compete in the
various markets.
The loan portfolio contains elements of credit and interest rate risk. The Bank
primarily lends 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. The Bank also maintains a well collateralized position in real
estate mortgages.
At June 30, 1998, residential real estate mortgages made up 61% of the total
loan portfolio, in which 54% of the residential loans are variable rate
products, as compared to 63% and 49%, respectively, at June 30, 1997. It has
been management's intent to increase the proportion of variable rate
residential real estate loans to reduce the interest rate risk in this area.
The Bank has primarily purchased adjustable rate residential loans and sold
fixed rate residential loans. However, during the last quarter of fiscal 1998,
the Bank sold approximately $8,000,000 in adjustable rate residential loans and
27
purchased approximately the same amount in fixed rate residential loans. This
purchase and sale improved the Company's asset/liability management position
during the declining rate environment. Due to repositioning the asset/liability
mix, the Bank was able to take advantage of current market prices to attain
gains on the sale of those loans.
At June 30, 1998, 17% of the Bank's total loan portfolio is commercial real
estate mortgages. Commercial real estate loans have minimal interest rate risk
as 88% of the portfolio consists of variable rate products. At June 30, 1997,
commercial real estate mortgages made up 21% of the total loan portfolio, in
which 89% 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 well collateralized position in real estate.
Commercial loans made up 10% of the total loan portfolio at June 30, 1998.
Variable rate loans comprise 59% of this loan portfolio at June 30, 1998. At
June 30, 1997 commercial loans made up 9% of the total loan portfolio, of which
83% of the balance were variable rate instruments. Variable rate commercial
loans have decreased during fiscal 1998, when compared to 1997, due to the
increased market demand for fixed rate loans. 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 loans make up 12% of the total loan portfolio as of June 30, 1998
which compares to 7% at June 30, 1997. Since these loans are primarily fixed
rate products, they have interest rate risk when market rates increase. These
loans also have credit risk with minimal security. As stated previously, the
increase in consumer loans was primarily due to the volume generated from the
automobile dealer finance department. This department underwrites all the
automobile dealer finance loans to protect credit quality. The Bank primarily
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 $2,978,000 as of June 30, 1998 versus
$2,741,809 as of June 30, 1997, representing 1.06% and 1.23% of total loans,
respectively. The Bank had non-performing loans totaling $2,248,000 and
$2,881,000 at June 30, 1998 and 1997, which was .80% and 1.29% of total loans,
respectively. Non-performing loans represented .70% and 1.01% of total assets
at June 30, 1998 and 1997, 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 132% and 95%
of the total non-performing loans at June 30, 1998 and 1997, respectively. At
June 30, 1998, the Bank had approximately $100,000 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, 1998, the amount of such loans has decreased from the June 30,
1997 amount by $486,000. This decrease was primarily due to substandard loans
being classified as non-performing or liquidated through the sale of foreclosed
assets. Management takes an aggressive posture in reviewing its loan portfolio
to classify certain loans substandard. The following table represents the
Bank's non-performing loans as of June 30, 1998 and 1997:
28
Description June 30, 1998 June 30, 1997
--------------------- ----------------- -----------------
1-4 Family Mortgages $ 783,000 $ 1,072,000
Commercial Mortgages 956,000 1,247,000
Commercial Loans 509,000 521,000
Consumer Installment 0 41,000
----------------- -----------------
Total non-performing $ 2,248,000 $ 2,881,000
================= =================
Although non-performing, delinquent and substandard loans have decreased the
past several years, management continues to allocate substantial resources to
the collection area in an effort to control the amount of such loans. The
Bank's delinquent loan accounts, as a percentage of total loans, decreased
during the 1998 fiscal year. This decrease was largely due to improved
collection efforts and the increase in the Bank's loan portfolio.
The following table reflects the annual trend of total delinquencies 30 days or
more past due, including non-performing loans, for the Bank as a percentage of
total loans:
06/30/95 06/30/96 06/30/97 06/30/98
2.46% 3.24% 1.93% 1.09%
At June 30, 1998, loans classified as non-performing included approximately
$823,000 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 .80% as of June 30, 1998.
The level of the allowance for loan losses as a percentage of total loans
decreased and the level of the allowance for loan losses as a percentage of
total non-performing loans increased at June 30, 1998 compared to June 30,
1997. The decrease in the level of allowance for loan losses as a percentage of
total loans was primarily due to the increase in purchased loans as well as
loans originated in the Bank's local market. The loans purchased were
residential mortgages and carry less risk than commercial and consumer loans.
The decrease was also supported by the Bank's lower delinquency levels and
decreased non-performing and substandard loans. As previously discussed, loans
classified substandard decreased in the 1998 fiscal year, when compared to the
1997 fiscal year. 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 these 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 $469,909, $633,490, and $539,234,
for the years ended June 30, 1998, June 30, 1997, and June 30, 1996,
respectively.
29
At June 30, 1998, total impaired loans were $1,623,720, of which $927,355 had
related allowances of $251,474. This compares to total impaired loans of
$1,661,698, of which $844,457 had related allowances of $369,474, at June 30,
1997. During the year ended June 30, 1998, the income recognized related to
impaired loans was $19,693 and the average balance of outstanding impaired
loans was $1,956,488. This compares to income recognized related to impaired
loans of $50,690 and the average balance of impaired loans of $1,330,983 at
June 30, 1997. 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 evaluates the adequacy of the Bank's
allowance for loan losses. 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 uses its best
judgement in recognizing loan losses in light of available information, 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 September 22, 1997. At the time of the exam the regulators
proposed no additions to the allowance for loan losses.
At June 30, 1998, the Bank had a total of $350,496 in other real estate owned
versus $563,207 as of June 30, 1997. The Bank has an allowance for losses on
other real estate owned that was established to provide for declines in real
estate values and to consider estimated selling costs. The allowance for losses
on other real estate owned totaled $5,100 at June 30, 1998 versus $50,839 at
June 30, 1997. The Company provided for this allowance through a charge against
earnings of $62,300 and $39,000 for the years ended June 30, 1998 and 1997,
respectively. In 1998 and 1997, write downs of other real estate owned totaled
$108,039 and $88,161, respectively. Management periodically receives
independent appraisals to assist in its valuation of the other real estate
owned portfolio. 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.
The Company's investment portfolio has been primarily classified as available
for sale at June 30, 1997 and 1998. 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, 1998 was $13,706,472 and $13,608,823,
respectively. The reduction in carrying value from the cost was primarily
30
attributable to the decline in market value of equity securities, which was due
to the change in market prices from the price at the time of purchase. The
decrease of $15,201,802 in securities available for sale, from June 30, 1998 to
June 30, 1997, was due to the Company repositioning the fixed rate mortgage-
backed securities portfolio, taking advantage of price fluctuations in the
current market. The sale of these securities strengthens the Company's asset/
liability management position and helps mitigate the Company's interest rate
risk in an increasing rate environment. The cash from the sale of securities
was utilized to fund loan growth during fiscal 1998. The net unrealized loss on
mortgage-backed securities has decreased from $410,000 at June 30, 1997 to
$9,500 at June 30, 1998 due to improvements in interest rates. Substantially
all of the mortgage-backed securities are high grade government backed
securities. As in any long term earning asset in which the earning 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 minimal
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 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 1998, 1997 and
1996, there have been other than temporary declines in values of individual
equity securities in the amounts of $172,235, $110,000, and $93,819,
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 increased its investment in FHLB stock by $1,559,500, compared to
June 30, 1997, 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.
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 $184,024,097 and securities sold under repurchase
agreements were $5,205,594 as of June 30, 1998. These amounts represent an
increase of $11,102,811 and $106,972, respectively, as compared to June 30,
1997. The increase in deposits was primarily due to the $9,000,000 increase in
NOW demand deposits. The increase in NOW deposits was attributable to the
development of a demand account where the interest rate increases as deposit
balances increase. Brokered deposits represented $7,574,710 of total deposits
at June 30, 1998, which increased by $389,144 compared to June 30, 1997's
$7,185,566 balance. Total borrowings from the FHLB were $104,439,952 as of
31
June 30, 1998, for an increase of $23,945,481 compared to June 30, 1997.
Mortgages, free of liens, pledges and encumbrances and certain non-pledged
mortgage-backed securities are pledged to secure FHLB advances. The increase in
deposits, repurchase agreements and FHLB advances were utilized to fund the
loan growth during fiscal 1998.
Other liabilities increased by $561,508 compared to June 30, 1997, due
primarily to increases in accrued expenses, escrow accounts and a payable
account resulting from the settlement of a loan sale transaction.
CAPITAL RESOURCES & LIQUIDITY
- -----------------------------
Liquidity is defined as the ability to meet unexpected deposit withdrawals and
increased loan demand of a short-term nature with a minimum loss of principal.
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
approximately $17,000,000 over and above the 1998 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 1998, the rate of
return was much stronger 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 $25,139,527 as of June 30, 1998 versus
$22,095,580 at June 30, 1997. On December 15, 1997, the Company authorized a
50% stock dividend to all shareholders. As a result of the stock dividend, the
Company's common shares outstanding increased by 740,807 shares. The June 30,
1997 book value per common share has been restated as a result of the stock
dividend. In October of 1997, the Company merged with Cushnoc in a transaction
accounted for as a pooling of interests and as a result issued 2.089 shares of
its common stock for each share of Cushnoc, which had 90,000 common shares
outstanding. The number of common shares issued to Cushnoc shareholders was
187,940 shares and all fractional shares were paid in cash. Earnings per share
have been restated as a result of the stock dividend and the merger with
Cushnoc Bank under the pooling of interests method of accounting.
In March of 1997 Square Lake Holding Corporation exercised 25,000 warrants at
an aggregate price of $175,000 and in fiscal 1998 exercised the remaining
163,146 warrants at an aggregate price of $761,433. There are no additional
warrants outstanding. During the final quarter of fiscal 1998, Square Lake
Holding Corporation converted their Series B preferred stock into common stock,
in which a total of 214,284 shares of common stock were issued. Square Lake
Holding Corporation is a Maine corporation and a subsidiary of a Canadian
corporation of which Ronald Goguen is a 95% shareholder and director. Mr.
Goguen, also is a director, and, through the ownership of his affiliates, a
principal shareholder of the Company. During fiscal 1998 and 1997, 46,000 and
30,000 stock options, respectively, were exercised by various employees of the
Company. The proceeds from the exercised warrants and options were utilized as
general working capital and contributed to the growth of the Company's total
equity. As of June 30, 1998, 444,000 shares of unissued common stock are
32
reserved for issuance pursuant to stock options.
Based on the 50% stock dividend, the converted preferred stock, the exercise of
warrants and options, and the merger with Cushnoc, the common shares
outstanding increased to 2,614,285 shares at June 30, 1998.
The Company repurchased 3,050 treasury shares at a cost of $44,988 during
fiscal 1998, 2,030 treasury shares at a cost of $28,420 during fiscal 1997 and
4,100 treasury shares at a cost of $52,277 during fiscal 1996. These treasury
shares were utilized for the employee stock bonus and option plans as well as
the exercise of warrants.
The total equity to total assets ratio of the Company was 7.79% as of June 30,
1998 and 7.78% at June 30, 1997. Book value per common share was $9.23 as of
June 30, 1998 versus $9.16 at June 30, 1997.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
contains various provisions intended to recapitalize the Bank Insurance Fund
("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, core capital of 3.0%, leverage
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, 1998 and 1997, 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, 1998 was $2,403,783 versus $1,489,745
for the year ended June 30, 1997 and $1,292,849 for the year ended June 30,
1996. Basic earnings per share was $1.00 and diluted earnings per share was
$.86 for the year ended June 30, 1998. Basic and diluted earnings per share
were $.63 and $.56, respectively, for the year ended June 30, 1997 and $.56 and
$.50, respectively for the year ended June 30, 1996. In the first quarter of
fiscal 1998, the Company adopted FASB Statement No. 128, "Earnings Per Share".
Earnings per share for prior periods have been restated in accordance with the
requirements of Statement No. 128. In addition, net income and earnings per
share have been restated for fiscal years 1997 and 1996 to consider the merger
with Cushnoc under the pooling of interests method of accounting and the effect
of the Company's 50% stock dividend. Also, the weighted average number of
shares outstanding in fiscal 1996, as well as the reported earnings per share,
have been restated as a result of the Company's 100% stock dividend in
December, 1995. The increase in net income for the year ended June 30, 1998,
33
when compared to June 30, 1997, was primarily due to the increase in net
interest income and total noninterest income. The increase in net income for
the year ended June 30, 1997, when compared to June 30, 1996, was primarily due
to the increase in net interest income. The Company's overall return on average
assets ("ROAA") was .83% for the year ended June 30, 1998, .57% for the year
ended June 30, 1997, and .55% for the year ended June 30, 1996.
The Company completed the acquisition of Cushnoc in the quarter ended December
31, 1997. The one-time costs associated with the merger totaled approximately
$435,000 before tax of which approximately $424,000 before tax was recognized
in the quarter ended December 31, 1997. The Company's net income, before the
aforementioned one-time expense for the merger with Cushnoc, would have been
$2,686,542, basic earnings per share would have been $1.13 and diluted earnings
per share would have been $.96 for the year ended June 30, 1998.
In September of 1996, Congress enacted comprehensive legislation amending the
FDIC BIF-SAIF deposit insurance assessment on savings and loan institution
deposits. The legislation imposed a one-time assessment on institutions
holding SAIF insured deposits on March 31, 1995, in an amount necessary for the
SAIF to reach its 1.25% Designated Reserve Ratio. Institutions with SAIF
deposits were required to pay an assessment rate of 65.7 cents per $100 of
domestic deposits held as of March 31, 1995. The Bank held approximately
$57,900,000 of SAIF deposits as of March 31, 1995. The net effect of the one
time assessment was $296,860 and decreased the Company's basic earnings per
share by $.09 and the diluted earnings per share by $.08 for the fiscal year
ended June 30, 1997. Commencing in 1997 and continuing through 1999, the Bank
is required to pay an annual assessment of 1.29 cents for every $100 of
domestic BIF insured deposits and 6.44 cents for every $100 of domestic SAIF
insured deposits. Commencing in 2000 and continuing through 2017, banks will
be required to pay a flat annual assessment of 2.43 cents for every $100 of
domestic deposits.
The Company's net interest income for the years ended June 30, 1998, 1997 and
1996 was $11,472,940, $10,644,833, and $10,018,230, respectively. Net interest
income for fiscal 1998 increased $828,107, or 7.78%, compared to the amount at
June 30, 1997. Total interest and dividend income increased $2,347,290 for the
year ended June 30, 1998 compared to the year ended June 30, 1997, resulting
primarily from an increase in the volume of loans offset in part by a decrease
in investment volume and rates. The increase in total interest expense of
$1,519,183 for the twelve months ended June 30, 1998 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 below.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1998 versus June 30, 1997
Difference Due to
Volume Rate Total
------------ ------------ ------------
Investments $ (722,905) $ (27,766) $ (750,671)
Loans 3,377,029 (361,725) 3,015,304
FHLB & Other 79,042 3,615 82,657
------------ ------------ ------------
34
Total Interest Earning Assets 2,733,166 (385,876) 2,347,290
Deposits 390,474 92,868 483,342
Repurchase Agreements 14,929 (7,731) 7,198
Borrowings 1,092,794 (64,151) 1,028,643
------------ ------------ ------------
Total Interest-Bearing
Liabilities 1,498,197 20,986 1,519,183
------------ ------------ ------------
Net Interest Income $ 1,234,969 $ (406,862) $ 828,107
============ ============ ============
Rate/Volume amounts spread proportionately between Volume and Rate.
Net interest income for fiscal 1997 increased $626,603, or 6.25%, compared to
the amount at June 30, 1996. Total interest and dividend income increased
$1,830,582 for the year ended June 30, 1997 compared to the year ended June 30,
1996, resulting primarily from an increase in the volume of loans and
investments offset in part by a decrease in rates. The increase in total
interest expense of $1,203,979 for fiscal 1997 compared to 1996 resulted
primarily from the increased volume of borrowings offset in part by a decrease
in rates. The changes in net interest income, as explained above, are also
presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1997 versus June 30, 1996
Difference Due to
Volume Rate Total
------------ ------------ ------------
Investments $ 970,843 $ 21,363 $ 992,206
Loans 1,573,250 (454,479) 1,118,771
FHLB & Other (243,375) (37,020) (280,395)
------------ ------------ ------------
Total Interest Earning Assets 2,300,718 (470,136) 1,830,582
Deposits (36,114) (208,713) (244,827)
Repurchase Agreements 46,631 (13,388) 33,243
Borrowings 1,533,310 (117,747) 1,415,563
------------ ------------ ------------
Total Interest-Bearing
Liabilities 1,543,827 (339,848) 1,203,979
------------ ------------ ------------
Net Interest Income $ 756,891 $ (130,288) $ 626,603
============ ============ ============
Rate/Volume amounts spread proportionately between Volume and Rate.
35
The majority of the Company's income is generated from the Bank. Management
believes that the Bank is slightly asset sensitive based on its own internal
analysis which considers its core deposits long term liabilities that are
matched to long term assets; therefore, it will generally experience a
contraction in its net interest margins during a period of falling rates.
Management believes that the maintenance of a slight asset sensitive position
is appropriate since historically interest rates tend to rise faster than they
decline.
Approximately 21% 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 34% 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 some 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 was $706,100 for fiscal 1998 compared to $614,427
and $638,860 for 1997 and 1996, respectively. Net charge-offs amounted to
$469,909 during fiscal 1998 versus $633,490 and $539,234 for 1997 and 1996,
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 $2,671,531 for the year ended June 30, 1998, $2,086,241
for June 30, 1997 and $2,187,593 for June 30, 1996. Included in non-interest
income were service charges and fees for other services which totaled $803,071
for the year ended June 30, 1998, $851,725 for the year ended June 30, 1997 and
$817,162 for June 30, 1996. The decrease in service charges and fees at June
30, 1998, when compared to June 30, 1997, was primarily due to the change in
the mix of deposit accounts and decreased deposit fee income.
Net securities gains were $287,513, $259,430, and $278,895 for fiscal 1998,
1997 and 1996, respectively. The major reason for the increase in 1998 was that
the Company sold some of its available for sale securities, taking advantage of
the fluctuation in higher market prices.
Gains on the sale of loans amounted to $726,599 for fiscal 1998 and was an
increase of $525,181 compared to the balance in fiscal 1997. Gains on the sale
of loans amounted to $201,418 for fiscal 1997 and was a decrease of $50,179
compared to $251,597 for fiscal 1996. The increase in gain on sale of loans in
1998, compared to 1997, was due to 1-4 family mortgage and SBA guaranteed loan
sales. The Bank had an increase of approximately $5,100,000 in its underwriting
and selling of Freddie Mac and Fannie Mae loans, which was a component of the
increase in gain on sale of loans at June 30, 1998, when compared to June 30,
1997. In addition, 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 1998. The decrease in gain on sales of loans in 1997, compared to
1996, was primarily due to the Bank's reduced volume in underwriting and
selling Freddie Mac, Fannie Mae and SBA guaranteed commercial loans. 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
36
loans increased from approximately $42,509,000 at June 30, 1997 to $55,581,000
at June 30, 1998.
Other income was $626,939 at June 30, 1998 and an increase of $128,767, when
compared to June 30, 1997. The increase in other income was primarily due to
income generated from the Bank's trust department 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 $9,731,717 for fiscal 1998,
$9,718,337 for fiscal 1997, and $9,536,288 for fiscal 1996. The increase in
non-interest expense of $13,380 for fiscal 1998 compared to 1997 was due, in
part, to the expenses from the merger with Cushnoc offset by the reduction in
FDIC deposit insurance expense.
The increase in non-interest expense of $182,049 for fiscal 1997 compared to
1996 was due, in part, to the following items: (I) occupancy expense increased
by $26,459 due to the expenses associated with the opening of the new Auburn
retail branch, (II) equipment expense increased by $30,500 due to the
depreciation expense associated with the new Auburn branch equipment as well as
general maintenance costs, and (III) FDIC deposit insurance increased by
$236,209 primarily due to the SAIF assessment described above. The non-interest
expense increases above were offset by the reduction of $72,752 in compensation
expense due to the Company restructuring its internal departments.
Other expenses decreased by $38,367 in fiscal 1997 compared to 1996 primarily
due to the following: a decrease of $8,000 in business insurances and computer
services, a decrease of $78,000 in other real estate owned and the provision
for other real estate owned expenses, a decrease of $9,000 in telephone
expenses due to the Company's telephone network system, a decrease of $27,000
in travel & meeting expenses, and a decrease of $31,000 in correspondent
banking fees, and decreases in the Company's other general business expenses.
These decreases in other expenses were primarily offset by the following
increases: an increase of $49,000 due to hiring third party consultants for
marketing and compliance, an increase of $22,000 in supplies expense, and an
increase of $109,000 in advertising expense to continue the Company's strategy
in increasing market exposure.
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 manages other risks, as in 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 is not exposed
to significant market risk from trading activities. The Company does not
currently use derivatives to manage market and interest rate risks.
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 committee is also involved in formulating the
economic projections for the Company's budget and strategic plan.
37
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 has undertaken 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.
The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate rise or fall in interest rates (rate
shock) over a twelve and twenty-four month period. The model is based on the
actual maturity and repricing characteristics of interest-rate sensitive assets
and liabilities. The model incorporates assumptions regarding the impact of
changing interest rates on the prepayment rate of certain assets and
liabilities. The assumptions are based on the Company's historical prepayment
speeds on assets and liabilities when interest rates increase or decrease by
200 basis points or greater. The model factors in projections for anticipated
activity levels by product lines offered by the Company. The simulation model
also takes into account the Company's increased ability to control the rates on
deposit products than over adjustable-rate loans tied to published indices.
Based on the information and assumptions in effect at June 30, 1998, management
believes that a 200 basis point rate shock over a twelve month period, up or
down, would not significantly affect the Company's annualized net interest
income.
The table below presents in tabular form contractual balances of the Company's
on balance sheet financial instruments in U.S. dollars at the expected maturity
dates as well as the fair value of those on balance sheet financial instruments
for the period ended June 30, 1998, with comparative summary balances for 1997.
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 weighted average interest rates for the various assets and
liabilities presented are actual as of June 30, 1998.
The fair value of cash, 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
38
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
payable's interest rate approximating market rates.
There have been no substantial changes in the Company's market risk from the
preceding year and the assumptions are consistent with prior year assumptions.
Market Risk
June 30, 1998
(In Thousands)
Expected Maturity Date
1998 1997
There- 1998 Fair 1997 Fair
6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 after Total Value Total Value
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
Financial Assets:
Cash $ - $ - $ - $ - $ - $ 6,822 $ 6,822 $ 6,822 $ 6,112 $ 6,112
Interest Bearing Deposits
Variable Rate - - - - - 5,330 5,330 5,330 12,662 12,662
Weighted Average Interest
Rate - - - - - 5.76% 5.76% - 5.77% -
Available for Sale
Securities
US Government Treasuries &
Agencies
Fixed Rate 347 - 399 - - 3,951 4,697 4,698 2,949 2,905
Weighted Average Interest
Rate 5.87% - 5.40% - - 7.17% 6.98% - 6.57% -
Corporate Bonds
Fixed Rate - - 54 - - 149 203 204 260 253
Weighted Average Interest
Rate - - 7.20% - - 5.95% 6.28% - 5.95% -
39
Mortgage Backed Securities
Fixed Rate 524 577 635 698 769 4,521 7,724 7,714 25,212 24,802
Weighted Average Interest
Rate 6.89% 6.89% 6.89% 6.89% 6.89% 6.89% 6.89% - 7.15% -
Equity Securities 1,083 - - - - - 1,083 993 897 851
Dividend Yield 2.64% - - - - - 2.64% - 3.82% -
FHLB Stock (1) - - - - - 5,681 5,681 5,681 4,121 4,121
Weighted Average Interest
Rate - - - - - 6.40% 6.40% - 6.50% -
Loans Held For Sale
Fixed Rate 370 - - - - - 370 372 240 242
Weighted Average Interest
Rate 7.08% - - - - - 7.08% - 8.19% -
Loans
Residential Mortgages
Fixed Rate 8,792 8,582 9,443 10,533 11,919 29,281 78,550 78,713 66,454 67,844
Weighted Average Interest
Rate 8.49% 8.61% 8.63% 8.66% 8.61% 8.61% 8.60% - 8.91% -
Variable Rate 10,072 10,184 11,059 12,450 17,240 32,950 93,955 94,554 73,861 73,507
Weighted Average Interest
Rate 8.70% 8.59% 8.52% 8.55% 8.44% 8.45% 8.51% - 8.79% -
Commercial Real Estate
Fixed Rate 709 645 483 1,994 1,030 797 5,658 5,594 6,381 5,917
Weighted Average Interest
Rate 9.42% 9.19% 9.37% 9.34% 9.12% 9.08% 9.26% - 9.22% -
Variable Rate 6,601 6,044 6,100 6,156 6,285 11,714 42,900 42,014 41,744 40,906
Weighted Average Interest
Rate 10.00% 9.92% 9.83% 9.90% 9.92% 9.89% 9.91% - 10.11% -
Commercial
Fixed Rate 1,240 1,182 3,513 2,591 2,119 563 11,208 11,104 4,978 4,821
Weighted Average Interest
Rate 9.35% 10.51% 10.76% 10.81% 10.36% 10.81% 10.52% - 10.37% -
Variable Rate 7,152 1,061 1,893 2,059 1,989 1,706 15,860 15,426 14,472 14,077
Weighted Average Interest
Rate 9.59% 10.14% 10.14% 10.05% 10.15% 10.13% 9.88% - 10.18% -
Consumer
40
Fixed Rate 2,745 2,689 4,316 4,117 8,713 10,500 33,080 33,809 13,618 13,038
Weighted Average Interest
Rate 10.08% 10.36% 9.56% 10.58% 10.88% 10.71% 10.53% - 10.42% -
Variable Rate 82 173 73 96 95 301 820 806 1,174 1,156
Weighted Average Interest
Rate 7.89% 8.91% 8.07% 7.74% 8.66% 8.77% 8.53% - 8.87% -
Interest Receivable 1,934 - - - - - 1,934 1,934 1,640 1,640
Finanicial Liabilities:
Deposits (with no stated
maturity)
Demand Deposits - - - - - 15,209 15,209 15,209 13,784 13,784
NOW - - - - - 23,430 23,430 23,430 14,368 14,368
Weighted Average Interest
Rate - - - - - 3.11% 3.11% - 1.26% -
Money Market - - - - - 11,993 11,993 11,993 15,236 15,236
Weighted Average Interest
Rate - - - - - 2.74% 2.74% - 3.44% -
Regular Savings - - - - - 20,306 20,306 20,306 22,484 22,484
Weighted Average Interest
Rate - - - - - 2.75% 2.75% - 2.60% -
Time Deposits
Fixed Rate 73,691 22,865 8,789 5,010 1,739 11 112,105 112,507 107,049 106,421
Weighted Average Interest
Rate 5.62% 5.97% 6.05% 6.38% 5.80% 5.03% 5.76% - 6.42% -
Variable Rate 814 167 - - - - 981 981 1,120 1,120
Weighted Average Interest
Rate 5.09% 5.09% - - - - 5.09% - 5.03% -
Repurchase Agreements
Fixed Rate 504 - - - - - 504 504 616 616
Weighted Average Interest
Rate 5.20% - - - - - 5.20% - 5.18% -
Variable Rate 4,702 - - - - - 4,702 4,702 4,483 4,483
Weighted Average Interest
Rate 4.09% - - - - - 4.09% - 4.12%
FHLB Advances
41
Fixed Rate 42,745 4,000 1,213 1,139 9,632 44,711 103,440 101,052 79,494 79,488
Weighted Average Interest
Rate 5.64% 6.17% 5.71% 6.08% 5.76% 5.34% 5.55% - 5.80%
Variable Rate 1,000 - - - - - 1,000 1,000 1,000 1,003
Weighted Average Interest
Rate 5.95% - - - - - 5.95% - 6.20%
Note Payable
Fixed Rate 306 306 306 75 - - 993 993 1,299 1,299
Weighted Average Interest
Rate 8.00% 8.00% 8.00% 8.00% - - 8.00% - 8.00%
(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 is currently addressing the Year 2000 issue. Many existing computer
programs and hardware configurations use only two digits to identify a year in
the date field. Since these programs did not take into consideration the
upcoming change in the century, many computer applications could create
erroneous results by the year 2000 if not corrected. The Year 2000 issue will
affect this Company and it will affect virtually all companies and
organizations, including the Company's borrowers. The Company has organized a
Year 2000 committee, comprised of senior officers and a full time consultant,
to research, develop and implement a plan that will correct this issue within
the time lines established by the Company's regulators. The Office of Thrift
Supervision (OTS) has issued a formal regulation and comprehensive plan
concerning the Year 2000 issue for financial institutions, for which the OTS
has oversight. The Company has adopted the regulatory comprehensive plan which
has the following phases.
Awareness Phase
This phase consists of defining the Year 2000 problem; developing the resources
necessary to perform compliance work, establishing a Year 2000 program
committee and developing an overall strategy that encompasses in-house systems,
service bureaus for systems that are outsourced, vendors, auditors, customers,
and suppliers (including correspondents). This phase has been completed by the
Company's committee.
42
Assessment Phase
This phase consists of assessing the size and complexity of the problem and
detailing the magnitude of the effort necessary to address the Year 2000 issue.
This phase must identify all hardware, software, networks, automated teller
machines, other various processing platforms, and customer and vendor
interdependencies affected by the Year 2000 date change. The assessment must go
beyond information systems and include environmental systems that are dependent
on embedded microchips, such as security systems, elevators and vaults. During
this phase management also must evaluate the Year 2000 effect on other
strategic business initiatives. The assessment should consider the potential
effect that mergers and acquisitions, major system development, corporate
alliances, and system interdependencies will have on existing systems and/or
the potential Year 2000 issues that may arise from acquired systems. The
financial institution or vendor should also identify resource needs and
establish time frames and sequencing of Year 2000 efforts. Resource needs
include appropriately skilled personnel, contractors, vendor support, budget
allocations, and hardware capacity. This phase should clearly identify
corporate accountability throughout the project, and policies should define
reporting, monitoring, and notification requirements. Finally, contingency
plans should be developed to cover unforeseen obstacles during the renovation
and validation phases and include plans to deal with lesser priority systems
that would be fixed later in the renovation phase.
The assessment phase has been materially completed, but is considered an
ongoing phase for the Company. The Company is in the process of developing its
contingency plan. The Company has instituted a comprehensive plan to
communicate with all its borrowers that the Company considers to be at risk
concerning the Year 2000 issue. The Company considers this plan necessary to
mitigate the risk associated with borrowers not having the ability to make loan
payments due to a Year 2000 issue. The Company has currently estimated the
following costs associated with the Year 2000 issue, (1) computer hardware
replacement $130,000, (2) software replacement $72,000, (3) testing and
administrative costs $84,000, and (4) potential contingency costs $60,000. As
of June 30, 1998, the Company has incurred $38,400 of Year 2000 expenses. These
costs are under continuous review and will be revised as needed. As of June 30,
1998, the Company's current computer hardware and software have been
substantially depreciated and the costs associated with the replacement of the
mainframe, software and data-communications is a component of Company's general
business expenses for fiscal 1999.
Renovation Phase
This phase includes code enhancements, hardware and software upgrades, system
replacements, vendor certification, and other associated changes. Work should
be prioritized based on information gathered during the assessment phase. For
institutions relying on outside servicers or third-party software providers,
ongoing discussions and monitoring of vendor progress are necessary. Each
servicer and vendor has been contacted and has or will provide information to
the Company concerning their efforts to comply with the Year 2000 issue. The
Company anticipates to have this phase completed by December 31, 1998.
Validation Phase
Testing is a multifaceted process that is critical to the Year 2000 project and
inherent in each phase of the project management plan. This process includes
the testing of incremental changes to hardware and software components. In
addition to testing upgraded components, connections with other systems must be
verified, and all changes should be accepted by internal and external users.
Management will establish controls to assure the effective and timely
43
completion of all hardware and software testing prior to final implementation.
As with the renovation phase, the Company will be in ongoing discussions with
their vendors on the success of their validation efforts. The Company
anticipates to have this phase completed by December 31, 1998.
Implementation Phase
In this phase, systems should be validated as Year 2000 compliant and be
accepted by the business users. For any system failing certification, the
business effect must be assessed clearly and the organization's Year 2000
contingency plans should be implemented. Any potentially noncompliant mission-
critical system should be brought to the attention of executive management
immediately for resolution. In addition, this phase must ensure that any new
systems or subsequent changes to verified systems are compliant with Year 2000
requirements. The Company anticipates to have this phase completed by March 31,
1999.
In summary, the Company recognizes the Year 2000 as a global issue with
potentially catastrophic results if not addressed. The Company has and will
continue to undertake all the necessary steps to protect itself and its
customers concerning the Year 2000 issue. Management is confident that all the
instituted phases will be completed and in place prior to the year 2000.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement 130"). Statement 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. This Statement requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed in equal prominence with the other financial statements. It requires
that an enterprise display an amount representing total comprehensive income
for each period. It does not require per share amounts of comprehensive income
to be disclosed. Comparative financial statements provided for earlier periods
are required to be reclassified to reflect the provisions of this statement.
The Company will adopt Statement 130 the first quarter of fiscal 1999.
Management anticipates that the only difference between net income and
comprehensive income will be the net unrealized gains or losses on available
for sale securities.
In June of 1997, FASB issued Statement of Financial Accounting Standards No.
131,"Disclosures about Segments of an Enterprise and Related Information",
("Statement 131"). Statement 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 is
effective for financial statements for periods beginning after December 15,
1997. Earlier application is encouraged. In the initial year of application,
comparative information for earlier years is to be restated, unless it is
impracticable to do so. Management does not anticipate that the Company will
be impacted by Statement 131.
In June of 1998, FASB issued Statement of Financial Accounting Standard 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
44
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 effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Management
has not determined the impact of the adoption of Statement 133.
FORWARD-LOOKING STATEMENTS
- --------------------------
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, year 2000
readiness, simulation of changes in interest rates, prospective results of
operations, capital spending and financing sources, and revenue sources.
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
"may", "will", "believe", "expect", "estimate", "anticipate", "continue", or
similar terms or variations on those terms, or the negative of those terms.
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.
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
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and 1997
ASSETS 1998 1997
-------- -------------- --------------
45
Cash and due from banks $ 6,821,574 $ 6,112,425
Interest bearing deposits 421,392 443,021
Federal Home Loan Bank overnight deposits 4,909,000 12,218,898
-------------- --------------
12,151,966 18,774,344
Trading account securities, at market value 50,000 25,000
Available for sale securities, at market value
(notes 2, 7 and 9) 13,608,823 28,810,625
Loans held for sale 369,500 240,000
Loans receivable (notes 3 and 7):
Mortgage loans:
Residential real estate 171,903,751 139,633,099
Construction loans 3,521,427 3,673,584
Commercial real estate 47,052,134 46,443,071
-------------- --------------
222,477,312 189,749,754
Undisbursed portion of construction loans (1,421,847) (1,076,936)
Net deferred loan origination (fees) costs 7,270 (203,819)
-------------- --------------
Total mortgage loans 221,062,735 188,468,999
Commercial loans 27,068,416 19,421,552
Consumer and other loans 33,899,799 14,791,583
-------------- --------------
282,030,950 222,682,134
Less allowance for loan losses 2,978,000 2,741,809
-------------- --------------
Net loans 279,052,950 219,940,325
Premises and equipment - net (note 4) 4,473,885 4,774,561
Other real estate owned - net (note 5) 350,496 563,207
Accrued interest receivable - loans 1,710,704 1,344,360
Accrued interest receivable - investments 222,994 295,733
Federal Home Loan Bank stock, at cost (note 7) 5,680,500 4,121,000
Goodwill, net of accumulated amortization of
$1,532,807 in 1998 and $1,236,433 in 1997 1,923,915 2,220,289
Other assets (note 14) 2,936,861 2,967,987
-------------- --------------
$ 322,532,594 $ 284,077,431
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------- -------------- --------------
Liabilities:
Deposits (note 6):
Demand $ 15,209,219 $ 13,784,339
NOW 23,429,512 14,368,105
Money market 11,993,110 15,236,189
Regular savings 20,305,953 22,483,976
Brokered deposits 7,574,710 7,185,566
Certificates of deposit under $100,000 86,156,463 81,154,696
Certificates of deposit $100,000 or more 19,355,130 18,708,415
-------------- --------------
46
Total deposits 184,024,097 172,921,286
FHLB Borrowings (note 7) 104,439,952 80,494,471
Note payable (note 8) 993,055 1,298,611
Securities sold under repurchase agreements
(notes 2 and 9) 5,205,594 5,098,622
Other liabilities 2,730,369 2,168,861
-------------- --------------
Total liabilities 297,393,067 261,981,851
Commitments and contingent liabilities
(notes 8, 16 and 17)
Stockholders' equity (notes 10, 11, 12 and 16):
Series A cumulative convertible preferred
stock; $1 par value, 1,000,000 shares
authorized; 45,454 shares issued and
outstanding 999,988 999,988
Series B cumulative convertible preferred
stock; $1 par value, 1,000,000 shares
authorized in 1997; 71,428 shares issued
and outstanding in 1997 - 999,992
Common stock, $1 par value, 3,000,000 shares
authorized; 2,614,285 and 1,462,909 shares
issued and outstanding at June 30, 1998 and
1997, respectively 2,614,285 1,462,909
Additional paid-in capital 9,258,107 7,699,882
Retained earnings 12,331,595 11,266,984
Net unrealized losses on available for sale
securities (note 2) (64,448) (334,175)
-------------- --------------
Total stockholders' equity 25,139,527 22,095,580
-------------- --------------
$ 322,532,594 $ 284,077,431
============== ==============
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
------------- ------------- -------------
Interest and dividend income:
Interest on loans $ 21,988,864 $ 18,973,560 $ 17,854,789
Interest on Federal Home Loan
Bank overnight deposits 514,113 429,531 707,262
Interest and dividends on
available for sale securities 1,461,024 2,277,573 1,359,423
Dividends on Federal Home Loan
Bank stock 300,664 227,360 155,256
Other interest income 18,346 27,697 28,409
47
------------- ------------- -------------
Total interest income 24,283,011 21,935,721 20,105,139
Interest expense:
Deposits (note 6) 7,586,717 7,103,375 7,348,202
Repurchase agreements 206,651 199,453 166,210
Borrowed funds 5,016,703 3,988,060 2,572,497
------------- ------------- -------------
Total interest expense 12,810,071 11,290,888 10,086,909
------------- ------------- -------------
Net interest income before
provision for loan losses 11,472,940 10,644,833 10,018,230
Provision for loan losses (note 3) 706,100 614,427 638,860
------------- ------------- -------------
Net interest income after
provision for loan losses 10,766,840 10,030,406 9,379,370
Noninterest income:
Fees and service charges on loans 206,961 194,020 201,504
Fees for other services to
customers 596,110 657,705 615,658
Net securities gains (note 2) 285,716 171,080 231,344
Gain on trading securities 1,797 88,350 47,551
Gain on sales of loans 726,599 201,418 251,597
Loan servicing fees 227,409 275,496 302,261
Other income 626,939 498,172 537,678
------------- ------------- -------------
Total noninterest income 2,671,531 2,086,241 2,187,593
Noninterest expense:
Salaries and employee benefits
(notes 15 and 16) $ 4,638,813 $ 4,614,802 $ 4,687,554
Occupancy expense (note 4) 903,978 783,434 756,975
Equipment expense (note 4) 863,580 893,605 863,105
FDIC insurance expense (note 10) 60,097 390,494 154,285
Other (notes 2, 13 and 15) 3,265,249 3,036,002 3,074,369
------------- ------------- -------------
Total noninterest expense 9,731,717 9,718,337 9,536,288
------------- ------------- -------------
Income before income taxes 3,706,654 2,398,310 2,030,675
Income tax expense (note 14) 1,302,871 908,565 737,826
------------- ------------- -------------
Net income $ 2,403,783 $ 1,489,745 $ 1,292,849
============= ============= =============
Earnings per share
(notes 11 and 16):
Basic 1.00 .63 .56
Diluted .86 .56 .50
See accompanying notes.
48
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1998, 1997 and 1996
Preferred Stock Common
Series A and B Stock
--------------- ---------------
Balance at June 30, 1995 $ 1,999,980 $ 735,442
Net income - -
Common stock - warrants exercised - 50,000
Stock split in the form of a dividend - 597,743
Increase in net unrealized losses on
available for sale securities - -
Treasury stock purchased - -
Issuance of common stock - 765
Stock options exercised - 38,000
Dividends on preferred stock - -
Dividends on common stock at $.16 per share - -
--------------- ---------------
Balance at June 30, 1996 1,999,980 1,421,950
Net income - -
Issuance of common stock through exercise
of stock options and purchase of treasury
stock - 20,000
Exercise of stock warrants - 19,940
Decrease in net unrealized losses on
available for sale securities - -
Treasury stock issued - employee stock bonus - -
Issuance of common stock - 1,019
Dividends on preferred stock - -
Dividends on common stock at $.21 per share - -
--------------- ---------------
Balance at June 30, 1997 1,999,980 1,462,909
Net income - -
Decrease in net unrealized losses on
available for sale securities - -
Issuance of common stock - 939
Conversion of preferred stock Series B (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 $.21 per share - -
--------------- ----------------
Balance at June 30, 1998 $ 999,988 $ 2,614,285
49
=============== ================
Net Unrealized
Additional Losses on
Paid-in Treasury Retained Available for
Capital Stock Earnings Sale Securities Total
- -------------- -------------- -------------- --------------- --------------
$ 6,703,434 $ - $ 10,044,825 $ (95,507) $ 19,388,174
- - 1,292,849 - 1,292,849
650,000 - - - 700,000
- - (597,743) - -
- - - (741,847) (741,847)
- (52,277) - - (52,277)
10,793 - - - 11,558
152,000 - - - 190,000
- - (139,999) - (139,999)
- - (284,891) - (284,891)
- -------------- -------------- -------------- --------------- --------------
7,516,227 (52,277) 10,315,041 (837,354) 20,363,567
- - 1,489,745 - 1,489,745
83,450 (28,420) - - 75,030
88,005 67,055 - - 175,000
- - - 503,179 503,179
(268) 13,642 - - 13,374
12,468 - - - 13,487
- - (139,997) - (139,997)
- - (397,805) - (397,805)
- -------------- -------------- -------------- --------------- --------------
7,699,882 - 11,266,984 (334,175) 22,095,580
- - 2,403,783 - 2,403,783
- - - 269,727 269,727
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
============== ============== ============== =============== ==============
See accompanying notes.
50
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
-------------- -------------- --------------
Cash flows from operating
activities:
Net income $ 2,403,783 $ 1,489,745 $ 1,292,849
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 706,100 614,427 638,860
Provision for losses on other
real estate owned 62,300 39,000 94,711
Deferred income tax expense
(benefit) (14,949) (72,290) 42,236
Depreciation of premises and
equipment and other 617,628 665,193 745,638
Goodwill amortization 296,374 296,374 308,913
Net gain on sale of available
for sale securities (285,716) (171,080) (231,344)
Net gains on sales of loans (726,599) (201,418) (251,597)
Originations of loans held for
sale (7,251,700) (2,178,115) (11,585,640)
Proceeds from sale of loans
held for sale 7,287,744 2,430,823 11,781,652
Net change in trading account
securities (25,000) 172,621 (196,246)
Other 41,035 (103,988) (68,105)
Change in other assets and
liabilities:
Interest receivable (293,605) (125,996) (209,848)
Other assets and liabilities 466,597 (17,869) (110,294)
-------------- -------------- --------------
Net cash provided by operating
activities 3,283,992 2,837,427 2,251,785
Cash flows from investing
activities:
Proceeds from the sale of
available for sale securities 27,974,991 12,377,154 16,858,706
Purchase of available for sale
securities (15,666,889) (12,129,135) (39,604,596)
Proceeds from maturities and
principal payments on available
for sale securities 3,588,092 3,256,713 2,778,278
Proceeds from sale of loans 17,479,139 - -
Purchases of loans (66,283,950) (25,425,642) -
Net increase in loans (10,509,720) (10,910,942) (19,928)
Additions to premises and
equipment (363,562) (1,043,176) (424,061)
Proceeds from sale of other real
estate owned 214,884 519,871 681,386
51
Purchase of Federal Home Loan
Bank stock (1,559,500) (1,362,700) (506,200)
-------------- -------------- --------------
Net cash used by investing
activities (45,126,515) (34,717,857) (20,236,415)
Cash flows from financing
activities:
Net increase (decrease) in
deposits $ 11,102,811 $ 8,066,043 $ (3,826,275)
Net increase in repurchase
agreements 106,972 1,335,656 1,177,579
Dividends paid (597,270) (537,802) (424,890)
Treasury stock purchased (44,988) (28,420) (52,277)
Treasury stock sold 44,988 - -
Stock options exercised 190,700 103,450 190,000
Warrants exercised 761,433 175,000 700,000
Issuance of common stock 16,669 13,487 11,558
Stock split - payment for
fractional shares (1,095) - -
Net borrowings from the Federal
Home Loan Bank 23,945,481 27,856,994 16,363,190
Principal payments on notes
payable (305,556) (203,581) (507,899)
-------------- -------------- --------------
Net cash provided by financing
activities 35,220,145 36,780,827 13,630,986
-------------- -------------- --------------
Net (decrease) increase in cash
and cash equivalents (6,622,378) 4,900,397 (4,353,644)
Cash and cash equivalents,
beginning of year 18,774,344 13,873,947 18,227,591
-------------- -------------- --------------
Cash and cash equivalents,
end of year $ 12,151,966 $ 18,774,344 $ 13,873,947
============== ============== =============
Supplemental schedule of cash
flow information:
Interest paid $ 12,727,917 $ 11,159,387 $ 10,103,852
Income taxes paid 972,000 641,000 919,000
Supplemental schedule of noncash
investing and financing
activities:
Transfer from loans to other
real estate owned $ 56,861 $ 538,019 $ 387,468
Loans originated to finance
the sales of other real
estate owned - - 184,732
Net change in valuation for
unrealized losses on available
for sale securities 269,727 503,179 741,847
Net change in deferred taxes for
unrealized losses on available
52
for sale securities 138,949 259,214 382,164
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of Northeast Bancorp and Subsidiary
(the Company) conform to generally accepted accounting principles and
general practice within the banking industry.
Merger
------
On October 24, 1997, the Company merged with Cushnoc Bank and Trust Company
in a transaction accounted for as a pooling of interest. All financial
information includes the financial position and results of operations of
Cushnoc Bank and Trust Company for all periods presented prior to the date
of the merger (See note 15). Cushnoc Bank and Trust Company had a fiscal
year based on the twelve months ending December 31. The financial
information for Cushnoc Bank and Trust Company has been included using the
same fiscal year presentation as Northeast Bancorp. The effect of the
different fiscal years is not significant to the consolidated financial
statements. Upon consummation of the merger, Cushnoc Bank and Trust Company
was merged into the Company's banking subsidiary, Northeast Bank, F.S.B.
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.
Basis of Financial Statement Presentation
-----------------------------------------
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 and the
valuation of real estate acquired in connection with foreclosures or in
53
satisfaction of loans. In connection with the determination of the allowance
for loan losses and the carrying value of real estate acquired through
foreclosure, 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. In addition, all of the real estate acquired through
foreclosure is located in the same market. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio and
the recovery of the carrying amount of real estate acquired through
foreclosure are susceptible to changes in market conditions in Maine.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Northeast Bancorp, a savings and loan holding company, and its wholly-owned
subsidiary, Northeast Bank, F.S.B. (including the bank's wholly-owned
subsidiary, Northeast Financial Services, Inc.) All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash Equivalents
----------------
For purposes of presentation in the cash flow statements, 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, 1998, the reserve balance was approximately
$872,000.
Investments
-----------
Trading Account Securities
--------------------------
Trading account securities, consisting of equity securities purchased with
the intent to be subsequently sold to provide net securities gains, are
carried at market value. Realized and unrealized gains and losses on
trading account securities are recognized in the statements of income as
they occur. Transactions are accounted for as of the trade date using the
specific identification method.
Available for Sale Securities
-----------------------------
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. 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 as a
writedown. Premiums and discounts are amortized and accreted over the
term of the securities on the level yield method adjusted for prepayments.
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.
54
Loans Held for Sale and Mortgage Banking Activities
---------------------------------------------------
Loans originated for sale are specifically identified and carried at the
lower of aggregate cost or estimated 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, 1998 and 1997. Gains and losses
on sales of loans are determined using the specific identification method
and recorded as gain on sales of loans in the consolidated statements of
income.
Effective July 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 122, Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement No. 65. Statement
No. 122 requires that the Company recognize as separate assets the rights to
service mortgage loans for others, and requires the assessment of
capitalized mortgage servicing rights for impairment based on the current
fair value of those rights. This assessment includes servicing rights
capitalized prior to adoption of Statement No. 122. As required by
Statement No. 122, the Company capitalizes mortgage servicing rights at
their allocated cost based on the relative fair values upon the sale of the
related loans. The impact of adoption of Statement No. 122 was not material
to the Company's financial position, liquidity or results of operations.
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The impact of adoption of Statement No. 125
was not material to the Company's financial position, liquidity or results
of operations.
The Company's mortgage servicing rights asset at June 30, 1998 and 1997 is
not material and is included in other assets in the consolidated statements
of financial position. Mortgage servicing rights are amortized on an
accelerated method 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 premiums paid
and net deferred loan costs reduced by partial charge-offs. 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
55
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 or the term of the lease, if
shorter. Maintenance and repairs are charged to current expense as incurred
and the cost of major renewals and betterments are capitalized.
Long-lived assets are evaluated periodically for other-than-temporary
impairment. An assessment of recoverability is performed prior to any
writedown of the asset. If circumstances suggest that their value may be
permanently 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 income in the period that includes the enactment date.
Other Real Estate Owned
-----------------------
Other real estate owned is comprised of properties acquired through
foreclosure proceedings, or acceptance of a deed or title in lieu of
56
foreclosure. Other real estate owned is carried at the lower of cost or
fair value of the collateral less estimated selling expenses. Losses
arising from the acquisition of such properties are charged against the
allowance for loan losses. Operating expenses and any subsequent provisions
to reduce the carrying value are charged to current period earnings. Gains
and losses upon disposition are reflected in earnings as realized.
Goodwill
--------
Goodwill arising from acquisitions is being amortized on a straight-line
basis over ten to fifteen years. 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 $172,000, $187,000, and $78,000 for the years ended June 30,
1998, 1997 and 1996, respectively.
Reclassification
----------------
Certain prior year accounts and balances in the consolidated financial
statements have been reclassified to conform to the current year
presentation.
2. Available for Sale Securities
-----------------------------
A summary of the cost and approximate fair values of available for sale
securities at June 30, 1998 and 1997 follows:
1998 1997
------------------------ ------------------------
Fair Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Debt securities issued
by the U.S. Treasury
and other U.S.
Government corporations
and agencies $ 4,696,659 $ 4,698,266 $ 2,948,527 $ 2,905,402
Corporate bonds 202,952 203,484 259,749 252,805
Mortgage-backed
securities 7,723,843 7,714,332 25,211,935 24,801,836
Equity securities 1,083,018 992,741 896,739 850,582
----------- ----------- ----------- -----------
$13,706,472 $13,608,823 $29,316,950 $28,810,625
=========== =========== =========== ===========
The gross unrealized gains and unrealized losses on available for sale
securities are as follows:
57
1998 1997
------------------------ ------------------------
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 $ 4,157 $ 2,550 $ - $ 43,125
Corporate bonds 789 257 - 6,944
Mortgage-backed
securities 27,730 37,241 37,503 447,602
Equity securities 16,676 106,953 28,965 75,122
----------- ----------- ----------- -----------
$ 49,352 $ 147,001 $ 66,468 $ 572,793
=========== =========== =========== ===========
At June 30, 1998, investment securities with a market value of approximately
$8,547,000 were pledged as collateral to secure outstanding repurchase
agreements.
At June 30, 1998 and 1997, included in net unrealized losses on available
for sale securities as a reduction to stockholders' equity are net
unrealized losses of $97,649 and $506,325, respectively, net of the deferred
tax effect of $33,201 and $172,150, respectively.
The cost and fair values of available for sale securities at June 30, 1998
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
------------ ------------
Due in one year $ 347,253 $ 347,253
Due after one year through five years 452,952 450,984
Due after five years through ten years 1,100,000 1,103,200
Due after ten years 2,999,406 3,000,313
------------ ------------
4,899,611 4,901,750
Mortgage-backed securities (including
securities with interest rates ranging
from 5.15% to 9.0% maturing
September 2003 to February 2026) 7,723,843 7,714,332
Equity securities 1,083,018 992,741
------------ ------------
$13,706,472 $13,608,823
58
============ ============
The realized gains and losses on available for sale securities for the year
ended June 30, 1998 were $288,196 and $2,480, respectively, for the year
ended June 30, 1997 were $171,205 and $125, respectively, and for the year
ended June 30, 1996 were $248,542 and $17,198, 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. At
June 30, 1998, 1997 and 1996, write-downs of available for sale securities
were $172,235, $110,000 and $93,819, respectively, and are included in other
expense in the statements of income.
3. Loans
-----
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 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 economic sector in the
borrowers' geographic area and 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
$2,219,800 and $2,165,044 at June 30, 1998 and 1997, respectively. In 1998,
new loans granted to related parties totaled $1,432,402; payments and
reductions amounted to $1,377,646. New loans granted to related parties in
1997 totaled $413,169; payments and reductions amounted to $913,409.
Included in the loan portfolio are unamortized premiums on purchased loans
of $1,016,498 and $297,839 at June 30, 1998 and 1997, respectively.
Activity in the allowance for loan losses was as follows:
Years Ended June 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Balance at beginning of year $ 2,741,809 $ 2,760,872 $ 2,661,246
Provision charged to operating
expenses 706,100 614,427 638,860
Loans charged off (785,111) (772,250) (620,301)
Recoveries on loans charged off 315,202 138,760 81,067
59
------------ ------------ ------------
Net loans charged off (469,909) (633,490) (539,234)
------------ ------------ ------------
Balance at end of year $ 2,978,000 $ 2,741,809 $ 2,760,872
============ ============ ============
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. Except for certain restructured loans, impaired loans are loans that
are on nonaccrual status. 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, or 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. A loan is classified as an insubstance foreclosure when the Company
has taken possession of the collateral, regardless of whether formal
foreclosure proceedings take place.
At June 30, 1998, total 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 $19,693 and the average
balance of outstanding impaired loans was $1,956,488. At June 30, 1997,
total impaired loans were $1,661,698 of which $844,457 had related
allowances of $369,474. During the year ended June 30, 1997, the income
recognized related to impaired loans was $50,690 and the average balance of
outstanding impaired loans was $1,330,983. During the year ended June 30,
1996, the average balance of outstanding impaired loans was $1,799,087 and
income recognized on impaired loans was $87,128. 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, 1998 and 1997 totaled approximately $2,248,000 and $2,881,000,
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, 1998, 1997 and 1996, totaled approximately
$165,000, $203,000, $251,000, 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
60
of which have been modified.
The Company was servicing for others, mortgage loans of approximately
$55,581,000, $42,509,000 and $49,616,000 at June 30, 1998, 1997 and 1996,
respectively.
4. Premises and Equipment
----------------------
Premises and equipment at June 30, 1998 and 1997 are summarized as follows:
1998 1997
------------ ------------
Land $ 1,037,503 $ 1,044,109
Buildings 2,503,254 2,573,698
Leasehold and building improvements 1,130,270 1,061,448
Furniture, fixtures and equipment 4,480,402 4,180,570
------------ ------------
9,151,429 8,859,825
Less accumulated depreciation 4,677,544 4,085,264
------------ ------------
Net premises and equipment $ 4,473,885 $ 4,774,561
============ ============
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense, was $615,591, $660,871 and $741,180 for the
years ended June 30, 1998, 1997 and 1996, respectively.
5. Other Real Estate Owned
-----------------------
The following table summarizes the composition of other real estate owned
at June 30:
1998 1997
------------ ------------
Real estate properties acquired in settlement
of loans $ 355,596 $ 614,046
Less allowance for losses 5,100 50,839
------------ ------------
$ 350,496 $ 563,207
============ ============
Activity in the allowance for losses on other real estate owned was as
follows:
1998 1997 1996
------------ ------------ ------------
61
Balance at beginning of year $ 50,839 $ 100,000 $ 5,289
Provision for losses on other
real estate owned 62,300 39,000 94,711
Other real estate owned write-downs (108,039) (88,161) -
------------ ------------ ------------
Balance at end of year $ 5,100 $ 50,839 $ 100,000
============ ============ ============
6. Deposits
--------
Deposits at June 30 are summarized as follows:
Weighted
Average
Rate 1998 1997
at June --------------------- ---------------------
30, 1998 Amount Percent Amount Percent
-------- ------------- ------- ------------- -------
Demand 0.00% $ 15,209,219 8.3% $ 13,784,339 8.0%
NOW 3.11 23,429,512 12.7 14,368,105 8.3
Money market 2.74 11,993,110 6.5 15,236,189 8.8
Regular savings 2.75 20,305,953 11.0 22,483,976 13.0
Certificates of deposit:
1.00 - 3.75% 1.00 360,674 .2 328,940 .2
3.76 - 5.75% 5.45 55,603,422 30.2 56,951,216 32.9
5.76 - 7.75% 6.09 57,105,075 31.0 49,635,723 28.7
7.76 - 9.75% 8.04 17,132 .1 132,798 .1
-------- ------------- ------- ------------- -------
4.42% $184,024,097 100.0% $172,921,286 100.0%
======== ============= ======= ============= =======
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
There-
1999 2000 2001 2002 2003 after
----------- ----------- ---------- ---------- ---------- -------
1.00 - 3.75% $ 311,876 $ 48,798 $ - $ - $ - $ -
3.76 - 5.75% 47,742,033 5,193,177 1,257,912 357,928 1,041,829 10,543
5.76 - 7.75% 26,433,161 17,791,377 7,531,021 4,652,184 697,332 -
7.76 - 9.75% 17,132 - - - - -
Interest expense on deposits for the years ended June 30, 1998, 1997 and
1996 is summarized as follows:
62
1998 1997 1996
------------ ------------ ------------
NOW $ 269,412 $ 216,437 $ 319,899
Money market 466,453 536,623 555,919
Regular savings 569,901 592,148 642,216
Certificates of deposit 6,280,951 5,758,167 5,830,168
------------ ------------ ------------
$ 7,586,717 $ 7,103,375 $ 7,348,202
============ ============ ============
7. Federal Home Loan Bank Borrowings
---------------------------------
A summary of borrowings from the Federal Home Loan Bank are as follows:
June 30, 1998
-------------------------------------------------------
Principal Interest Maturity
Amounts Rates Dates
--------------- --------------- ---------------
$ 43,745,440 5.55% - 6.00% 1999
4,000,000 5.88% - 6.27% 2000
1,212,676 5.56% - 6.40% 2001
1,138,627 6.21% - 6.49% 2002
9,631,854 5.69% - 6.64% 2003
1,711,355 6.36% - 6.67% 2004
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
---------------
$ 104,439,952
===============
June 30, 1997
-------------------------------------------------------
Principal Interest Maturity
Amounts Rates Dates
--------------- --------------- ---------------
$ 55,458,706 4.97% - 6.39% 1998
15,606,482 5.64% - 6.20% 1999
3,000,000 6.27% 2000
273,080 6.40% 2001
1,441,827 6.21% - 6.49% 2002
740,762 6.61% - 6.64% 2003
1,973,614 6.36% - 6.67% 2004
2,000,000 6.65% 2005
---------------
$ 80,494,471
===============
63
Residential mortgages on one to four family owner occupied homes, free of
liens, pledges and encumbrances, investment securities not otherwise
pledged, and the Company's Federal Home Loan Bank stock equal to at least
200% of the borrowings from that bank have been pledged 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, 1998 are
adjustable and, therefore, the rates are subject to change.
8. Note Payable
------------
The note payable at June 30, 1998 and 1997 consists of a loan from an
unrelated financial institution for the acquisition of a bank. The note is
payable in eighteen equal quarterly principal payments of $76,389. Interest
is payable monthly at 8%. The Company has pledged Northeast Bank F.S.B.
common stock and a $400,000 key man life insurance policy as collateral for
the loan.
The loan agreement contains certain covenants which limit capital
expenditures of the Company and the amount of nonperforming loans and
requires minimum loan loss reserves, capital, return on assets, and the
Company is required to obtain approval from the lender before the Company
can commit to a merger or consolidation with another entity. At June 30,
1998, the Company complied with these covenants.
9. Securities Sold Under Repurchase Agreements
-------------------------------------------
During 1998 and 1997, the Company sold securities under agreements to
repurchase. The weighted average interest rate on repurchase agreements was
4.20% and 4.25% at June 30, 1998 and 1997, respectively. These borrowings,
which were scheduled to mature within 180 days, were collateralized by FHLMC
and GNMA securities with a market value of $8,547,000 and amortized cost of
$8,558,000 at June 30, 1998, and a market value of $9,161,000 and amortized
cost of $9,300,000 at June 30, 1997. The average balance of repurchase
agreements was $4,917,000 and $4,566,000 during the years ended June 30,
1998 and 1997, respectively. The maximum amount outstanding at any month-
end during 1998 and 1997 was $5,737,000 and $5,214,000, respectively.
Securities sold under these agreements were under the control of the Company
during 1998 and 1997.
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.
64
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, 1998 and 1997, the most recent notification from the Office
of Thrift Supervision (OTS) categorized the Bank as well capitalized.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The following tables illustrate the actual and required amounts and ratios
for the Company and the Bank as set forth by the Federal Deposit Insurance
Corporation (FDIC) and the OTS 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, 1998:
Tier 1 (Core) capital
(to risk weighted
assets):
Northeast Bancorp $ 22,211 10.2% >$ 8,713 >4.0% >$ 13,070 > 6.0%
Northeast Bank 22,695 10.4% > 8,711 >4.0% > 13,067 > 6.0%
Tier 1 (Core) capital
(to total assets):
Northeast Bancorp $ 22,211 6.9% >$ 12,839 >4.0% >$ 16,049 > 5.0%
Northeast Bank 22,695 7.1% > 12,837 >4.0% > 16,046 > 5.0%
Total capital (to risk
weighted assets):
Northeast Bancorp $ 23,891 11.0% >$ 17,427 >8.0% >$ 21,784 >10.0%
Northeast Bank 24,374 11.2% > 17,422 >8.0% > 21,778 >10.0%
For
Minimum Classification As
Actual Capital Adequacy Well Capitalized
-------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ---------- ------ ---------- -------
(Dollars in Thousands)
As of June 30, 1997:
Tangible capital:
Northeast Bancorp $ 18,180 6.4% >$ 4,232 >1.5% >$ 4,232 > 1.5%
Northeast Bank 19,930 7.1% > 4,226 >1.5% > 4,226 > 1.5%
65
Tier I (Core) capital
(to total assets):
Northeast Bancorp $ 18,180 6.4% >$ 8,463 >3.0% >$ 14,106 > 5.0%
Northeast Bank 19,930 7.1% > 8,452 >3.0% > 14,087 > 5.0%
Total capital (to risk
weighted assets):
Northeast Bancorp $ 19,491 11.1% >$ 14,022 >8.0% > 17,528 >10.0%
Northeast Bank 21,237 12.2% > 13,953 >8.0% > 17,442 >10.0%
The Company may not declare or pay a cash dividend on, or repurchase, any
of its capital stock if the effect thereof would cause the capital of the
Company to be reduced below the capital requirements imposed by the
regulatory authorities. The amount of dividends paid per share on common
stock in the consolidated statements of changes in stockholders' equity for
the years ended June 30, 1998, 1997 and 1996 have been restated for the
effects of the stock split effected in the form of a dividend in December
1997.
In September of 1996, Congress enacted comprehensive legislation amending
the FDIC BIF-SAIF deposit insurance assessments on savings and loan
institution deposits. The legislation imposed a one-time assessment on
institutions holding SAIF deposits at March 31, 1995. As a result of this
legislation, the Company incurred a special assessment of approximately
$297,000 during 1997. This assessment is included in FDIC insurance
expense in the 1997 consolidated statement of income.
11. Earnings Per Share
------------------
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. All amounts have been restated to
reflect the three-for-two stock split effected in the form of a dividend in
December 1997. EPS amounts for 1997 and 1996 have also been restated to
give effect to Statement of Financial Accounting Standards No. 128,
Earnings Per Share, adopted by the Company in 1998. 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:
1998 1997 1996
------------ ------------ ------------
Average shares outstanding,
used in computing Basic EPS 2,277,165 2,152,564 2,057,890
Effect of Dilutive Securities:
Stock warrants and options 41,797 122,937 129,168
Options and warrants exercised 167,116 42,063 61,463
Convertible preferred stock 309,165 350,646 350,646
------------ ------------ ------------
66
Average equivalent shares
outstanding, used in computing
Diluted EPS 2,795,243 2,668,210 2,599,167
============ ============ ============
There is a difference 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:
1998 1997 1996
------------ ------------ ------------
Net income $ 2,403,783 $ 1,489,745 $ 1,292,849
Preferred stock dividends (125,827) (139,997) (139,999)
------------ ------------ ------------
Net income available to common
stockholders $ 2,277,956 $ 1,349,748 $ 1,152,850
============ ============ ============
12. Preferred Stock
---------------
The preferred stock, Series A, may be converted to common stock on a three
to one ratio at the option of the holder and carries voting rights.
Dividends are to be paid to the holder of the preferred stock quarterly at
a rate equal to interest at prime rate less two percent but in no event
less than 7% per annum. 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 for a term of seven years
to purchase shares of the Company's common stock. During 1998, 163,146
warrants were exercised for a total capital contribution of $761,443. At
June 30, 1998, all warrants have been exercised.
13. Other Expenses
--------------
Other expenses includes the following for the years ended June 30, 1998,
1997 and 1996:
1998 1997 1996
------------ ------------ ------------
Merger expense (note 15) $ 318,061 $ - $ -
Professional fees 310,390 398,704 350,214
Insurance 104,391 125,670 133,734
Supplies 265,954 263,648 241,403
Real estate owned expenses 50,912 64,907 87,442
Provision for losses on OREO 62,300 39,000 94,711
Goodwill amortization 296,374 296,374 308,913
Write-down on securities 172,235 110,000 93,819
Other 1,684,632 1,737,699 1,764,133
67
------------ ------------ ------------
$ 3,265,249 $ 3,036,002 $ 3,074,369
============ ============ ============
14. Income Taxes
------------
The current and deferred components of income tax expense (benefit) were
as follows for the years ended June 30, 1998, 1997 and 1996:
1998 1997 1996
------------ ------------ ------------
Federal:
Current $ 1,265,879 $ 942,244 $ 664,655
Deferred (14,949) (72,290) 42,236
------------ ------------ ------------
1,250,930 869,954 706,891
State and local - current 51,941 38,611 30,935
------------ ------------ ------------
$ 1,302,871 $ 908,565 $ 737,826
============ ============ ============
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, 1998, 1997 and 1996:
1998 1997 1996
----------------- ----------------- -----------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------- ------ ---------- ------ ---------- ------
Expected income
tax expense at
federal tax rate $1,260,262 34.0% $ 815,425 34.0% $ 690,430 34.0%
State tax, net of
federal tax benefit 34,281 .9 25,483 1.1 20,417 1.0
Amortization of
goodwill 42,192 1.1 42,192 1.8 42,192 2.1
Dividend received
deduction (7,848) (.2) (6,873) (.3) (6,903) (.3)
Low income/
rehabilitation
credit (20,000) (.5) (20,000) (.8) (20,000) (1.0)
Other (6,016) (.2) 52,338 2.1 11,690 .5
----------- ------ ---------- ------ ---------- ------
68
$1,302,871 35.1% $ 908,565 37.9% $ 737,826 36.3%
=========== ====== ========== ====== ========== ======
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1998 and 1997 are presented below:
1998 1997
------------ ------------
Deferred tax assets:
Loans, principally due to allowance for
loan losses $ 1,013,000 $ 890,000
Deferred gain on loan sales 51,000 67,000
Interest on nonperforming loans 56,000 60,000
Difference in tax and financial statement
bases of investments 154,000 241,000
Difference in tax and financial statement
amortization of goodwill 100,000 73,000
Other 57,000 63,000
------------ ------------
Total deferred tax assets 1,431,000 1,394,000
Deferred tax liabilities:
Loan loss reserve - tax (89,000) (73,000)
Mortgage servicing assets (124,000) (26,000)
Other (53,000) (6,000)
------------ ------------
Total deferred tax liabilities (266,000) (105,000)
------------ ------------
Net deferred tax assets, included in
other assets $ 1,165,000 $ 1,289,000
============ ============
The Company has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset of $1,431,000.
Accordingly, no valuation allowance has been recorded at June 30, 1998 and
1997.
In August 1996, the provisions repealing the then current thrift bad debt
rules were passed by Congress. The new rules eliminate the 8% of taxable
income method for deducting additions to the tax bad debt reserves for all
thrifts for tax years beginning after December 31, 1995. These rules also
require 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
new rules will have no effect on net income or federal income tax expense.
The unrecaptured base year reserves will not be subject to recapture as
long as the Company continues to carry on the business of banking. In
addition, the balance of the pre-1988 tax bad debt reserves continue to be
subject to provisions of present law that require recapture in the case of
certain excess distributions to stockholders. For federal income tax
69
purposes, the Company has designated approximately $2,400,000 of net worth
as a reserve for tax bad debts on loans. The use of this amount for
purposes other than to absorb losses on loans would result in taxable
income and financial statement tax expense at the then current tax rate.
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,
$117,000 is included in salaries and employee benefits and $318,000 is
included in other expense, in the 1998 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 Year Ended Year Ended
October 24, 1997 June 30, 1997 June 30, 1996
---------------- ------------- -------------
Interest Income:
Northeast Bancorp $ 7,280,300 $ 20,029,140 $ 17,994,862
Cushnoc Bank 613,733 1,906,581 2,110,277
---------------- ------------- -------------
Combined $ 7,894,033 $ 21,935,721 $ 20,105,139
================ ============= =============
Net Income (Loss):
Northeast Bancorp $ 432,319 $ 1,507,103 $ 1,193,420
Cushnoc Bank 29,435 (17,358) 99,429
---------------- ------------- -------------
Combined $ 461,754 $ 1,489,745 $ 1,292,849
================ ============= =============
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
-------------------
70
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 for the profit sharing plan for the years ended June
30, 1998, 1997 and 1996 were $43,500, $130,000 and $99,000, 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 3% contributed. For the years ended June 30, 1998, 1997 and
1996, the Company contributed approximately $60,700, $38,300 and $36,800,
respectively.
Stock Option Plans
------------------
The Company adopted Stock Option Plans in 1987, 1989 and 1992. 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,
three years for nonqualified stock options in the 1987 plan and five years
for nonqualified stock options in the 1989 and 1992 plans.
In accordance with the Stock Option Plans, a total of 354,000 shares of
unissued common stock are reserved for issuance pursuant to incentive stock
options and 90,000 shares of unissued common stock are reserved for
issuance pursuant to nonqualified stock options. The number of shares
reserved for the option plans did not change in 1998, except for the effect
of the stock split.
The number of shares and the exercise prices in the following table have
been retroactively restated for the stock split effected in the form of a
dividend in December 1997. A summary of the qualified and non-qualified
option activity for the years ended June 30 follows:
1998 1997 1996
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
Outstanding at
beginning of
71
year 130,500 $ 6.01 139,500 $ 5.11 204,000 $ 4.70
Granted 41,250 18.50 22,500 8.33 - -
Exercised (46,000) 5.11 (30,000) 3.45 (57,000) 3.33
Expired (2,750) 10.18 (1,500) 8.33 (7,500) 7.50
-------- --------- -------- --------- -------- --------
Outstanding at
end of year 123,000 $ 10.44 130,500 $ 6.01 139,500 $ 5.11
======== ========= ======== ========= ======== =========
Options
exercisable
at year end 123,000 $ 10.44 130,500 $ 6.01 139,500 $ 5.11
The following table summarizes information about stock options outstanding
at June 30, 1998:
Options Outstanding
------------------------------------------------------
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices June 30, 1998 Contractual Life Exercise Price
--------------- ---------------- ---------------- ----------------
$3.58 to $9.50 81,750 6.0 years $ 6.37
$18.50 41,250 9.5 18.50
---------------- ---------------- ----------------
$3.58 to $18.50 123,000 8.0 $ 10.44
================ ================ ================
The per share weighted average fair value of stock options granted during
1998 and 1997 was $6.24 and $3.15, 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, 1.40% and
2.21%; risk-free interest rate, 5.46% and 6.45%; expected life, 8 years and
8 years; and expected volatility, 22.49% and 10.84%, 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 FASB Statement
No. 123, Accounting for Stock-Based Compensation, the Company's net income
and earnings per share for the year ended June 30, 1998 and June 30, 1997
would have been reduced to the pro forma amounts indicated below.
Net Earnings Per Share
Income Basic Diluted
--------------- --------------- ---------------
72
June 30, 1998:
As reported $ 2,403,783 $ 1.00 $ 0.86
Pro forma $ 2,225,811 $ 0.92 $ 0.80
June 30, 1997:
As reported $ 1,489,745 $ 0.63 $ 0.56
Pro forma $ 1,462,953 $ 0.61 $ 0.55
The pro forma amounts reflect only stock options granted in 1997 and
subsequent years. Therefore, the full impact of calculating the cost for
stock options under Statement No. 123 is not reflected in the pro forma
amounts presented above because the cost for options granted prior to July
1, 1995 is not considered under the requirements of Statement No. 123.
Stock Purchase Plan
-------------------
The Company has a stock purchase plan which covers substantially all full-
time employees with one year of service. Offerings under the Plan are made
quarterly at the market value on the offering termination date. The
maximum number of shares which may be granted under the plan is 156,000
shares.
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 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:
1998 1997
--------------- ---------------
Commitments to originate loans:
Residential real estate mortgages $ 6,392,000 $ 2,404,000
Commercial real estate mortgages,
including multi-family residential
real estate 1,510,000 2,773,000
73
Commercial business loans 3,460,000 1,068,000
--------------- ---------------
11,362,000 6,245,000
Unused lines of credit 14,585,000 9,999,000
Standby letters of credit 329,000 491,000
Unadvanced portions of construction loans 1,422,000 1,077,000
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.
Derivative Financial Instruments
--------------------------------
The Company has only limited involvement with derivative financial
instruments and they are used for trading purposes. The derivative
financial instruments used by the Company are covered call and put
contracts on its equity securities portfolio. Gains and losses from
entering into these types of 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 $380,000, $246,000 and $167,000 for
the years ended June 30, 1998, 1997 and 1996, respectively.
Approximate minimum lease payments over the remaining terms of the leases
at June 30, 1998 are as follows:
74
1999 $ 324,000
2000 162,000
2001 132,000
2002 132,000
2003 132,000
2004 and after 480,000
------------
$ 1,362,000
============
18. Condensed Parent Information
----------------------------
Condensed financial statements for Northeast Bancorp at June 30, 1998 and
1997 and for each of the years in the three year period ended June 30, 1998
are presented below.
Balance Sheets
--------------
June 30,
---------------------------------
Assets 1998 1997
------------------------------------- --------------- ---------------
Cash and due from banks $ 1,104,504 $ 818,965
Investment in subsidiary 23,908,576 21,029,151
Premises and equipment, net - 376,012
Goodwill, net 713,819 815,793
Other assets 413,620 367,118
--------------- ---------------
Total assets $ 26,140,519 $ 23,407,039
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Note payable $ 993,055 $ 1,298,611
Other liabilities 7,937 12,848
--------------- ---------------
1,000,992 1,311,459
Stockholders' equity 25,139,527 22,095,580
--------------- ---------------
Total liabilities and stockholders'
equity $ 26,140,519 $ 23,407,039
=============== ===============
Statements of Income
--------------------
75
Years Ended June 30,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Income:
Dividends from banking subsidiary $ - $ - $1,436,000
Management fees charged to subsidiary - - 2,119,992
Other income 76,556 16,232 25,100
----------- ----------- ----------
Total income 76,556 16,232 3,581,092
Expenses:
Amortization expense 101,974 101,973 114,513
Interest on note payable 89,884 112,753 176,140
Salaries and benefits - - 1,326,271
Occupancy expense 46,611 65,257 140,065
Equipment expense - - 179,977
General and administrative expenses 97,969 86,457 422,411
----------- ----------- -----------
Total expenses 336,438 366,440 2,359,377
----------- ----------- -----------
Income (loss) before income tax
benefit, and equity in undistributed
net income of subsidiary (259,882) (350,208) 1,221,715
Income tax benefit 53,967 82,371 31,771
----------- ----------- -----------
Income (loss) before equity in
undistributed net income of
subsidiary (205,915) (267,837) 1,253,486
Equity in undistributed net income
of subsidiary 2,609,698 1,757,582 39,363
----------- ----------- -----------
Net income $2,403,783 $1,489,745 $1,292,849
=========== =========== ===========
Years Ended June 30,
-----------------------------------
Statements of Cash Flows 1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income $2,403,783 $1,489,745 $1,292,849
Adjustments to reconcile net income
to net cash provided (used) by
operations:
Depreciation and amortization 110,658 114,775 253,569
Treasury stock bonused - 13,374 -
Undistributed earnings of subsidiary (2,609,698) (1,757,582) (39,363)
(Increase) decrease in other assets (46,502) 17,467 (72,132)
Decrease in other liabilities (4,911) (56,337) (70,375)
76
----------- ----------- -----------
Net cash (used) provided by operating
activities (146,670) (178,558) 1,364,548
Cash flows from investing activities:
Proceeds from sale of premises and
equipment to subsidiary 367,696 245,167 24,473
Purchase of premises and equipment (368) (7,086) (167,217)
----------- ----------- -----------
Net cash provided (used) by
investing activities 367,328 238,081 (142,744)
Cash flows from financing activities:
Principal payments on note payable (305,556) (201,389) (500,000)
Stock options exercised 190,700 103,450 190,000
Proceeds from issuance of common stock 16,669 13,487 11,558
Treasury stock purchased (44,988) (28,420) (52,277)
Treasury stock sold 44,988 - -
Dividends paid to stockholders (597,270) (537,802) (424,890)
Warrants exercised 761,433 175,000 700,000
Stock split - payment for fractional
shares (1,095) - -
----------- ----------- -----------
Net cash flow provided (used) by
financing activities 64,881 (475,674) (75,609)
----------- ----------- -----------
Net increase (decrease) in cash 285,539 (416,151) 1,146,195
Cash and cash equivalents, beginning
of year 818,965 1,235,116 88,921
----------- ----------- -----------
Cash and cash equivalents, end of year $1,104,504 $ 818,965 $1,235,116
=========== =========== ===========
Supplemental schedule of cash flow
information:
Interest paid $ 91,921 $ 111,490 $ 157,959
Income taxes paid 972,000 641,000 919,000
19. 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.
Trading Account Securities and Available for Sale Securities
------------------------------------------------------------
The fair value of investment securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
77
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.
78
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.
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 other real estate owned. 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, 1998 and 1997:
June 30, 1998 June 30, 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
79
Non-Trading
Instruments:
--------------
Financial assets:
Cash and cash
equivalents $12,152,000 $12,152,000 $18,774,000 $18,774,000
Available for sale
securities 13,609,000 13,609,000 28,811,000 28,811,000
Loans held for sale 370,000 372,000 240,000 242,000
Loans 279,053,000 282,020,000 219,940,000 221,266,000
Interest receivable 1,934,000 1,934,000 1,640,000 1,640,000
Financial liabilities:
Deposits (with no
stated maturity) 70,938,000 70,938,000 65,873,000 65,873,000
Time deposits 113,086,000 113,488,000 107,049,000 107,541,000
Borrowed funds 104,440,000 102,052,000 80,494,000 80,491,000
Note payable 993,000 993,000 1,299,000 1,299,000
Repurchase agreements 5,206,000 5,206,000 5,099,000 5,099,000
Trading Instruments:
--------------------
Financial assets:
Trading account
securities 50,000 50,000 25,000 25,000
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northeast Bancorp and Subsidiary
We have audited the consolidated statements of financial condition of Northeast
Bancorp and Subsidiary as of June 30, 1998 and 1997, 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, 1998. These
consolidated financial statements are the responsibility of Northeast Bancorp's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Cushnoc Bank and Trust Company, for the years ended December 31,
1996 and 1995, which statements reflect total assets constituting 7.8% for 1997
of the related consolidated financial statement totals, and which reflect
interest income constituting 8.7% and 10.5% of the related consolidated
financial statement totals for the years ended June 30, 1997 and 1996,
respectively. Those statements were audited by other auditors whose reports
have been furnished to us, and in our opinion, insofar as it relates to data
included for Cushnoc Bank and Trust Company, is based solely on the report of
the other auditors.
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
80
statement presentation. We believe that our audits and the reports of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Northeast Bancorp and
Subsidiary as of June 30, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
July 31, 1998 /s/ Baker Newman & Noyes
-------------------------
Portland, Maine Limited Liability Company
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Cushnoc Bank & Trust
We have audited the balance sheets of Cushnoc Bank and Trust Company as of
December 31,1996 and 1995, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the two years ended December
31, 1996 (not presented separately herein). These financial statements are the
responsibility of the Bank'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 and the reports of the
other auditors provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cushnoc Bank and Trust
Company as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the two years ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of non-interest expenses
is presented for additional analysis and is not part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.
81
Augusta, Maine /s/ Schatz Fletcher & Associates
January 31, 1997
Item 8. b Statistical Disclosures Required by Industry Guide 3
----------------------------------------------------
Northeast Bancorp Consolidated
Distribution of Assets, Liabilities and Net Worth
Interest Rates and Interest Differential
Years Ending June 30, 1998, 1997 and 1996
Interest Average
Average Income/ Yield/
June 30, 1998 Balance Expense Rate
------------- ------------- -------------
Assets:
Earning Assets:
Securities Available for Sale $ 21,766,940 1,461,024 6.71%
Trading Securities 32,080 0 0.00%
FHLB Stock 4,646,841 300,664 6.47%
Loans (3) 240,858,661 21,988,864 9.13%
FHLB Overnight Deposits & Other 9,951,326 532,459 5.35%
------------- ------------- -------------
Total Earning Assets 277,255,848 24,283,011 8.76%
------------- ------------- -------------
Non-interest Earning Assets:
Cash & Due from Banks 4,516,290
Premise & Equip Net 4,597,184
Other Assets 7,061,277
(Allowance for Loan Loss) (2,867,432)
-------------
Total Assets $290,563,167
=============
Liabilities & Net Worth:
Interest Bearing Liabilities:
Deposits
Now $ 15,399,537 269,412 1.75%
Money Market 14,001,795 466,453 3.33%
Savings 21,289,109 569,901 2.68%
Time 108,580,380 6,280,951 5.78%
------------- ------------- -------------
Total Deposits 159,270,821 7,586,717 4.76%
Repurchase Agreements 4,917,057 206,651 4.20%
Other Borrowed Funds 85,685,853 5,016,703 5.85%
------------- ------------- -------------
Total Interest Bearing Liabilities 249,873,731 12,810,071 5.13%
------------- ------------- -------------
Non-interest Bearing Liabilities
82
Demand 15,480,530
Other 1,983,263
Net Worth 23,225,643
-------------
Total Liabilities & Net Worth $290,563,167
=============
Net Interest Income $ 11,472,940
=============
Interest Rate Spread (1) 3.63%
Net yield on Interest Earning Assets (2) 4.14%
Equity to Assets Ratio (4) 7.99%
Interest Average
Average Income/ Yield/
June 30, 1997 Balance Expense Rate
------------- ------------- -------------
Assets:
Earning Assets:
Securities Available for Sale $ 31,904,945 2,277,572 7.14%
Trading Securities 118,954 7,426 6.24%
FHLB Stock 3,531,428 227,360 6.44%
Loans (3) 203,933,997 18,973,560 9.30%
FHLB Overnight Deposits & Other 8,473,570 449,803 5.31%
------------- ------------- -------------
Total Earning Assets 247,962,894 21,935,721 8.85%
------------- ------------- -------------
Non-interest Earning Assets:
Cash & Due from Banks 4,181,508
Premise & Equip Net 4,609,543
Other Assets 7,038,721
(Allowance for Loan Loss) (2,769,141)
-------------
Total Assets $261,023,525
=============
Liabilities & Net Worth:
Interest Bearing Liabilities:
Deposits
Now $ 14,813,590 216,437 1.46%
Money Market 15,902,113 536,623 3.37%
Savings 22,141,625 592,148 2.67%
Time 100,484,775 5,758,166 5.73%
------------- ------------- -------------
Total Deposits 153,342,103 7,103,374 4.63%
Repurchase Agreements 4,566,385 199,453 4.37%
Other Borrowed Funds 67,036,999 3,988,060 5.95%
------------- ------------- -------------
Total Interest Bearing Liabilities 224,945,487 11,290,887 5.02%
------------- ------------- -------------
Non-interest Bearing Liabilities
Demand 13,380,027
Other 1,576,413
83
Net Worth 21,121,598
-------------
Total Liabilities & Net Worth $261,023,525
=============
Net Interest Income $ 10,644,834
=============
Interest Rate Spread (1) 3.83%
Net yield on Interest Earning Assets (2) 4.29%
Equity to Assets Ratio (4) 8.09%
Interest Average
Average Income/ Yield/
June 30, 1996 Balance Expense Rate
------------- ------------- -------------
Assets:
Earning Assets:
Securities Available for Sale $ 19,500,579 1,359,423 6.97%
Trading Securities 162,430 5,474 3.37%
FHLB Stock 2,372,362 155,256 6.54%
Loans (3) 187,117,813 17,854,789 9.54%
FHLB Overnight Deposits & Other 13,024,645 730,197 5.61%
------------- ------------- -------------
Total Earning Assets 222,177,829 20,105,139 9.05%
------------- ------------- -------------
Non-interest Earning Assets:
Cash & Due from Banks 4,216,722
Premise & Equip Net 4,673,170
Other Assets 7,752,829
(Allowance for Loan Loss) (2,709,526)
-------------
Total Assets $236,111,024
=============
Liabilities & Net Worth:
Interest Bearing Liabilities:
Deposits
Now $ 17,098,811 319,899 1.87%
Money Market 16,148,909 555,919 3.44%
Savings 23,848,926 642,216 2.69%
Time 99,501,845 5,830,168 5.86%
------------- ------------- -------------
Total Deposits 156,598,491 7,348,202 4.69%
Repurchase Agreements 3,516,283 166,210 4.73%
Other Borrowed Funds 41,341,004 2,572,497 6.22%
------------- ------------- -------------
Total Interest Bearing Liabilities 201,455,778 10,086,909 5.01%
------------- ------------- -------------
Non-interest Bearing Liabilities
Demand 11,774,973
Other 2,398,571
Net Worth 20,481,702
-------------
84
Total Liabilities & Net Worth $236,111,024
=============
Net Interest Income $ 10,018,230
=============
Interest Rate Spread (1) 4.04%
Net yield on Interest Earning Assets (2) 4.51%
Equity to Assets Ratio (4) 8.67%
(1) Interest rate spread is the difference between the yield on earning assets
and the rates paid on interest-bearing liabilities.
(2) Net yield on interest earning assets is net interest income divided by
average earning assets.
(3) Non-accruing loans are included in the average of net loans.
(4) Average equity divided by average assets.
Northeast Bancorp Consolidated
Changes in Net Interest Income
Years Ended June 30, 1998 and 1997
June 30, 1998 Compared to June 30, 1997
- ---------------------------------------
Variance Variance Variance
Due to Due to Due to Total
Rate Volume Rate/Volume Variance
----------- ----------- ----------- -----------
Interest Earning Assets:
Securities Available for Sale ($22,774) ($779,886) ($13,889) ($816,549)
Trading Securities (7,426) (5,423) 5,423 (7,426)
FHLB Stock 1,134 71,812 358 73,304
Loans (355,683) 3,435,388 (64,401) 3,015,304
FHLB Overnight Deposits & Other 3,588 78,444 625 82,657
----------- ----------- ----------- -----------
Total Income on Earning Assets (381,161) 2,800,335 (71,884) 2,347,290
----------- ----------- ----------- -----------
Interest Bearing Liabilities:
Deposits:
Now 42,723 8,561 1,690 52,974
Money Market (6,863) (64,127) 820 (70,170)
Savings 575 (22,799) (23) (22,247)
Time 54,486 463,910 4,389 522,785
----------- ----------- ----------- -----------
Total Deposits 90,921 385,545 6,876 483,342
Repurchase Agreements (7,540) 15,317 (579) 7,198
Borrowed funds (63,203) 1,109,428 (17,582) 1,028,643
----------- ----------- ----------- -----------
Total Interest Expense 20,178 1,510,290 (11,285) 1,519,183
85
----------- ----------- ----------- -----------
Change in Net interest Income ($401,339) $1,290,045 ($60,599) $828,107
=========== =========== =========== ===========
June 30, 1997 Compared to June 30, 1996
- ---------------------------------------
Variance Variance Variance
Due to Due to Due to Total
Rate Volume Rate/Volume Variance
----------- ----------- ----------- -----------
Interest Earning Assets:
Securities Available for Sale $ 19,892 $ 884,151 $ 14,107 $ 918,150
Trading Securities 4,666 (1,465) (1,249) 1,952
FHLB Stock (2,519) 75,853 (1,230) 72,104
Loans (445,769) 1,604,601 (40,061) 1,118,771
FHLB Overnight Deposits & Other (38,811) (255,146) 13,562 (280,395)
----------- ----------- ----------- -----------
Total Income on Earning Assets (462,541) 2,307,994 (14,871) 1,830,582
----------- ----------- ----------- -----------
Interest Bearing Liabilities:
Deposits:
Now (70,073) (42,754) 9,365 (103,462)
Money Market (10,968) (8,496) 168 (19,296)
Savings (4,409) (45,975) 316 (50,068)
Time (128,327) 57,593 (1,267) (72,001)
----------- ----------- ----------- -----------
Total Deposits (213,777) (39,632) 8,582 (244,827)
Repurchase Agreements (12,624) 49,637 (3,770) 33,243
Borrowed funds (113,103) 1,598,966 (70,300) 1,415,563
----------- ----------- ----------- -----------
Total Interest Expense (339,504) 1,608,971 (65,488) 1,203,979
----------- ----------- ----------- -----------
Change in Net interest Income ($123,037) $ 699,023 $ 50,617 $ 626,603
=========== =========== =========== ===========
This table reflects changes in net interest income attributable to the change
in interest rates and the change in the volume of interest-bearing assets and
liabilities. Amounts attributable to the change in rate are based upon the
change in rate multiplied by the prior year's volume. Amounts attributable to
the change in volume are based upon the changes in volume multiplied by the
prior year's rate. The combined effect of changes in both volume and rate are
calculated by multiplying the change in rate by the change in volume.
Northeast Bancorp Consolidated
Maturities and Repricing of Loans
As of June 30, 1998
1 Year 1 to 5 5 to 10 Over 10 Total
86
or Less Years Years Years Loans
------------ ----------- ----------- ----------- ------------
Mortgages:
Residential $105,857,687 $ 9,653,045 $ 9,168,415 $47,155,701 $171,834,849
Commercial 23,593,878 20,576,703 1,796,600 1,161,126 47,128,307
Construction 1,871,639 157,969 69,973 0 2,099,581
Non-Mortgage Loans:
Commercial 15,774,718 9,395,756 798,454 1,099,488 27,068,416
Consumer 2,657,453 11,802,824 10,578,788 8,860,733 33,899,798
------------ ----------- ----------- ----------- ------------
Total Loans $149,755,375 $51,586,297 $22,412,230 $58,277,048 $282,030,950
============ =========== =========== =========== ============
Loans due after
1 year:
Fixed $104,697,192
Variable 27,578,384
------------
Total due after
1 year: $132,275,576
============
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
Securities Available for Sale June 30, June 30, June 30,
As of June 30, 1998 1997 1996
---------- ---------- ----------
Market Value (thousands)
U.S. Government and Agency Obligations $ 4,698 $ 2,905 $ 2,871
Mortgage-backed Securities 7,714 24,802 27,821
Other Bonds 204 253 250
Equity Securities 993 851 440
---------- ---------- ----------
Total Securities Available for Sale $ 13,609 $ 28,811 $ 31,382
========== ========== ==========
This table sets forth the market value of securities available for sale at the
dates indicated.
87
Northeast Bancorp Consolidated
Investment Maturity
Weighted Carrying
Securities Available for Sale Average Value
As of June 30, 1998 Rate (thousands)
----------- -----------
Due in one Year 5.87% $ 347
Due after one year through five 5.72% 451
Due after five years through ten 6.89% 1,103
Due after ten years 7.17% 3,001
Mortgage-backed securities maturing
September 2003 to February 2026 6.89% 7,714
----------- -----------
Total Securities Available for Sale 6.89% $ 12,616
=========== ===========
This table sets forth the anticipated maturities of debt securities available
for sale and the respective weighted average rates within the these ranges.
Northeast Bancorp Consolidated
Loan Portfolio
As of June 30,
Percent of
June 30, 1998 Amount Total Loans
----------- -----------
Loan Portfolio (thousands)
Residential Mortgage $ 172,505 61.17%
Consumer & Other 33,900 12.02%
Commercial Mortgage 48,558 17.22%
Commercial 27,068 9.59%
----------- -----------
Total Loans 282,031 100.00%
----------- -----------
Less: Allowance for loan losses 2,978
-----------
Net Loans $ 279,053
===========
Percent of
June 30, 1997 Amount Total Loans
----------- -----------
88
Loan Portfolio (thousands)
Residential Mortgage $ 140,315 63.01%
Consumer & Other 14,792 6.64%
Commercial Mortgage 48,125 21.61%
Commercial 19,450 8.74%
----------- -----------
Total Loans 222,682 100.00%
----------- -----------
Less: Allowance for loan losses 2,742
-----------
Net Loans $ 219,940
===========
Percent of
June 30, 1996 Amount Total Loans
----------- -----------
Loan Portfolio (thousands)
Residential Mortgage $ 117,670 62.86%
Consumer & Other 14,491 7.74%
Commercial Mortgage 38,288 20.45%
Commercial 16,761 8.95%
----------- -----------
Total Loans 187,210 100.00%
----------- -----------
Less: Allowance for loan losses 2,761
-----------
Net Loans $ 184,449
===========
Percent of
June 30, 1995 Amount Total Loans
----------- -----------
Loan Portfolio (thousands)
Residential Mortgage $ 121,510 64.71%
Consumer & Other 16,400 8.73%
Commercial Mortgage 34,270 18.25%
Commercial 15,597 8.31%
----------- -----------
Total Loans 187,777 100.00%
----------- -----------
Less: Allowance for loan losses 2,661
-----------
Net Loans $ 185,116
===========
Percent of
June 30, 1994 Amount Total Loans
----------- -----------
Loan Portfolio (thousands)
89
Residential Mortgage $ 114,570 65.22%
Consumer & Other 14,182 8.07%
Commercial Mortgage 32,312 18.39%
Commercial 14,623 8.32%
----------- -----------
Total Loans 175,687 100.00%
----------- -----------
Less: Allowance for loan losses 2,728
-----------
Net Loans $ 172,959
===========
This table shows the Company's loan distribution at the end of each of the last
five years.
Northeast Bancorp Consolidated
Allowance for Loan Losses
As of June 30,
Percent of
Loans in Each
Category to
June 30, 1998 Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 352 61.17%
Commercial Mortgage 762 17.22%
Commercial 582 9.59%
Consumer 380 12.02%
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 63.01%
Commercial Mortgage 821 21.61%
Commercial 436 8.74%
Consumer 159 6.64%
Unallocated 1,018 0.00%
------------- -------------
Total $ 2,742 100.00%
============= =============
90
Percent of
Loans in Each
Category to
June 30, 1996 Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 268 62.86%
Commercial Mortgage 799 20.45%
Commercial 501 8.95%
Consumer 152 7.74%
Unallocated 1,041 0.00%
------------- -------------
Total $ 2,761 100.00%
============= =============
Percent of
Loans in Each
Category to
June 30, 1995 Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 658 64.71%
Commercial Mortgage 263 18.25%
Commercial 137 8.31%
Consumer 279 8.73%
Unallocated 1,324 0.00%
------------- -------------
Total $ 2,661 100.00%
============= =============
Percent of
Loans in Each
Category to
June 30, 1994 Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 709 65.22%
Commercial Mortgage 279 18.39%
Commercial 143 8.32%
Consumer 272 8.07%
Unallocated 1,325 0.00%
------------- -------------
Total $ 2,728 100.00%
============= =============
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
91
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
As of June 30,
June 30, June 30, June 30, June 30, June 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Non-performing loans
(thousands)
Mortgages $ 1,739 $ 2,319 $ 2,786 $ 2,396 $ 2,186
Other 509 562 396 261 676
-------- -------- -------- -------- --------
Total non-performing loans 2,248 2,881 3,182 2,657 2,862
Other Real Estate Owned 350 563 585 1,169 1,994
-------- -------- -------- -------- --------
Total non-performing assets $ 2,598 $ 3,444 $ 3,767 $ 3,826 $ 4,856
======== ======== ======== ======== ========
Total non-performing loans -------- -------- -------- -------- --------
to total loans 0.80% 1.29% 1.70% 1.42% 1.63%
======== ======== ======== ======== ========
Total non-performing assets -------- -------- -------- -------- --------
to total assets 0.81% 1.21% 1.54% 1.65% 2.29%
======== ======== ======== ======== ========
This table sets forth certain information concerning non-performing loans and
assets and the ratios of non-performing loans to total loans and non-performing
assets to total assets at the dates indicated.
Non-performing loans are problem loan accounts for which the Company has ceased
accrual of interest because the loan is 90 days past due or because
collectability is doubtful, whichever is earlier.
92
Management believes that all loans that are considered potential problems are
disclosed in the current non-performing loans table above with the exception of
loans internally rated substandard. At June 30, 1998, the Company had
approximately $100,000 of loans classified as substandard that could
potentially become non-performing due to previous delinquencies or marginal
cash flows.
No loans greater than 90 days past due are on accrual status and there are no
troubled debt restructurings not disclosed above.
Refer to the financial statement footnotes #1 & #3 for further discussion of
the Company's non-performing loan policy and interest income recognition.
Northeast Bancorp Consolidated
Summary of Loan Losses Experience (in thousands)
As of June 30,
June 30, June 30, June 30, June 30, June 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Average net loans outstanding,
During period $237,791 $200,919 $183,947 $178,736 $167,942
======== ======== ======== ======== ========
Net loans outstanding,
End of period $279,053 $219,940 $184,449 $185,116 $172,959
======== ======== ======== ======== ========
Allowance for loan losses,
Beginning of period $ 2,742 $ 2,761 $ 2,661 $ 2,728 $ 2,360
Loans charged off:
Residential Mortgage 196 319 151 162 230
Commercial Real Estate 432 128 236 296 122
Commercial 42 154 125 205 286
Installment 115 171 108 151 97
-------- -------- -------- -------- --------
Total loans charged off 785 772 620 814 735
-------- -------- -------- -------- --------
Recoveries on amounts
previously charged off:
Residential Mortgage 87 43 10 7 25
Commercial Real Estate 83 49 34 1 0
Commercial 87 13 12 16 6
Installment 58 34 25 32 27
-------- -------- -------- -------- --------
Total Recoveries 315 139 81 56 58
-------- -------- -------- -------- --------
Net loans charged off 470 633 539 758 677
Provision for loan losses 706 614 639 691 1,045
-------- -------- -------- -------- --------
Allowance for loan losses,
End of period $ 2,978 $ 2,742 $ 2,761 $ 2,661 $ 2,728
======== ======== ======== ======== ========
93
Net loans charged-off as a
percentage of average loans
outstanding 0.20% 0.32% 0.29% 0.42% 0.40%
======== ======== ======== ======== ========
Allowance for loan losses,
as a percentage of net
loans outstandingat
the end of period 1.07% 1.25% 1.50% 1.44% 1.58%
======== ======== ======== ======== ========
The June 30, 1998 allowance for loan losses as a percentage of net loans was
1.07%, which was a reduction when compared to June 30,1997. The reduction was
due to the purchase of $66,000,000 in residential mortgages as well as
portfolio loan growth during fiscal 1998. The decrease was also supported by
the Company's lower delinquency levels and decreased non-performing and
substandard loans.
The reduction in the June 30, 1997 allowance for loan loss percentage to net
loans, as compared to June 30, 1996, is primarily due to the purchase of
$25,000,000 of residential mortgages during fiscal year 1997.
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 (thousands) and Rates
As of June 30,
June 30, 1998 June 30, 1997 June 30, 1996
--------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
Average Deposits:
Non-interest bearing demand
deposits $ 15,481 0.00% $ 13,380 0.00% $ 11,775 0.00%
Regular savings 21,289 2.68% 22,141 2.67% 23,849 2.69%
NOW and Money Market 29,401 2.50% 30,716 2.45% 33,247 2.63%
Time deposits 108,580 5.78% 100,485 5.73% 99,502 5.86%
-------- ----- -------- ----- -------- -----
Total Average Deposits $174,751 4.06% $166,722 4.26% $168,373 4.36%
======== ===== ======== ===== ======== =====
This table shows the average daily amount of deposits and average rates paid on
such deposits for the periods indicated.
94
Northeast Bancorp Consolidated
Maturities of Time Deposits $100,000 & Over
As of June 30, 1998
Balance
-----------
Time Deposits $100,000 & Over (in thousands):
3 months or less $ 471
Over 3 through 6 months 1,779
Over 6 through 12 months 7,685
Over 12 months 9,420
-----------
Total Time Deposits $100,000 & Over $ 19,355
===========
Northeast Bancorp Consolidated
Maturities and Repricing of Earning Assets & Interest-bearing Liabilities
As of June 30, 1998
(in thousands)
Less Than 1-5 Over 5 % of
1 Year Years Years Total Total
--------- --------- --------- --------- ---------
EARNING ASSETS
Real Estate Loans:
Fixed $ 20,921 $ 4,515 $ 58,800 84,236 27.43%
Variable 110,402 25,873 552 136,827 44.56%
--------- --------- --------- --------- ---------
Total Real Estate Loans 131,323 30,388 59,352 221,063 71.99%
--------- --------- --------- --------- ---------
Non-Real Estate Loans:
Fixed 2,880 20,044 21,337 44,261 14.41%
Variable 15,553 1,154 0 16,707 5.44%
--------- --------- --------- --------- ---------
Total Non-Real Estate
Loans 18,433 21,198 21,337 60,968 19.85%
--------- --------- --------- --------- ---------
Investment Securities
& Other Earning Assets 6,097 451 18,491 25,039 8.16%
--------- --------- --------- --------- ---------
Total Earning Assets $155,853 $ 52,037 $ 99,180 $307,070 100.00%
========= ========= ========= ========= =========
95
INTEREST-BEARING LIABILITIES
Deposits:
Regular savings $ 20,306 20,306 7.27%
NOW Accounts 23,430 23,430 8.38%
Money market accounts 11,993 11,993 4.29%
Certificates of deposit 74,504 38,571 11 113,086 40.47%
--------- --------- --------- --------- ---------
Total Deposits 130,233 38,571 11 168,815 60.41%
--------- --------- --------- --------- ---------
Repurchase Agreements 5,206 0 0 5,206 1.86%
FHLB Borrowings & Note Payable 44,051 16,670 44,711 105,432 37.73%
--------- --------- --------- --------- ---------
Total Interest-bearing
Liabilities $179,490 $ 55,241 $ 44,722 $279,453 100.00%
========= ========= ========= ========= =========
Excess(deficiency) of earning
assets over interest-bearing
liabilities (23,637) (3,204) 54,458 27,617
========= ========= ========= =========
Cumulative excess (deficiency)
of earning assets over
interest-bearing liabilities (23,637) (26,841) 27,617 27,617
========= ========= ========= =========
Cumulative excess (deficiency)
of earning assets over
interest-bearing liabilities
as a % of total assets -7.33% -8.32% 8.56% 8.56%
========= ========= ========= =========
This table summarizes the anticipated maturities and repricing of the Company's
earning assets and interest-bearing liabilities at June 30, 1998.
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/liabilitiy 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
As of June 30, 1998
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
96
1997 1997 1998 1998
------------ ------------ ------------ ------------
Interest Income $ 5,172,282 $ 5,256,343 $ 5,323,547 $ 6,236,692
Interest on loans
Interest & dividends
on investments &
available for sale
securities 705,194 636,036 545,427 407,490
------------ ------------ ------------ ------------
Total Interest Income 5,877,476 5,892,379 5,868,974 6,644,182
------------ ------------ ------------ ------------
Interest Expense
Interest on Deposits 1,883,483 1,901,610 1,845,499 1,956,125
Interest on Repurchase
Agreements 48,438 54,618 51,244 52,351
Interest on Borrowings 1,180,294 1,128,589 1,172,303 1,535,517
------------ ------------ ------------ ------------
Total Interest Expense 3,112,215 3,084,817 3,069,046 3,543,993
------------ ------------ ------------ ------------
Net Interest Income 2,765,261 2,807,562 2,799,928 3,100,189
Provision for Loan
Losses 162,500 227,663 156,304 159,633
------------ ------------ ------------ ------------
Net Interest Income
after Provision for
Loan Losses 2,602,761 2,579,899 2,643,624 2,940,556
Securities Transactions 109,793 99,696 37,439 40,585
Other Operating Income 445,271 642,412 557,920 738,415
Other Operating Expense 2,277,221 2,765,623 2,123,636 2,565,236
------------ ------------ ------------ ------------
Income Before Income
Taxes 880,604 556,384 1,115,347 1,154,320
Income Tax Expense 310,039 200,318 382,986 409,529
------------ ------------ ------------ ------------
Net Income $ 570,565 $ 356,066 $ 732,361 $ 744,791
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.24 $ 0.14 $ 0.31 $ 0.30
Diluted $ 0.21 $ 0.13 $ 0.26 $ 0.27
Northeast Bancorp Consolidated
Quarterly Data
As of June 30, 1997
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1996 1996 1997 1997
------------ ------------ ------------ ------------
Interest Income
Interest on loans $ 4,443,413 $ 4,652,547 $ 4,824,158 $ 5,053,442
Interest & dividends
on investments &
available for sale
securities 770,896 748,268 727,258 715,739
------------ ------------ ------------ ------------
97
Total Interest Income 5,214,309 5,400,815 5,551,416 5,769,181
------------ ------------ ------------ ------------
Interest Expense
Interest on Deposits 1,739,594 1,727,321 1,766,509 1,869,951
Interest on Repurchase
Agreements 38,269 54,686 50,744 55,754
Interest on Borrowings 863,412 938,321 1,088,090 1,098,237
------------ ------------ ------------ ------------
Total Interest Expense 2,641,275 2,720,328 2,905,343 3,023,942
------------ ------------ ------------ ------------
Net Interest Income 2,573,034 2,680,487 2,646,073 2,745,239
Provision for Loan
Losses 153,814 153,443 153,452 153,718
------------ ------------ ------------ ------------
Net Interest Income
after Provision for
Loan Losses 2,419,220 2,527,044 2,492,621 2,591,521
Securities Transactions 89,666 34,876 75,493 59,395
Other Operating Income 438,914 376,418 582,010 429,469
Other Operating Expense 2,638,627 2,126,897 2,456,126 2,496,687
------------ ------------ ------------ ------------
Income Before Income
Taxes 309,173 811,441 693,998 583,698
Income Tax Expense 117,932 300,894 273,364 216,375
------------ ------------ ------------ ------------
Net Income $ 191,241 $ 510,547 $ 420,634 $ 367,323
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.07 $ 0.22 $ 0.18 $ 0.15
Diluted $ 0.08 $ 0.19 $ 0.16 $ 0.14
The decrease in net income for the quarter ending December 31,1997 was
primarily due to the one-time cost of approximately $435,000 associated with
the merger of Cushnoc Bank.
The decrease in net income for the quarter ending June 30, 1997 is primarily
due to the writedown of equity securities and the provision for real estate
held for investment.
The reduction of net income for the quarter ending September 30, 1996 is
primarily due to the FDIC-SAIF deposit assessment of $380,000.
Item 9. Changes in and Disagreements with Accountants on
________________________________________________
Accounting and Financial Disclosure.
____________________________________
Not applicable.
PART III
98
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 experience and principal occupations, directorships in
other public companies, and service on the Company's board of
directors set forth under the caption "Election of Directors" in
the definitive 1998 proxy statement of the Company to be furnished
to shareholders in connection with the Company's Annual Meeting to
be held on November 10, 1998 (the"1998 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 1998 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 1998 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 1998 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
99
_________________________________________________________
The following financial statements are submitted herewith in
response to Part II Item 8:
Consolidated Statements of Financial Condition as of June 30, 1998
and 1997
Consolidated Statements of Income for the years ended June 30,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the
years ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996
(b) Reports on Form 8-K
___________________
The Company filed a Form 8-K on May 14, 1998, reporting the
restating of data previously submitted as part of the Company's
Form 10-K for the fiscal year ended June 30, 1997, to give
retroactive effect to the acquisition of Cushnoc.
(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
100
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
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 23.1
23.2 The Consent of Shatz & Fletcher is submitted herewith as Exhibit
23.2
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 18, 1998 By: /s/ James D. Delamater
_____________________________
James D. Delamater, President
101
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 18, 1998
- -------------------------
John B. Bouchard
/s/ A. William Cannan Director, September 18, 1998
- ------------------------- Executive Vice President
A. William Cannan
/s/ James D. Delamater Director, September 18, 1998
- ------------------------- President and Chief
James D. Delamater Executive Officer
(Principal
Executive Officer)
/s/ Ronald J. Goguen Director September 18, 1998
- -------------------------
Ronald J. Goguen
/s/ Judith W. Hayes Director September 18, 1998
- ------------------------- Vice President
Judith W. Hayes
/s/ Philip C. Jackson Director September 18, 1998
- -------------------------
Philip C. Jackson
/s/ Ronald C. Kendall Director September 18, 1998
- -------------------------
Ronald C. Kendall
/s/ John Rosmarin Director September 18, 1998
- -------------------------
John Rosmarin
/s/ John Schiavi Director September 18, 1998
- -------------------------
John Schiavi
/s/ John W. Trinward, DMD Chairman of the September 18, 1998
- ------------------------- Board
102
John W. Trinward, DMD
/s/ Stephen W. Wight Director September 18, 1998
- -------------------------
Stephen W. Wight
/s/ Dennis A. Wilson Director September 18, 1998
- -------------------------
Dennis A. Wilson
/s/ Richard E. Wyman, Jr. Chief Financial September 18, 1998
- ------------------------- Officer (Principal
Richard E. Wyman, Jr. Financial and
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
103
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
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 23.1
23.2 The Consent of Shatz & Fletcher is submitted herewith as Exhibit
23.2
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