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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number (1-14588)
Northeast Bancorp
(Exact name of registrant as specified in its charter)
Maine 01-0425066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
232 Center Street, Auburn, Maine 04210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 777-6411
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $1.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
2
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, 1999, was $24,241,315 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 2,770,446 shares of the registrant's common stock issued and outstanding
as of September 14, 1999.
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
1999 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 mortgage
lender, it also generates other loans and provides other services and products
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, 1999, the Company, on a
consolidated basis, had total assets of approximately $364 million, total
deposits of approximately $219 million, and stockholders' equity of
approximately $27 million. Unless the context otherwise requires, references
3
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
afederally-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
March 1999 the Bank opened a new branch located on Lisbon Street in Lewiston,
Maine giving the Bank a total of 12 banking branches. In addition, the Bank
has opened a facility in Falmouth, Maine, from which it accepts loan
applications and offers investment, insurance, and financial planning products
to its customers.
The Bank has broad powers, including the power to engage in non-residential
lending activities. In connection with its conversion into a federal savings
bank in 1983, the Bank retained its then-authorized powers as a Maine-chartered
mutual savings bank. Under applicable regulations, except as otherwise
determined by the 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.
From its 12 retail banking branches located throughout western, central, and
the mid-coastal regions of the State of Maine, and through the Bank's
subsidiary 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, deposits, repurchase agreements,
investment services, trust services, insurance services, ATM access, debit
cards, electronic transfer services, 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,
Lewiston, Lisbon Falls, Mechanic Falls, Richmond, and South Paris, Maine.
Strategy
________
Northeast Bancorp's corporate strategy is to offer a wide array of financial
products and services with an emphasis on a high level of personalized service,
with a view to establishing long-term banking relationships with its customers
which will increase the Bank's core earnings by developing strong interest
margins, non-interest fee income, and increased loan volume as its market area
expands. In keeping with this strategy, the Bank is making a concerted effort
to become an all-inclusive financial center that is able to provide its
customers with virtually any financial product and service that will meet their
needs. In this regard, the Bank assists its clients in assessing their
financial needs through its personalized financial planning services. Once the
customer's financial needs have been identified, the Bank provides the customer
with financial product or service solutions which are the most beneficial to
the customer. Management believes that the ability to deliver such
personalized service and advice will be one of the primary competitive factors
in the financial institutions industry in the future. Accordingly, over the
past few years the Bank has invested a substantial amount of resources in
developing its ability to offer a high level of personalized service with an
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emphasis on financial planning and delivery of financial advisory services that
are responsive to a broad range of customer needs.
To further support the corporate strategy, the Bank has recently expanded the
scope of lending and other financial services that it provides to its
customers. In the past, the Bank has focused primarily on its residential
mortgage lending business. As a result, its business has historically
consisted of attracting deposits from the general public through its retail
banking offices and applying those funds principally to the origination,
retention, servicing, investing in and selling first mortgage loans on single
and multi-family residential real estate. However, during the past several
years, the Bank has expanded the scope of its services by placing additional
emphasis on:
* consumer lending and small business, home equity, and commercial loans;
* lending funds to retail banking customers by means of home equity and
installment loans;
* originating loans secured by commercial property and multi-family dwellings;
and
* generating indirect dealer consumer loans used for the purchase of mobile
homes and automobiles.
Northeast Bancorp also offers to its customers financial planning, investment
services and all lines of insurance products through the Bank's subsidiary,
Northeast Financial Services Corporation. Northeast Financial Services
Corporation, which is located at Northeast Bancorp's headquarters in Auburn,
Maine, offers customers access to investment, and annuity products through an
arrangement with Commonwealth Equity Services, Inc., an unaffiliated, fully
licensed New York securities firm, which licenses the brokers who sell such
products and services. It also offers a full line of insurance products to
customers through its relationships with several agencies, including one owned
by Mr. Kendall who is a director of the company.
Trust services and employee benefit products are provided to Northeast Bancorp
customers through Northeast Trust, a division of the Bank. Since 1993,
employee benefit products were provided to Northeast Bancorp's customers
through First New England Benefits, a division of the Bank ("FNEB"). During
fiscal 1999, Northeast Bancorp dissolved FNEB because it could not attain
sufficient growth revenue. These services are now provided to customers
through the Bank's trust department. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Results of
Operations."
The community banking strategy of Northeast Bancorp emphasizes the development
of long-term full banking relationships with customers by providing consistent,
high quality service from:
* locally-based decision makers;
* persons who are familiar with the customers' needs, their business
environment and competitivedemands; and
* persons who are able to provide personalized financial solutions that are
tailored to meet theirneeds in a timely manner.
With the goal of providing a full range of banking services to its customers
and in an effort to develop strong long-term primary banking relationships with
businesses and individuals, the Bank has expanded its commercial banking
operations by selectively making commercial loans to small and medium sized
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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, 1999, the Bank's loan
portfolio consisted of 58% residential real estate mortgages, 17% commercial
real estate mortgages, 11% commercial loans, and 14% consumer loans. At June
30, 1999, the Bank's lending limit was approximately $4 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.
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 24% of the Bank's total deposits, are
insured through the Savings Association Insurance Fund.
The principal executive offices of Northeast Bancorp and the Bank are located
at 232 Center Street, Auburn, Maine, 04210, and their telephone number is
(207) 777-6411.
Market Area and Competition
___________________________
The Bank is headquartered in Auburn, Maine with full service branches in
Augusta, Bethel, Harrison, South Paris, Buckfield, Mechanic Falls, Brunswick,
Richmond, Lewiston, and Lisbon Falls, Maine. In addition, the Company maintains
a facility in Falmouth, Maine from which it accepts loan applications and
offers investment services, insurance, and financial planning products and
services. As a result of its recent acquisitions and expansion, the Company's
market areas cover western, central and mid-coastal regions of the State of
Maine. The Bank's market area is characterized by a diversified economy has
experienced moderate growth in recent years.
Market for Services and Competition
___________________________________
Businesses are solicited through the personal efforts of the directors and
officers of both Northeast Bancorp and the Bank. Management believes a
locally-based independent bank is often perceived by the local business
community as possessing a clearer understanding of local commerce and its
needs. Consequently, Northeast Bancorp believes that it is able to make
prudent lending decisions quickly and more equitably than its competitors
without compromising asset quality or profitability.
In an effort to attract a broader base of long-term customer relationships and
diversity in its banking operations, Northeast Bancorp has recently expanded
its focus from primarily seeking residential loan customers to becoming a "one-
stop shopping" destination point for our customers full financial needs.
Accordingly, during the past few years the Bank has significantly increased the
number and type of financial products, loans, and services that it makes
available to its customers.
Northeast Bancorp encounters strong competition in its market areas, both in
making loans and attracting deposits. The deregulation of the banking industry
6
and the widespread enactment of state laws which permit multi-bank holding
companies, as well as the availability of nationwide interstate banking, has
created a highly competitive environment for financial services providers. In
one or more aspects of its business, the Bank competes with other savings
banks, commercial banks, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, finance
companies, and other financial intermediaries operating in Maine and elsewhere.
Many of the Bank's primary competitors, some of which are affiliated with large
bank holding companies or other larger financial-based institutions, have
substantially greater resources and have higher lending limits.
The principal factors in competing for deposits are convenient office
locations, flexible hours, interest rates and services, while those relating to
loans are interest rates, the range of lending services offered and lending
fees. Additionally, Northeast Bancorp believes that an emphasis on
personalized financial planning and advice tailored to individual customer
needs, together with the local character of the Bank's business and its
"community bank" management philosophy will enhance its ability to compete
successfully in its market areas. Further, Northeast Bancorp now offers a wide
range of financial services to its customers, including not only basic loan and
deposit services, but also investment services, trust services, and insurance
products. We believe that our ability to provide such services and advice, and
to provide the financial services and products required by our customers, will
be an attractive alternative to consumers in our market area.
Regional Economic Environment
_____________________________
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, 1999, investment in and loans to its subsidiary constituted
0.13% of the Company's total assets. This 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, and a variety of insurance agencies, including Kendall
Insurance Agency, which allows the Bank to deliver insurance products to its
customers, in which the Bank receives a flat fee from the various relationships
for referrals. Northeast Financial has not invested in any assets in its
business relationship with Commonwealth.
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Employees
_________
As of June 30, 1999, the Company and the Bank together employed 128 full-time
and 27 part-time employees. The Company's employees are not represented by any
collective bargaining unit. The Company believes that its relations with its
employees are good.
SUPERVISION AND REGULATION
__________________________
General
_______
Northeast Bancorp is a savings and loan holding company that is regulated and
subject to examination by the OTS. The Bank is a federally chartered savings
bank and is subject to the regulations, examinations, and reporting
requirements of the OTS. The Bank is a member of the Federal Home Loan Bank of
Boston and the Bank's deposits are insured by the FDIC.
The Bank also is subject to regulation by the Board of Governors of the Federal
Reserve System governing reserves to be maintained against deposits and certain
other matters. The Bank's relationship with its depositors and borrowers also
is regulated to a great extent by both federal and state laws. Any change in
applicable laws or regulations, or a change in the ways these laws and
regulations are interpreted by regulatory agencies or courts, may have a
material adverse impact on the business of Northeast Bancorp and the Bank.
The following information is a summary of some of the laws and regulations
applicable to Northeast Bancorp and the Bank. The applicable statutes and
regulations are summarized and do not purport to be complete, and are qualified
in their entirety by reference to the particular statutes and regulations.
Federal Regulation of Savings and Loan Holding Companies
________________________________________________________
General Limitations.
____________________
Northeast Bancorp is a unitary savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA") and is registered with
the OTS. Northeast Bancorp is subject to OTS regulations, examinations,
supervision and reporting requirements. Further, the OTS has enforcement
authority over Northeast Bancorp and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
As a unitary savings and loan holding company, Northeast Bancorp generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a qualified thrift
lender. See "Supervision and Regulation Federal Regulations of Savings
Associations Qualified Thrift Lender Test." Nevertheless, various activities
conducted by savings and loan holding companies require OTS authorization.
8
The HOLA prohibits a savings and loan holding company from directly or
indirectly acquiring control (including through an acquisition by merger,
consolidation or purchase of assets) of any savings association, or any other
savings and loan holding company, without prior OTS approval. In considering
whether to grant approval for any such transaction, the OTS will take into
consideration a number of factors, including:
* competitive effects of the transaction;
* financial and managerial resources;
* future prospects of the holding company and its bank or thrift subsidiaries
following thetransaction;
* the effect of the acquisition on the risk to the insurance fund; and
* compliance history of such subsidiaries with the Community Reinvestment Act.
Further, a savings and loan holding company may not acquire more than 5% of the
voting shares of any savings association unless by merger, consolidation or
purchase of assets, each of which requires prior OTS approval. In addition,
under other provisions of HOLA, a savings and loan holding company may acquire
up to 15% of the voting shares of certain undercapitalized savings
associations.
Multiple Savings and Loan Holding Companies.
____________________________________________
At the present time, Northeast Bancorp is a unitary savings and loan holding
company. Upon acquisition by Northeast Bancorp of a separate subsidiary
savings association, Northeast Bancorp would become a multiple savings and loan
holding company and would be subject to extensive limitations on the types of
business activities in which it could engage. A holding company that acquires
another institution and maintains it as a separate subsidiary or whose sole
subsidiary fails to meet the qualified thrift lender test will become subject
to the activities limitations applicable to multiple savings bank holding
companies. In general, a multiple savings bank holding company (or subsidiary
thereof that is not an insured institution) may not commence, or continue for
more than a limited period of time after becoming a multiple savings bank
holding company (or a subsidiary thereof), any business activity other than:
* furnishing or performing management services for a subsidiary insured
institution;
* conducting an insurance agency or an escrow business;
* holding, managing or liquidating assets owned by or acquired from a
subsidiary insuredinstitution;
* holding or managing properties used or occupied by a subsidiary insured
institution;
* acting as trustee under deeds of trust;
* those activities previously directly authorized by the OTS by regulation as
of March 5, 1987 tobe engaged in by multiple savings bank holding companies;
or
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* subject to prior approval of the OTS, those activities authorized by the
Federal Reserve Boardas permissible investments for bank holdings companies.
These restrictions do not apply to a multiple savings bank holding company if
(a) all, or all but one, of its insured institution subsidiaries were acquired
in emergency thrift acquisitions or assisted acquisitions and (b) all of its
insured institution subsidiaries are qualified thrift lenders.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (a) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (b) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary with regard to the extent to which they permit interstate savings
and loan holding company acquisitions. Northeast Bancorp currently is not a
party to any discussions with any acquisition targets which would make
Northeast Bancorp a multiple savings and loan holding company.
Safety and Soundness.
_____________________
Under federal law, the Director of the OTS is authorized to take action when it
determines that there is reasonable cause to believe that the continuation by a
savings bank holding company of any particular activity constitutes a serious
risk to the financial safety, soundness or stability of a savings bank holding
company's subsidiary savings institution. The Director of the OTS has
oversight authority for all holding company affiliates, not just the insured
institution. Specifically, the Director of the OTS may, as necessary:
* limit the payment of dividends by the savings institution to its parent
holding company;
* limit transactions between the savings institution, the holding company and
the subsidiaries oraffiliates of either; or
* limit any activities of the savings institution that might create a serious
risk that the liabilities ofthe holding company and its affiliates may be
imposed on the savings institution.
Federal Regulation of Savings Institutions
__________________________________________
Business Activities.
____________________
The activities of savings institutions are governed by the HOLA and, in certain
respects, the Federal Deposit Insurance Act and the rules and regulations
issued by the OTS and the FDIC pursuant to these acts. These laws and
regulations delineate the nature and extent of the activities in which savings
associations may engage.
Capital Requirements.
_____________________
The OTS capital regulations have three components: a leverage limit, a
tangible capital requirement, and a risk-based capital requirement. The OTS
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has broad discretion to impose capital requirements in excess of minimum
applicable ratios.
The leverage limit requires that a savings association maintain core capital of
at least 3% of its adjusted total assets. For purposes of this requirement,
total assets are adjusted to exclude intangible assets and investments in
certain subsidiaries, and to include the assets of certain other subsidiaries,
certain intangibles arising from prior period supervisory transactions, and
permissible mortgage servicing rights. Core capital includes common
shareholders' equity and retained earnings, noncumulative perpetual preferred
stock and related surplus and minority interests in consolidated subsidiaries,
minus intangibles, plus certain mortgage servicing rights and certain goodwill
arising from prior regulatory accounting practices.
Certain mortgage servicing rights are not deducted in computing core and
tangible capital. Prior to August 10, 1998, generally, the lower of 90% of the
fair market value of readily marketable mortgage servicing rights, or the
current unamortized book value as determined under GAAP could be included in
core and tangible capital up to a maximum of 50% of core capital computed
before the deduction of any disallowed qualifying intangible assets. Effective
August 10, 1998, the OTS increased the maximum amount of mortgage servicing
rights that are includable in regulatory capital from 50% to 100% of core
capital.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks, which are generally
more limited than activities permissible for savings associations and their
subsidiaries, must be deducted. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association.
The tangible capital requirement mandates that a savings association maintain
tangible capital of at least 1.5% of adjusted total assets, provided, however,
that savings institutions may include up to 90% of the fair market value of
readily marketable purchased mortgage servicing rights included in core capital
as tangible capital (subject to certain conditions, including any limitations
imposed by the FDIC on the maximum percentage of the tangible capital
requirement that may be satisfied with such servicing rights). For purposes of
the tangible capital requirement, adjusted total assets are calculated on the
same basis as the leverage limit. Tangible capital is defined in As of June
30, 1999, the Bank was in compliance with these requirements. The balances
maintaine the same manner as core capital, except that all intangible assets
must be deducted.
The risk-based requirement promulgated by the OTS pursuant to the HOLA, tracks
the standard applicable to national banks, except that the OTS may determine to
reflect interest rate and other risks not specifically included in the national
bank standard. However, such deviations from the national bank standard may
not result in a materially lower risk-based requirement for savings
associations than for national banks. The risk-based standard adopted by the
OTS is similar to the Office of the Comptroller of the Currency standard for
national banks. The risk-based standards of the OTS require maintenance of
core capital equal to at least 4% of risk-weighted assets and total capital
equal to at least 8% of risk-weighted assets. Total capital includes core
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capital plus supplementary capital (to the extent it does not exceed core
capital). Supplementary capital includes (a) cumulative perpetual preferred
stock; (b) mutual capital certificates, income capital certificates and net
worth certificates; (c) nonwithdrawable accounts and pledged deposits to the
extent not included in core capital; (d) perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements; and (e) general loan and lease loss allowances, up to a maximum
of 1.25% of risk-weighted assets. See Item 8. "Financial Statements and
Supplementary Data - Footnote 10."
In determining the amount of risk-weighted assets, savings associations must
assign balance sheet assets to one of four risk-weight categories, reflecting
the relative credit risk inherent in the asset. Off-balance-sheet items are
assigned to one of the four risk-weight categories after a credit conversion
factor is applied.
OTS regulations add an interest rate risk component to the 8% risk-based
capital requirement discussed above. Only savings associations with more than
a normal level of interest rate risk are subject to these requirements.
Specifically, savings associations with interest rate risk exposure in excess
of 2% (measured in accordance with an OTS Model and Guidelines) must deduct an
interest rate risk component from total capital prior to calculating their
risk-based capital ratios. The interest rate risk component is calculated as
one-half of the difference between the institution's measured interest rate
risk and 2%, multiplied by the market value of the institution's assets. This
deduction will have the effect of requiring savings associations with interest
rate risk exposure of more than 2% to hold more capital than those with less
than 2% exposure. On August 21, 1995, the OTS adopted and approved an appeal
process, but delayed the interest rate risk capital deduction indefinitely.
Under OTS rules, savings associations are required 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-
weighed 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 federal law, the OTS is required to appoint a conservator or receiver for
12
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.
Federal banking law prohibits any depository institution that is not well
capitalized from accepting deposits through a deposit broker. Previously, only
troubled institution 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. Further, undercapitalized
institutions are prohibited 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 be 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.
Loans to One Borrower.
______________________
Under the HOLA, savings institutions are generally subject to the national bank
limits on loans to a single or related group of borrowers. Generally, a
savings association may lend to a single borrower or group of related
borrowers, on an unsecured basis, in an amount not greater than 15% of its
unimpaired capital and unimpaired surplus. An additional amount, not greater
than 10% of the savings association's unimpaired capital and unimpaired
surplus, may be loaned if the loan is secured by readily marketable collateral,
which is defined to include certain financial instruments and bullion, but
generally does not include real estate. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. The OTS also may impose more stringent limits on an
association's loans to one borrower, if it determines that such limits are
necessary to protect the safety and soundness of the institution.
Qualified Thrift Lender Test.
_____________________________
All savings associations, including the Bank, are required to meet a qualified
thrift lender ("QTL") test for, among other things, future eligibility for FHLB
advances. A savings association that fails to satisfy the QTL test is subject
to substantial restrictions on its activities and to other significant
penalties. A savings association is a QTL if it meets either (a) has invested
at least 65% of its "portfolio assets" in qualified thrift investments and
maintains this level of "qualified thrift investments" on a monthly average
basis in the nine of every twelve months, or (b) the test for being a domestic
building and loan association, as that term is defined in Section 7701(a) (19)
of the Internal Revenue Code of 1986, as amended.
The term "portfolio assets" under the QTL test is defined as savings
institutions total assets less (i) intangibles, (ii) properties used to conduct
13
business, and (iii) liquid assets (up to 20% total assets). The following
asset may be included as "qualified thrift investments" without limit: (1)
domestic residential housing or manufactured housing loans, (2) home equity
loans and mortgage backed securities backed by residential housing and
manufactured housing loans, (3) FHLB stock, (4) certain obligations of the FDIC
and certain other related entities, and (5) education, small business, and
credit card loans. In addition, the following assets, which may be included in
the aggregate amount of up to 20% of portfolio assets, also constitute
qualified thrift investments: (I) 50% of originated residential mortgage loans
sold within 90 days of origination, (ii) investments in debt or equity of
service corporations that derive 80% of their gross revenues from hosing-
related activities, (iii) 200% of certain loans to, and investment in, low cost
one-to-four family housing, (iv) 200% of loans for residential real property,
churches, nursing homes, schools, and small businesses in areas where the
credit needs of low-and moderate-income families are not met, (v) other loans
for churches, schools, nursing homes and hospitals, and (vi) personal, family,
or household loans (other than education, small business, or credit card
loans).
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies. A savings association may
requalify the next time it meets the requirement in nine of the preceding
twelve months, but it may requalify only one time. If an institution that
fails the QTL test and has not yet requalified or converted to a national bank
charter, the savings institution is immediately ineligible to receive any new
FHLB advances, and is subject to national bank limits for payment of dividends.
Further, it may not establish a branch office at any location at which a
national bank located in the savings association's state could not establish a
branch. In addition, within one year of the loss of QTL status, the holding
company of the savings association that does not convert to a bank charter must
register as a bank holding company and will be subject to all statutes
applicable to bank holding companies.
These penalties do not apply to a federal savings association, such as the
Bank, which existed as a federal savings association on August 9, 1989 but was
chartered before October 15, 1982 as a savings bank under state law.
Limitation on Capital Distributions.
____________________________________
OTS regulations impose limitations upon all capital distributions by savings
institutions, including:
* cash dividends;
* payments to repurchase or otherwise acquire its shares;
* payments to stockholders of another institution in a cash-out merger; and
* other distributions charged against capital.
OTS rules establish three tiers of institutions, which are based primarily on
an institution's capital level. An institution, such as the Bank, that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
14
of: (i) 100% of its net earnings to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75% of its net earnings for the previous four quarters;
provided that the institution would not be undercapitalized, as the term is
defined in the OTS Prompt Corrective Action regulations, following the capital
distribution. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its fully
phased-in requirement or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity.
__________
The Bank is required to maintain an average daily balance of "liquid assets"
equal to a certain percentage of net withdrawable deposit accounts and
borrowings payable in one year or less. Liquid assets are cash, certain time
deposits, bankers' acceptances, highly rated corporate debt securities and
commercial paper, securities of certain government mutual funds, reserves
maintained pursuant to Federal Reserve Board requirements, and specified
government, state or federal agency obligations. The liquidity requirement may
vary from time to time, between 4% and 10%, depending on economic conditions
and savings flows of all savings associations. At June 30, 1999, OTS
regulations required savings associations, such as the Bank, to maintain liquid
assets equal to not less than 4% of its net withdrawable deposit accounts and
borrowing payable in one year or less.
Simply meeting the minimum liquidity requirement does not automatically mean a
thrift institution has sufficient liquidity for safe and sound operation. OTS
rules include a separate additional requirement that each thrift must maintain
sufficient liquidity to ensure its safe and sound operation. Adequate
liquidity may vary from institution to institution depending on a thrift's
asset/liability structure, market conditions, the activities of financial
service competitors and the requirements of its own deposit and loan customers.
At June 30, 1999, the Bank was in compliance with the liquidity ratio
regulatory requirements.
Community Reinvestment Act and Fair Lending Laws.
_________________________________________________
Savings associations have a responsibility under the Community Reinvestment Act
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. A savings institution's failure to comply with
the provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities. Failure of a savings association to
comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the OTS, as well as other federal regulatory
agencies and the Department of Justice. The Bank received a satisfactory
Community Reinvestment Act rating under the current regulations in its most
recent federal examination by the OTS.
15
The Bank Secrecy Act and Money Laundering Laws.
_______________________________________________
The Bank Secrecy Act was enacted by Congress in 1970. This act requires every
financial institution within the United States to file a Currency Transaction
Report with the Internal Revenue Service for each transaction in currency of
more than $10,000 not exempted by the United States Treasury Department.
The Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's checks,
traveler's checks, or money orders involving $3,000 or more in cash.
Institutions also must verify and record the identity of the originator and
beneficiary of certain funds transfers.
Branching.
__________
Subject to certain statutory restrictions in the HOLA and the Federal Deposit
Insurance Act, the Bank is authorized to branch on a nationwide basis.
Branching by savings associations also is subject to other regulatory
requirements, including compliance with the Community Reinvestment Act and its
implementing regulations.
Transactions with Related Parties.
__________________________________
The Bank's authority to engage in transactions with related parties or
"affiliates" (i.e., any company that controls or is under common control with
the Bank, including Northeast Bancorp and any non-savings institution
subsidiaries) or to make loans to certain insiders of the Bank or Northeast
Bancorp, is limited by Sections 23A and 23B of the Federal Reserve Act.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from affiliates
is generally prohibited. Section 23B provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
Loans to Officers, Directors, and Principal Stockholders.
_________________________________________________________
Sections 22(g) and 22(h) of the Federal Reserve Act and the rules and
regulations issued under that act are applicable to loans from a savings
association to any of the following persons:
* an executive officer of a savings association;
* a director of a savings association;
16
* a principal stockholder of a savings association (i.e., any person who
directly or indirectly, oracting through or in concert with one or more
persons, owns, controls, or has power to votemore than 10% of any class of
voting securities of a savings association);
* any company controlled by an executive officer, director or principal
stockholder of a savings association; and
* any political or campaign committee which is controlled by, or which will
benefit any executive officer, director or principal stockholder.
Among other things, such loans must be made on terms substantially the same as
those prevailing on comparable transactions made to unaffiliated individuals,
and may not involve more than the normal risk of repayment or present other
unfavorable features. Certain extensions of credit to such persons must first
be approved in advance by a disinterested majority of a savings association's
entire board of directors. Section 22(h) of the Federal Reserve Act prohibits
loans to any such individuals where the aggregate amount exceeds an amount
equal to 15% of an insured institution's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus in the case of loans that
are fully secured by readily marketable collateral, or when the aggregate
amount on all such extensions of credit outstanding to all such persons would
exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g)
establishes additional limitations on loans to executive officers.
Changes in Directors and Senior Executive Officers.
___________________________________________________
Section 32 of the Federal Deposit Insurance Act, as amended by the 1996 Act,
requires a depository institution or holding company of a depository
institution to give 30 days prior written notice to its primary federal
regulator of any proposed appointment of a director or senior executive officer
if the institution is not in compliance with the minimum capital requirements
or otherwise is in a troubled condition. The regulator then has the
opportunity to disapprove the proposed appointment.
Permissible Loans and Investments.
__________________________________
Federally chartered savings banks, such as the Bank, are authorized to
originate, invest in, sell, purchase, service, participate, and otherwise deal
in: (1) loans made on the security of residential and nonresidential real
estate, (2) commercial loans (up to 20% of assets, the last 10% of which must
be small business loans), (3) consumer loans (subject to certain percentage of
asset limitations), and (4) credit card loans. The lending authority of
federally chartered associations is subject to various OTS requirements,
including, as applicable, requirements governing loan-to-value ratio,
percentage-of-assets limits, and loans to one borrower limits. In September
1996, the OTS substantially revised its investment and lending regulations
eliminating many of their specific requirements in favor of a more general
standard of safety and soundness.
Federally chartered savings associations may invest, without limitation, in the
following assets: (1) obligations of the United States government or certain
agencies thereof; (2) stock issued or loans made by FHLB or the FNMA; (3)
obligations issued or guaranteed by the FNMA, the Student Loan Marketing
Association, the GNMA, or any agency of the United States Government; (4)
17
certain mortgages, obligations, or other securities that have been sold by the
FHLMC; (5) stock issued by a national housing partnership corporation; (6)
demand, time, or savings deposits, shares, or accounts of any insured
depository institution; (7) certain "liquidity" investments approved by the OTS
to meet liquidity requirements; (8) shares of registered investment companies,
the portfolios of which are limited to investments that a federal association
is otherwise authorized to make; (9) certain MBS; (10) general obligations of
any state of the United States or any political subdivision or municipality
thereof, provided that not more than 10% of a savings association's capital may
be invested in the general obligations of any one issuer; (11) loans secured by
residential real property; (12) credit card loans; and (13) educational loans.
Federally chartered savings associations may invest in secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, up to 20%
of assets, provided that the last 10% is invested in small business loans. The
HOLA also limits a federal savings association's aggregate nonresidential real
property loans to 400% of the savings association's capital as determined
pursuant to the OTS's capital requirements. See "Supervision and Regulation
Federal Regulation of Savings Associations Capital Requirements." The OTS may
allow a savings association to exceed the aggregate limitation, if the OTS
determines that exceeding the limitation would pose no significant risk to the
safe and sound operations of the association and would be consistent with
prudent operating practices. Federally chartered savings associations also are
authorized by the HOLA to make investments in consumer loans, business
development credit corporations, certain commercial paper and corporate debt
securities, service corporations, and small business investment companies. All
of these types of investments are subject to percentage-of-assets and various
other limitations.
Service Corporations.
_____________________
The HOLA authorizes federally chartered savings associations, such as the Bank,
to invest in the capital stock, obligations, or other securities of service
corporations. The HOLA authorizes a savings association to invest up to a
total of 3% of its assets in service corporations. The last 1% of the 3%
statutory investment limit applicable to service corporations must be primarily
invested in community development investments drawn from a broad list of
permissible investments that include, among other things: (1) government
guaranteed loans, (2) loans for investment in small businesses, (3) investments
in revitalization, and rehabilitation projects, and (4) investments in low- and
moderate-income housing developments.
Service corporations are authorized to engage in a variety of preapproved
activities, some of which (e.g., securities brokerage and real estate
development) are ineligible activities for the parent savings association. The
OTS regulations implementing the service corporation authority contained in the
HOLA also provide that activities reasonably related to the activities of a
federally chartered savings association may be approved on a case-by-case basis
by the Director of the OTS.
Operating Subsidiaries.
_______________________
All federal savings associations are authorized to establish or acquire one or
more operating subsidiaries. Operating subsidiaries are subject to examination
and supervision by the OTS to the same extent as the parent thrift. An
operating subsidiary is a corporation that meets all of the following
18
requirements: (1) it engages only in activities that a federal savings
association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total
assets, OTS regulations do not limit the amount that a parent savings
association may invest in its operating subsidiaries. Operating subsidiaries
may be incorporated and operated in any geographical location where its parent
may operate. An operating subsidiary that is a depository institution may
accept deposits in any location, provided that the subsidiary has federal
deposit insurance.
Enforcement.
____________
Under the Federal Deposit Insurance Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless
disregard is made, in which case penalties may be as high as $1 million per
day. Under the act, the FDIC has the authority to recommend to the Director of
OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such actions under certain circumstances.
Standards for Safety and Soundness.
___________________________________
The Federal Deposit Insurance Act requires each federal banking agency to
prescribe for all insured depository institutions standards relating to, among
other things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
and compensation fees and benefits and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness to implement the safety and soundness standards required
under the act. These guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. Further, the
guidelines address (a) internal controls and information systems; (b) internal
audit system; (c) credit underwriting; (d) loan documentation; (e) interest
rate risk exposure; (f) asset growth; and (g) compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by these guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the Federal Deposit Insurance Act. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
19
Prompt Corrective Regulatory Action
___________________________________
Under the OTS Prompt Corrective Action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 core capital ratio that is less than 3.0% is
considered to be undercapitalized. A savings institution that has total risk-
based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 1.5% is deemed to be "critically
undercapitalized."
Subject to a narrow exception, the OTS is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notices that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors. As
of June 30, 1999, the Bank was considered to be well capitalized.
Insurance of Deposit Accounts and Assessments
_____________________________________________
The Bank's deposits are insured by the FDIC through the bank insurance fund
("BIF") and the savings association insurance fund ("SAIF") for up to $100,000
for each insured account holder, the maximum amount currently permitted by law.
The FDIC establishes premium assessment rates for BIF and SAIF deposit
insurance. There is no statutory limit on the maximum assessment and the
percent of increase in the assessment that the FDIC may impose in any one year,
provided, however, that the FDIC may not collect more than is necessary to
reach or maintain the BIF's and SAIF's designated reserve ratio and must rebate
any excess collected. Under the FDIC's risk-based insurance system, BIF and
SAIF-assessable deposits are now subject to premiums of between 0 to 27 cents
per $100 of deposits, depending upon the institution's capital position and
other supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC places
the institution in one of nine risk categories using a two-step process based
first on capital ratios and then on relevant supervisory information. Each
institution is assigned to one of three groups (well-capitalized, adequately
capitalized, or undercapitalized) based on its capital ratios. A well-
capitalized institution is one that has at least a 10% total risk-based capital
ratio (the ratio of total capital to risk-weighted assets), a 6% tier 1 risk-
based capital ratio (the ratio of tier 1 core capital to risk-weighted assets),
and a 5% leverage capital ratio (the ratio of core capital to adjusted total
assets). An adequately capitalized institution has at least an 8% total risk-
based capital ratio, a 4% tier 1 core risk-based capital ratio, and a 4%
leverage capital ratio. An undercapitalized institution is one that does not
meet either the definition of well-capitalized or adequately capitalized.
20
The FDIC also assigns each institution to one of three supervisory subgroups
based on an evaluation of the risk posed by the institution. These supervisory
evaluations modify premium rates within each of the three capital groups. The
nine risk categories and the corresponding BIF and SAIF assessment rates are as
follows:
Supervisory Subgroup
Meets numerical standards for:
A B C
_ _ _
Well-capitalized . . . . . . . . . 0 3 17
Adequately capitalized . . . . . . 3 10 24
Undercapitalized . . . . . . . . . 10 24 27
For purposes of assessments of FDIC insurance premiums, the Bank is a well-
capitalized institution as of June 30, 1999. FDIC regulations prohibit
disclosure of the supervisory subgroup to which an insured institution is
assigned.
As an insurer, the FDIC issues regulations and conducts examinations of its
insured members. Insurance of deposits by the FDIC may be terminated by the
FDIC, after notice and hearing, upon a finding that an institution (a) has
engaged in unsafe and unsound practice, (b) is in an unsafe and unsound
condition to continue operations, or (c) has violated any applicable law,
regulation, rule, order or condition imposed by the OTS or the FDIC. When
conditions warrant, the FDIC may impose less severe sanctions as an alternative
to termination of insurance.
Brokered Deposits
_________________
Only a well-capitalized depository institution may accept brokered deposits
without prior regulatory approval. Under implementing regulations, well-
capitalized banks may accept brokered deposits without restriction, adequately
capitalized banks may accept brokered deposits without a waiver from the FDIC
(subject to certain restrictions on payments of rates), while undercapitalized
banks may not accept brokered deposits.
Federal Home Loan Bank System
_____________________________
The Bank is a member of the Federal Home Loan Bank System, which consists of 12
regional banks. FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Boston, is required to
acquire and hold shares of capital stock in that institution in an amount at
least equal to 1% of the aggregate principal amount of the Bank's unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB of Boston, whichever is greater.
Federal Reserve System
______________________
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transactions (primarily NOW and
regular checking accounts). As of June 30, 1999, the Bank was in compliance
with these requirements. The balances maintained to meet the reserve
21
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
Federal Securities Laws
_______________________
Northeast Bancorp's common stock is registered with the SEC under the
Securities Exchange Act of 1934. Accordingly, Northeast Bancorp is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act.
Maine Law
_________
Northeast Bancorp and the Bank are headquartered in, and qualified to do
business in the State of Maine. Accordingly, the Maine Bureau of Banking has
the authority to impose certain regulations and the power to examine both the
Bank and Northeast Bancorp. In addition to approvals from federal regulatory
agencies, Northeast Bancorp may be required to seek approval of the Maine
Bureau of Banking prior to engaging in certain extraordinary transactions.
Legislation
___________
Federal legislation and regulation have significantly affected the operations
of federally insured savings associations, such as the Bank, and other
federally regulated financial institutions in the past several years and have
increased competition among savings associations, commercial banks, and other
financial institutions. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Bank cannot determine
whether, or in what form, such legislation may eventually be enacted, and there
can be no assurance of the effect that any legislation that is enacted would
have on Northeast Bancorp, the Bank, and its affiliates. The operations of
regulated depository institutions will continue to be subject to changes in
applicable statutes and regulations from time to time and could adversely
affect Northeast Bancorp, the Bank, and its affiliates.
Statistical Disclosure
______________________
The additional statistical disclosure describing the business of the Company
and the Banks required by Industry Guide 3 under the Securities Exchange Act of
1934, as amended, is provided in Item 8b.
Forward-Looking Statements
__________________________
This Annual Report on Form 10-K (including the Exhibits hereto) contains
certain "forward-looking statements" within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, such as
statements relating to, among other things, the financial conditions and
prospects of the Company and its subsidiaries, loan loss reserve adequacy, Year
2000 readiness, market risks and simulation of changes in interest rates,
results of operations, plans for future business development activities and the
opportunities available within its market areas, capital spending plans,
financing sources, projections of financial results or economic performance,
22
capital structure, the effects of regulation and competition, statements
of plans or objectives of the Company, and the business of the Company and its
subsidiaries. These forward-looking statements are typically identified by
words or phrases such as "believe," "expect," "anticipate," "plan," "estimate,"
"intend," and other similar words and expressions, or future or conditional
verbs such as "will," "should," "would," and "could." In addition, the Company
may from time to time make such written or oral "forward-looking statements" in
future filings with the Securities and Exchange Commission (including exhibits
thereto), in its reports to shareholders, and in other communications made by
or with the approval of the Company.
These forward-looking statements reflect the current views of the Company at
the time they are made and are based on information currently available to the
management of the Company and upon current expectations, estimates, and
projections regarding the Company and its industry, management's beliefs with
respect thereto, and certain assumptions made by management. These forward-
looking statements are not guarantees of future performance and are subject to
risks, uncertainties, and other factors (many of which are outside the control
of the Company) which could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. Potential
risks, uncertainties, and other factors which could cause the Company's
financial performance or results of operations to differ materially from
current expectations or such forward-looking statements include, but are not
limited to:
(a) general economic conditions becoming less favorable than expected,
either nationally or in the markets where the Company or its
subsidiaries offer their financial products or services, resulting in,
among other things, a deterioration of credit quality or in a decreased
demand for the Company's products or services;
(b) competitive pressure in the banking and financial services industry
increasing significantly and, more particularly, competition in the
Company's market areas as described under "Business Market for
Services and Competition";
(c) changes in the interest rate environment which reduces margins,
including those described under " Management's Discussion and Analysis
of Financial Condition and Results of Operations Financial Condition";
(d) the adequacy of the allowance for loan losses and the Bank's asset
quality, including those matters described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations Financial
Conditions," and " Results of Operations";
(e) changes in political conditions or changes occurring in the legislative
or regulatory environment, including the impact of any changes in laws
and regulations relating to banking, securities, taxes, and insurance;
(f) the ability to increase market share and to control expenses, and
changes in consumer spending, borrowing, and saving habits;
(g) changes in trade, tax, monetary, or fiscal policies, including the
interest rate policies of the FRB;
(h) money market and monetary fluctuations, and changes in inflation or in
the securities markets;
23
(i) technological changes and factors relating to the Year 2000 issues,
including those described under "Management's Discussion and Analysis
of Financial Condition and Results of Operations Year 2000";
(j) future acquisitions and the integration of acquired businesses and
assets;
(k) changes in the Company's organizational structure and in its
compensation and benefit plans, including those necessitated by
pressures in the labor market for attracting and retaining qualified
personnel;
(l) the effect of changes in accounting policies and practices, as may be
adopted by regulatory agencies as well as the Financial Accounting
Standards Board;
(m) unanticipated litigation, regulatory, or other judicial proceedings;
(n) the success of the Company at managing the risks involved in the
foregoing;
(o) other one-time events, risks and uncertainties detailed from time to
time in the filings of the Company with the Securities and Exchange
Commission.
Such forward-looking statements speak only to the date that such statements are
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
The Company's results are strongly influenced by general economic conditions in
its market areas in the western, central, and mid-coastal regions of the State
of Maine. A deterioration in these conditions could have a material adverse
effect on the quality of the Bank's loan portfolio and the demand for its
products and services. In particular, changes in the real estate or service
industries, or a slow-down in population growth may adversely impact the
Company's performance. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
All forward-looking statements presume a continuation of the existing
regulatory environment and monetary policy. The banking industry is subject to
extensive state and federal regulation, and significant new laws or
regulations, or changes in or repeals of existing laws or regulations may cause
results of the Company to differ materially. Further federal monetary policy,
particularly as implemented by the FRB, significantly affect credit conditions
for the Bank and its customers. Such changes could adversely impact the
Company's financial results. See "Item 1. Business Supervision and
Regulation."
A significant source of risks arise from the possibility that losses will be
sustained because borrowers, guarantors, and related parties fail to perform in
accordance with the terms of their loans. The Bank has adopted underwriting
and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that management
believes are appropriate to minimize the risks in assessing the likelihood of
nonperformance, tracking loan performance, and diversifying the Bank's loan
24
portfolio. However, such policies may not prevent unexpected losses that could
adversely affect the Company's results and the allowance for loan losses may
not be adequate in all instances. Further, certain types of lending
relationships carry greater risks of nonperformance and collectability, such as
commercial and consumer loans. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Financial Condition,"
" Results of Operations," and " Market Risk."
Item 2. Properties
___________________
The 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 12 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 and Lewiston, Maine
are leased by the Bank. The Bank also owns in fee simple certain real property
and improvements located in Auburn and Falmouth, Maine at which various loan
and non-banking services as well as accounting and operations functions of the
Company and the Bank are performed. The facilities owned or occupied under
lease by the Bank and its subsidiaries are considered by management to be
adequate.
Item 3. Legal Proceedings
__________________________
There are no pending legal proceedings to which the Company is a party or any
of its property is the subject. There are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of banking, to which the Bank is a party or of which any of the Bank's property
is the subject. There are no material pending legal proceedings to which any
director, officer or affiliate of the Company, any owner of record beneficially
of more than five percent of the common stock of the Company, or any associate
of any such director, officer, affiliate of the Company or any security holder
is a party adverse to the Company or has a material interest adverse to the
Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
There were no matters submitted to a vote of the Company's securities-holders
during the fourth quarter of the fiscal year ended June 30, 1999.
Item 4a. Executive Officers of the Regisrant
______________________________________________
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
25
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. . . . 47 President and Chief Executive Officer (1)
A. William Cannan . . . . 57 Executive Vice President and Chief Operating
Officer (1)
Philip C. Jackson . . . . 55 Senior Vice President of Bank Trust Operations
Richard E. Wyman, Jr. . . 43 Chief Financial Officer (1)
Gary Berlucchi. . . . . . 53 Senior Vice President of Bank - Operations
Marilyn Wyman . . . . . . 48 Senior Vice President of Bank Human Resources
A.Daniel Keneborus. . . . 58 Senior Vice President of Bank Commercial
Lending
Marcel Blais. . . . . . . 40 Senior Vice President of the Bank - Sales
Manager
Suzanne Carney. . . . . . 32 Clerk
________________
(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 1987.
Mr. Jackson also has served as the Senior Vice President of the Bank's Trust
Operations since 1997. From 1991 to 1994, Mr. Jackson served as President of
Bethel Savings, the predecessor to the Bank.
Richard E. Wyman, Jr. has been the Chief Financial Officer of the Company and
the Bank since 1992.
Gary Berlucchi has been the Senior Vice President of the Bank - Operations
since January 1999. From 1972 to 1995, Mr. Berlucchi was a Vice President of
Casco Northern Bank, N.A., in operations and credit policy. Previous to
joining Northeast Bank, Mr. Berlucchi was self-employed as a financial
consultant.
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.
A. Daniel Keneborus has been the Senior Vice President of the Bank - Commercial
Lending since October 1998. Mr. Keneborus served as Vice President, Casco
Northern Bank from 1976 to 1990, Vice President Commercial Lending of Peoples
Heritage from 1990 to 1992, and Vice President Commercial Lending for Shawmut
Bank from 1993 to 1997.
Marcel Blais has been the Senior Vice President of the Bank - Retail Lending
since 1998. Mr. Blais joined the Company in 1997 as the Vice President of the
Bank - Branch Administration. Prior to joining the Company he served as Vice
President of Atlantic Bank from 1995 to 1997, and as Vice President - Branch
26
Manager of Casco Bank from 1977 until 1995.
Suzanne Carney has been Clerk of the Bank since March 1999 and has been with
the company since 1994 in the Accounting Division.
Part II
Item 5. Market Prices of Common Stock and Dividends Paid
________________________________________________
The Common Stock of Northeast Bancorp trades on the American Stock Exchange
("AMEX") under the symbol NBN. As of the close of business on September 14,
1999, there were approximately 2,770,446 of shares of common stock outstanding
held by approximately 486 stockholders of record.
The following table sets forth the high and low closing sales prices of the
Company's Common Stock as reported on AMEX, and dividends paid during each
quarter for fiscal years ending June 30, 1999 and 1998. All information set
forth on the table below has been revised to reflect a 50% stock dividend paid
December 15, 1997.
1998-99 High Low Div Pd
_______________ ______ ______ ______
Jul 1 - Sep 30 16.13 9.75 .053
Oct 1 - Dec 31 11.25 8.00 .053
Jan 1 - Mar 31 11.50 9.88 .053
Apr 1 - Jun 30 11.00 9.50 .053
1997-98 High Low Div Pd
_______________ ______ ______ ______
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
The amount and timing of future dividends payable on the Company's Common Stock
will depend on, among other things, the financial condition of the Company,
regulatory considerations, and other factors, including the ability of the Bank
to pay dividends to the Company, the amount of cash on hand, and any
obligations to pay dividends to holders of its preferred stock.
Item 6. Selected Financial Data
_______________________
At or for the Year Ended June 30,
________________________________________________
1999 1998 1997 1996 1995
________ ________ ________ ________ ________
27
(Dollars in thousands except for Per Share Data)
Selected Operations Data:
Interest income $ 26,857 $ 24,283 $ 21,936 $ 20,105 $ 18,953
Interest expense 14,550 12,810 11,291 10,087 8,841
________ ________ ________ ________ ________
Net interest income 12,307 11,473 10,645 10,018 10,112
Provision for loan losses 610 706 614 639 691
Other operating income (1) 2,621 2,384 1,827 1,909 1,760
Net securities gains 95 288 259 279 419
Other operating expenses (2) 10,570 9,732 9,718 9,536 9,093
________ ________ ________ ________ ________
Income before income taxes 3,843 3,707 2,399 2,031 2,507
Income tax expense 1,433 1,303 909 738 878
________ ________ ________ ________ ________
Net income $ 2,410 $ 2,404 $ 1,490 $ 1,293 $ 1,629
Consolidated Per Share Data(3):
Net income:
Basic $ 0.88 $ 1.00 $ 0.63 $ 0.56 $ 0.77
Diluted $ 0.86 $ 0.86 $ 0.56 $ 0.50 $ 0.66
Cash dividends $ 0.21 $ 0.21 $ 0.21 $ 0.16 $ 0.11
Selected Balance Sheet Data:
Total assets $364,383 $322,533 $284,077 $244,782 $231,856
Loans receivable 318,986 282,031 222,682 187,210 187,777
Deposits 219,364 184,024 172,921 164,855 168,682
Borrowings 104,569 105,433 81,793 54,140 38,274
Total stockholders' equity 26,683 25,140 22,096 20,364 19,388
Performance Ratios:
Return on average assets 0.71% 0.83% 0.57% 0.55% 0.71%
Return on average equity 9.18% 10.35% 7.05% 6.31% 8.81%
Average equity to average
total assets 7.73% 7.99% 8.09% 8.67% 8.10%
Efficiency Ratio (4) 70.36% 68.80% 76.33% 78.13% 73.98%
Net Interest Margin 3.30% 3.63% 3.83% 4.04% 4.28%
Common dividend payout
ratio (3) 24.42% 24.42% 37.50% 32.00% 16.67%
Asset Quality Ratios:
Allowance for loan losses
to total loans 0.93% 1.07% 1.25% 1.50% 1.44%
Allowance for loan losses to
non-performing loans 255.59% 132.47% 95.18% 86.77% 100.15%
Net charge-offs to average
loans 0.23% 0.20% 0.32% 0.29% 0.42%
(1) Includes fees for services to customers and sale of loans.
(2) Includes salaries, employee benefits, occupancy, equipment and other
expenses.
(3) Per share data include restatement to reflect (a)100% stock dividend paid
in December 1995, (b) a 50% stock dividend paid in 1997, and (c) adoption
of FASB No. 128 "Earnings Per Share" and its retroactive application to
periods prior to and including 1997. The selected financial data for the
years 1997 to 1995 has been restated to include Cushnoc Bank's financial
information in accordance with the pooling of interests accounting method
28
due to a merger.
(4) Non-interest expense divided by net interest income plus non-interest
income.
Item 7. Management's Discussion of Financial Condition and Results of
_____________________________________________________________
Operations
__________
Management's Discussion and Analysis
____________________________________
DESCRIPTION OF OPERATIONS
_________________________
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company registered with the Office of Thrift Supervision ("OTS") its primary
regulator. The Company 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,
Lewiston, and Lisbon Falls, Maine. In March of 1999 the Bank opened a new
branch located on Lisbon Street in Lewiston, Maine as well as a facility on
Fundy Road in Falmouth, Maine, which accepts loan applications and offers
investment, insurance and financial planning products. The Bank's deposits are
primarily BIF-insured. Deposits at the Brunswick branch are SAIF-insured and
represent approximately 24% of the Bank's total deposits at June 30, 1999.
Northeast Bancorp through its subsidiary, Northeast Bank and it's subsidiary
Northeast Financial Services, Inc., provide a broad range of financial services
to individuals and companies in western, midcoast and south-central Maine.
Substantially all income and services are derived from banking products and
services in Maine. Accordingly, the Company's subsidiary is considered by
management to be aggregated in one reportable operating segment.
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, 1998 to June 30, 1999, and the results of
operations for the fiscal years ended June 30, 1999, 1998, and 1997. 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 and non-interest fee
income, by increasing deposit and loan volume through a larger market area as
well as increasing sales in the Company's financial service departments.
The state of Maine's economy in which the Company operates, including the south
central and mid-coast region of Cumberland, Androscoggin and Sagadahoc
counties, has experienced moderate growth over the previous two years. The
banking business has become increasingly competitive over the past several
years. The Bank's major competitors for deposits and loans consist primarily
of other Maine-based banks, regional and money center banks, and non-bank
financial institutions. Many of the Bank's competitors are larger in size and,
consequently, possess greater financial resources. The principal factors in
competing for deposits are convenient office locations, flexible hours,
29
interest rates and services, while those relating to loans are interest rates,
the range of lending services offered and lending fees. The Bank believes that
the local character of its business and its "community bank" management
philosophy enhances its ability to compete in its market areas. The Company
has continuously enhanced its product lines and now provides a wide range of
financial services such as loans and deposits, investments through its
relationship with Commonwealth Financial Services, Inc., employee retirement
benefits and trust services through the Bank's trust department, and provides
insurance products through its affiliation with local insurance agencies.
The Company believes that its level of capital is adequate and with its current
capital plan will support future growth and development as well as allow for
additional provisions to the allowance for loan losses, if needed, without
significant impairment of the financial stability of the Company. As of June
30,1999, the Company's total equity represents 7.32% of its total assets. The
Company's assets totaled $364,382,905 as of June 30, 1999, an increase of
$41,850,311 compared to June 30, 1998, primarily due to loan growth. Loan
volume was enhanced during the 1999 fiscal year due to residential whole loan
purchases on the secondary market, increased commercial loans, and automobile
dealer finance loans. The increase in loans was funded with increased deposits
and securities sold under repurchase agreements. The Company has focused its
business development efforts on full service credit packages and financial
services, as well as competitively priced mortgage packages.
The Bank's loan portfolio had a balance of $318,986,247 as of June 30, 1999,
which represents an increase of $36,955,297 compared to June 30, 1998. From
June 30, 1998 to June 30, 1999, the loan portfolio increased by $18,525,570 in
real estate mortgage loans, $10,683,891 in consumer and other loans, and by
$7,745,836 in commercial loans. During fiscal 1999, the Bank purchased
$27,913,995 of residential whole loans on the secondary market. The purchase
consisted of 1-4 family fixed rate mortgages secured by property located
primarily in the States of North Carolina and New York. The continued
expansion into new markets diversifies the credit risk and the potential
economic risks of the credits held in the Bank's loan portfolio, such that the
portfolio is not affected solely by the State of Maine economy. The Bank sold
$9,825,932 of indirect auto loans in fiscal 1999. The Bank anticipates holding
approximately $15,000,000 to $20,000,000 of indirect auto loans in its
portfolio and currently holds $18,143,379 as of June 30, 1999. As the Bank
continues to grow the indirect auto loan portfolio, it is the Bank's intent to
build relationships with other institutions for future sales of indirect auto
loans. 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 adversely 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 Bank has experienced margin compression
due to decreased loan rates and anticipates that the margin compression will
continue for the foreseeable future until loan volume increases in the current
rising interest rate environment.
The loan portfolio contains elements of credit and interest rate risk. The
Bank historically has loaned within its local market areas, which management
believes helps it to better evaluate credit risk. As the Bank expands its
purchase of loans in other states, management researches the strength of the
economy in the respective state and underwrites every loan before purchase.
These steps are taken to better evaluate and minimize the credit risk of out-
of-state purchases.
30
At June 30, 1999, residential real estate mortgages made up 58% of the total
loan portfolio and 40% of the residential loans are variable rate products, as
compared to 61% and 54%, respectively, at June 30, 1998. It has traditionally
been management's intent to increase the proportion of variable rate
residential real estate loans during a rising rate environment to reduce the
interest rate risk in this area. The Bank has historically purchased
adjustable rate residential loans and sold fixed rate residential loans.
However, during fiscal 1999, the Bank purchased fixed rate residential loans.
This purchase improved the Company's asset/liability management position during
the declining rate environment earlier in the fiscal year. Interest rates
began to rise late in the fiscal year. Due to this changing interest rate
environment, management will again pursue its strategy of increasing the
percentage of variable rate loans as a percentage of the total loan portfolio
to help manage interest rate risk.
At June 30, 1999, 17% of the Bank's total loan portfolio is commercial real
estate mortgages. Commercial real estate loans have minimal interest rate risk
as 84% of the portfolio consists of variable rate products. At June 30, 1998,
commercial real estate mortgages made up 17% of the total loan portfolio, in
which 88% 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 11% of the total loan portfolio at June 30, 1999.
Variable rate loans comprise 43% of this loan portfolio at June 30, 1999. At
June 30, 1998 commercial loans made up 10% of the total loan portfolio, of
which 59% of the balance was variable rate instruments. Variable rate
commercial loans have decreased during fiscal 1999, when compared to 1998, 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 and other loans make up 14% of the total loan portfolio as of June 30,
1999 which compares to 12% at June 30, 1998. Since these loans are primarily
fixed rate products, they have interest rate risk when market rates increase.
These loans also have credit risk because of 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 typically pays a nominal one time origination fee on the loans. The
fees are deferred and amortized over the life of the loans as a yield
adjustment. Management attempts to mitigate credit and interest rate risk by
keeping the products offered short-term, receiving a rate of return
commensurate with the risk, and lending to individuals in the Bank's known
market areas.
The Banks's allowance for loan losses was $2,924,000 as of June 30, 1999 versus
$2,978,000 as of June 30, 1998, representing 0.92% and 1.06% of total loans,
respectively. The Bank had non-performing loans totaling $1,144,000 and
$2,248,000 at June 30, 1999 and 1998, which was 0.36% and 0.80% of total loans,
respectively. Non-performing loans and other real estate owned represented
0.37% and 0.81% of total assets at June 30, 1999 and 1998, 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 256% and 132% of the total non-performing loans at June 30,
31
1999 and 1998, respectively. The following table represents the Bank's non-
performing loans as of June 30, 1999 and 1998:
Description June 30, 1999 June 30, 1998
_____________________ _______________ _______________
1-4 Family Mortgages $ 293,000 $ 783,000
Commercial Mortgages 654,000 956,000
Commercial Loans 0 509,000
Consumer Installment 197,000 0
_______________ _______________
Total non-performing $ 1,144,000 $ 2,248,000
=============== ===============
At June 30, 1999, the Bank had approximately $741,000 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, 1999, the amount of such loans has increased from the June 30,
1998 amount by $641,000. The increase was attributed to management downgrading
certain loans during its internal review process. Although non-performing and
delinquent 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 1999 fiscal year. This decrease was
largely due to improved collection efforts, increased charge-offs 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:
06/30/99 06/30/98 06/30/97 06/30/96
________ ________ ________ ________
0.76% 1.09% 1.93% 3.24%
At June 30, 1999, loans classified as non-performing included $117,169 of loan
balances that are current and paying as agreed, but which the Bank maintains as
non-performing until the borrower has demonstrated a sustainable period of
performance. Excluding these loans, the Bank's total delinquencies 30 days or
more past due, as a percentage of total loans, would be 0.72% as of June 30,
1999.
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, 1999 compared to June 30,
1998. The decrease in the level of allowance for loan losses as a percentage
of total loans was primarily due to loan growth. The Company has experienced
good growth in the commercial and consumer loan portfolio during fiscal 1999,
32
however these type of loans have additional credit risk as compared to real
estate mortgage loans. Although these types of loans have increased during
fiscal 1999, the decrease in the allowance for loan losses was supported by
management's ongoing analysis of the adequacy of the allowance for loan losses
and the continued historical trend of lower delinquency and non-performing
loans. Classified loans are also considered in management's analysis of the
adequacy of the allowance for loan losses. Based on reviewing the credit risk
and collateral of classified loans, management has considered the risks of the
classified portfolio and believes the allowance for loan losses is adequate.
The Company's charge-offs in fiscal 1999 increased as a result of management's
review of its portfolio which further improved its position in classified and
non-performing loans. This also has an impact on reducing the allowance for
loan losses, however management feels this was prudent in that the classified
loan portfolio now has little credit risk exposure. Net charge-offs for the
Bank were $664,017, $469,909, and $633,490, for the years ended June 30, 1999,
June 30, 1998, and June 30, 1997, respectively.
At June 30, 1999, total impaired loans were $612,867, of which $241,420 had
related allowances of $77,200. This compares to total impaired loans of
$1,623,720, of which $927,355 had related allowances of $251,474, at June 30,
1998. During the year ended June 30, 1999, the income recognized related to
impaired loans was $66,030 and the average balance of outstanding impaired
loans was $1,229,987. This compares to income recognized related to impaired
loans of $19,693 and the average balance of impaired loans of $1,956,488 at
June 30, 1998. 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 November 30, 1998. At the time of the exam the regulators
proposed no additions to the allowance for loan losses.
At June 30, 1999, the Bank had a total of $193,850 in other real estate owned
versus $350,496 as of June 30, 1998. 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 $27,725 at June 30, 1999 versus
$5,100 at June 30, 1998. The Company provided for this allowance through a
charge against earnings of $47,000 and $62,300 for the years ended June 30,
33
1999 and 1998, respectively. In 1999 and 1998, write downs of other real
estate owned totaled $24,375 and $108,039, 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, 1999 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, 1999 was $18,720,268 and $18,054,317,
respectively. The increase of $5,013,796 in the cost of securities available
for sale, from June 30, 1998 to June 30, 1999, was due to the Company
purchasing mortgage-backed securities for collateral for the increased volume
in securities sold under repurchase agreements. The net unrealized loss on
mortgage-backed securities has increased from $9,511 at June 30, 1998 to
$626,274 at June 30, 1999 due to rising 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 1999, 1998 and
1997, there have been other than temporary declines in values of individual
equity securities in the amounts of $95,728, $172,235, and $110,000,
respectively. Such securities have been written down through an adjustment
against earnings and are included in other expenses in the statements of
income.
The Company's premises and equipment increased by $563,141 during fiscal 1999
when compared to 1998. The increase was due to opening two new locations in
Lewiston and Falmouth, Maine as well as replacing the Company's mainframe
hardware and software, data-communications network and voice communication
systems.
Other assets increased by $559,928 from June 30, 1998 to June 30, 1999. The
increase was primarily due to the increase in capitalized loan servicing rights
and the purchase of non-marketable investments.
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
34
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 $219,364,035 and securities sold under repurchase
agreements were $11,867,839 as of June 30, 1999. These amounts represent an
increase of $35,339,938 and $6,662,245, respectively, as compared to June 30,
1998. The increase in deposits was primarily due to a $7,773,835 increase in
NOW demand deposits and a $22,143,247 increase in time deposits. The increase
in NOW deposits was attributable to the development of a demand account where
the interest rate increases as deposit balances increase. Time deposits
increased due to various special offerings as well as normal growth from the
branch market areas. The Company has devoted additional staffing to increase
its balances in repurchase agreements. Repurchase agreements enhances the
Company's ability to attain additional municipal and commercial deposits,
improving the Company's overall liquidity position in a cost effective manner.
Brokered deposits represented $13,458,257 of total deposits at June 30, 1999,
which increased by $5,883,547 compared to June 30, 1998's $7,574,710 balance.
Total borrowings from the FHLB were $103,881,716 as of June 30, 1999, for a
decrease of $558,236 compared to June 30, 1998. Mortgages, free of liens,
pledges and encumbrances and certain non-pledged mortgage-backed securities are
pledged to secure FHLB advances. The increase in deposits and repurchase
agreements were utilized to fund the loan growth and reduce FHLB advances
during fiscal 1999.
Other liabilities were $1,898,700 as of June 30, 1999, which was a decrease of
$831,669 when compared to June 30, 1998. In June of 1998, the Bank's other
liabilities were higher due to higher escrow account balances 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
$26,058,000 over and above the 1999 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 1999, 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 $26,683,115 as of June 30, 1999 versus
$25,139,527 at June 30, 1998. In November of 1998 Square Lake Holding
Corporation converted its Series A preferred stock into 136,362 shares of
35
common stock. Square Lake Holding Corporation is a Maine corporation and a
subsidiary of a Canadian corporation of which Ronald Goguen is a 95%
stockholder and director. Mr. Goguen, also is a director, and, through the
ownership of his affiliates, a principal stockholder of the Company.
On December 15, 1997, the Company authorized a 50% stock dividend to all
stockholders. As a result of the stock dividend, the Company's common shares
outstanding increased by 740,807 shares. 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 stockholders 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.
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 were 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 and 2,030 treasury shares at a cost of $28,420 during fiscal 1997.
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 7.32% as of June 30,
1999, 7.79% as of June 30, 1998 and 7.78% at June 30, 1997. Book value per
common share was $9.64 as of June 30, 1999, $9.23 as of June 30, 1998 and $9.16
at June 30, 1997.
The Company's net cash provided by operating activities was $2,535,984 during
fiscal 1999, which was a $748,008 decrease when compared to fiscal 1998. The
decrease was primarily attributable to the increase in other assets. The
decrease in net cash provided by operating activities was offset by a reduction
in cash used by investing activities due to the reduction in loans purchased
and an increase in cash provided by financing activities due to the growth in
the Company's deposits and repurchase agreements. Overall, the Company's cash
position did not change materially in fiscal 1999 when compared to fiscal 1998.
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
36
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, 1999, 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.
Management believes that there are adequate funding sources to meet its future
liquidity needs for the foreseeable future. Primary among these funding
sources are the repayment of principal and interest on loans, the renewal of
time deposits, and the growth in the deposit base. Management does not believe
that the terms and conditions that will be present at the renewal of these
funding sources will significantly impact the Company's operations, due to its
management of the maturities of its assets and liabilities. However, in order
to finance the continued growth of the Bank at current levels, additional funds
may be necessary in order to provide sufficient capital to fund loan growth.
In this regard, the Company is considering and evaluating a variety of
additional sources of funds, including other debt financing vehicles, sales of
equity securities, and other financing alternatives. In particular, the
Company is considering the possible issuance of junior subordinated debentures
to a trust to be formed for the sole purpose of issuing trust preferred
securities to investors, the proceeds of which will be invested in such junior
subordinated debentures. There can be no assurance that the Company will be
able to obtain such additional financing, if needed, or, if available, that it
can be obtained on terms favorable to the Company.
RESULTS OF OPERATIONS
_____________________
Net income for the year ended June 30, 1999 was $2,410,452 versus $2,403,783
for the year ended June 30, 1998 and $1,489,745 for the year ended June 30,
1997. Basic earnings per share was $0.88 and diluted earnings per share was
$0.86 for the year ended June 30, 1999. Basic and diluted earnings per share
were $1.00 and $0.86, respectively, for the year ended June 30, 1998 and $0.63
and $0.56, respectively for the year ended June 30, 1997. 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 1997 to consider the merger
with Cushnoc under the pooling of interests method of accounting and the effect
of the Company's 50% stock dividend. The increase in net income for the year
ended June 30, 1999, when compared to June 30, 1998, was primarily due to the
increase in net interest income which was offset, in part, by the increase in
operating expenses. The increase in net income for the year ended June 30,
37
1998, when compared to June 30, 1997, was primarily due to the increase in net
interest income and total non-interest income. The Company's overall return on
average assets ("ROAA") was .71% for the year ended June 30, 1999, .83% for the
year ended June 30, 1998, and .57% for the year ended June 30, 1997.
The Company completed the acquisition of Cushnoc in fiscal 1998. The one-time
costs associated with the merger totaled $435,013 before tax. The Company's
net income in fiscal 1998, 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 fiscal 1997, 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, 1999, 1998 and
1997 was $12,306,551, $11,472,940, and $10,644,833, respectively. Net interest
income for fiscal 1999 increased $833,611, or 7.27%, compared to the amount at
June 30, 1998. Total interest and dividend income increased $2,573,782 for the
year ended June 30, 1999 compared to the year ended June 30, 1998, resulting
primarily from an increase in the volume of loans offset in part by a decrease
in loan rates as well as investment volume and rates. The increase in total
interest expense of $1,740,171 for the twelve months ended June 30, 1999
resulted primarily from the increased volume of borrowings and deposits. The
changes in net interest income, as explained above, are also presented in the
schedule that follows.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1999 versus June 30, 1998
Difference Due to
Volume Rate Total
______________ ______________ ______________
Investments $ (331,743) $ (108,142) $ (439,885)
Loans 4,897,423 (1,707,700) 3,189,723
FHLB Deposits & Other (140,613) (35,443) (176,056)
______________ ______________ ______________
Total Interest Earning Assets 4,425,067 (1,851,285) 2,573,782
Deposits 1,185,979 (92,399) 1,093,580
38
Repurchase Agreements 136,042 (3,137) 132,905
Borrowings 755,980 (242,294) 513,686
______________ ______________ ______________
Total Interest-Bearing
Liabilities 2,078,001 (337,830) 1,740,171
______________ ______________ ______________
Net Interest Income $ 2,347,066 $ (1,513,455) $ 833,611
============== ============== ==============
Rate/Volume amounts are spread proportionately between Volume and Rate.
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 that follows.
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 Deposits & Other 79,042 3,615 82,657
______________ ______________ ______________
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 are spread proportionately between Volume and Rate.
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
39
is appropriate since historically interest rates tend to rise faster than they
decline.
Approximately 20% of the Bank's loan portfolio is comprised of floating rate
loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as approximately 23% of
other loans in the Bank's portfolio that are based on short-term rate indices
such as the one-year treasury bill. An increase in short-term interest rates
will also increase deposit and FHLB advance rates, increasing the Company's
interest expense. Although the Company has experienced net interest margin
compression, the impact on net interest income will depend on, among other
things, actual rates charged on the Bank's loan portfolio, deposit and advance
rates paid by the Bank, and loan volume.
The provision for loan losses was $610,017 for fiscal 1999 compared to $706,100
and $614,427 for 1998 and 1997, respectively. Net charge-offs amounted to
$664,017 during fiscal 1999 versus $469,909 and $633,490 for 1998 and 1997,
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 $2,716,352 for the year ended June 30, 1999, $2,671,531
for June 30, 1998 and $2,086,241 for June 30, 1997. Included in non-interest
income were service charges and fees for other services which totaled $948,765
for the year ended June 30, 1999, $803,071 for the year ended June 30, 1998 and
$851,725 for June 30, 1997. The increase in service charges and fees at June
30, 1999, when compared to June 30, 1998, was primarily due to fees generated
from loan and deposit growth. 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 $94,865, $287,513, and $259,430 for fiscal 1999, 1998
and 1997, respectively. Net security gains were higher in fiscal 1998 than
fiscal 1999. The primary reason for the increase in net security gains during
fiscal 1998 was that the Company sold more of its available for sale securities
in fiscal 1998 than fiscal 1999, taking advantage of the fluctuation in higher
market prices.
Gains on the sale of loans amounted to $817,084 for fiscal 1999 and was an
increase of $90,485 compared to the balance in fiscal 1998. Gains on the sale
of loans amounted to $726,599 for fiscal 1998 and was an increase of $525,181
compared to $201,418 for fiscal 1997. The increase in gain on sale of loans in
fiscal 1999, when compared to 1998, was due to increased sales of $10,224,848
in qualified 1-4 family mortgage loans to Freddie Mac. 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 $5,073,585 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 Company's loan sales activity
is dependent on market interest rates as well as local competition. The
Company receives income from servicing mortgage loans for others that the Bank
originated and sold. The outstanding balance of such loans increased from
approximately $55,581,000 at June 30, 1998 to $64,690,112 at June 30, 1999.
40
Other income was $694,827 at June 30, 1999 and was an increase of $67,888, when
compared to June 30, 1998. Other income was $626,939 at June 30, 1998 for an
increase of $128,767, when compared to June 30, 1997. The increase in other
income for fiscal 1999 and 1998 was primarily due to income generated from the
Bank's trust department, insurance division and revenue from the sale of
investments to customers through the Bank's relationship with Commonwealth
Financial Services, Inc..
Total non-interest expense for the Company was $10,569,843 for fiscal 1999,
$9,731,717 for fiscal 1998, and $9,718,337 for fiscal 1997. The increase in
non-interest expense of $838,126 for fiscal 1999 compared to 1998 was due, in
part, to the following items: (I) compensation expense increased by $250,359
primarily due to the additional staffing for the new branch opened in Lewiston,
Maine, the increased commission paid to brokers in the investment sales
division due to growth in sales revenue and increased costs associated with the
Company's health insurance and benefit plans, (II) occupancy expense increased
by $71,108 due to the additional lease expense in opening the new Lewiston
branch as well as the Company relocating its benefit administration department
and in doing so paid a one time lease penalty to terminate the existing lease
contract for that location, (III) equipment expense increased by $24,843 due to
the expenses associated with opening the new Lewiston branch as well as the
conversion of the mainframe hardware and software and tele-communication
system.
The Company decided in the fourth quarter of fiscal 1999 to dissolve the First
New England Benefits (FNEB) division. FNEB was a pension and 401k
administration company and was purchased by the Company in 1993. The FNEB
division was dissolved because the division could not attain sufficient growth
to meet revenue expectations. Management further decided during the fourth
quarter of fiscal 1999 that certain individuals of the administrative support
staff of the FNEB division would be transferred to the Bank's trust department
and the combination of these two functions could potentially generate higher
revenue than FNEB as a stand alone division. Due to the closure of FNEB the
Company has experienced one-time pretax expenses of $290,133 for goodwill,
receivables and fixed asset write-offs as well as approximately $140,000 in
pretax other general business expenses that the Company does not anticipate in
the upcoming year that were related to the operations of FNEB during fiscal
1999.
Other expenses increased by $488,472 during fiscal 1999, when compared to
fiscal 1998. The increase in fiscal 1999 was primarily due to the following:
an increase in professional fees of $160,493 due to increased legal services,
courier services, trust consulting services and data operations services; an
increase in supplies expense of $34,934 due to the opening of the Lewiston and
Falmouth locations; an increase in check item and data processing of $175,043
due to the Company's growth in checking accounts and data-communication lines;
an increase in advertising expense of $39,129 due to the opening of the
Lewiston branch and to support the growth of the Company; an increase in loan
servicing fees of $108,246 due to the growth in loans purchased and the fees
paid for servicing those loans; a goodwill write-off of $165,195 due to the
closing of the First New England Benefits division and merging the
administrative function into the trust department; and an increase of $66,650
in telephone, postage, education and other general expenses. These increases
were offset, in part, by the reduction of the merger expenses associated with
Cushnoc Bank.
The Company's income tax expense increased by $129,720 for the year ended June
41
30, 1999, when compared to the year ended June 30, 1998. The increase in
income tax expense is due to increased earnings before tax and that the
goodwill write-off of $165,195 for FNEB is not a tax deductible expense.
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.
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.
The Company continues to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. To accomplish this, management undertakes steps to
increase the percentage of variable rate assets, as a percentage of its total
earning assets. In recent years, the focus has been to originate adjustable
rate residential and commercial real estate loans, which reprice or mature more
quickly than fixed-rate real estate loans. The Company also originates
adjustable-rate consumer loans and commercial business loans. The Company's
adjustable-rate loans are primarily tied to published indices, such as the Wall
Street Journal prime rate and one year U.S. Treasury Bills. During the current
fiscal year the Company increased its fixed rate assets, as a percentage of
total earning assets to protect the Company against the continuation of
declining interest rates. Currently interest rates have started to increase
and due to that fact the Company will revert back to its focus of originating
variable rate assets in the upcoming fiscal year.
The table that follows presents in tabular form contractual balances of the
Company's on balance sheet financial instruments that are interest rate
sensitive, in U.S. dollars, at the expected maturity dates as well as the fair
value of those on balance sheet financial instruments that are interest rate
sensitive for the period ended June 30, 1999, with comparative summary balances
for 1998. 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
42
historically the balances have remained fairly constant over various economic
conditions. The interest rate table for loans reflects contractual maturity
and does not indicate repricing in variable rate loans. Variable rate loans
reprice in the fiscal years as follows; fiscal year 2000 $77,184,000, fiscal
year 2001 $13,479,884, fiscal year 2002 $22,668,642, fiscal year 2003
$9,411,503, fiscal year 2004 $13,408,882, and fiscal years thereafter $680,000.
The weighted average interest rates for the various assets and liabilities
presented are actual as of June 30, 1999.
The fair value of interest bearing deposits at other banks and interest
receivable approximate their book values due to their short maturities. The
fair value of available for sale securities are based on bid quotations from
security dealers or on bid prices published in financial newspapers. FHLB
stock does not have a market and the fair value is unknown. The fair value of
loans are estimated in portfolios with similar financial characteristics and
takes into consideration discounted cash flows through the estimated maturity
or repricing dates using estimated market discount rates that reflect credit
risk. The fair value of loans held for sale is based on bid quotations from
loan dealers. The fair value of demand deposits, NOW, money market, and
savings accounts is the amount payable upon demand. The fair value of time
deposits is based upon the discounted value of contractual cash flows, which is
estimated using current rates offered for deposits of similar remaining terms.
The fair value of repurchase agreements approximate the carrying value due to
their short maturity. The fair value of FHLB borrowings is estimated by
discounting the cash flows through maturity or the next repricing date based on
current rates offered by the FHLB for borrowings with similar maturities. The
fair value of the note payable approximates the carrying value due to the note
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, 1999
(In Thousands)
Expected Maturity Date 1999 1998
There- 1999 Fair 1998 Fair
6/30/00 6/30/01 6/30/02 6/30/03 6/30/04 after Total Value Total Value
________ ________ ________ ________ ________ _______ ________ ________ ________ ________
Financial Assets:
Interest Bearing Deposits
Variable Rate -- -- -- -- -- $ 7,130 $ 7,130 $ 7,130 5,330 5,330
Weighted Average Interest
Rate -- -- -- -- -- 5.54% 5.54% -- 5.76% --
43
Available for Sale
Securities 2,831 1,225 1,291 1,420 1,755 10,198 18,720 18,054 13,707 13,609
Weighted Average Interest
Rate 6.31% 6.60% 6.57% 6.57% 6.48% 6.58% 6.52% -- 6.58% --
FHLB Stock (1) -- -- -- -- -- 5,681 5,681 5,681 5,681 5,681
Weighted Average Interest
Rate -- -- -- -- -- 6.55% 6.55% -- 6.40% --
Loans Held For Sale
Fixed Rate 312 -- -- -- -- -- 312 315 370 372
Weighted Average Interest
Rate 7.53% -- -- -- -- -- 7.53% -- 7.08% --
Loans
Fixed Rate Loans 16,181 16,877 20,539 25,376 35,080 68,100 182,153 172,834 128,496 129,220
Weighted Average Interest
Rate 8.58% 8.90% 9.00% 9.19% 9.10% 8.45% 8.75% -- 9.29% --
Variable Rate Loans 16,821 13,109 13,491 16,960 20,053 56,399 136,833 135,853 153,535 152,800
Weighted Average Interest
Rate 8.73% 8.63% 8.64% 8.54% 8.46% 8.54% 8.58% -- 9.04% --
Interest Receivable 1,991 -- -- -- -- 1,991 1,991 1,934 1,934 --
Financial Liabilities:
NOW/Money Market/Savings -- -- -- -- -- 60,359 60,359 60,359 55,729 55,729
Weighted Average Interest
Rate -- -- -- -- -- 2.41% 2.41% -- 2.90% --
Time Deposits 98,448 30,405 9,190 1,996 1,036 38 141,113 141,352 113,086 113,488
Weighted Average Interest
Rate 5.26% 5.47% 6.11% 5.58% 5.30% 4.97% 5.37% -- 5.75% --
Repurchase Agreements
Fixed Rate -- -- -- -- -- -- -- -- 504 504
Weighted Average Interest
Rate -- -- -- -- -- -- -- -- 5.20% --
Variable Rate 11,868 -- -- -- -- -- 11,868 11,868 4,702 4,702
Weighted Average Interest
Rate 4.07% -- -- -- -- -- 4.07% -- 4.09% --
FHLB Advances
Fixed Rate 42,000 3,148 2,816 9,516 3,402 43,000 103,882 99,986 103,440 101,052
44
Weighted Average Interest
Rate 5.29% 5.23% 5.65% 5.75% 5.95% 5.29% 5.36% -- 5.55% --
Variable Rate -- -- -- -- -- -- -- -- 1,000 1,000
Weighted Average Interest
Rate -- -- -- -- -- -- -- -- 5.95% --
Note Payable
Fixed Rate 306 306 76 -- -- -- 688 688 993 993
Weighted Average Interest
Rate 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.
Assessment Phase
45
________________
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 completed, but is considered an ongoing phase for
the Company. The Company has developed its contingency plan and will continue
to test the plan in the upcoming quarter. 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 $40,000, (2) software replacement $42,000,
(3) testing and administrative costs $94,000, and (4) potential contingency
costs $15,000. As of June 30, 1999, the Company has incurred approximately
$37,333 of capitalized purchases and $92,000 of cumulative Year 2000 expenses.
These costs are under continuous review and will be revised as needed. There
can be no assurance that actual costs will not exceed the Company's estimates.
During fiscal 1999, the Company has replaced its computer mainframe, software
and data communication systems as planned to accommodate the growth of the
Company through merger and acquisitions. The previous mainframe and software
had been fully depreciated through the normal course of its depreciable life
and the costs associated with the replacement of these items was in the
Company's general business plan for fiscal 1999. The anticipated Year 2000
hardware and software costs indicated above are in addition to the Company's
costs associated with the replacement of the mainframe, software and data
communication system.
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 has completed this phase. However, there can be no assurance that
46
these services or vendors will become Year 2000 compliant in a timely manner.
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
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 has
completed the testing of its critical systems and has completed this phase.
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 has completed the validation of its systems and has
completed this phase.
Risks Associated with Year 2000 and Contingency Plan
____________________________________________________
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. The
inability of third party vendors to complete their year 2000 remediation
process in a timely fashion could result in delays in processing daily
transactions and could result in a material and adverse effect on the Company's
results of operations and financial condition. The Company has developed a
contingency plan to address potential failures in these systems. The Company
believes that modifications to existing systems, conversion to new systems, and
vendor compliance upgrades will be resolved in a timely fashion.
RECENT ACCOUNTING DEVELOPMENTS
______________________________
In June of 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
("Statement 133"). Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
Companies recognize all derivatives as other assets or liabilities in the
statements of financial position and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
internal use of the derivative and the resulting designation. Statement 133 is
scheduled to be effective in fiscal 2001. Management of the Company does not
expect this statement to have a significant effect on the Company's financial
position or results of operations based on the Company's current activities.
47
In October of 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("Statement 134"). Statement 134 is an amendment of FASB Statement
No. 65, "Accounting for Certain Mortgage Banking Activities". Statement No. 65
addresses accounting and reporting standards for certain activities of mortgage
banking enterprises and other enterprises that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise. Statement 134 is scheduled to be effective in fiscal 2000.
Management of the Company does not expect this statement to have a significant
effect on the Company's financial position or results of operations based on
the Company's current activities.
Item 7A. Quantiture and Qualitative Disclosure about Market Risk
_______________________________________________________
See " - Market Risks" and accompanying table set forth in Item 7
above.
Item 8. Financial Statements and Supplementary Data
___________________________________________
a. Financial Statements Required by Regulation S-X
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and 1998
ASSETS 1999 1998
________ _______________ _______________
Cash and due from banks $ 4,963,985 $ 6,821,574
Interest bearing deposits 345,585 421,392
Federal Home Loan Bank overnight deposits 6,784,000 4,909,000
_______________ _______________
Total cash and cash equivalents 12,093,570 12,151,966
Trading account securities, at market value - 50,000
Available for sale securities, at market value
(notes 2, 7 and 9) 18,054,317 13,608,823
Loans held for sale 311,600 369,500
Loans receivable (notes 3 and 7):
Mortgage loans:
Residential real estate 182,244,336 171,903,751
Construction loans 3,187,642 3,521,427
Commercial real estate 55,437,983 47,052,134
_______________ _______________
240,869,961 222,477,312
Undisbursed portion of construction loans (1,501,993) (1,421,847)
Net deferred loan origination costs 220,337 7,270
_______________ _______________
Total mortgage loans 239,588,305 221,062,735
Commercial loans 34,814,252 27,068,416
48
Consumer and other loans 44,583,690 33,899,799
_______________ _______________
318,986,247 282,030,950
Less allowance for loan losses (2,924,000) (2,978,000)
_______________ _______________
Net loans 316,062,247 279,052,950
Premises and equipment - net (note 4) 5,037,026 4,473,885
Other real estate owned - net (note 5) 193,850 350,496
Accrued interest receivable - loans 1,803,379 1,710,704
Accrued interest receivable - investments 187,281 222,994
Federal Home Loan Bank stock, at cost (note 7) 5,680,500 5,680,500
Goodwill, net of accumulated amortization of
$1,662,588 in 1999 and $1,532,807 in 1998
(note 13) 1,462,346 1,923,915
Other assets (note 14) 3,496,789 2,936,861
_______________ _______________
Total assets $ 364,382,905 $ 322,532,594
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
____________________________________ _______________ _______________
Liabilities:
Deposits (note 6):
Demand $ 17,891,552 $ 15,209,219
NOW 31,203,347 23,429,512
Money market 7,156,424 11,993,110
Regular savings 21,999,615 20,305,953
Brokered time deposits 13,458,257 7,574,710
Certificates of deposit under $100,000 103,302,505 86,156,463
Certificates of deposit $100,000 or more 24,352,335 19,355,130
_______________ _______________
Total deposits 219,364,035 184,024,097
FHLB Borrowings (note 7) 103,881,716 104,439,952
Note payable (note 8) 687,500 993,055
Securities sold under repurchase agreements
(notes 2 and 9) 11,867,839 5,205,594
Other liabilities 1,898,700 2,730,369
_______________ _______________
Total liabilities 337,699,790 297,393,067
Commitments and contingent liabilities
(notes 8, 16 and 17)
Stockholders' equity (notes 10, 12 and 16):
Series A cumulative convertible preferred
stock; $1 par value,
1,000,000 shares authorized; 45,454 shares
issued and outstanding at June 30, 1998 - 999,988
Common stock, $1 par value, 15,000,000 shares
authorized; 2,768,624 and 2,614,285 shares
issued and outstanding at June 30, 1999 and
1998, respectively 2,768,624 2,614,285
Additional paid-in capital 10,208,299 9,258,107
Retained earnings 14,145,720 12,331,595
49
Accumulated other comprehensive income (loss)
(note 2) (439,528) (64,448)
_______________ _______________
Total stockholders' equity 26,683,115 25,139,527
_______________ _______________
Total liabilities and stockholders' equity $ 364,382,905 $ 322,532,594
=============== ===============
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
_____________ _____________ _____________
Interest and dividend income:
Interest on loans $ 25,178,587 $ 21,988,864 $ 18,973,560
Interest on Federal Home Loan
Bank overnight deposits 328,981 514,113 429,531
Interest and dividends on
available for sale securities 957,558 1,461,024 2,277,573
Dividends on Federal Home Loan
Bank stock 364,245 300,664 227,360
Other interest and dividend income 27,422 18,346 27,697
_____________ _____________ _____________
Total interest and dividend income 26,856,793 24,283,011 21,935,721
Interest expense:
Deposits (note 6) 8,680,297 7,586,717 7,103,375
Repurchase agreements 339,556 206,651 199,453
Borrowed funds 5,530,389 5,016,703 3,988,060
_____________ _____________ _____________
Total interest expense 14,550,242 12,810,071 11,290,888
_____________ _____________ _____________
Net interest income before
provision for loan losses 12,306,551 11,472,940 10,644,833
Provision for loan losses (note 3) 610,017 706,100 614,427
_____________ _____________ _____________
Net interest income after
provision for loan losses 11,696,534 10,766,840 10,030,406
Noninterest income:
Fees and service charges on loans 288,720 206,961 194,020
Fees for other services to customers 660,045 596,110 657,705
Net securities gains (note 2) 84,133 285,716 171,080
Gain on trading activities 10,732 1,797 88,350
Gain on sales of loans 817,084 726,599 201,418
Loan servicing fees 160,811 227,409 275,496
Other income 694,827 626,939 498,172
_____________ _____________ _____________
50
Total noninterest income 2,716,352 2,671,531 2,086,241
Noninterest expense:
Salaries and employee benefits
(notes 15 and 16) $ 4,889,172 $ 4,638,813 $ 4,614,802
Occupancy expense (note 4) 975,086 903,978 783,434
Equipment expense (note 4) 888,423 863,580 893,605
FDIC insurance expense (note 10) 63,441 60,097 390,494
Other (notes 2, 13 and 15) 3,753,721 3,265,249 3,036,002
_____________ _____________ _____________
Total noninterest expense 10,569,843 9,731,717 9,718,337
_____________ _____________ _____________
Income before income taxes 3,843,043 3,706,654 2,398,310
Income tax expense (note 14) 1,432,591 1,302,871 908,565
_____________ _____________ _____________
Net income $ 2,410,452 $ 2,403,783 $ 1,489,745
============= ============= =============
Earnings per share
(notes 11 and 16):
Basic $ 0.88 $ 1.00 $ 0.63
Diluted $ 0.86 $ 0.86 $ 0.56
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1999, 1998 and 1997
Preferred Stock Common
Series A and B Stock
_______________ _______________
Balance at June 30, 1996 $ 1,999,980 $ 1,421,950
Net income - -
Other comprehensive income net of tax:
Net unrealized income on investments
available for sale, net of
reclassification adjustment (note 19) - -
Total comprehensive income - -
Issuance of common stock through exercise
of stock options and purchase of treasury
stock - 20,000
Exercise of stock warrants - 19,940
Treasury stock issued - employee stock bonus - -
Issuance of common stock - 1,019
Dividends on preferred stock - -
Dividends on common stock at $0.21 per share - -
_______________ _______________
Balance at June 30, 1997 1,999,980 1,462,909
51
Net income - -
Other comprehensive income net of tax:
Net unrealized income on investments
available for sale, net of
reclassification adjustment (note 19) - -
Total comprehensive income - -
Issuance of common stock - 939
Conversion of preferred stock Series B
(note 12) (999,992) 214,284
Stock split in the form of a dividend - 740,807
Stock options exercised and treasury stock
purchased - 32,200
Treasury stock sold - -
Exercise of stock warrants - 163,146
Dividends on preferred stock - -
Dividends on common stock at $0.21 per share - -
_______________ _______________
Balance at June 30, 1998 999,988 2,614,285
Net income - -
Other comprehensive income net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 19) - -
Total comprehensive income - -
Issuance of common stock - 1,477
Stock options exercised - 16,500
Dividends on preferred stock - -
Dividends on common stock at $0.21 per share - -
Conversion of preferred stock Series A
(note 12) (999,988) 136,362
_______________ _______________
Balance at June 30, 1999 $ - $ 2,768,624
=============== ===============
See accompanying notes.
Accumulated
Additional Other
Paid-in Treasury Retained Comprehensive
Capital Stock Earnings Income (Loss) Total
______________ ______________ ______________ _______________ ______________
$ 7,516,227 $ (52,277) $ 10,315,041 $ (837,354) $ 20,363,567
- - 1,489,745 - 1,489,745
- - - 503,179 503,179
- - - - 1,992,924
83,450 (28,420) - - 75,030
88,005 67,055 - - 175,000
(268) 13,642 - - 13,374
12,468 - - - 13,487
52
- - (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
- - - - 2,673,510
15,730 - - - 16,669
785,708 - - - -
- - (741,902) - (1,095)
158,500 (44,988) - - 145,712
- 44,988 - - 44,988
598,287 - - - 761,433
- - (125,827) - (125,827)
- - (471,443) - (471,443)
______________ ______________ ______________ _______________ ______________
9,258,107 - 12,331,595 (64,448) 25,139,527
- - 2,410,452 - 2,410,452
- - - (375,080) (375,080)
- - - - 2,035,372
14,780 - - - 16,257
71,786 - - - 88,286
- - (25,667) - (25,667)
- - (570,660) - (570,660)
863,626 - - - -
______________ ______________ ______________ _______________ ______________
$ 10,208,299 $ - $ 14,145,720 $ (439,528) $ 26,683,115
============== ============== ============== =============== ==============
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
______________ ______________ ______________
Cash flows from operating
activities:
Net income $ 2,410,452 $ 2,403,783 $ 1,489,745
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 610,017 706,100 614,427
Provision for losses on
other real estate owned 47,000 62,300 39,000
Deferred income tax expense
(benefit) 86,398 (14,949) (72,290)
Depreciation of premises and
equipment and other 755,956 617,628 665,193
53
Goodwill amortization and
impairment provision 461,569 296,374 296,374
Net gain on sale of available
for sale securities (84,133) (285,716) (171,080)
Net gains on sales of loans (817,084) (726,599) (201,418)
Originations of loans held
for sale (17,476,548) (7,251,700) (2,178,115)
Proceeds from sale of loans
held for sale 17,908,553 7,287,744 2,430,823
Net change in trading account
securities 50,000 (25,000) 172,621
Other (118,171) 41,035 (103,988)
Change in other assets and
liabilities:
Interest receivable (56,962) (293,605) (125,996)
Other assets and
liabilities (1,241,063) 466,597 (17,869)
______________ ______________ ______________
Net cash provided by operating
activities 2,535,984 3,283,992 2,837,427
Cash flows from investing
activities:
Proceeds from the sale of
available for sale securities 6,930,743 27,974,991 12,377,154
Purchases of available for
sale securities (15,992,030) (15,666,889) (12,129,135)
Proceeds from maturities and
principal payments on available
for sale securities 4,086,624 3,588,092 3,256,713
Proceeds from sale of loans 11,278,496 17,479,139 -
Purchases of loans (27,913,995) (66,283,950) (25,425,642)
Net increase in loans (20,629,306) (10,509,720) (10,910,942)
Additions to premises and
equipment (1,424,307) (363,562) (1,043,176)
Proceeds from sale of other
real estate owned 422,787 214,884 519,871
Purchase of Federal Home
Loan Bank stock - (1,559,500) (1,362,700)
______________ ______________ ______________
Net cash used by investing
activities (43,240,988) (45,126,515) (34,717,857)
Cash flows from financing
activities:
Net increase in deposits $ 35,339,938 $ 11,102,811 $ 8,066,043
Net (repayments) borrowings
from the Federal Home Loan Bank (558,236) 23,945,481 27,856,994
Net increase in repurchase
agreements 6,662,245 106,972 1,335,656
Dividends paid (596,327) (597,270) (537,802)
Treasury stock purchased - (44,988) (28,420)
Treasury stock sold - 44,988 -
Stock options exercised 88,286 190,700 103,450
Warrants exercised - 761,433 175,000
Issuance of common stock 16,257 16,669 13,487
Stock split - payment for
54
fractional shares - (1,095) -
Principal payments on note
payable (305,555) (305,556) (203,581)
______________ ______________ ______________
Net cash provided by financing
activities 40,646,608 35,220,145 36,780,827
______________ ______________ ______________
Net (decrease) increase in cash
and cash equivalents (58,396) (6,622,378) 4,900,397
Cash and cash equivalents,
beginning of year 12,151,966 18,774,344 13,873,947
-------------- -------------- --------------
Cash and cash equivalents,
end of year $ 12,093,570 $ 12,151,966 $ 18,774,344
============== ============== ==============
Supplemental schedule of cash
flow information:
Interest paid $ 14,610,453 $ 12,727,917 $ 11,159,387
Income taxes paid 1,524,000 972,000 641,000
Supplemental schedule of
noncash investing and
financing activities:
Transfer from loans to
other real estate owned $ 301,537 $ 56,861 $ 538,019
Change in valuation
allowance for unrealized
losses on available for sale
securities, net of tax 375,080 269,727 503,179
Net change in deferred taxes
for unrealized losses on
available for sale securities 193,222 138,949 259,214
Transfer of nonmarketable
investment security to other
assets 45,000 - -
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
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.
Business
________
Northeast Bancorp provides a full range of banking services to individual
55
and corporate customers throughout south central and western Maine through
its wholly owned subsidiary, Northeast Bank, F.S.B. The bank is subject to
competition from other financial institutions. The bank is subject to the
regulations of the Federal Deposit Insurance Corporation (FDIC) and the
Office of Thrift Supervision (OTS) and undergoes periodic examinations by
these agencies.
Principles of Consolidation
___________________________
The accompanying consolidated financial statements include the accounts of
Northeast Bancorp, a savings and loan holding company, and 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.
Use of Estimates
________________
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and income and
expenses for the period. Actual results could differ significantly from
those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
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.
Merger
______
On October 24, 1997, the Company merged with Cushnoc Bank and Trust Company
in a transaction accounted for as a pooling of interests. All financial
information includes the accounts 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. Upon consummation of the merger, Cushnoc Bank and Trust
Company was merged into the Company's banking subsidiary, Northeast Bank,
F.S.B.
Cash and Cash Equivalents
_________________________
For purposes of presentation in the cash flow statements, cash and cash
equivalents consist of cash and due from banks, Federal Home Loan Bank
overnight deposits and interest bearing deposits. The Company is required
to maintain a certain reserve balance in the form of cash or deposits with
56
the Federal Reserve Bank. At June 30, 1999, the reserve balance was
approximately $1,211,000.
Available for Sale Securities
_____________________________
Marketable equity securities, and debt securities which may be sold prior to
maturity, are classified as available for sale and are carried at market
value. Market value is determined based on bid prices published in
financial newspapers or bid quotations received from securities dealers.
Changes in market value, net of applicable income taxes, are reported as a
separate component of stockholders' equity. When a decline in market value
of a security is considered other than temporary, the loss is charged to
other expense in the consolidated statements of income and is treated as a
writedown of the security's "cost". Gains and losses on the sale of
securities are recognized on the trade date using the specific
identification method.
Federal Home Loan Bank Stock
____________________________
Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale and Mortgage Banking Activities
___________________________________________________
Loans originated for sale are specifically identified and carried at the
lower of aggregate cost or market value, estimated based on bid quotations
from loan dealers. The carrying value of loans held for sale approximates
the market value at June 30, 1999 and 1998. Gains and losses on sales of
loans are determined using the specific identification method and are
reflected as gain on sales of loans in the consolidated statements of
income.
The Company recognizes as separate assets the rights to service mortgage
loans for others, and performs an assessment of capitalized mortgage
servicing rights for impairment based on the current fair value of those
rights. The Company capitalizes mortgage servicing rights at their
allocated cost (based on the relative fair values of the rights and the
related loans) upon the sale of the related loans.
The Company's mortgage servicing rights asset at June 30, 1999 and 1998 was
approximately $569,000 and $363,000, respectively, 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 net premiums
paid and net deferred loan costs. Loan origination fees and certain direct
loan origination costs are deferred and recognized in interest income as an
adjustment to the loan yield over the life of the related loans. Loan
premiums paid to acquire loans are recognized as a reduction of interest
income over the estimated life of the loans. Loans are generally placed on
57
nonaccrual status when they are past due 90 days as to either principal or
interest, or when in management's judgment the collectibility of interest or
principal of the loan has been significantly impaired. When a loan has been
placed on nonaccrual status, previously accrued and uncollected interest is
reversed against interest on loans. A loan can be returned to accrual
status when collectibility of principal is reasonably assured and the loan
has performed for a period of time, generally six months. Loans are
classified as impaired when it is probable that the Company will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment
include payment status and collateral value.
Allowance for Loan Losses
_________________________
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the
allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses based on evaluations of collectibility and prior
loss experience. The evaluation takes into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio
quality, specific problem loans, and current and anticipated economic
conditions that may affect the borrowers' ability to repay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, changing
economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
Premises and Equipment
______________________
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line and accelerated methods over
the estimated useful lives of the assets. Maintenance and repairs are
charged to expense as incurred and the cost of major renewals and
betterments are capitalized.
Long-lived assets are evaluated periodically for impairment. An assessment
of recoverability is performed prior to any writedown of the asset. If
circumstances suggest that their value may be impaired, then an expense
would be charged in the then current period.
Income Taxes
____________
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
58
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
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
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 against 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 year periods. Goodwill is reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the asset (See note 13).
Advertising Expense
___________________
Advertising costs are expensed as incurred. Advertising costs were
approximately $218,000, $172,000 and $187,000 for the years ended June 30,
1999, 1998 and 1997, respectively.
Stock-Based Compensation
________________________
Compensation expense for the Stock Option Plans is accounted for in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The Stock Option Plans are noncompensatory plans
and no expense is recognized. Shares not yet awarded are not considered
outstanding for purposes of computing earnings per share.
Comprehensive Income
____________________
In 1999, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. No
adjustments to recorded amounts were required by adoption of this statement.
Accumulated other comprehensive income or loss consists solely of net
unrealized gains or losses on investment securities available for sale.
New Accounting Pronouncements Not Yet Implemented
_________________________________________________
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is scheduled to be effective in fiscal 2001. SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise, is scheduled to be
effective in fiscal 2000. Management of the Company does not expect these
statements to have a significant effect on the Company's financial position
or results of operations based on the Company's current activities.
2. Available for Sale Securities
_____________________________
A summary of the cost and approximate fair values of available for sale
59
securities at June 30, 1999 and 1998 follows:
1999 1998
________________________ ________________________
Fair Fair
Cost Value Cost Value
___________ ___________ ___________ ___________
Debt securities issued
by the U.S. Treasury and
other U.S. Government
corporations and
agencies $ 596,626 $ 598,445 $ 4,696,659 $ 4,698,266
Corporate bonds 201,916 199,527 202,952 203,484
Mortgage-backed
securities 16,653,302 16,027,028 7,723,843 7,714,332
Equity securities 1,268,424 1,229,317 1,083,018 992,741
___________ ___________ ___________ ___________
$18,720,268 $18,054,317 $13,706,472 $13,608,823
=========== =========== =========== ===========
The gross unrealized gains and unrealized losses on available for sale
securities are as follows:
June 30, 1999 June 30, 1998
________________________ ________________________
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 $ 2,752 $ 933 $ 4,157 $ 2,550
Corporate bonds 681 3,070 789 257
Mortgage-backed
securities 3,287 629,561 27,730 37,241
Equity securities 15,631 54,738 16,676 106,953
___________ ___________ ___________ ___________
$ 22,351 $ 688,302 $ 49,352 $ 147,001
=========== =========== =========== ===========
At June 30, 1999, investment securities with a market value of approximately
$14,938,000 were pledged as collateral to secure outstanding repurchase
agreements.
At June 30, 1999 and 1998, included in accumulated other comprehensive
60
income (loss) as a reduction to stockholders' equity are net unrealized
losses of $665,951 and $97,649, respectively, net of the deferred tax effect
of $226,423 and $33,201, respectively.
The cost and fair values of available for sale securities at June 30, 1999
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 $ 496,626 $ 497,820
Due after one year through five years 301,916 300,152
____________ ____________
798,542 797,972
Mortgage-backed securities (including securities
with interest rates ranging from 5.15% to 9.0%
maturing September 2003 to March 2029) 16,653,302 16,027,028
Equity securities 1,268,424 1,229,317
____________ ____________
$18,720,268 $18,054,317
============ ============
Realized gains and losses on available for sale securities for the year
ended June 30, 1999 were $85,891 and $1,758, respectively, for the year
ended June 30, 1998 were $288,196 and $2,480, respectively, and for the year
ended June 30, 1997 were $171,205 and $125, 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. For
the years ended June 30, 1999, 1998 and 1997, write-downs of available for
sale securities were $95,728, $172,235 and $110,000, respectively, and are
included in other expense in the consolidated statements of income.
3. Loans Receivable
________________
The Company's lending activities are predominantly conducted in south
central and western Maine. However, the Company does purchase residential
mortgage loans in the open market out of this geographical area. The
Company grants single-family and multi-family residential loans, commercial
real estate loans, commercial loans and a variety of consumer loans. In
addition, the Company grants loans for the construction of residential
homes, multi-family properties, commercial real estate properties and for
land development. Also, the Company participates in indirect lending
arrangements for automobile, equipment and mobile home loans. The Company's
indirect lending activities are conducted in south central and western
Maine. Most loans granted by the Company are collateralized by real estate.
The ability and willingness of residential and commercial real estate,
commercial and construction loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate sector
in the borrowers' geographic area and/or the general economy.
61
In the ordinary course of business, the Company has loan transactions with
its officers, directors and their associates and affiliated companies
("related parties") at substantially the same terms as those prevailing at
the time for comparable transactions with others. Such loans amounted to
$3,500,973 and $2,219,800 at June 30, 1999 and 1998, respectively. In 1999,
new loans granted to related parties totaled $2,008,528; payments and
reductions amounted to $727,355.
Included in the loan portfolio are unamortized premiums on purchased loans
of approximately $742,000 and $1,016,000 at June 30, 1999 and 1998,
respectively.
Activity in the allowance for loan losses was as follows:
Years Ended June 30,
________________________________________
1999 1998 1997
____________ ____________ ____________
Balance at beginning of year $ 2,978,000 $ 2,741,809 $ 2,760,872
Provision charged to operating
expenses 610,017 706,100 614,427
Loans charged off (926,364) (785,111) (772,250)
Recoveries on loans charged off 262,347 315,202 138,760
____________ ____________ ____________
Net loans charged off (664,017) (469,909) (633,490)
____________ ____________ ____________
Balance at end of year $ 2,924,000 $ 2,978,000 $ 2,741,809
============ ============ ============
Commercial and commercial real estate loans with balances greater than
$25,000 are considered impaired when it is probable that the Company will
not collect all amounts due in accordance with the contractual terms of the
loan. Loans that are returned to accrual status are no longer considered
to be impaired. Certain loans are exempt from individual impairment
evaluation, including large groups of smaller-balance homogenous loans that
are collectively evaluated for impairment, such as consumer and residential
mortgage loans and commercial loans with balances less than $25,000.
The allowance for loan losses includes impairment reserves related to loans
that are identified as impaired, which are based on discounted cash flows
using the loan's effective interest rate, the fair value of the collateral
for collateral-dependent loans, or the observable market price of the
impaired loan. When foreclosure is probable, impairment is measured based
on the fair value of the collateral. Loans that experience insignificant
payment delays (less than 60 days) and insignificant shortfalls in payment
amounts (less than 10%) generally are not classified as impaired.
Restructured loans are reported as impaired in the year of restructuring.
Thereafter, such loans may be removed from the impaired loan disclosure if
the loans were paying a market rate of interest at the time of restructuring
and are performing in accordance with their renegotiated terms.
At June 30, 1999, total impaired loans were $612,867 of which $241,420 had
62
related allowances of $77,200. During the year ended June 30, 1999, the
income recognized related to impaired loans was $66,030 and the average
balance of outstanding impaired loans was $1,229,987. At June 30, 1998,
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. 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, 1999 and 1998 totaled approximately $1,144,000 and $2,248,000,
respectively. Interest income that would have been recorded under the
original terms of such loans, net of interest income actuall recognized for
the years ended June 30, 1999, 1998 and 1997, totaled approximately $71,000,
$165,000 and $203,000, respectively.
The Company has no material outstanding commitments to lend additional funds
to customers whose loans have been placed on nonaccrual status or the terms
of which have been modified.
The Company was servicing for others mortgage loans of approximately
$64,690,000, $55,581,000 and $42,509,000 at June 30, 1999, 1998 and 1997,
respectively.
4. Premises and Equipment
______________________
Premises and equipment at June 30, 1999 and 1998 are summarized as follows:
1999 1998
____________ ____________
Land $ 1,012,503 $ 1,037,503
Buildings 2,586,996 2,503,254
Leasehold and building improvements 1,272,732 1,130,270
Furniture, fixtures and equipment 3,818,358 4,480,402
____________ ____________
8,690,589 9,151,429
Less accumulated depreciation 3,653,563 4,677,544
____________ ____________
Net premises and equipment $ 5,037,026 $ 4,473,885
============ ============
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense, was $754,665, $615,591 and $660,871 for the
years ended June 30, 1999, 1998 and 1997, respectively.
5. Other Real Estate Owned
_______________________
63
The following table summarizes the composition of other real estate owned at
June 30:
1999 1998
____________ ____________
Real estate properties acquired in
settlement of loans $ 221,575 $ 355,596
Less allowance for losses 27,725 5,100
____________ ____________
$ 193,850 $ 350,496
============ ============
Activity in the allowance for losses on other real estate owned was as
follows:
1999 1998 1997
____________ ____________ ____________
Balance at beginning of year $ 5,100 $ 50,839 $ 100,000
Provision for losses on other
real estate owned 47,000 62,300 39,000
Other real estate owned write-downs (24,375) (108,039) (88,161)
____________ ____________ ____________
Balance at end of year $ 27,725 $ 5,100 $ 50,839
============ ============ ============
6. Deposits
________
Deposits at June 30 are summarized as follows:
Weighted
Average
Rate 1999 1998
at June _____________________ _____________________
30, 1999 Amount Percent Amount Percent
________ _____________ _______ _____________ _______
Demand 0.00% $ 17,891,552 8.2% $ 15,209,219 8.3%
NOW 2.66 31,203,347 14.2 23,429,512 12.7
Money market 2.16 7,156,424 3.3 11,993,110 6.5
Regular savings 2.15 21,999,615 10.0 20,305,953 11.0
Certificates of
deposit:
1.00 - 3.75% 2.35 1,093,801 .5 360,674 .2
3.76 - 5.75% 5.12 103,086,863 47.0 55,603,422 30.2
5.76 - 7.75% 6.10 36,924,752 16.8 57,105,075 31.0
7.76 - 9.75% 8.00 7,681 .0 17,132 .1
________ _____________ _______ _____________ _______
64
4.47% $219,364,035 100.0% $184,024,097 100.0%
======== ============= ======= ============= =======
At June 30, 1999, scheduled maturities of certificates of deposit are as
follows:
There-
2000 2001 2002 2003 2004 after
___________ ___________ __________ __________ __________ _______
1.00 - 3.75% $ 1,090,387 $ 3,414 $ - $ - $ - $ -
3.76 - 5.75% 76,299,359 22,282,660 2,072,149 1,358,661 1,036,081 37,953
5.76 - 7.75% 21,051,009 8,118,697 7,117,931 637,115 - -
7.76 - 9.75% 7,681 - - - - -
Interest expense on deposits for the years ended June 30, 1999, 1998 and
1997 is summarized as follows:
1999 1998 1997
____________ ____________ ____________
NOW $ 932,896 $ 269,412 $ 216,437
Money market 209,733 466,453 536,623
Regular savings 514,917 569,901 592,148
Certificates of deposit 7,022,751 6,280,951 5,758,167
____________ ____________ ____________
$ 8,680,297 $ 7,586,717 $ 7,103,375
============ ============ ============
7. Federal Home Loan Bank Borrowings
_________________________________
A summary of borrowings from the Federal Home Loan Bank are as follows:
June 30, 1999
_______________________________________________________
Principal Interest Maturity
Amounts Rates Dates
_______________ _______________ _______________
$ 42,000,000 4.64% - 6.27% 2000
3,148,288 4.98% - 6.40% 2001
2,815,780 5.38% - 6.49% 2002
9,515,546 5.69% - 6.64% 2003
3,402,102 5.55% - 6.67% 2004
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
_______________
65
$ 103,881,716
===============
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
===============
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 under a blanket
agreement to secure these borrowings. The Company is required to own stock
of the Federal Home Loan Bank of Boston in order to borrow from the Federal
Home Loan Bank. Several of the Federal Home Loan Bank borrowings held at
June 30, 1999 are adjustable and, therefore, the rates are subject to
change.
At June 30, 1999, the Company had approximately $2,100,000 available under a
line of credit arrangement with the FHLB. Also, in addition to the FHLB
advances outstanding at June 30, 1999, the Company had approximately
$24,000,000 available for long-term advances with the FHLB.
8. Note Payable
____________
The note payable at June 30, 1999 and 1998 consists of a loan from an
unrelated financial institution relating to 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, requires
minimum loan loss reserves, capital and 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, 1999, the
Company was in compliance with these covenants.
9. Securities Sold Under Repurchase Agreements
___________________________________________
During 1999 and 1998, the Company sold securities under agreements to
repurchase. The weighted average interest rate on repurchase agreements was
4.07% and 4.20% at June 30, 1999 and 1998, respectively. These borrowings,
66
which were scheduled to mature within 180 days, were collateralized by GNMA
securities with a market value of $14,938,000 and amortized cost of
$15,525,000 at June 30, 1999, and a market value of $8,547,000 and amortized
cost of $8,558,000 at June 30, 1998. The average balance of repurchase
agreements was $8,202,000 and $4,917,000 during the years ended June 30,
1999 and 1998, respectively. The maximum amount outstanding at any month-
end during 1999 and 1998 was $11,868,000 and $5,737,000, respectively.
Securities sold under these agreements were under the control of the Company
during 1999 and 1998.
10.Capital and Regulatory Matters
______________________________
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in
declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized."
As of June 30, 1999 and 1998, the most recent notification from the Office
of Thrift Supervision (OTS) categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"well capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 capital as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios established the
Federal Deposit Insurance Corporation (FDIC) as set forth in the table
below. The Bank is also subject to certain capital requirements established
by the OTS. At June 30, 1999 and 1998, the Bank ratios exceeded the OTS
regulatory requirements. Management believes that the Bank meets all
capital adequacy requirements to which it is subject as of June 30, 1999 and
1998.
The Company is also subject to similar capital adequacy requirements and the
regulatory requirements of federal banking agencies.
The following tables illustrate the actual and required amounts and ratios
for the Company and the Bank as set forth by the FDIC at the dates
indicated.
To Be "Well
67
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
______________ _________________ __________________
Amount Ratio Amount Ratio Amount Ratio
________ _____ __________ ______ __________ _______
(Dollars in Thousands)
As of June 30, 1999:
Tier 1 (Core) capital
(to risk weighted
assets):
Northeast Bancorp $ 25,635 10.1% >$ 10,160 >4.0% >$ 15,239 > 6.0%
Northeast Bank 25,615 10.1% > 10,159 >4.0% > 15,239 > 6.0%
Tier 1 (Core) capital
(to total assets):
Northeast Bancorp $ 25,635 7.1% >$ 14,533 >4.0% >$ 18,167 > 5.0%
Northeast Bank 25,615 7.1% > 14,533 >4.0% > 18,166 > 5.0%
Total capital (to risk
weighted assets):
Northeast Bancorp $ 27,253 10.7% >$ 20,319 >8.0% >$ 25,399 >10.0%
Northeast Bank 27,233 10.7% > 20,318 >8.0% > 25,398 >10.0%
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
______________ _________________ __________________
Amount Ratio Amount Ratio Amount Ratio
________ _____ __________ ______ __________ _______
(Dollars in Thousands)
As of June 30, 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%
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
68
the years ended June 30, 1998 and 1997 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
__________________
Basic earnings per share (EPS) are computed by dividing net income available
to common stockholders by the weighted average number of shares outstanding.
The following table shows the weighted average number of shares outstanding
for each of the last three years. The 1998 and 1997 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 have also been restated to
give effect to Statement of Financial Accounting Standards No. 128, Earnings
Per Share, adopted by the Company in fiscal 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:
1999 1998 1997
____________ ____________ ____________
Average shares outstanding, used
in computing Basic EPS 2,710,117 2,277,165 2,152,564
Effect of Dilutive Securities:
Stock warrants and options
outstanding 26,188 41,797 122,937
Options and warrants exercised 8,177 167,116 42,063
Convertible preferred stock 50,062 309,165 350,646
____________ ____________ ____________
Average equivalent shares
outstanding, used in computing
Diluted EPS 2,794,544 2,795,243 2,668,210
============ ============ ============
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:
1999 1998 1997
____________ ____________ ____________
69
Net income $ 2,410,452 $ 2,403,783 $ 1,489,745
Preferred stock dividends (25,667) (125,827) (139,997)
____________ ____________ ____________
Net income available to common
stockholders $ 2,384,785 $ 2,277,956 $ 1,349,748
============ ============ ============
12.Preferred Stock
_______________
In November of 1998, the preferred stock, Series A, was converted to common
stock at a three to one ratio. There were no warrants attached to the
Series A preferred stock. In April of 1998, the preferred stock, Series B,
was converted into common stock at a three to one ratio. The Series B
preferred stock was issued with warrants attached and during 1998, 163,146
warrants were exercised for a total capital contribution of $761,443. At
June 30, 1998, all Series B preferred stock warrants had been exercised. No
preferred stock is outstanding at June 30, 1999.
13.Other Expenses
______________
Other expenses includes the following for the years ended June 30, 1999,
1998 and 1997:
1999 1998 1997
____________ ____________ ____________
Merger expense (note 15) $ - $ 318,061 $ -
Professional fees 471,083 310,390 398,704
General insurance 81,830 104,391 125,670
Printing and office supplies 300,888 265,954 263,648
Real estate owned expenses 44,219 50,912 64,907
Provision for losses on OREO 47,000 62,300 39,000
Goodwill amortization 461,569 296,374 296,374
Write-down of investment securities 95,728 172,235 110,000
Other 2,251,404 1,684,632 1,737,699
____________ ____________ ____________
$ 3,753,721 $ 3,265,249 $ 3,036,002
============ ============ ============
The goodwill amortization for 1999 included an impairment write-down of
approximately $165,000.
14.Income Taxes
____________
The current and deferred components of income tax expense (benefit) were as
follows for the years ended June 30, 1999, 1998 and 1997:
1999 1998 1997
____________ ____________ ____________
70
Federal:
Current $ 1,290,783 $ 1,265,879 $ 942,244
Deferred 86,398 (14,949) (72,290)
____________ ____________ ____________
1,377,181 1,250,930 869,954
State and local - current 55,410 51,941 38,611
____________ ____________ ____________
$ 1,432,591 $ 1,302,871 $ 908,565
============ ============ ============
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, 1999, 1998 and 1997:
1999 1998 1997
_________________ _________________ _________________
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
__________ ______ __________ ______ __________ ______
Expected income tax
expense at federal
tax rate $1,306,635 34.0% $1,260,262 34.0% $ 815,425 34.0%
State tax, net of
federal tax benefit 36,571 1.0 34,281 .9 25,483 1.1
Non-deductible
goodwill 98,358 2.6 42,192 1.1 42,192 1.8
Dividend received
deduction (19,367) (.5) (7,848) (.2) (6,873) (.3)
Low income/
rehabilitation
credit (20,000) (.5) (20,000) (.5) (20,000) (.8)
Other 30,394 .8 (6,016) (.2) 52,338 2.1
__________ ______ __________ ______ __________ ______
$1,432,591 37.4% $1,302,871 35.1% $ 908,565 37.9%
========== ====== ========== ====== ========== ======
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1999 and 1998 are presented below:
1999 1998
____________ ____________
Deferred tax assets:
Loans, principally due to allowance for
loan losses $ 994,000 $ 1,013,000
71
Deferred gain on loan sales 46,000 51,000
Interest on nonperforming loans 24,000 56,000
Difference in tax and financial statement
bases of investments 331,000 154,000
Difference in tax and financial statement
amortization of deductible goodwill 107,000 100,000
Other 99,000 57,000
____________ ____________
Total deferred tax assets 1,601,000 1,431,000
Deferred tax liabilities:
Loan loss reserve - tax basis (74,000) (89,000)
Mortgage servicing rights (193,000) (124,000)
Other (41,000) (53,000)
____________ ____________
Total deferred tax liabilities (308,000) (266,000)
____________ ____________
Net deferred tax assets, included
in other assets $ 1,293,000 $ 1,165,000
============ ============
The Company has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset. Accordingly, no
valuation allowance has been recorded at June 30, 1999 and 1998.
Tax legislation requires that all thrift institutions recapture all or a
portion of their tax bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Company has previously
recorded a deferred tax liability equal to the tax bad debt recapture and as
such, the rules will have no effect on net income or federal income tax
expense. 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 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,
since no deferred taxes have been provided for base year reserve recapture.
15.Merger
______
In October 1997, the Company issued approximately 188,000 shares of its
common stock for all the outstanding common stock of Cushnoc Bank and Trust
Company, of Augusta, Maine (Cushnoc). Cushnoc shareholders received 2.089
shares of the Company's common stock for each share of Cushnoc common stock.
The merger qualified as a tax-free reorganization and was accounted for as a
pooling of interests. Accordingly, the Company's consolidated financial
statements were restated for all periods prior to the business combination
to include the results of operations, financial position and cash flows of
Cushnoc. No adjustments were necessary to conform Cushnoc's methods of
accounting to the methods used by the Company. There were no significant
intercompany transactions prior to consummation of the merger. The costs
associated with the merger totaled approximately $435,000, with $117,000
72
included in salaries and employee benefits and $318,000 included in other
expense in the 1998 consolidated statement of income.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
Through Year Ended
October 24, 1997 June 30, 1997
________________ ________________
Interest Income:
Northeast Bancorp $ 7,280,300 $ 20,029,140
Cushnoc Bank 613,733 1,906,581
________________ ________________
Combined $ 7,894,033 $ 21,935,721
================ ================
Net Income (Loss):
Northeast Bancorp $ 432,319 $ 1,507,103
Cushnoc Bank 29,435 (17,358)
________________ ________________
Combined $ 461,754 $ 1,489,745
================ ================
There were no other changes in stockholders' equity prior to consummation of
the merger in fiscal 1998 that were material to the financial position of
the Company.
16.Employee Benefit Plans
______________________
Profit Sharing Plan
___________________
The Company has a profit sharing plan which covers substantially all full-
time employees. Contributions and costs are determined as a percent of each
covered employee's salary and are at the Board of Directors discretion.
Expenses related to the profit sharing plan for the years ended June 30,
1999, 1998 and 1997 were $53,590, $43,500 and $130,000, 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 6% contributed. For the years ended June 30, 1999, 1998 and 1997, the
Company contributed approximately $74,115, $60,700 and $38,300,
respectively.
Stock Option Plans
__________________
73
The Company has 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 were reserved for issuance pursuant to incentive stock
options with 6,250 shares at June 30, 1999 available to be granted and
90,000 shares of unissued common stock were reserved for issuance pursuant
to nonqualified stock options with 1,000 shares at June 30, 1999 to be
granted.
The number of shares and the exercise prices in the following table for 1998
and 1997 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:
1999 1998 1997
__________________ __________________ __________________
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
________ _________ ________ _________ ________ _________
Outstanding at
beginning of
year 123,000 $ 10.44 130,500 $ 6.01 139,500 $ 5.11
Granted 11,500 9.92 41,250 18.50 22,500 8.33
Exercised (16,500) 5.35 (46,000) 5.11 (30,000) 3.45
Expired (7,750) 18.50 (2,750) 10.18 (1,500) 8.33
________ _________ ________ _________ ________ _________
Outstanding at
end of year 110,250 $ 10.59 123,000 $ 10.44 130,500 $ 6.01
======== ========= ======== ========= ======== =========
Options
exercisable at
year end 110,250 $ 10.59 123,000 $ 10.44 130,500 $ 6.01
The following table summarizes information about stock options outstanding
at June 30, 1999:
Options Outstanding
74
______________________________________________________
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices June 30, 1999 Contractual Life Exercise Price
________________ ________________ ________________ ________________
$3.58 15,000 .5 years $ 3.58
$ 7.50 to $10.50 61,250 6.0 7.90
$15.31 to $18.50 34,000 8.5 18.41
________________ ________________ ________________
$ 3.58 to $18.50 110,250 7.0 $10.59
================ ================ ================
The per share weighted average fair value of stock options granted during
1999 and 1998 was $3.44 and $6.24, respectively, on the date of the grants
using the Black Scholes option-pricing model as a valuation technique with
the following average assumptions: expected dividend yield, 2.13% and
1.40%; risk-free interest rate, 5.79% and 5.46%; expected life, 8 years and
8 years; and expected volatility, 27.82% and 22.49%, respectively.
For financial statement purposes, the Company measures the compensation
costs of its stock option plans under Accounting Principles Board (APB)
Opinion No. 25, whereby no compensation cost is recorded if, at the grant
date, the exercise price of the options is equal to the fair market value of
the Company's common stock. Had the Company determined cost based on the
fair value at the grant date for its stock options under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and
earnings per share for the year ended June 30, 1999 and June 30, 1998 would
have been reduced to the pro forma amounts indicated below.
Net Earnings Per Share
Income Basic Diluted
_______________ _______________ _______________
June 30, 1999:
As reported $ 2,410,452 $ 0.88 $ 0.86
Pro forma $ 2,376,947 $ 0.87 $ 0.85
June 30, 1998:
As reported $ 2,403,783 $ 1.00 $ 0.86
Pro forma $ 2,225,811 $ 0.92 $ 0.80
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 of the Company's common stock on the offering
75
termination date. The maximum number of shares which may be purchased 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:
1999 1998
_______________ _______________
Commitments to originate loans:
Residential real estate mortgages $ 9,392,000 $ 6,392,000
Commercial real estate mortgages,
including multi-family residential
real estate 10,314,000 1,510,000
Commercial business loans 4,725,000 3,460,000
_______________ _______________
24,431,000 11,362,000
Unused lines of credit 18,941,000 14,585,000
Standby letters of credit 1,501,000 329,000
Unadvanced portions of construction loans 1,502,000 1,422,000
At June 30, 1999, $925,000 of the stand-by letters of credit have been
granted to related parties.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counter party.
Collateral held varies but may include accounts receivable, inventory,
76
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 $373,000, $380,000 and $246,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.
Approximate future minimum lease payments over the remaining terms of the
leases at June 30, 1999 are as follows:
2000 $ 266,000
2001 251,000
2002 251,000
2003 194,000
2004 182,000
2005 and after 828,000
____________
$ 1,972,000
============
18.Condensed Parent Information
____________________________
Condensed financial statements for Northeast Bancorp at June 30, 1999 and
1998 and for each of the years in the three year period ended June 30, 1999
are presented below.
77
Balance Sheets
______________
June 30,
_________________________________
Assets 1999 1998
_____________________________________ _______________ _______________
Cash (deposited with subsidiary) $ 80,758 $ 1,104,504
Investment in subsidiary 26,051,816 23,908,576
Goodwill, net 611,845 713,819
Other assets 632,094 413,620
_______________ _______________
Total assets $ 27,376,513 $ 26,140,519
=============== ===============
Liabilities and Stockholders' Equity
____________________________________
Note payable $ 687,500 $ 993,055
Other liabilities 5,898 7,937
_______________ _______________
693,398 1,000,992
Stockholders' equity 26,683,115 25,139,527
_______________ _______________
Total liabilities and stockholders'
equity $ 27,376,513 $ 26,140,519
=============== ===============
Statements of Income
____________________
Years Ended June 30,
___________________________________
1999 1998 1997
___________ ___________ ___________
Income:
Dividends from banking subsidiary $ 98,314 $ - $ -
Other income 758 76,556 16,232
___________ ___________ ___________
Total income 99,072 76,556 16,232
Expenses:
Amortization expense 101,974 101,974 101,973
Interest on note payable 65,100 89,884 112,753
Occupancy expense - 46,611 65,257
General and administrative expenses 95,558 97,969 86,457
___________ ___________ ___________
Total expenses 262,632 336,438 366,440
___________ ___________ ___________
Loss before income tax benefit
and equity in undistributed net
78
income of subsidiary (163,560) (259,882) (350,208)
Income tax benefit 55,692 53,967 82,371
Loss before equity in undistributed
net income of subsidiary (107,868) (205,915) (267,837)
Equity in undistributed net income
of subsidiary 2,518,320 2,609,698 1,757,582
___________ ___________ ___________
Net income $2,410,452 $2,403,783 $1,489,745
=========== =========== ===========
Years Ended June 30,
___________________________________
Statements of Cash Flows 1999 1998 1997
________________________ ___________ ___________ ___________
Cash flows from operating activities:
Net income $2,410,452 $2,403,783 $1,489,745
Adjustments to reconcile net income
to net cash used by operations:
Depreciation and amortization 101,974 110,658 114,775
Treasury stock bonused - - 13,374
Undistributed earnings of
subsidiary (2,518,320) (2,609,698) (1,757,582)
(Increase) decrease in other assets (218,474) (46,502) 17,467
Decrease in other liabilities (2,039) (4,911) (56,337)
___________ ___________ ___________
Net cash used by operating activities (226,407) (146,670) (178,558)
Cash flows from investing activities:
Proceeds from sale of premises and
equipment to subsidiary - 367,696 245,167
Purchase of premises and equipment - (368) (7,086)
___________ ___________ ___________
Net cash provided by investing
activities - 367,328 238,081
Cash flows from financing activities:
Principal payments on note payable (305,555) (305,556) (201,389)
Stock options exercised 88,286 190,700 103,450
Proceeds from issuance of common stock 16,257 16,669 13,487
Treasury stock purchased - (44,988) (28,420)
Treasury stock sold - 44,988 -
Dividends paid to stockholders (596,327) (597,270) (537,802)
Warrants exercised - 761,433 175,000
Stock split - payment for fractional
shares - (1,095) -
___________ ___________ ___________
Net cash (used) provided by financing
activities (797,339) 64,881 (475,674)
___________ ___________ ___________
Net (decrease) increase in cash (1,023,746) 285,539 (416,151)
Cash, beginning of year 1,104,504 818,965 1,235,116
79
___________ ___________ ___________
Cash, end of year $ 80,758 $1,104,504 $ 818,965
=========== =========== ===========
Supplemental schedule of cash flow
information:
Interest paid $ 67,100 $ 91,921 $ 111,490
19.Other Comprehensive Income
__________________________
Beginning in 1999, SFAS No. 130, Reporting Comprehensive Income, requires
display in financial statements of amounts of total comprehensive income and
accumulated other comprehensive income. The components of other
comprehensive income for the years ended 1999, 1998 and 1997 are as follows:
1999 1998 1997
___________ ___________ ___________
Unrealized gains (losses) arising
during the period, net of tax effect
of $197,195 in 1999, $177,534 in 1998
and $279,981 in 1997 $ (382,733) $ 344,624 $ 543,492
Less: reclassification adjustment for
gains, net of write-downs, included
in net income, net of tax effect of
$3,942 in 1999, $38,584 in 1998 and
$20,767 in 1997 7,653 (74,897) (40,313)
___________ ___________ ___________
Other comprehensive income $ (375,080) $ 269,727 $ 503,179
=========== =========== ===========
20.Segment Reporting
_________________
Northeast Bancorp through its subsidiary, Northeast Bank and it's subsidiary
Northeast Financial Services, Inc., provide a broad range of financial
services to individuals and companies in western and south central Maine.
These services include lending, demand, savings and time deposits, cash
management and trust services. While the Company's senior management team
monitors the operations of the subsidiaries, the subsidiaries are primarily
organized to operate in the banking industry. Substantially all income and
services are derived from banking products and services in Maine.
Accordingly, the Company's subsidiaries are considered by management to be
aggregated in one reportable operating segment.
21.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
80
overnight deposits approximates their relative book values, as these
financial instruments have short maturities.
Available for Sale Securities
_____________________________
The fair value of available for sale securities is estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. Fair values are calculated based on the value of one
unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. If these considerations had
been incorporated into the fair value estimates, the aggregate fair value
amounts could have changed.
Federal Home Loan Bank Stock
____________________________
This financial instrument does not have a market nor is it practical to
estimate the fair value without incurring excessive costs.
Loans
_____
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimates of maturity are based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic conditions, lending conditions and the effects of estimated
prepayments.
Fair value for significant non-performing loans is based on estimated cash
flows and is discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows and discount rates are judgmentally determined using available market
information and historical information.
The fair value of loans held for sale is estimated based on bid quotations
received from loan dealers.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many of
these financial instruments, management has no basis to determine whether
the fair value presented would be indicative of the value negotiated in an
actual sale.
Accrued Interest Receivable
___________________________
The fair value of this financial instrument approximates the book value as
this financial instrument has a short maturity. It is the Company's policy
to stop accruing interest on loans past due by more than ninety days.
Therefore this financial instrument has been adjusted for estimated credit
loss.
Deposits
________
The fair value of deposits with no stated maturity, such as non-interest-
81
bearing demand deposits, savings, NOW accounts and money market accounts, is
equal to the amount payable on demand. The fair values of certificates of
deposit are based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. If that value was considered, the fair value
of the Company's net assets could increase.
Borrowed Funds, Note Payable and Repurchase Agreements
______________________________________________________
The fair value of the Company's borrowings with the Federal Home Loan Bank
is estimated by discounting the cash flows through maturity or the next
repricing date based on current rates available to the Company for
borrowings with similar maturities. The fair value of the note payable
approximates the carrying value, as the interest rate approximates market
rates. The fair value of repurchase agreements approximates the carrying
value, as these financial instruments have a short maturity.
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, other real estate owned and
intangible assets, including the customer base. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following table presents the estimated fair value of the Company's
significant financial instruments at June 30, 1999 and 1998:
82
June 30, 1999 June 30, 1998
_________________________ _________________________
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
____________ ____________ ____________ ____________
Financial assets:
Cash and cash
equivalents $ 12,094,000 $ 12,094,000 $ 12,152,000 12,152,000
Available for sale
securities 18,054,000 18,054,000 13,609,000 13,609,000
Loans held for sale 312,000 315,000 370,000 372,000
Loans 316,062,000 308,687,000 279,053,000 282,020,000
Interest receivable 1,991,000 1,991,000 1,934,000 1,934,000
Financial liabilities:
Deposits (with no
stated maturity) 78,251,000 78,251,000 70,938,000 70,938,000
Time deposits 141,113,000 141,352,000 113,086,000 113,488,000
Borrowed funds 103,882,000 99,986,000 104,440,000 102,052,000
Note payable 688,000 688,000 993,000 993,000
Repurchase agreements 11,868,000 11,868,000 5,206,000 5,206,000
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, 1999 and 1998, 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, 1999. These
financial statements are the responsibility of Northeast Bancorp's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northeast Bancorp
and Subsidiary as of June 30, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
83
July 30, 1999 Baker Newman & Noyes
Portland, Maine Limited Liability Company
Item 8. b. Statistical Disclosures Required by Industry Guide 3
____________________________________________________
Northeast Bancorp Consolidated
Distribution of Assets, Liabilities and Net Worth (in thousands)
Interest Rates and Interest Differential
Years Ending June 30, 1999, 1998 and 1997
Interest Average
Average Income/ Yield/
June 30, 1999 Balance Expense Rate
_____________ _____________ _____________ _____________
Assets:
Interest earning-assets:
Investment Securities (1) $ 15,413 $ 958 6.22%
Loans (2) (3) 297,690 25,179 8.46%
FHLB Stock 5,680 364 6.41%
Short-term investments (4) 7,157 356 4.97%
_____________ _____________ _____________
Total interest-earning assets/
interest income/average rates
earned 325,940 26,857 8.24%
_____________ _____________ _____________
Non-interest earning assets:
Cash & due from banks 5,099
Bank premises and equipment, net 4,839
Other assets 6,912
Allowance for loan losses (2,955)
_____________
Total non-interest earning assets 13,895
_____________
Total assets $ 339,835
=============
Liabilities & Net Worth:
Interest-bearing liabilities:
Now $ 31,162 $ 933 2.99%
Money Market 8,938 210 2.35%
84
Savings 20,068 515 2.57%
Time 125,802 7,022 5.58%
_____________ _____________ _____________
Total interest-bearing deposits 185,970 8,680 4.67%
Repurchase agreements 8,202 340 4.15%
Borrowed funds 100,074 5,530 5.53%
_____________ _____________ _____________
Total interest-earning liabilities/
interest expense/average rates paid 294,246 14,550 4.94%
_____________ _____________ _____________
Total non-interest bearing
liabilities:
Demand deposits and escrow accounts 17,132
Other liabilities 2,194
_____________
Total liabilities 313,572
_____________
Stockholders' equity 26,263
_____________
Total liabilities and stockholders'
equity $ 339,835
=============
Net interest income $ 12,307
=============
Interest rate spread 3.30%
Net yield on interest earning assets (5) 3.78%
Interest Average
Average Income/ Yield/
June 30, 1998 Balance Expense Rate
_____________ _____________ _____________ _____________
Assets:
Interest earning-assets:
Investment Securities (1) $ 21,799 $ 1,461 6.70%
Loans (2) (3) 240,859 21,989 9.13%
FHLB Stock 4,647 301 6.48%
Short-term investments (4) 9,951 532 5.35%
_____________ _____________ _____________
Total interest-earning assets/
interest income/average rates
earned 277,256 24,283 8.76%
_____________ _____________ _____________
Non-interest earning assets:
Cash & due from banks 4,516
Bank premises and equipment, net 4,597
Other assets 7,061
Allowance for loan losses (2,867)
_____________
Total non-interest earning assets 13,307
_____________
85
Total assets $ 290,563
=============
Liabilities & Net Worth:
Interest-bearing liabilities:
Now $ 15,400 $ 269 1.75%
Money Market 14,002 467 3.34%
Savings 21,289 570 2.68%
Time 108,580 6,281 5.78%
_____________ _____________ _____________
Total interest-bearing deposits 159,271 7,587 4.76%
Repurchase agreements 4,917 206 4.19%
Borrowed funds 85,686 5,017 5.86%
_____________ _____________ _____________
Total interest-earning liabilities/
interest expense/average rates paid 249,874 12,810 5.13%
_____________ _____________ _____________
Total non-interest bearing
liabilities:
Demand deposits and escrow accounts 15,480
Other liabilities 1,983
_____________
Total liabilities 267,337
_____________
Stockholders' equity 23,226
_____________
Total liabilities and stockholders'
equity $ 290,563
=============
Net interest income $ 11,473
=============
Interest rate spread 3.63%
Net yield on interest earning assets (5) 4.14%
Interest Average
Average Income/ Yield/
June 30, 1997 Balance Expense Rate
_____________ _____________ _____________ _____________
Assets:
Interest earning-assets:
Investment Securities (1) $ 32,024 $ 2,285 7.14%
Loans (2) (3) 203,934 18,974 9.30%
FHLB Stock 3,531 227 6.43%
Short-term investments (4) 8,474 450 5.31%
_____________ _____________ _____________
Total interest-earning assets/
interest income/average rates
earned 247,963 21,936 8.85%
_____________ _____________ _____________
Non-interest earning assets:
86
Cash & due from banks 4,182
Bank premises and equipment, net 4,609
Other assets 7,038
Allowance for loan losses (2,769)
_____________
Total non-interest earning assets 13,060
_____________
Total assets $ 261,023
=============
Liabilities & Net Worth:
Interest-bearing liabilities:
Now $ 14,813 $ 216 1.46%
Money Market 15,902 537 3.38%
Savings 22,142 592 2.67%
Time 100,485 5,758 5.73%
_____________ _____________ _____________
Total interest-bearing deposits 153,342 7,103 4.63%
Repurchase agreements 4,566 200 4.38%
Borrowed funds 67,037 3,988 5.95%
_____________ _____________ _____________
Total interest-earning liabilities/
interest expense/average rates paid 224,945 11,291 5.02%
_____________ _____________ _____________
Total non-interest bearing
liabilities:
Demand deposits and escrow accounts 13,380
Other liabilities 1,576
_____________
Total liabilities 239,901
_____________
Stockholders' equity 21,122
_____________
Total liabilities and stockholders'
equity $ 261,023
===========
Net interest income $ 10,645
=============
Interest rate spread 3.83%
Net yield on interest earning assets (5) 4.29%
(1) Principally taxable. The yield information does not give effect to
changes in fair value that are reflected as a component of stockholders
equity.
(2) Non-accruing loans included in computation of average balance.
(3) Interest income on loans includes fees (costs) which are immaterial in
amount.
(4) Short term investments include FHLB overnight deposits and interest-
87
bearing deposits.
(5) The net yield on average earning assets is net interest income divided by
average interest-earning assets.
Northeast Bancorp Consolidated
Changes in Net Interest Income
Years Ended June 30, 1999 and 1998
June 30, 1999 Compared to June 30, 1998
_______________________________________
Increase (decrease) due to change in:
Average Average Total
Volume (1) Rate Change
_____________ _____________ _____________
(Dollars in thousands)
Interest earning assets:
Investment securities $ (398) $ (105) $ (503)
Loans, net (2) 4,898 (1,708) 3,190
FHLB stock 66 (3) 63
Short-term investments (3) (141) (35) (176)
_____________ _____________ _____________
Total interest income 4,425 (1,851) 2,574
_____________ _____________ _____________
Interest bearing liabilities:
Now 391 272 663
Money Market (141) (116) (257)
Savings (32) (23) (55)
Time 968 (226) 742
_____________ _____________ _____________
Total interest on deposits 1,186 (93) 1,093
Repurchase agreements 136 (3) 133
Borrowed funds 756 (242) 514
_____________ _____________ _____________
Total interest expense 2,078 (338) 1,740
_____________ _____________ _____________
Change in net interest income $ 2,347 $ (1,513) $ 834
============= ============= =============
June 30, 1998 Compared to June 30, 1997
_______________________________________
Increase (decrease) due to change in:
Average Average Total
Volume (1) Rate Change
_____________ _____________ _____________
(Dollars in thousands)
Interest earning assets:
Investment securities $ (795) $ (29) $ (824)
Loans, net (2) 3,377 (362) 3,015
FHLB stock 72 1 73
88
Short-term investments (3) 79 4 83
_____________ _____________ _____________
Total interest income 2,733 (386) 2,347
_____________ _____________ _____________
Interest bearing liabilities:
Now 9 44 53
Money Market (64) (7) (71)
Savings (23) 1 (22)
Time 468 55 523
_____________ _____________ _____________
Total interest on deposits 390 93 483
Repurchase agreements 15 (8) 7
Borrowed funds 1,093 (64) 1,029
_____________ _____________ _____________
Total interest expense 1,498 21 1,519
_____________ _____________ _____________
Change in net interest income $ 1,235 $ (407) $ 828
============= ============= =============
Rate/Volume amounts spread proportionately between Volume and Rate.
(1) Non-accruing loans are excluded from the average volumes used in
calculating this table.
(2) Interest income on loans includes fees (costs) which are immaterial in
amount.
(3) Short-term investments include FHLB overnight deposits and interest-
earning deposits.
Northeast Bancorp Consolidated
Maturities and Repricing of Loans (in thousands)
As of June 30, 1999
1 Year 1 to 5 5 to 10 Over 10 Total
or Less Years Years Years Loans
___________ ___________ ___________ ___________ ___________
Mortgages:
Residential 46,699 29,516 12,420 93,609 182,244
Commercial 19,004 32,622 1,156 2,656 55,438
Construction 1,686 0 0 0 1,686
Non-Mortgage Loans:
Commercial 12,802 16,627 2,139 3,080 34,647
Consumer and
installment 2,138 17,649 7,715 16,140 43,643
___________ ___________ ___________ ___________ ___________
Total Loans 82,329 96,414 23,430 115,485 317,658
=========== =========== =========== =========== ===========
Type of Interest
Rate:
Predetermined rate,
89
maturity greater
than 1 year 175,680
Floating of
adjustable rate
due after one year 59,649
___________
Total due after 1
year: 235,329
===========
Scheduled repayments are reported in the maturity category in which the payment
is due. Demand loans and overdrafts are reported in one year or less.
Maturities are based upon contract terms.
Northeast Bancorp Consolidated
Investment Securities Portfolio
At June 30,
__________________________________
1999 1998 1997
__________ __________ __________
Available for Sale (1)
(Dollars in thousands)
U.S. Government and Agency Obligations $ 598 $ 4,698 $ 2,905
Mortgage-backed Securities 16,027 7,714 24,802
Other Bonds 200 204 253
Equity Securities 1,229 993 851
__________ __________ __________
Total Available for Sale (2): $ 18,054 $ 13,609 $ 28,811
========== ========== ==========
(1) Carried at estimated market value. Northeast Bancorp does not have any
securities being held to maturity.
(2) Cost of such securities ($ in thousands) was $18,720 as of June 30, 1999,
$13,706 as of June 30, 1998, and $29,317 as of June 30, 1997.
Northeast Bancorp Consolidated
Investment Maturity
(Dollars in thousands)
After One After Five
Year But Years But
Within Within Within After
One Year 5 Years 10 Years 10 Years Total
____________ ____________ ____________ _____________ _____________
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
90
______ _____ ______ _____ ______ _____ _______ _____ _______ _____
At June 30,
1999
U. S. Govern-
ment and
agencies
obligations $ 498 4.62% $ 100 7.23% $ 0 0.00% $ 0 0.00% $ 598 5.06%
Mortgage-
backed
securities 0 0.00% 44 5.15% 572 7.04% 15,411 6.55% 16,027 6.56%
Other bonds 0 0.00% 200 6.28% 0 0.00% 0 0.00% 200 6.28%
Equity
securities 1,229 6.76% 0 0.00% 0 0.00% 0 0.00% 1,229 6.76%
______ _____ ______ _____ ______ _____ _______ _____ _______ _____
$1,727 6.14% $ 344 6.41% $ 572 7.04% $15,411 6.55% $18,054 6.52%
====== ===== ====== ===== ====== ===== ======= ===== ======= =====
At June 30, 1998
U. S. Govern-
ment and
agencies
obligations $ 347 5.87% $ 248 5.40% $1,103 7.02% $ 3,000 7.17% $ 4,698 6.95%
Mortgage-
backed
securities 0 0.00% 99 5.15% 24 8.50% 7,591 6.91% 7,714 6.89%
Other bonds 0 0.00% 204 6.28% 0 0.00% 0 0.00% 204 6.28%
Equity
securities 993 2.64% 0 0.00% 0 0.00% 0 0.00% 993 2.64%
______ _____ ______ _____ ______ _____ _______ _____ _______ _____
$1,340 3.48% $ 551 5.68% $1,127 7.05% $10,591 6.98% $13,609 6.59%
====== ===== ====== ===== ====== ===== ======= ===== ======= =====
Northeast Bancorp Consolidated
Loan Portfolio
As of June 30,
Percent of
June 30, 1999 Amount Total Loans
_____________ _______________ _______________
Loan Portfolio (thousands)
Residential Mortgage $ 182,244 57.4%
Commercial real estate 55,438 17.5%
Construction 1,686 0.5%
Commercial 34,647 10.9%
Consumer & Other 43,643 13.7%
_______________ _______________
Total Loans 317,658 100.0%
Less:
91
Allowance for loan losses 2,924
Net Deferred fees (costs) (1,328)
_______________ _______________
Net Loans $ 316,062
===============
Percent of
June 30, 1998 Amount Total Loans
_____________ _______________ _______________
Loan Portfolio (thousands)
Residential Mortgage $ 171,903 61.1%
Commercial real estate 47,053 16.7%
Construction 2,100 0.8%
Commercial 26,967 9.6%
Consumer & Other 33,305 11.8%
_______________ _______________
Total Loans 281,328 100.0%
Less:
Allowance for loan losses 2,978
Net Deferred fees (costs) (703)
_______________
Net Loans $ 279,053
===============
Percent of
June 30, 1997 Amount Total Loans
_____________ _______________ _______________
Loan Portfolio (thousands)
Residential Mortgage $ 139,633 62.7%
Commercial real estate 46,443 20.8%
Construction 2,597 1.2%
Commercial 19,421 8.7%
Consumer & Other 14,792 6.6%
_______________ _______________
Total Loans 222,886 100.0%
Less:
Allowance for loan losses 2,742
Net Deferred fees (costs) 204
_______________
Net Loans $ 219,940
===============
Percent of
June 30, 1996 Amount Total Loans
_____________ _______________ _______________
Loan Portfolio (thousands)
Residential Mortgage $ 116,273 62.0%
Commercial real estate 37,270 19.9%
Construction 2,769 1.5%
Commercial 16,761 8.9%
Consumer & Other 14,491 7.7%
_______________ _______________
92
Total Loans 187,564 100.0%
Less:
Allowance for loan losses 2,761
Net Deferred fees (costs) 354
_______________
Net Loans $ 184,449
===============
Percent of
June 30, 1995 Amount Total Loans
_____________ _______________ _______________
Loan Portfolio (thousands)
Residential Mortgage $ 120,762 64.2%
Commercial real estate 33,000 17.5%
Construction 2,391 1.3%
Commercial 15,597 8.3%
Consumer & Other 16,400 8.7%
_______________ _______________
Total Loans 188,150 100.0%
Less:
Allowance for loan losses 2,661
Net Deferred fees (costs) 373
_______________
Net Loans $ 185,116
===============
Northeast Bancorp Consolidated
Allowance for Loan Losses
As of June 30, 1999
Percent of
Loans in Each
Category to
June 30, 1999 Amount Total Loans
_____________ _______________ _______________
Allowance for Loan Losses (thousands)
Real Estate $ 378 57.4%
Commercial Mortgage 882 17.5%
Construction 0 0.5%
Commercial 508 10.9%
Consumer 497 13.7%
Unallocated 659 0.0%
_______________ _______________
Total $ 2,924 100.0%
=============== ===============
Percent of
Loans in Each
Category to
93
June 30,1998 Amount Total Loans
____________ _______________ _______________
Allowance for Loan Losses (thousands)
Real Estate $ 352 61.1%
Commercial Mortgage 762 16.7%
Construction 0 0.8%
Commercial 582 9.6%
Consumer 380 11.8%
Unallocated 902 0.0%
_______________ _______________
Total $ 2,978 100.0%
=============== ===============
Percent of
Loans in Each
Category to
June 30, 1997 Amount Total Loans
_____________ _______________ _______________
Allowance for Loan Losses (thousands)
Real Estate $ 308 62.7%
Commercial Mortgage 821 20.8%
Construction 0 1.2%
Commercial 436 8.7%
Consumer 159 6.6%
Unallocated 1,018 0.0%
_______________ _______________
Total $ 2,742 100.0%
=============== ===============
Percent of
Loans in Each
Category to
June 30, 1996 Amount Total Loans
_____________ _______________ _______________
Allowance for Loan Losses (thousands)
Real Estate $ 268 62.0%
Commercial Mortgage 799 19.9%
Construction 0 1.5%
Commercial 501 8.9%
Consumer 152 7.7%
Unallocated 1,041 0.0%
_______________ _______________
Total $ 2,761 100.0%
=============== ===============
Percent of
Loans in Each
Category to
June 30, 1995 Amount Total Loans
_____________ _______________ _______________
Allowance for Loan Losses (thousands)
Real Estate $ 658 64.2%
Commercial Mortgage 263 17.5%
94
Construction 0 1.3%
Commercial 137 8.3%
Consumer 279 8.7%
Unallocated 1,324 0.0%
_______________ _______________
Total $ 2,661 100.0%
=============== ===============
This table shows how the allowance for loan losses was allocated for the
periods indicated.
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the
allowance.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses based on evaluations of collectibility and prior loss
experience. The evaluation takes into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, specific
problem loans, and current and anticipated economic conditions that may affect
the borrowers' ability to pay. Management also obtains appraisals when
considered necessary.
Northeast Bancorp Consolidated
Non-performing Ratios (in thousands)
As of June 30,
At June 30,
________________________________________________
1999 1998 1997 1996 1995
________ ________ ________ ________ ________
Non-accrual loans:
Residential mortgage 235 640 1,023 1,043 650
Commercial Real Estate 595 317 541 895 1,223
Commercial Loans 197 468 54 308 381
Consumer and installment 0 0 41 76 33
________ ________ ________ ________ ________
Total non-accrual loans 1,027 1,425 1,659 2,322 2,287
Accruing loans contractually
past due 90 days or more 117 823 1,222 860 370
________ ________ ________ ________ ________
Total non-performing loans 1,144 2,248 2,881 3,182 2,657
Other real estate owned 194 350 563 585 1,169
________ ________ ________ ________ ________
Total non-performing assets 1,338 2,598 3,444 3,767 3,826
======== ======== ======== ======== ========
Non-performing loans to total
loans 0.36% 0.80% 1.29% 1.70% 1.42%
Non-performing assets to total
assets 0.37% 0.81% 1.21% 1.54% 1.65%
95
See additional information concerning non-performing and impaired loans in
footnote 3 of the consolidated financial statements as well as in the
Management's Discussion and Analysis.
Northeast Bancorp Consolidated
Summary of Loan Losses Experience (in thousands)
As of June 30,
June 30, June 30, June 30, June 30, June 30,
1999 1998 1997 1996 1995
________ ________ ________ ________ ________
Average net loans outstanding
during the period $294,207 $237,791 $200,919 $183,947 $178,736
======== ======== ======== ======== ========
Net loans at end of period (1) $316,062 $279,053 $219,940 $184,449 $185,116
======== ======== ======== ======== ========
Allowance at beginning of
period $ 2,978 $ 2,742 $ 2,761 $ 2,661 $ 2,728
Loans charged-off during the
period:
Residential mortgage 232 196 319 151 162
Commercial real estate 26 432 128 236 296
Commercial 272 42 154 125 205
Consumer and other 396 115 171 108 151
________ ________ ________ ________ ________
Total loans charged-off 926 785 772 620 814
________ ________ ________ ________ ________
Recoveries on loans previously
charged-off:
Residential Mortgage 12 87 43 10 7
Commercial Real Estate 109 83 49 34 1
Commercial 20 87 13 12 16
Consumer and other 121 58 34 25 32
________ ________ ________ ________ ________
Total Recoveries 262 315 139 81 56
________ ________ ________ ________ ________
Net loans charged off during
the period 664 470 633 539 758
Provision for loan losses 610 706 614 639 691
________ ________ ________ ________ ________
Allowance at end of period $ 2,924 $ 2,978 $ 2,742 $ 2,761 $ 2,661
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding 0.23% 0.20% 0.32% 0.29% 0.42%
Allowance as a percentage of
total portfolio loans 0.93% 1.07% 1.25% 1.50% 1.44%
Allowance as a percentage of
96
non-performing and non-accrual
loans 255.59% 132.47% 95.18% 86.77% 100.15%
(1) Excludes loans held for sale.
The allowance for loan losses as a percentage of net loans decreased at the end
of each fiscal year from 1996 to 1999. The reduction in each fiscal year was
due to the purchase of residential mortgages as well as portfolio loan growth.
The decrease was supported each fiscal year by the Company's lower delinquency
levels and decreased non-performing and substandard loans.
This table summarizes loans outstanding at the end of each period indicated,
net of unearned income, at the end of each period indicated and the average
amount of loans outstanding, changes in the allowance for loan losses and other
selected statistics during each period indicated.
Northeast Bancorp Consolidated
Average Deposits (in thousands) and Rates
As of June 30,
% of
June 30, 1999 Amount Rate Deposits
_____________ ____________ ____________ ____________
Average Deposits:
Non-interest bearing demand deposits $ 17,132 0.00% 8.4%
Regular savings 20,068 2.57% 9.9%
NOW and Money Market 40,100 2.85% 19.7%
Time deposits 125,802 5.58% 61.0%
____________ ____________ ____________
Total Average Deposits $ 203,102 4.27% 100.0%
============ ============ ============
% of
June 30, 1998 Amount Rate Deposits
_____________ ____________ ____________ ____________
Average Deposits:
Non-interest bearing demand deposits $ 15,481 0.00% 8.9%
Regular savings 21,289 2.68% 12.2%
NOW and Money Market 29,401 2.50% 16.8%
Time deposits 108,580 5.78% 62.1%
____________ ____________ ____________
Total Average Deposits $ 174,751 4.34% 100.0%
============ ============ ============
% of
June 30, 1997 Amount Rate Deposits
_____________ ____________ ____________ ____________
Average Deposits:
97
Non-interest bearing demand deposits $ 13,380 0.00% 8.0%
Regular savings 22,141 2.67% 13.3%
NOW and Money Market 30,716 2.45% 18.4%
Time deposits 100,485 5.73% 60.3%
____________ ____________ ____________
Total Average Deposits $ 166,722 4.26% 100.0%
============ ============ ============
This table shows the average daily amount of deposits and average rates paid on
such deposits for the periods indicated.
Northeast Bancorp Consolidated
Maturities of Time Deposits $100,000 & Over
As of June 30, 1999
Balance
_______________
Time Deposits $100,000 & Over (in thousands):
3 months or less $ 1,579
Over 3 through 6 months 1,648
Over 6 through 12 months 6,944
Over 12 months 14,181
_______________
Total Time Deposits $100,000 & Over $ 24,352
Northeast Bancorp
Repurchase Agreements (in thousands)
For Years ended June 30,
_______________________________________________________
1999 1998 1997
_________________ _________________ _________________
Weighted Weighted Weighted
Balance Rate Balance Rate Balance Rate
________ ________ ________ ________ ________ ________
Balance at year end 11,868 4.07% 5,206 4.20% 5,099 4.25%
Average outstanding
during year 8,202 4.15% 4,917 4.19% 4,566 4.38%
Maximum Outstanding at
any month end 11,868 5,737 5,214
These borrowings, which were scheduled to mature within 180 days, were
98
collateralized by GNMA and FHLMC securities with the market value of
$14,938,000 and amortized cost of $15,525,000 at June 30, 1999, 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.
Securities sold under these agreements were under the control of the company
during 1999, 1998 and 1997.
Northeast Bancorp Consolidated
Maturities and Repricing of Earning Assets & Interest-bearing Liabilities
As of June 30, 1999
(in thousands)
Term to Repricing or Maturity
90 91-180 181-365 1-5 Over 5 % of
Days Days Days Years Years Total Total
________ ________ _________ _______ ________ ________ _______
Interest Earning
Assets:
Investment
securities $ 1,727 $ 0 $ 0 $ 344 $ 15,983 $ 18,054 5.18%
FHLB stock 0 0 0 0 5,680 5,680 1.63%
Short-term
investments (1) 7,441 0 0 0 0 7,441 2.13%
Mortgage Loans:
Residential
mortgages:
Fixed rate loans 41 2 239 1,815 105,926 108,023 30.97%
Variable loans 15,964 12,153 18,300 27,701 103 74,221 21.28%
Commercial real
estate 14,594 1,311 3,099 32,622 3,812 55,438 15.89%
Construction 685 475 526 0 0 1,686 0.48%
Other Loans:
Commercial 12,314 54 434 16,627 5,218 34,647 9.93%
Consumer and
installment 1,687 134 317 17,649 23,856 43,643 12.51%
________ ________ _________ _______ ________ ________ _______
Total loans 45,285 14,129 22,915 96,414 138,915 317,658 91.06%
________ ________ _________ _______ ________ ________ _______
Total interest-
earning assets $ 54,453 $ 14,129 $ 22,915 $96,758 $160,578 $348,833 100.00%
======== ======== ========= ======= ======== ======== =======
Interest-bearing
liabilities:
Customer deposits:
NOW Accounts 31,203 0 0 0 0 31,203 9.82%
Money market
accounts 7,156 0 0 0 0 7,156 2.25%
Regular savings 22,000 0 0 0 0 22,000 6.92%
Certificates of
deposit 31,112 21,557 45,779 42,627 38 141,113 44.39%
99
________ ________ _________ _______ ________ ________ _______
Total Customer
deposits 91,471 21,557 45,779 42,627 38 201,472 63.38%
________ ________ _________ _______ ________ ________ _______
Borrowings:
Repurchase
Agreements 11,868 0 0 0 0 11,868 3.73%
Other Borrowings 25,076 2,077 15,153 19,264 43,000 104,570 32.89%
Total borrowings 36,944 2,077 15,153 19,264 43,000 116,438 36.62%
Total interest-
bearing
liabilities $128,415 $ 23,634 $ 60,932 $61,891 $ 43,038 $317,910 100.00%
________ ________ _________ _______ ________ ________ _______
Interest
sensitivity gap (73,962) (9,505) (38,017) 34,867 117,540 30,923
======== ======== ========= ======= ======== ========
Cumulative gap (73,962) (83,467) (121,484) (86,617) 30,923 30,923
======== ======== ========= ======== ======= ========
Cumulative gap
ratio 42.40% 45.11% 42.96% 68.49% 109.73% 109.73%
======== ======== ========= ======= ======== ========
Cumulative gap as
a percentage of
total assets -20.30% -22.91% -33.34% -23.77% 8.49% 8.49%
======== ======== ========= ======= ======== ========
(1) Includes FHLB overnight deposits and interest earning deposits and loans
held for sale.
This table summarizes the anticipated maturities and repricing of the Company's
earning assets and interest-bearing liabilities at June 30, 1999.
The Company's internal asset/liability analysis considers regular savings, NOW
and money market accounts core deposits. Due to this consideration, the
Company's internal asset/liability model has these core deposits designated in
a five year or greater maturity category and not one year or less as the above
schedule shows. Because of this difference, the Company does not consider its
position to be as negative as presented in the schedule above.
Northeast Bancorp Consolidated
Quarterly Date
As of June 30, 1999
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1998 1998 1999 1999
____________ ____________ ____________ ____________
Interest Income
100
Interest on loans $ 6,309,260 $ 6,179,727 $ 6,140,300 $ 6,549,300
Interest & dividends
on investments &
available for sale
securities 405,896 347,989 468,978 455,343
____________ ____________ ____________ ____________
Total Interest and
Dividend Income 6,715,156 6,527,716 6,609,278 7,004,643
____________ ____________ ____________ ____________
Interest Expense
Interest on Deposits 2,129,744 2,157,908 2,143,909 2,248,736
Interest on Repurchase
Agreements 52,744 86,531 95,483 104,798
Interest on Borrowings 1,437,078 1,379,940 1,340,474 1,372,897
____________ ____________ ____________ ____________
Total Interest Expense 3,619,566 3,624,379 3,579,866 3,726,431
____________ ____________ ____________ ____________
Net Interest Income 3,095,590 2,903,337 3,029,412 3,278,212
Provision for Loan Losses 204,931 164,491 120,007 120,588
____________ ____________ ____________ ____________
Net Interest Income
after Provision for
Loan Losses 2,890,659 2,738,846 2,909,405 3,157,624
Securities Transactions 16,403 52,819 11,035 14,608
Other Operating Income 490,118 788,651 722,173 620,545
Other Operating Expense 2,402,657 2,485,079 2,488,839 3,193,268
____________ ____________ ____________ ____________
Income Before Income
Taxes 994,523 1,095,237 1,153,774 599,509
Income Tax Expense 358,486 394,669 410,268 269,168
____________ ____________ ____________ ____________
Net Income $ 636,037 $ 700,568 $ 743,506 $ 330,341
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.24 $ 0.26 $ 0.27 $ 0.12
Diluted $ 0.23 $ 0.25 $ 0.27 $ 0.12
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
1997 1997 1998 1998
____________ ____________ ____________ ____________
Interest Income
Interest on loans $ 5,172,282 $ 5,256,343 $ 5,323,547 $ 6,236,692
Interest & dividends
on investments &
available for sale
securities 705,194 636,036 545,427 407,490
____________ ____________ ____________ ____________
101
Total Interest and
Dividend 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
The decrease in net income and the increase in other operating expense for the
quarter ending June 30, 1999 is primarily due to the writedown of equity
securities and the write-off of goodwill, receivables and fixed assets due to
the Company's decision to dissolve 1st New England Benefits. Refer to
Management's Discussion and Analysis for further discussion.
The decrease in net income for the quarter ending December 31,1997 was
primarily due to the one-time costs of approximately $435,000 associated with
the merger of Cushnoc Bank.
Item 9. Changes in and Disagreements with Accountants on
________________________________________________
Accounting and Financial Disclosure.
____________________________________
Not applicable.
PART III
102
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 1999 proxy statement of the
Company to be furnished to shareholders in connection with the
Company's Annual Meeting to be held on November 09, 1999 (the"1999
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 1999 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 1999 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 1999 Proxy
is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
________________________________________________________________
(a) List of Financial Statements Filed as Part of This Report
_________________________________________________________
The following financial statements are submitted herewith in
response to Part II Item 8:
Consolidated Statements of Financial Condition as of June 30,
1999 and 1998
Consolidated Statements of Income for the years ended June 30,
1999, 1998 and 1997
103
Consolidated Statements of Changes in Stockholders' Equity for
the years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended June
30, 1999, 1998 and 1997
(b) Reports on Form 8-K
___________________
Not applicable.
(c) Exhibits
________
The exhibits listed below are filed herewith or are incorporated
herein by reference to other filings.
2.1 Agreement for the Purchase and Sale of Assets and Assumption of
Liabilities dated as of May 4, 1994 between Bethel Savings Bank
and Key Bank of Maine, incorporated by reference to Exhibit 2.1 to
Northeast Bancorp's Current Report on Form 8-K dated May 4, 1994
2.2 Agreement for the Purchase and Sale of Assets and Assumption of
Liabilities dated as of May 4, 1994 between Brunswick Federal
Savings Bank and Key Bank of Maine, incorporated by reference to
Exhibit 2.2 to Northeast Bancorp's Current Report on Form 8-K
dated May 4, 1994
2.3 Agreement and Plan of Merger dated as of May 9, 1997 by and among
Northeast Bancorp, Northeast Bank, FSB and Cushnoc Bank and Trust
Company, incorporated by reference to Exhibit 2 to Northeast
Bancorp's Registration Statement on Form S-4 (No. 333-31797)
filed with the Securities and Exchange Commission
3.1 Conformed Articles of Incorporation of Northeast Bancorp,
incorporated by reference to Exhibit 3.1 to Northeast Bancorp's
Registration Statement on Form S-4 (No.333-31797) filed with the
Securities and Exchange Commission
3.2 Bylaws of Northeast Bancorp, incorporated by reference to Exhibit
3.2 to amendment No.1 to Northeast Bancorp's Registration
Statement on Form S-4(No.333-31797) filed with the Securities and
Exchange Commission
10.1* 1987 Stock Option Plan of Northeast Bancorp (formerly known as
Bethel Bancorp), incorporated by reference to Bethel Bancorp's
Registration Statement on Form S-1 (No. 33-12815), filed with the
Securities and Exchange Commission.
10.2* 1989 Stock Option Plan of Northeast Bancorp (formerly known as
Bethel Bancorp) is incorporated by reference to Exhibit 10.6 to
Bethel Bancorp's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994
10.3* 1992 Stock Option Plan of Northeast Bancorp (formerly known as
Bethel Bancorp), incorporated by reference to Exhibit 10.7 to
Bethel Bancorp's Annual Report on Form 10-K for the year ended
104
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 The Consent of Baker Newman & Noyes, Limited Liability Company, is
submitted herewith as Exhibit 23
27 A Financial Data Schedule is submitted herewith as Exhibit 27
* Management or compensation plan or arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTHEAST BANCORP
Date: September 17, 1999 By:/s/ James D. Delamater
_____________________________
James D. Delamater, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
_________________________ ____________________ ___________________
/s/ John B. Bouchard Director September 17, 1999
- -------------------------
John B. Bouchard
/s/ A. William Cannan Director, September 17, 1999
- ------------------------- Executive Vice President
A. William Cannan
/s/ James D. Delamater Director, September 17, 1999
- ------------------------- President and Chief
James D. Delamater Executive Officer
(Principal
Executive Officer)
105
/s/ Ronald J. Goguen Director September 17, 1999
- -------------------------
Ronald J. Goguen
/s/ Judith W. Hayes Director September 17, 1999
- ------------------------- Vice President
Judith W. Hayes
/s/ Philip C. Jackson Director September 17, 1999
- -------------------------
Philip C. Jackson
/s/ Ronald C. Kendall Director September 17, 1999
- -------------------------
Ronald C. Kendall
/s/ John Rosmarin Director September 17, 1999
- -------------------------
John Rosmarin
/s/ John Schiavi Director September 17, 1999
- -------------------------
John Schiavi
/s/ John W. Trinward, DMD Chairman of the September 17, 1999
- ------------------------- Board
John W. Trinward, DMD
/s/ Stephen W. Wight Director September 17, 1999
- -------------------------
Stephen W. Wight
/s/ Dennis A. Wilson Director September 17, 1999
- -------------------------
Dennis A. Wilson
/s/ Richard E. Wyman, Jr. Chief Financial September 17, 1999
- ------------------------- Officer (Principal
Richard E. Wyman, Jr. Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
106
2.1 Agreement for the Purchase and Sale of Assets and Assumption of
Liabilities dated as of May 4, 1994 between Bethel Savings Bank and
Key Bank of Maine, incorporated by reference to Exhibit 2.1 to Bethel
Bancorp's Current Report on Form 8-K dated May 4, 1994
2.2 Agreement for the Purchase and Sale of Assets and Assumption of
Liabilities dated as of May 4, 1994 between Brunswick Federal Savings
Bank and Key Bank of Maine, incorporated by reference to Exhibit 2.2
to Bethel Bancorp's Current Report on Form 8-K dated May 4, 1994
2.3 Agreement and Plan of Merger dated as of May 9, 1997 by and among
Northeast Bancorp, Northeast Bank, FSB and Cushnoc and Trust Company,
incorporated by reference to Exhibit 2 to Northeast Bancorp's
Registration Statement on Form S-4 (No. 333-31797) filed with the
Securities and Exchange Commission
3.1 Conformed Articles of Incorporation of Northeast Bancorp,
incorporated by reference to Exhibit 3.1 to Northeast Bancorp's
Registration Statement on Form S-4 (333-31797) filed with the
Securities and Exchange Commission
3.2 Bylaws of Northeast Bancorp, incorporated by reference to Exhibit
3.2 to amendment No.1 to Northeast Bancorp's Registration
Statement on Form S-4(No.333-31797) filed with the Securities and
Exchange Commission
10.1* 1987 Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp), incorporated by reference to Bethel Bancorp's Registration
Statement on Form S-1 (No. 33-12815), filed with the Securities and
Exchange Commission.
10.2* 1989 Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp) is incorporated by reference to Exhibit 10.6 to Bethel
Bancorp's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994
10.3* 1992 Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp), incorporated by reference to Exhibit 10.7 to Bethel
Bancorp's Annual Report on Form 10-K for the year ended June 30,
1992
11 Statement regarding computation of per share earnings is submitted
herewith as Exhibit 11
21 A list of subsidiaries of Northeast Bancorp is filed herewith
as Exhibit 21
23 The Consent of Baker Newman & Noyes, Limited Liability Company, is
submitted herewith as Exhibit 23
27 A Financial Data Schedule is submitted herewith as Exhibit 27
* Management or compensation or plan arrangement required to be filed
as an Exhibit pursuant to Item 14 of Form 10-K