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, 1997
[ ] 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 (0-16123)
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:
<PAGE> 2
Common Stock, $1.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of September 19, 1997, was $14,345,253. 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.
As of September 19, 1997, 1,292,132 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
Document Part
-------- ----
Proxy Statement for the III
1997 Annual Meeting of
Shareholders
PART I
Item 1. Business
_________________
(a) General Development of Business
___________________________________
The Registrant, Northeast Bancorp (the "Company"), is a Maine Corporation
chartered in April 1987 for the purpose of becoming a savings and loan
holding company. The Office of Thrift Supervision ("OTS") is the Company's
primary regulator. The Company has one wholly-owned banking subsidiary,
Northeast Bank, FSB (the "Bank"), which has branches located in Auburn,
Bethel, Harrison, South Paris, Buckfield, Mechanic Falls, Brunswick,
Richmond and Lisbon Falls, Maine.
<PAGE> 3
In May of 1992, the Company entered into a Stock Purchase Agreement with
Square Lake Holding Corporation ("Square Lake") and, on February 9, 1994,
following receipt of regulatory and shareholder approval, the Company issued
71,428 shares of a newly designated Series B convertible preferred stock to
Square Lake at an aggregate price of approximately $1 million, or $14.00 per
share. As part of the transaction, the Company also issued Square Lake a
warrant with a term of seven years to purchase 116,882 shares of the
Company's common stock at a price of $14.00 per share. As a result of the
exercise of certain of such warrants and the application of anti-dilution
provisions pursuant to which such warrants were issued, 108,764 shares
remain subject to such warrants at a purchase price of $7.00 per share.
The Series B Preferred Stock is convertible into shares of the Company's
common stock on a two-for-one basis and carries a dividend rate equal to 2%
below the prime rate of The First National Bank of Boston, not to be less
than 7%. The rights and preferences of the Series B Preferred Stock issued
pursuant to this transaction are similar to, and on a parity with, the
Company's Series A Preferred Stock.
In fiscal year 1993, the Company moved its headquarters from Bethel, Maine
to Portland, Maine. The Company also acquired a controlling interest in ASI
Data Services, Inc. ("ASI"), an existing company which provided sales and
service of computer related hardware and software, as well as a full line of
data processing support systems. On July 1, 1996, the operations of ASI,
which consists primarily of providing data processing support to the Bank
and the Company, were transferred to the Bank.
During fiscal 1995 the Company acquired four branches from Key Bank of
Maine, located in Buckfield, Mechanic Falls, Richmond and Lisbon Falls,
Maine. The total deposits and repurchase agreements acquired from the four
branches were approximately $27,749,000. The premium paid to Key Bank of
Maine for these deposits was $1,590,228. The cost of the real estate,
buildings and equipment purchased from Key Bank of Maine was $498,500.
On July 1, 1996 the Company's then two wholly-owned banking subsidiaries,
Bethel Savings Bank, F.S.B. ("Bethel"), a federally - chartered savings bank
with its principal place of business in Bethel, Maine and Brunswick Federal
Savings, F.A. ("Brunswick"), a federally - chartered savings association
with its principal place of business in Brunswick, Maine merged following
receipt of regulatory approval. The merged banking subsidiary was renamed
Northeast Bank, FSB. In 1996, the Company amended its Articles of
Incorporation to change its name from Bethel Bancorp to Northeast Bancorp
and relocated its headquarters from Portland, Maine to 158 Court Street,
Auburn, Maine.
In Fiscal 1997, the Company relocated its corporate headquarters and opened
a new retail banking facility at 232 Center Street, Auburn, Maine. During
fiscal 1997, there were no bankruptcy, receivership or similar proceedings
with respect to the Company or the Bank.
On May 9, 1997 the Company entered into a definitive agreement to merge the
Bank with Cushnoc Bank and Trust Company ("Cushnoc") of Augusta, Maine. The
agreement has been approved by the Company's and Cushnoc's Board of
Directors and is subject to approval by Cushnoc's shareholders at a special
meeting to be held October 14, 1997. On August 29, 1997, the Company
received approval from OTS, subject to certain conditions, to merge the Bank
and Cushnoc. At March 31, 1997, Cushnoc had approximately $21,000,000 in
total assets and $2,200,000 in stockholder's equity. Under the terms of the
<PAGE> 4
agreement, the Company will issue 2.089 shares of common stock for each
share of Cushnoc, which has 90,000 common shares outstanding. The
acquisition will be accounted for under the pooling of interest method. The
merger of Cushnoc and the Bank is expected to occur during the fourth
quarter of Calendar 1997.
(b) Financial Information About Industry Segments
__________________________________________________
Not applicable.
(c) Narrative Description of Business
______________________________________
General
_______
The Company is a unitary savings and loan holding company whose primary
asset is its subsidiary, the Bank.
The Bank (which was formerly known as Bethel Savings Bank, F.S.B.), is a
federally-chartered stock savings bank which was organized in 1872 as a Maine-
chartered mutual savings bank and received its federal charter in 1984 and is
the successor by merger to Brunswick Federal Savings, F.A., a federally-
chartered savings association formed in 1988.
In connection with its conversion to a federal stock savings bank in 1984,
the Bank retained its then-authorized powers as a Maine-chartered mutual
savings bank. Under applicable federal regulations, the Bank may exercise any
authority it was allowed to exercise as a mutual savings bank under state law
and regulation at the time of its conversion to a federal savings bank. In
exercising such "grandfathered" powers, the Bank may continue to comply with
applicable state laws and regulations in effect at the time of its conversion
to federal charter except as otherwise determined by the OTS. The Bank,
however, may not use its grandfathered powers to engage in activities to a
greater degree than would be allowed under the most liberal construction of
either state or federal law or regulations.
Historically, Maine-chartered savings banks have had certain lending,
investment and other powers only recently authorized for federal institutions,
including commercial lending authority and the ability to offer personal
checking and negotiable order of withdrawal (NOW) accounts. The Bank also has
broader securities investment authority than other federal thrift institutions
(i.e. savings banks and savings and loan associations) as a result of its
retention of state powers.
The Bank's primary business has historically consisted of attracting savings
deposits from the general public and applying these funds primarily to the
origination and retention of first mortgage loans on residential real estate.
Over the past several years, the Bank has concentrated its lending efforts
on the origination of loans that are shorter-term or interest rate sensitive.
Of the Bank's loan portfolio at June 30, 1997, 85% was invested in real estate
loans (including residential, construction and commercial mortgage loans), 8%
in commercial loans and 7% in consumer loans.
The Bank's deposits are insured by the Federal Deposit Insurance Corporation
<PAGE> 5
(the "FDIC"), primarily through the Bank Insurance Fund. Deposits at the
Brunswick branch are insured through the Savings Association Insurance Fund and
represent 33% of the Bank's total deposits at June 30, 1997. The Bank is a
member of the Federal Home Loan Bank of Boston (the "FHLB").
At June 30, 1997, the legal lending limit of the Bank was approximately
$2,800,000. When, on occasion, customers' credit needs exceed the Bank's
lending limits, the Bank may seek participations of such loans with other
banks.
Market Area and Competition
___________________________
The Bank is headquartered in Auburn, Maine with full service branches in
Bethel, Harrison, South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond
and Lisbon Falls, Maine. The Banks market area is characterized by a
diversified economy and a strong emphasis on the tourist industry.
The banking business in the Bank's market areas has become increasingly
competitive over the past several years. The Bank's major competitors in
attracting deposits and lending funds consist principally of other Maine-based
banks, regional and money center banks, and nonbank financial institutions.
Many of the Banks' competitors are larger in size and possess greater financial
resources.
The principal factors in competing for deposits are convenient office
locations, flexible hours, interest rates and services, while those relating to
loans are interest rates, the range of lending services offered and lending
fees. Additionally, the Bank believes that the local character of its
business and its "community bank" management philosophy will improve its
ability to compete successfully in its market areas.
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 stabilized with moderate growth.
Subsidiaries
____________
The Company acquired a wholly-owned subsidiary, ASI Data Services, Inc.
("ASI")through two stock purchases during 1993-1994 for an aggregate purchase
price of $465,840. ASI initially provided data processing services to the
Company and its subsidiaries. The Company's board of directors voted to
transfer the operations of ASI to the Bank as of July 1, 1996. ASI continues
to exist as a separate legal entity, but is now inactive.
The Bank 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. While the Bank does not actively pursue such projects, several
projects of varying sizes have been undertaken in the past few years. 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
<PAGE> 6
June 30, 1997, investment in and loans to its subsidiary constituted 0.4% of
the Company's total assets. The service corporation also supports the Bank's
non-banking financial services through its relationship with Commonwealth
Financial Services, Inc., ("Commonwealth") a fully licensed New York securities
firm. The service corporation receives rental fee income, from Commonwealth,
derived from the sales activity of local in-house security sales people. The
service corporation has not invested in any assets in its business relationship
with Commonwealth.
In 1994, Northeast Financial Services Corporation invested $375,000 of
capital and became the majority owner of First New England Benefits, Inc.. In
fiscal 1997, Northeast Financial Services purchased the remaining 37.5% of
outstanding shares of First New England Benefits for $213,750. First New
England Benefits has been merged into and will continue to operate as part of
the Bank's trust division. First New England was an employee benefits
consulting firm which specialized in the design and administration of qualified
retirement and 401(k) plans.
Employees
_________
As of June 30, 1997, the Company and its consolidated subsidiaries had 112
full-time and 21 part-time employees. The Company's employees are not
represented by any collective bargaining unit. Relations between the Company
and its employees are considered good.
Regulation
__________
General
_______
The Company, as a savings and loan holding company, is subject to
regulation, examination and supervision by the OTS under the Home Owners Loan
Act. The Company is also deemed a Maine financial institution holding company.
As such, the Company is registered with the Maine Superintendent of Banking
(the "Superintendent") and will be subject to periodic examinations and
reporting requirements of the Superintendent.
Recent Developments in Savings Institution Regulation
_____________________________________________________
Federal Deposit Insurance Corporation Improvement Act of 1991
_____________________________________________________________
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which was enacted on December 19, 1991, contains various provisions
intended to recapitalize the Bank Insurance Fund ("BIF") and also effects a
number of regulatory reforms that will impact all insured depository
institutions, regardless of the insurance fund in which they participate. Due
to the FDICIA Act, SAIF insurance premiums were increased, commencing January
1,1991, to 0.23% of the assessment base. FIDICIA grants, among other things,
the OTS broad regulatory authority to take prompt corrective action against
insured institutions that do not meet capital requirements, including placing
undercapitalized institutions into conservatorship or receivership or that are
otherwise operating in an unsafe and unsound manner. Since the Bank exceeded
all capital requirements at June 30, 1997, these provisions did not have any
<PAGE> 7
significant impact on its operations. On September 5, 1995, the FDIC announced
that the BIF was fully recapitalized at the end of May 1995. As a result, the
premium rates for the healthiest banks (1A category) were decrease from 0.23%
to 0.04% of the assessment base. During fiscal 1996, premium rates for the
healthiest banks (1A category) were decreased from 0.04% to an annual fee of
$2,000.
The Deposit Insurance Funds Act of 1996, which was enacted in September of
1996, amended the FDIC BIF-SAIF deposit insurance assessment on institution
deposits. 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. Commencing in 1997 and continuing through 1999,
annual premium rates for the healthiest banks (1A category) are 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 Bank is 1A category bank. All of the Bank's
deposits, except for the Brunswick's branch deposits, which represented 33% of
the Bank's total deposits at June 30, 1997, are BIF insured.
Savings and Loan Holding Company Regulation
___________________________________________
General.
________
Under the Home Owners Loan Act (the "HOLA"), as amended by the Financial
Institution Return Recovery and Enforcement Act of 1989, the Director of the
OTS is the operating head of the Federal Savings and Loan Insurance Corporation
(the "FSLIC"), with jurisdiction over savings and loan holding companies.
Thus, the Company, as a savings and loan holding company within the meaning of
the HOLA, is now subject to regulation, supervision and examination by, and the
reporting requirements of, the Director of the OTS.
The HOLA prohibits a savings and loan holding company such as the Company,
directly or indirectly, or through one or more subsidiaries, from (I)
acquiring control of, or acquiring by merger with or purchase of the assets of,
another savings institution or a savings and loan holding company without the
prior written approval of the Director of the OTS; (ii) acquiring more than 5%
of the issued and outstanding shares of voting stock of another savings
institution or savings and loan holding company, except as part of an
acquisition of control approved by the Director of the OTS, as part of an
acquisition of stock issued by an undercapitalized savings institution or its
holding company approved by the Director of the OTS or except under certain
specified conditions (such as an acquisition of stock in a fiduciary capacity)
which negate a finding of control; or (iii) acquiring or retaining control of a
financial institution that does not have SAIF or BIF insurance of accounts.
The HOLA also allows the Director of the OTS to approve transactions resulting
in the creation of multiple savings and loan holding companies controlling
savings institutions located in more than one state in both supervisory and
nonsupervisory transactions, subject to the requirement that, in nonsupervisory
transactions, the law of the state in which the savings institution to be
acquired is located must specifically authorize the proposed acquisition, by
language to that effect and not merely by implication. As a result, the
Company may, with the prior approval of the Director of the OTS, acquire
control of a savings institution located in a state other than Maine if the
<PAGE> 8
acquisition is expressly permitted by the laws of the state in which the
savings institution to be acquired is located. No director, officer, or
controlling shareholder of the Company may, except with the prior approval of
the Director of the OTS, acquire control of any savings institution which is
not a subsidiary of the Company. Restrictions relating to service as an
officer or director of an unaffiliated holding company or savings institution
are applicable to the directors and officers of the Company and its savings
institution subsidiaries under the Depository Institution Management Interlocks
Act.
Pursuant to the HOLA, transactions engaged in by a savings association or
one of its subsidiaries with affiliates of the savings association generally
are subject to the affiliate transaction restrictions contained in Sections 23A
and 23B of the Federal Reserve Act in the same manner and to the same extent as
such restrictions now apply to transactions engaged in by a member bank or one
of its subsidiaries with affiliates of the member bank. Section 23A of the
Federal Reserve Act imposes both quantitative and qualitative restrictions on
transactions engaged in by a member bank or one of its subsidiaries with an
affiliate, while Section 23B of the Federal Reserve Act requires, among other
things, that all transactions with affiliates be on terms substantially the
same, and at least as favorable to the member bank or its subsidiary, as the
terms that would apply to, or would be offered in, a comparable transaction
with an unaffiliated party. Exemptions from, and waivers, of, the provisions
of Sections 23A and 23B of the Federal Reserve Act may be granted only by the
Federal Reserve Board, but the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRRE Act"), authorizes the Director of the OTS
to impose additional restrictions on transactions with affiliates if the
Director determines such restrictions are necessary to ensure the safety and
soundness of any savings institution.
Restrictions on Activities of Savings and Loan Holding Companies
_________________________________________________________________________
The Company is a savings and loan holding company by virtue of its control
of the Bank. Under applicable federal regulations, savings and loan holding
companies and their noninsured subsidiaries are prohibited from engaging in
any activities other than (I) furnishing or providing management services for
the savings association; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing or liquidating assets owned or acquired from
the savings association; (iv) holding or managing properties used or occupied
by the savings association; (v) acting as trustee under deeds of trust; (vi)
engaging in any other activity in which savings and loan holding companies were
authorized by regulation to engage as of March 5, 1987; and (vii) engaging in
any activity which the Board of Governors of the Federal Reserve System has
permitted for bank holding companies under its regulations (unless the Director
of the OTS, by regulation, prohibits or limits any such activity for savings
and loan holding companies). The activities in which savings and loan holding
companies were authorized by regulation to engage as of March 5, 1987 consist
of activities similar to those permitted for service corporations of federally
chartered savings institutions and include, among other things, various types
of lending activities, furnishing or performing clerical, accounting and
internal audit services primarily for affiliates, certain real estate
development and leasing activities,underwriting credit life or credit health
and accident insurance in connection with extension of credit by savings
institutions or their affiliates and the performance of a range of other
services primarily for their affiliates, their savings association subsidiaries
and service corporation subsidiaries thereof. The activities which the Board
<PAGE> 9
of Governors of the Federal Reserve System by regulation has permitted for bank
holding companies generally consist of those activities that the Board of
Governors of the Federal Reserve System has found to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto,
and include, among other things, various lending activities, certain real and
personal property leasing activities, certain securities brokerage activities,
acting as an investment or financial advisor subject to certain conditions, and
providing management consulting to depository institutions, subject to certain
conditions. OTS regulations do not limit the extent to which savings and loan
holding companies and their nonsavings institution subsidiaries may engage in
activities permitted for bank holding companies pursuant to the regulations
adopted by the Governors of the Federal Reserve System, although prior OTS
approval is required to commence such activity whether de novo or by an
acquisition (in whole or part) of a going concern.
The Company could be prohibited from engaging in any activity (including
those otherwise permitted under the HOLA) not allowed for bank holding
companies if the Bank fails to constitute a qualified thrift lender. See
"Regulation -- Savings Institution Regulation -- Qualified Thrift Lender
Requirement."
Savings Institution Regulation
______________________________
General.
________
As a federally chartered institution, the Bank is subject to supervision
and regulation by the Director of the OTS, the FHLBB's successor under the
FIRRE Act. As a result of its conversion to a federal mutual savings bank
in 1984, the Bank retains the then-authorized powers of a Maine-chartered
mutual savings bank. Under OTS regulations, the Bank is required to obtain
audits by independent accountants and to be examined periodically by the
Director of the OTS. These examinations must be conducted no less frequently
than every twelve (12) months. The Bank is subject to assessments by the OTS
and the FDIC to cover the costs of such examinations. The OTS may revalue
assets of the Bank, based upon appraisals, and require the establishment of
specific reserves in amounts equal to the difference between such revaluation
and the book value of the assets. The Director of the OTS is also authorized
to promulgate regulations to ensure the safe and sound operations of savings
institutions and may impose various requirements and restrictions on the
activities of savings institutions. The FIRRE Act requires that all
regulations and policies of the Director of the OTS for the safe and sound
operations of savings institutions be no less stringent than those established
by the Office of the Comptroller of the Currency (the "OCC") for national
banks. The Bank is also subject to regulation and supervision by the FDIC, in
its capacity as insurer of deposits in the Bank, to ensure the safety and
soundness of the BIF and the SAIF. See "Regulation -- Savings Institution
Regulation -- Insurance of Deposits."
Capital Requirements.
_____________________
As required by amendments of the HOLA enacted as part of the FIRRE Act, the
Director of the OTS has adopted capital standards which require savings
institutions to maintain (I) "core capital" in an amount of not less than 3% of
total assets, (ii) "tangible capital" in an amount not less than 1.5% of total
assets and (iii) a level of risk-based capital equal to 8.0% of risk-weighted
assets. The capital standards established for savings institutions must
<PAGE> 10
generally be no less stringent than those applicable to national banks and must
use all relevant substantive definitions used in the capital standards for
national banks. Under the OTS regulations, the term "core capital" includes
common stockholders equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries, less intangible assets, other than certain amounts of supervisory
goodwill, and up to 90% of the fair market value of readily marketable
purchased mortgage servicing rights ("PMSRs") (subject to certain conditions).
The term "tangible capital," for purposes of the HOLA, is defined as core
capital minus intangible assets (as defined by the OCC for national banks),
provided, however, that savings institutions may include up to 90% of the
fair market value of readily marketable PMSRs as tangible capital (subject to
certain conditions, including any limitations imposed by the FDIC on the
maximum percentage of the tangible capital requirement that may be satisfied
with such servicing rights). In determining compliance with capital standards,
a savings institution must deduct from capital its entire investment in and
loans to any subsidiary engaged as principal in activities not permissible for
a national bank, other than subsidiaries (I) engaged in such nonpermissible
activities solely as agent for their customers; (ii) engaged in mortgage
banking activities, or (iii) that are themselves savings institutions, or
companies the only investment of which is another savings institution, acquired
prior to May 1, 1989. With respect to investments in and loans to subsidiaries
engaged as of April 12, 1989 in activities not permitted for national banks,
the required deduction from capital was to be phased-in over a period ending
June 30, 1995.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (I) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of
each such item by a credit conversion factor ranging from 0% to 100% (depending
upon the nature of the asset), (ii) the credit equivalent amount of each
off-balance sheet asset and the book value of each on-balance sheet asset must
be multiplied by a risk factor ranging from 0% to 100% (again depending upon
the nature of the asset) and (iii) the resulting amounts are added together and
constitute total risk-weighted assets. Total capital, for purposes of the
risk-based capital requirement, equals the sum of core capital plus
supplementary capital (which, as defined, includes, among other items,
perpetual preferred stock, not counted as core capital, limited life preferred
stock, subordinated debt, and general loan and lease loss allowances up to
1.25% of risk-weighted assets), less certain deductions. The amount of
supplementary capital that may be counted towards satisfaction of the total
capital requirement may not exceed 100% of core capital, and OTS regulations
require the maintenance of a minimum ratio of core capital to total risk-
weighted assets of at least 4.0%.
In August 1993, the OTS issued a final ruling adding an interest rate risk
component for purposes of risk-based capital requirements. The interest rate
risk component now takes into account, for risk-based capital purposes, the
effect that a change in interest rates would have on the value of a savings
institution's portfolio. The final rule and amendments became effective July
1, 1994.
Any insured depository institution which falls below the 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
<PAGE> 11
actions are consistent with the plan. Savings institutions that are
significantly undercapitalized or critically undercapitalized are subject to
additional restrictions and may be required to (I) raise additional capital;
(ii) limit asset growth; (iii) limit the amount of interest paid on deposits to
the prevailing rate of interest in the region where the institution is located;
(iv) divest or liquidate any subsidiary which the OTS determines poses a
significant risk; (v) order a new election for members of the board of
directors; (vi) require the dismissal of a director or senior executive
officer, or (vii) take such other action as the OTS determines is appropriate.
Under FDICIA, the OTS is required to appoint a conservator or receiver for
a critically undercapitalized institution no later than 9 months after the
institution becomes critically undercapitalized, subject to a limited exception
for institutions which are in compliance with an approved capital plan and
which the OTS and the FDIC certify are not likely to fail.
FDICIA prohibits any depository institution that is not well capitalized
from accepting deposits through a deposit broker. Previously, only troubled
institutions were prohibited from accepting brokered deposits. The FDIC may
allow adequately capitalized institutions to accept brokered deposits for
successive periods of up to 90 days. FDICIA also prohibits undercapitalized
institutions from offering rates of interest on insured deposits that
significantly exceed the prevailing rate in their normal market area or the
area in which the deposits would otherwise be accepted.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. Individual minimum capital requirements may
be appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns.
Qualified Thrift Lender Requirement.
____________________________________
In order for the Bank to exercise the powers granted to federally chartered
savings institutions, and maintain full access to FHLB advances, it must
constitute a "qualified thrift lender" ("QTL"). Pursuant to recent amendment
effected by FDICIA, a savings institution will constitute a QTL if the
institution's qualified thrift investments continue to equal or exceed 65% of
the savings association's portfolio assets on a monthly average basis in 9 out
of every 12 months. As amended by FDICIA, qualified thrift investments
generally consist of (I) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile
home loans, home equity loans and mortgage-backed securities), (ii) certain
obligations of the FSLIC, the FDIC, the FSLIC Resolution fund and the RTC (for
limited periods of time), and (iii) shares of stock issued by any Federal Home
Loan Bank, the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association. In addition, the following assets may be categorized as
qualified thrift investments in an amount not to exceed 20% in the aggregate of
portfolio assets: (I) 50% of the dollar amount of residential mortgage loans
originated and sold within 90 days of origination; (ii) investments in
securities of a service corporation that derives at least 80% of its income
from residential housing finance; (iii) 200% of loans and investments made to
acquire, develop or construct starter homes or homes in credit needy areas
(subject to certain conditions); (iv) loans for the purchase or construction of
churches, schools, nursing homes and hospitals; and (v) consumer loans (in an
amount up to 20% of portfolio assets). For purposes of the QTL test, as
<PAGE> 12
amended by FDICIA, the term "portfolio assets" means the savings institution's
total assets minus goodwill and other intangible assets, the value of property
used by the savings institution to conduct its business, and liquid assets
held by the savings institution in an amount up to 20% of its total assets.
OTS regulations provide that any savings institution that fails to meet the
new QTL test must either convert to a national bank charter or limit its future
investments and activities (including branching and payments of dividends) to
those permitted for both savings institutions and national banks. Additionally,
any such savings institution that does not convert to a bank charter will be
ineligible to receive further FHL Bank advances and, beginning three years
after the loss of QTL status, will be required to repay all outstanding FHL
Bank advances and dispose of or discontinue any pre-existing investments and
activities not permitted for both savings institutions and national banks.
Further, within one year of the loss of QTL status, the holding company of a
savings institution that does not convert to a bank charter must register as a
bank holding company and will be subject to all statutes applicable to bank
holding companies.
These penalties do not apply to a federal savings association, such as the
Bank, which existed as a federal savings association on August 9, 1989 but was
chartered before October 15, 1982 as a savings bank under state law.
Liquidity.
__________
Under OTS regulations, savings institutions are required to maintain an
average daily balance of liquid assets (including cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly
rated commercial paper, securities of certain mutual funds and specified United
States government, state or federal agency obligations) equal to a monthly
average of not less than a specified percentage of the average daily balance of
the savings institution's net withdrawable deposits plus short-term borrowings.
Under the HOLA, this liquidity requirement may be changed from time to time by
the Director of the OTS to any amount within the range of 4% to 10%, depending
upon economic conditions and the deposit flows of member institutions, and the
required ratio currently is 5%. OTS regulations also require each savings
institution to maintain an average daily balance of short term liquid assets at
a specified percentage (currently 1%) of the total of the average daily balance
of its net withdrawable deposits and short-term borrowings.
Loans to One Borrower Limitations.
__________________________________
The HOLA, as amended by the FIRRE Act, generally requires savings
institutions to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may not make loans to a single
borrower in excess of 15% to 25% of their unimpaired capital and unimpaired
surplus (depending upon the type of loans and the collateral therefor). The
HOLA, as amended by the FIRRE Act, provides exceptions from the generally
applicable national bank limits, under which a savings institution may make
loans to one borrower in excess of such limits under one of the following
circumstances: (I) for any purpose, in an amount not to exceed $500,000; (ii)
to develop domestic residential housing units, in an amount not to exceed the
lesser of $30 million or 30% of the savings institution's unimpaired capital
and unimpaired surplus, provided other conditions are satisfied; or (iii) to
finance the sale of real property which it owns as a result of foreclosure, in
an amount not to exceed 50% of the savings institution's unimpaired capital and
unimpaired surplus. In addition, further restrictions on a savings
<PAGE> 13
institution's loans to one borrower may be imposed by the Director of the OTS
if necessary to protect the safety and soundness of the savings institution.
The new loans to one borrower limits apply prospectively to loan commitments
issued after the date of enactment of the FIRRE Act, and legally binding loan
commitments issued prior to that date in compliance with the pre-FIRRE Act
limits may be funded even if the amount of the loan would cause the institution
to exceed the FIRRE Act limits.
Pursuant to its authority to impose more stringent requirements on savings
associations to protect safety and soundness, however, the OTS has promulgated
a rule limiting loans to one borrower to finance the sale of real property
acquired in satisfaction of debts to 15% of unimpaired capital and surplus. The
rule provides that purchase money mortgages received by a savings association
to finance the sale of such real property do not constitute "loans" (provided
that the savings association is not placed in a more detrimental position
holding the note than holding the real estate) and, therefore, are not subject
to the loan-to-one-borrower limitations.
Commercial Real Property Loans.
_______________________________
Another of the FIRRE Act amendments to the HOLA limits the aggregate amount
of commercial real estate loans that a federal savings institution may make to
an amount not in excess of 400% of the savings institution's capital (as
compared with the 40% of assets limitation in effect prior to the enactment of
the FIRRE Act). However, the new limit does not require the divestiture of
loans made prior to enactment of the FIRRE Act. The OTS has the authority
to grant exceptions to the limit if the additional amount will not pose a
significant risk to the safe or sound operation of the savings institution
involved, and is consistent with prudent operating practices.
Regulatory Restrictions on the Payment of Dividends by Savings Institutions.
____________________________________________________________________________
OTS regulations establish uniform treatment for all capital distributions by
savings associations (including dividends, stock repurchases and cash-out
mergers). Under the rules, a savings association is classified as a tier 1
institution, a tier 2 institution or a tier 3 institution, depending on its
level of regulatory capital both before and after giving effect to a proposed
capital distribution. A tier 1 institution (i.e., one that both before and
after a proposed capital distribution has net capital equal to or in excess of
its fully phased-in regulatory capital requirement) is allowed, subject to any
otherwise applicable statutory or regulatory requirements or agreements entered
into with regulators, to make capital distributions in any calendar year up to
100% of its net income to date during the capital year plus the amount that
would reduce by one-half its surplus capital ratio (i.e., the percentage by
which (x) its ratio of capital to assets exceeds (y) the ratio of its fully
phased-in capital requirement to assets) as of the beginning of the calendar
year, adjusted to reflect current earnings. No regulatory approval of the
capital distribution is required, but prior notice has to be given to the OTS.
A tier 2 institution (i.e., one that both before and after a proposed capital
distribution has net capital equal to its then-applicable minimum capital
requirement but would fail to meet its fully phased-in capital requirement
either before or after the distribution) may make only limited capital
distributions without prior regulatory approval. A tier 3 institution (i.e.,
one that either before or after a proposed capital distribution fails to meet
its then-applicable minimum capital requirement) may not make any capital
<PAGE> 14
distributions without prior OTS approval. In addition, the OTS may prohibit a
proposed capital distribution, which otherwise would be permitted by the
regulation, if the OTS determines that such a distribution would constitute an
unsafe or unsound practice. Also, an institution meeting the tier 1 criteria
which has been notified that it needs more than normal supervision will be
treated as a tier 2 or tier 3 institution, unless the OTS deems otherwise.
Activities of Subsidiaries.
___________________________
The FIRRE Act requires a savings institution seeking to establish a new
subsidiary, acquire control of an existing company (after which it would be a
subsidiary), or conduct a new activity through a subsidiary, to provide 30 days
prior notice to the FDIC and the Director of the OTS and conduct any activities
of the subsidiary in accordance with regulations and orders of the Director of
the OTS. The Director of the OTS has the power to require a savings
institution to divest any subsidiary or terminate any activity conducted by a
subsidiary that the Director of the OTS determines is a serious threat to the
financial safety, soundness or stability of such savings institution or is
otherwise inconsistent with sound banking practices.
Insurance of Deposits.
______________________
Federal deposit insurance is required for all federal savings institutions.
Federal savings institutions' deposits are insured to a maximum of $100,000 for
each insured depositor by the BIF or the SAIF. As a FDIC-insured institution,
the Bank is subject to regulation and supervision by the FDIC, to the extent
deemed necessary by the FDIC to ensure the safety and soundness of BIF and
SAIF. The FDIC is entitled to have access to reports of examination of the
Banks made by the Director of the OTS and all reports of condition filed by the
Bank with the Director of the OTS, and may require the Bank to file such
additional reports as the FDIC determines to be advisable for insurance
purposes. The FDIC may determine by regulation or order that any specific
activity poses a serious threat to BIF or SAIF and that no BIF or SAIF
member may engage in the activity directly. The FDIC is also authorized to
issue and enforce such regulations or orders as it deems necessary to prevent
actions of savings institutions that pose a serious threat to BIF or SAIF.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon finding by the FDIC that the savings institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings institution,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
Effective December 19, 1992, FDICIA requires any company that controls an
undercapitalized savings institution, in connection with the submission of a
capital restoration plan by the savings institution, to guarantee that the
institution will comply with the plan and to provide appropriate assurances of
performance. The aggregate liability of any such controlling company under such
guaranty is limited to the lesser of (I) 5% of the savings institution's assets
at the time it became undercapitalized; or (ii) the amount necessary to bring
the savings institution into capital compliance as of the time the institution
fails to comply with the terms of its capital plan.
Federal Home Loan Bank System
<PAGE> 15
_____________________________
The Federal Home Loan Bank System consists of 12 regional FHL Banks, each
subject to supervision and regulation by the Federal Housing Finance Board (the
"FHFB"), a new agency established pursuant to the FIRRE Act. The FHL Banks
provide a central credit facility for member savings institutions. The Bank,
as a member of the FHLB, is required to own shares of capital stock in that
FHL Bank in an amount at least equal to 1% of the aggregate principal amount
of their unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of their advances
(borrowings) from the FHL Bank, whichever is greater. The Bank is in
compliance with this requirement. The maximum amount which the FHLB will
advance fluctuates from time to time in accordance with changes in policies of
the FHFB and the FHLB, and the maximum amount generally is reduced by
borrowings from any other source. In addition, the amount of FHL Bank advances
that a savings institution may obtain will be restricted in the event the
institution fails to constitute a QTL. See "Regulation -- Savings Institution
Regulation -- Qualified Thrift Lender Requirement."
Federal Reserve Board
_____________________
Pursuant to the Depository Institutions Deregulation and Monetary Control
Act of 1980 (the "Deregulation Act"), Federal Reserve Board regulations require
savings institutions to maintain reserves against their net transaction
accounts (primarily NOW accounts), subject to certain exemptions. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve
Board may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of vault cash or a
non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the institution's interest-earning assets.
The Deregulation Act also gives savings institutions authority to borrow
from the appropriate Federal Reserve Bank's "discount window." Current Federal
Reserve regulations require savings institutions to exhaust all FHLB sources
before borrowing from the Federal Reserve Bank. The FDICIA places limitations
upon a Federal Reserve Bank's ability to extend advances to undercapitalized
and critically undercapitalized depository institutions. The FDICIA provides
that a Federal Reserve bank generally may not have advances outstanding to an
undercapitalized institution for more than 60 days in any 120-day period.
Maine Law
_________
Under Maine law, a Maine financial institution holding company such as the
Company may not engage in any activity other than managing or controlling
financial institutions, or other activities deemed permissible by the
Superintendent. The Superintendent has by regulation determined that, with the
prior approval of the Superintendent, a financial institution holding company
may engage in those activities deemed closely related pursuant to Section 408
of the National Housing Act, unless that activity is prohibited by the Maine
Banking Code or regulations.
Securities and Exchange Commission
__________________________________
<PAGE> 16
The Company has registered its common stock with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of
1934, as amended. As a result of such registration, the proxy and tender offer
rules, periodic reporting requirements, insider trading restrictions and
reporting requirements, as well as certain other requirements, of such Act are
applicable.
Restrictions on the Payment of Dividends
________________________________________
The Maine Business Corporation Act permits the Company to pay dividends on
its capital stock only from its unreserved and unrestricted earned surplus or
from its net profits for the current fiscal year and the next preceding fiscal
year taken as a single period.
Applicable rules further prohibit the payment of a cash dividend by the
Company if the effect thereof would cause its net worth to be reduced below
either the amount required for the liquidation account or the net worth
requirements imposed by federal laws or regulations. The Company is prohibited
from paying dividends on their capital stock if it is in default in the payment
of any assessment to the FDIC.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the current income tax rates on the amount used.
Restrictions on the Acquisition of the Company
______________________________________________
The savings and loan holding company provisions of the HOLA (the "Holding
Company Provisions") provide that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions, may acquire "control" of an insured savings
institution at any time without the prior approval of the OTS. In addition,
any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination and regulation under the Holding
Company Provisions and the regulations promulgated thereunder. "Control" in
this context means ownership, control of, or holding proxies representing more
than 25% of the voting shares of, an insured institution, the power to control
in any manner the election of a majority of the directors of such institution
or the power to exercise a controlling influence over the management or
policies of the institution.
In addition, the Change in Bank Control Act (the "Control Act") provides
that no "person," acting directly or indirectly or through or in concert with
one or more other persons, may acquire "control" of an insured institution
unless at least 60 days' prior written notice has been given to the OTS and the
OTS has not objected to the proposed acquisition. "Control" is defined for
this purpose as the power, directly or indirectly, to direct the management or
policies of an insured institution or to vote 25% or more of any class of
voting securities of an insured institution. Under both the Holding Company
Provisions and the Control Act (as well as the regulations referred to below)
the term "insured institutions" includes state and federally chartered
SAIF-insured institutions, federally chartered savings banks insured under the
<PAGE> 17
BIF and holding companies thereof.
OTS regulations establish a uniform set of regulations under both the
Control Act and the Holding Company Provisions. Under these regulations, prior
to obtaining control of an insured institution, a person (under the Control
Act) must give 60 days notice to the OTS and have received no OTS objection to
such acquisition of control, and a company (under the Holding Company
Provisions) must apply for and receive OTS approval of the acquisition.
"Control," for purposes of the regulations, means the acquisition of 25% or
more of the voting stock (or irrevocable proxies for 25% of more of the voting
stock) of the institution, control in any manner of the election of a majority
of the institution's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of eight "control factors," constitutes a rebuttable determination
of control under the new regulations. The determination of control may be
rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstance giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings.
The regulations provide that persons or companies which acquire beneficial
ownership exceeding 10% or more of any class of an insured institution's stock
after the effective date of the regulations must file with the OTS a
certification that the holder is not in control of such institution, is not
subject to a rebuttable determination of control and will take no action which
would result in a determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable.
Other Regulations
_________________
The policies of regulatory authorities, including the Federal Reserve Board,
the OTS and the FDIC, have had a significant effect on the operating results
of financial institutions in the past and are expected to do so in the future.
Policies of these agencies may be influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and fiscal policies of the United States government.
Supervision, regulation or examination of the Company and the Bank by such
regulatory agencies is not intended for the protection of the Company's
shareholders.
The United States Congress has periodically considered and adopted
legislation which has resulted and could result in further deregulation of the
Bank and other financial institutions. Such legislation could relax or
eliminate geographic restrictions on banks and bank holding companies and could
place the Company in more direct competition with other financial institutions,
including mutual funds, securities brokerage firms and investment banking
firms.
Statistical Disclosure
______________________
The additional statistical disclosure describing the business of the Company
and the Banks required by Industry Guide 3 under the Securities Exchange Act of
1934, as amended, is provided in Item 8 b.
<PAGE> 18
(d) Financial Information About Foreign and Domestic
Operations and Export Sales
_____________________________________________________
Not applicable.
Item 2. Properties
__________
The only real property which the Company owns is the real estate in Auburn,
Maine on which various operational functions are performed for the Bank. It
utilizes the premises and equipment of the Bank with no payment of any rental
fee to the Bank.
The Bank owns its branch offices in Bethel, Harrison, Buckfield,
Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine. The branch
offices in Auburn and South Paris, Maine is leased.
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
___________________________________________________
Not applicable
PART II
Item 5. Market Prices of Common Stock and Dividends Paid
------------------------------------------------
The common stock of Northeast Bancorp trades on the American Stock Exchange
under the symbol NBN. The number of shares of common stock outstanding as of
June 30, 1997 was 1,274,969. The number of stockholders of record as of
September 19, 1997 was approximately 400.
The following table sets forth the high and low sales prices of the Company's
common shares and dividends paid during each quarter for fiscal years ending
June 30, 1996 and 1997.
<TABLE>
<CAPTION>
1996-97 High Low Div. Pd
<PAGE> 19
- ----------------- --------- --------- ---------
<S> <C> <C> <C>
Jul 1 - Sep 30 13.50 12.50 .08
Oct 1 - Dec 31 14.00 13.00 .08
Jan 1 - Mar 31 14.25 13.25 .08
Apr 1 - Jun 30 14.75 13.75 .08
1995-96 High Low Div. Pd
- ----------------- --------- --------- ---------
Jul 1 - Sep 30 11.38* 10.75* .04*
Oct 1 - Dec 31 12.00* 10.75* .04*
Jan 1 - Mar 31 13.25 11.00 .08
Apr 1 - Jun 30 13.25 12.50 .08
</TABLE>
*Adjusted to reflect 100% stock dividend paid on 12/15/95
Northeast Bancorp has 45,454 shares of Series A preferred stock outstanding.
The Series A preferred stock is convertible into common stock on a two-for-one
basis and carries a dividend rate of two percent below the prime rate of the
First National Bank of Boston, but in no event to be less than 7% per annum.
There is no trading market for the Series A preferred stock.
Northeast Bancorp has 71,428 shares of Series B preferred stock outstanding.
The Series B preferred stock is convertible into common stock on a two-for-one
basis and carries a dividend rate of two percent below the prime rate of the
First National Bank of Boston, but in no event to be less than 7% per annum.
There is no trading market for the Series B preferred stock.
On July 1, 1997, the Company issued a total of 1,070 shares of its common
stock, $1.00 par value per share, to Company employees under its 1996 Employee
Stock Bonus Plan (the "Plan"). Each employee, other than executive officers
who are not eligible to participate in the Plan, received 10 shares. The Plan
is a non-voluntary, non-contributory employee bonus plan. No consideration
(other than past services of the employees) was paid for the shares. No
underwriter was involved in the issuance of the shares, and there was no
underwriting discount or commission. There was no solicitation. The shares
were not registered under the Securities Act of 1933, as amended, in reliance
on SEC Rels. No. 33-6188 and 33-6281.
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
Years Ended
June 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 20,029 $ 17,994 $ 16,923 $ 14,036 $ 14,359
Interest expense 10,500 9,128 8,053 6,479 7,155
-------- -------- -------- -------- --------
Net interest income 9,529 8,866 8,870 7,557 7,204
<PAGE> 20
Provision for loan losses 578 603 641 1,021 852
Other operating income 1 1,753 1,818 1,697 2,111 1,342
Net securities gains 259 279 419 347 108
Other operating expenses 2 8,438 8,355 7,988 7,011 5,734
Writedowns on equity and debt
securities 110 93 0 84 61
-------- -------- -------- -------- --------
Income before income taxes 2,415 1,912 2,358 1,899 2,008
Income tax expense 908 719 869 698 786
Cumulative effect of change in
accounting principle - - - 260 -
-------- -------- -------- -------- --------
Net income $ 1,507 $ 1,193 $ 1,489 $ 1,461 $ 1,222
======== ======== ======== ======== ========
Primary earnings per share 3 $ 1.03 $ 0.83 $ 1.10 $ 1.13 $ 1.07
Fully diluted earnings per
share 3 $ 0.96 $ 0.79 $ 1.02 $ 1.08 $ 1.07
Cash dividends per common
share $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32
Common dividend payout ratio 33.33% 40.51% 15.69% 14.81% 15.02%
At June 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Total assets $261,800 $222,290 $207,509 $190,600 $178,914
Total loans 206,356 169,851 170,140 158,461 150,756
Total deposits 154,411 145,195 147,120 124,306 122,497
Total borrowings 80,292 53,625 37,710 48,420 40,500
Total stockholders' equity 19,901 18,151 17,275 15,756 14,067
Return on assets
(net income/average assets) 0.63% 0.56% 0.73% 0.80% 0.72%
Return on equity
(net income/average net worth 7.96% 6.52% 9.08% 9.72% 9.01%
Average equity/average assets 7.90% 8.62% 8.02% 8.23% 7.85%
</TABLE>
1 Includes fees for services to customer and gains on sale of loans.
2 Includes salaries, employee benefits and occupancy.
3 Per share data for the years prior to 1996 have been retroactively restated
as a result of the stock split in December 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
DESCRIPTION OF OPERATIONS
- -------------------------
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company with the Office of Thrift Supervision ("OTS") as its primary regulator.
The Company has one wholly-owned banking subsidiary, Northeast Bank, FSB (the
<PAGE> 21
"Bank"), which has branches located in Auburn, Bethel, Harrison, South Paris,
Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine.
Prior to July 1, 1996, the Company conducted business as Bethel Bancorp. The
Company's board of directors voted to assume the name of Northeast Bancorp as
of July 1, 1996. At the 1996 annual meeting, the Company's shareholders
approved changing the Company's name from Bethel Bancorp to Northeast Bancorp.
On July 1, 1996, the Company's two wholly-owned banking subsidiaries, Bethel
Savings Bank, F.S.B. and Brunswick Federal Savings, F.A. merged following
receipt of regulatory approval. The merged banking subsidiary's name was
changed to Northeast Bank, FSB.
The Bank's deposits are primarily BIF-insured. Deposits at the Brunswick branch
are SAIF-insured and represent 33% of the Bank's total deposits at June 30,
1997.
The Company relocated its corporate headquarters and opened a new retail
banking facility at 232 Center Street, Auburn, Maine, in February, 1997.
FINANCIAL CONDITION
- -------------------
The overall strategy of the Company is to increase the core earnings of the
Bank by the development of strong net interest margins, non-interest fee
income, and by increasing volume through a larger market area.
The state of Maine's economy in which the Company operates, including the south
central and mid-coast region of Cumberland, Androscoggin and Sagadahoc
counties, has stabilized with moderate growth. The banking business has become
increasingly competitive over the past several years. The Bank's major
competitors for deposits and loans consist primarily of other Maine-based
banks, regional and money center banks, and non-bank financial institutions.
Many of the Bank's competitors are larger in size and, consequently, possess
greater financial resources. The principal factors in competing for deposits
are convenient office locations, flexible hours, interest rates and services,
while those relating to loans are interest rates, the range of lending services
offered and lending fees. The Bank believes that the local character of its
business and its "community bank" management philosophy will improve its
ability to compete in its market areas. The Company has enhanced its product
lines and now provides a range of financial services such as loans, deposits
and investments through its relationship with Commonwealth Financial Services,
Inc., trust services through the Bank's trust department, employee retirement
benefits through First New England Benefits ("FNEB"), a division of the Bank's
trust department, and leasing services through its relationship with LGIC
Leasing.
The Company believes that it has adequate capital, as total equity represents
7.60% of total assets and that its capital position 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. The Company's assets totaled $261,799,706 as of June
30, 1997, an increase of $39,510,091 compared to June 30, 1996. Loan volume was
enhanced during the 1997 fiscal year due to whole loan purchases on the
secondary market. The loans purchased were funded with advances through the
Federal Home Loan Bank of Boston ("FHLB"). The Bank has focused its business
development efforts towards full service credit packages and financial
services, as well as competitively priced mortgage packages.
<PAGE> 22
Cash and cash equivalents increased by $4,095,115 at June 30, 1997 compared to
June 30, 1996. The increase in cash equivalents was primarily the result of
the timing of cash items clearing through the Federal Reserve and increased
liquidity requirements due to the growth of the Bank during fiscal 1997.
The Bank's loan portfolio had a balance of $206,356,137 as of June 30, 1997,
which represents an increase of $36,505,213 compared to June 30, 1996. From
June 30, 1996 to June 30, 1997, the loan portfolio increased by $33,663,000 in
real estate mortgage loans, $400,000 in consumer loans, and by $2,443,000 in
commercial loans. During fiscal 1997, the Bank purchased approximately
$25,000,000 of residential whole loans on the secondary market. The loans
purchased are secured by properties located throughout the State of Maine and
were originated and are being serviced by a local Maine bank. The loan
portfolio contains elements of credit and interest rate risk. The Bank
primarily lends within its local market areas, which management believes helps
it to better evaluate credit risk. The Bank also maintains a well
collateralized position in real estate mortgages.
At June 30, 1997, residential real estate mortgages made up 66% of the total
loan portfolio, in which 53% of the residential loans are variable rate
products, as compared to 68% and 48%, respectively, at June 30, 1996. It is
management's intent to increase the proportion of variable rate residential
real estate loans to reduce the interest rate risk in this area.
At June 30, 1997, 19% of the Bank's total loan portfolio is commercial real
estate mortgages. Commercial real estate loans have minimal interest rate risk
as 87% of the portfolio consists of variable rate products. At June 30, 1996,
commercial real estate mortgages made up 15% of the total loan portfolio, in
which 83% of the commercial real estate loans were variable rate products.
Similar to the residential mortgages, 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 make up 8% of the total loan portfolio in which 74% of the
balance were variable rate instruments at June 30, 1997. At June 30, 1996
commercial loans made up 8% of the total loan portfolio, of which 87% of the
balance were variable rate instruments. The credit loss exposure on commercial
loans is highly dependent on the cash flow of the customers' business. The Bank
attempts to mitigate losses through lending in accordance with the Company's
credit policies.
Consumer loans make up 7% of the total loan portfolio as of June 30, 1997 which
compares to 9% at June 30, 1996. Since these loans are primarily fixed rate
products, they have interest rate risk when market rates increase. These loans
also have credit risk with, at times, minimal collateral security. Management
attempts to mitigate these risks 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.
In fiscal year 1997, the Company adopted FASB Statement No. 122, "Accounting
for Mortgage Servicing Rights an amendment of FASB Statement No. 65" and
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities". The effect of adopting the new accounting
standards did not have a significant effect on the Company's financial
condition, liquidity, or results of operations. These statements are more fully
described in footnote 1 to the consolidated financial statements.
<PAGE> 23
The Banks's allowance for loan losses was $2,517,000 as of June 30, 1997 versus
$2,549,000 as of June 30, 1996, representing 1.22% and 1.50% of total loans,
respectively. The Bank had non-performing loans totaling $2,424,000 and
$2,603,000 at June 30, 1997 and 1996, which was 1.17% and 1.53% of total loans,
respectively. Non-performing loans represented .93% and 1.17% of total assets
at June 30, 1997 and 1996, respectively. The Bank's allowance for loan losses
was equal to 104% and 98% of the total non-performing loans at June 30, 1997
and 1996, respectively. At June 30, 1997, the Bank had approximately $586,000
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, 1997, the amount of such loans has
decreased from the June 30, 1996 amount by $1,955,000. This decrease was
primarily due to substandard loans being classified as non-performing or
liquidated through the sale of foreclosed assets. Management takes an
aggressive posture in reviewing its loan portfolio to classify certain loans
substandard. The following table represents the Bank's non-performing loans as
of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Description June 30, 1997 June 30, 1996
------------------------- ------------- -------------
<S> <C> <C>
1-4 Family Mortgages $ 983,000 $ 1,092,000
Commercial Mortgages 913,000 1,154,000
Commercial Installment 492,000 283,000
Consumer Installment 36,000 74,000
------------- -------------
Total non-performing $ 2,424,000 $ 2,603,000
============= =============
</TABLE>
Although the growth in non-performing, delinquent and substandard loans has
been reversed, 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
1997 fiscal year. This decrease was largely due to improved collection efforts
and the increase in the Bank's loan portfolio.
The following table reflects the annual trend of total delinquencies 30 days or
more past due, including non-performing loans, for the Bank as a percentage of
total loans:
<TABLE>
<C> <C> <C> <C>
6/30/94 6/30/95 6/30/96 6/30/97
2.64% 2.60% 2.77% 1.60%
</TABLE>
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, 1997 compared to June 30,
1996. The decrease in the level of allowance for loan losses as a percentage of
total loans was primarily due to the increase in the Bank's total loan
<PAGE> 24
portfolio. The decrease was also supported by the Bank's lower delinquency
levels and decreased non-performing and substandard loans. As previously
discussed, loans classified substandard decreased in the 1997 fiscal year, when
compared to the 1996 fiscal year. Classified loans are also considered in
management's analysis of the adequacy of the allowance for loan losses. Based
on reviewing the credit risk and collateral of these classified loans,
management has considered the risks of the classified portfolio and believes
the allowance for loan losses is adequate. Net charge-offs for the Bank were
$610,427, $449,860, and $707,634, for the three years ended June 30, 1997, June
30, 1996, and June 30, 1995, respectively.
At June 30, 1997, total impaired loans were $1,661,698, of which $844,457 had
related allowances of $369,474. This compares to total impaired loans of
$1,530,650, of which $1,063,720 had related allowances of $499,200, at June 30,
1996. 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. This compares to income recognized related to impaired
loans of $87,128 and the average balance of impaired loans being $1,799,087 at
June 30, 1996. 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 OTS was on August 19,
1996. At the time of the exam the regulators proposed no additions to the
allowance for loan losses.
At June 30, 1997, the Bank had a total of $492,411 in other real estate owned
versus $513,831 as of June 30, 1996. 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 $50,839 at June 30, 1997 versus $100,000 at
June 30, 1996. The Company provided for this allowance through a charge against
earnings of $39,000 and $94,711 for the years ended June 30, 1997 and 1996,
respectively. In 1997 and 1996, write downs of other real estate owned totaled
$88,161 and $-0-, respectively. The Company increased the June 30, 1996
allowance for losses on other real estate owned to provide for additional
losses due to its plan to aggressively sell the other real estate owned
property. Management periodically receives independent appraisals to assist in
its valuation of the other real estate owned portfolio. As a result of its
<PAGE> 25
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.
As of June 30, 1997, trading account securities had decreased by $172,621
compared to the balance of such assets at June 30, 1996. This decrease was
attributed to the sale of securities in which management traded for net
securities gains. Trading account securities consist of equity securities
purchased with the intent to be subsequently sold to provide net securities
gains, and are carried at market value. Realized and unrealized gains and
losses on trading account securities are recognized in the statements of income
as they occur. Transactions are accounted for as of the trade date using the
specific identification method.
Since the last quarter of fiscal 1995, the remainder of the Company's total
securities portfolio has been classified as available for sale. 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 stockholder's 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, 1997 was $27,603,256 and $27,096,931, respectively. The reduction in
carrying value from the cost was primarily attributable to the decline in
market value of mortgage-backed securities, which was due to the change in
current market prices from the price at the time of purchase. The net
unrealized loss on mortgage-backed securities has decreased from $1,164,000 at
June 30, 1996 to $410,000 at June 30, 1997 due to improvements in interest
rates. Substantially all of the mortgage-backed securities are high grade
government backed securities. As in any long term earning asset in which the
earning rate is fixed, the market value of mortgage-backed securities will
fluctuate based on changes in market interest rates from the time of purchase.
Since these mortgage-backed securities are backed by the U.S. Government, there
is no risk of loss of principal. Management believes that the yields currently
received on this portfolio are satisfactory and intends to hold these
securities for the foreseeable future.
Management 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 1997, 1996 and
1995, there have been other than temporary declines in values of individual
equity securities in the amounts of $110,000, $93,819, and $-0-, respectively.
Such securities have been written down through an adjustment against earnings
and are included in other expenses in the statements of income.
The Company increased its investment in FHLB stock by $1,293,500, compared to
June 30, 1996, due to the increase in FHLB borrowings. As discussed below, the
Bank had a large increase in FHLB borrowings to fund loan growth. The FHLB
requires institutions to hold a certain level of FHLB stock based on advances
outstanding.
The Bank has used off-balance-sheet risk financial instruments in the normal
course of business to meet the financing needs of its customers and to reduce
<PAGE> 26
its own exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. The Bank
uses the same credit policies in making commitments as it does for on-balance-
sheet instruments. Hence, these instruments have the same elements of credit
and interest rate risk. The Company limits its involvement in derivative
financial instruments to covered call and put contracts. Gains and losses from
entering into these contracts were immaterial to the results of operations of
the Company in fiscal 1997, 1996 and 1995. 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. Off-balance-sheet risk financial
instruments are more fully described in footnote 18 to the financial
statements.
The Company's premises and equipment increased by a net of $384,317 during
fiscal 1997. The increase was primarily due to the construction of the new
Auburn retail branch as well as the relocation of the Company's headquarters to
the Auburn location.
The increase in accrued interest receivable on loans of $125,908 during fiscal
1997 was primarily due to the increase in the loan portfolio. The increase in
other assets during fiscal 1997 of $463,774 was primarily due to the increase
in federal tax receivables and in deferred tax assets, caused by temporary
differences between the Company's financial statements and its tax returns. The
balance in real estate held for investment decreased by $98,166, during fiscal
1997 when compared to June 30, 1996, due to the Company establishing an
allowance for losses on real estate held for investment of $100,000. The
allowance for losses in real estate held for investment totaled $100,000 at
June 30, 1997 versus $-0- at June 30, 1996. The Company provided for this
allowance through a charge against earnings of $100,000 for the year ended June
30, 1997.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered C.D.'s when national
deposit interest rates are less than the interest rates on local market
deposits as well as 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 as well as to
fund short-term liquidity demands.
Total deposits were $154,410,687 and securities sold under repurchase
agreements were $5,098,622 as of June 30, 1997. These amounts represent an
increase of $9,215,318 and $1,335,656, respectively, compared to June 30, 1996.
Broker deposits represented $7,185,566 of total deposits at June 30, 1997,
which increased by $1,538,428 compared to June 30, 1996's $5,647,138 balance.
Total borrowings from the FHLB were $78,993,361 as of June 30, 1997, for an
increase of $26,870,361 compared to June 30, 1996. Mortgages, free of liens,
pledges and encumbrances and certain non-pledged mortgage-backed securities are
required to be pledged to secure FHLB advances. The increase in deposits,
repurchase agreements and FHLB advances were utilized to fund the loan growth
during fiscal 1997.
Notes payable decreased by $203,581 during the 1997 fiscal year due to the
scheduled principal payments on the Fleet Bank of Maine loan incurred to
finance, in part, the purchase of a bank in prior years. The note is payable
in eighteen quarterly principal payments of $76,389. Interest is payable
<PAGE> 27
monthly at an 8% fixed rate. Other liabilities increased by $542,966 compared
to June 30, 1996, due primarily to increases in accrued expenses and escrow
accounts.
CAPITAL RESOURCES & LIQUIDITY
- -----------------------------
Liquidity is defined as the ability to meet unexpected deposit withdrawals and
increased loan demand of a short-term nature with a minimum loss of principal.
The Bank's primary sources of funds are its interest bearing deposits, cash and
due from banks, deposits with the FHLB, certificates of deposit, loan payments
and prepayments and other investments maturing in less than two years as well
as securities available for sale. In addition, the Bank has unused borrowing
capacity from the FHLB through its advances program. The Bank's current advance
availability, subject to the satisfaction of certain conditions, is
approximately $35,000,000 over and above the 1997 end-of-year advances
reported. The Company's ability to access the principal sources of liquid funds
listed above is immediate and adequate to support the Company's budgeted
growth.
Cross selling strategies are employed by the Bank to develop deposit growth.
Even though deposit interest rates increased during fiscal 1997, 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 liquidity base.
Total equity of the Company was $19,900,613 as of June 30, 1997 versus
$18,151,242 at June 30, 1996. In March of 1997 Square Lake Holding Corporation
exercised 25,000 warrants at an aggregate price of $175,000. Square Lake
Holding Corporation is a Maine corporation and subsidiary of a Canadian
corporation of which Ronald Goguen is a 95% shareholder and director. Mr.
Goguen, who is also a director of this Company, and the affiliates he controls,
owns approximately 22.8% of common shares outstanding of the Company. During
fiscal 1997, 20,000 stock options 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, 1997, 296,000 shares of unissued common stock are
reserved for issuance pursuant to stock options as well as 108,764 outstanding
warrants. The Company repurchased 2,030 treasury shares at a cost of $28,420
during fiscal 1997 and 4,100 treasury shares at a cost of $52,277 during fiscal
1996. These treasury shares were utilized in fiscal 1997, for the employee
stock bonus and options plans as well as the exercise of warrants. On December
15, 1995, the Company paid a 100% stock dividend to all shareholders. The 1996
and 1995 earnings per share have been restated as a result of the stock
dividend. Based in part on this dividend, the common shares outstanding
increased to 1,229,910 shares on June 30, 1996.
The total equity to total assets ratio of the Company was 7.60% as of June 30,
1997 and 8.17% at June 30, 1996. The reduction in the equity to assets ratio
during fiscal 1997, when compared to fiscal 1996, was primarily due to the
Company leveraging the Bank in the purchase of mortgage loans through the
increased use of FHLB advances. Book value per common share was $14.04 as of
June 30, 1997 versus $13.13 at June 30, 1996.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
which was enacted on December 19, 1991, contains various provisions intended to
recapitalize the Bank Insurance Fund ("BIF") and also affects a number of
<PAGE> 28
regulatory reforms that impact all insured depository institutions, regardless
of the insurance fund in which they participate. Among other things, FDICIA
grants 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 OTS broader regulatory authority to take corrective action
against insured institutions that are otherwise operating in an unsafe and
unsound manner.
Regulations implementing the prompt corrective action provisions of FDICIA
became effective December 19, 1992 and defined specific capital categories
based on an institution's capital ratios. 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%. Regulatory capital requirements are also discussed in
footnote 11 of the consolidated financial statements. At June 30, 1997, the
Bank was in compliance with regulatory capital requirements as follows:
<TABLE>
<CAPTION>
Northeast Bank, F.S.B.
Actual Capital Required Capital Excess Capital
Amount Ratio Amount Ratio Amount
------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Tangible capital $ 17,733,000 6.83% $ 3,892,000 1.50% $ 13,841,000
Core capital $ 17,733,000 6.83% $ 7,785,000 3.00% $ 9,948,000
Leverage capital $ 17,733,000 6.83% $ 10,380,000 4.00% $ 7,353,000
Risk-based capital $ 18,840,000 11.89% $ 12,677,000 8.00% $ 6,163,000
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
Net income for the year ended June 30, 1997 was $1,507,103 versus $1,193,420
for the year ended June 30, 1996 and $1,489,381 for the year ended June 30,
1995. Primary earnings per share was $1.03 and fully diluted earnings per share
was $.96 for the year ended June 30, 1997. Primary and fully diluted earnings
per share were $.83 and $.79, respectively, for the year ended June 30, 1996
and $1.10 and $1.02, respectively for the year ended June 30, 1995. The
weighted average number of shares outstanding in fiscal 1996 and 1995, as well
as the reported earnings per share for these two years, have been restated as a
result of the Company's 100% stock dividend in December, 1995. The increase in
net income for the year ended June 30, 1997, when compared to June 30, 1996,
was primarily due to the increase in net interest income and the reduction in
the Company's operational expenses, exclusive of the one time FDIC SAIF
assessment described below. The Company experienced a reduction in net income
in fiscal 1996, as compared to fiscal 1995, primarily due to the expenses
attributed to the merger and name change of the subsidiary banks, the costs
associated with the acquisition of the Key Bank branches, and the general
growth in infrastructure expenses of the Company. The Company's overall return
on average assets ("ROAA") was .63% for the year ended June 30, 1997, .56% for
the year ended June 30, 1996, and .73% for the year ended June 30, 1995.
In September of 1996, Congress enacted comprehensive legislation amending the
FDIC BIF-SAIF deposit insurance assessment on savings and loan institution
<PAGE> 29
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. This resulted in an expense
of $380,000 which was reflected in the Company's September 30, 1996 quarter end
financial statements. During the December 31, 1996 quarter, Congress issued
final legislation which enabled certain qualifying institutions to apply for a
20% discount on the special assessment. The Bank received a credit of $83,140
reducing the assessment expense in the December 31, 1996 quarter. The net
effect of the one time assessment was $296,860 and decreased the Company's
primary earnings per share by $.15 and the fully diluted earnings per share by
$.12 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 would be required to pay a flat annual assessment of 2.43 cents for
every $100 of domestic deposits. If there are no additional deposit assessments
in the future, it is anticipated that the Company may save approximately
$80,000 annually commencing in fiscal 1998.
The Company's net interest income for the years ended June 30, 1997, June 30,
1996 and June 30, 1995 was $9,529,044, $8,866,458 and $8,870,005, respectively.
Net interest income for fiscal 1997 increased $662,586, or 7.47%, compared to
the amount at June 30, 1996. Total interest and dividend income increased
$2,034,278 for the year ended June 30, 1997 compared to the year ended June 30,
1996, resulting from the following items: (I) interest income on loans
increased by $1,215,252 resulting from an increase of $1,576,666 due to an
increase in the volume of loans, which was offset by the decrease of $361,414
due to decreased interest rates on loans, (II) interest and dividend income on
investment securities increased by $996,594 resulting from a $986,222 increase
due to increased volume and an increase of $10,372 due to increased interest
rates on investments, and (III) interest income on short term liquid funds
decreased by $177,568 resulting from a $149,079 decrease due to decreased
volume and a decrease of $28,489 due to decreased interest rates on deposits at
the FHLB and other institutions.
The increase in total interest expense of $1,371,692 for fiscal 1997 compared
to 1996 resulted from the following items: (I) interest expense on deposits
decreased by $71,369 resulting from a $120,230 increase due to increased
deposits, which was more than offset by the decrease of $191,599 due to
decreased deposit interest rates, (II) interest expense on repurchase
agreements increased by $33,243 resulting from a $46,631 increase due to
increased volume offset, in part, by a decrease of $13,388 due to decreasing
interest rates, and (III) interest expense on borrowings increased $1,409,818
resulting from an increase of $1,468,418 due to an increase in volume which was
offset by the decrease of $58,600 due to the change in the mix of interest
rates on borrowings. The changes in net interest income, as explained above,
are also presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1997 versus June 30, 1996
<TABLE>
<PAGE> 30
<CAPTION>
Difference Due to
Volume Rate Total
------------ ------------ ------------
<S> <C> <C> <C>
Investments $ 986,222 $ 10,372 $ 996,594
Loans 1,576,666 (361,414) 1,215,252
FHLB & Other Deposits (149,079) (28,489) (177,568)
------------ ------------ ------------
Total Interest Earning Assets 2,413,809 (379,531) 2,034,278
Deposits 120,230 (191,599) (71,369)
Repurchase Agreements 46,631 (13,388) 33,243
Borrowings 1,468,418 (58,600) 1,409,818
------------ ------------ ------------
Total Interest-Bearing
Liabilities 1,635,279 (263,587) 1,371,692
------------ ------------ ------------
Net Interest Income $ 778,530 $ (115,944) $ 662,586
============ ============ ============
</TABLE>
Rate/Volume amounts spread proportionately between Volume and Rate.
Net interest income for fiscal 1996 decreased $3,547, or .04%, compared to the
amount for the year ended June 30, 1995. Total interest and dividend income
increased $1,071,937 for the year ended June 30, 1996 compared to the year
ended June 30, 1995, resulting from the following items: (I) interest income on
loans increased by $925,547 resulting from an increase of $518,349 due to an
increase in the volume of loans and an increase of $407,198 due to increased
interest rates on loans, (II) interest and dividend income on investment
securities decreased by $22,088 resulting from a $11,381 increase due to
increased volume, which was more than offset by the decrease of $33,469 due to
decreased interest rates on investments, and (III) interest income on short
term liquid funds increased by $168,478 resulting from a $154,590 increase due
to increased volume and an increase of $13,888 due to increased interest rates
on deposits at the FHLB and other institutions.
The increase in total interest expense of $1,075,484 for fiscal 1996 compared
to 1995 resulted from the following items: (I) interest expense on deposits
increased by $983,069 resulting from a $328,965 increase due to increased
deposits and an increase of $654,104 due to higher deposit interest rates, (II)
interest expense on repurchase agreements increased by $81,289 resulting from
an $82,258 increase due to increased volume offset, in part, by a decrease of
$969 due to decreasing interest rates, and (III) interest expense on borrowings
increased $11,126 resulting from a decrease of $161,857 due to a decrease in
volume which was more than offset by the increase of $172,983 due to the change
in the mix of interest rates on borrowings. The changes in net interest income,
as explained above, are also presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1996 versus June 30, 1995
<TABLE>
<CAPTION>
Difference Due to
<PAGE> 31
Volume Rate Total
------------ ------------ ------------
<S> <C> <C> <C>
Investments $ 11,381 $ (33,469) $ (22,088)
Loans 518,349 407,198 925,547
FHLB & Other Deposits 154,590 13,888 168,478
------------ ------------ ------------
Total Interest Earning Assets 684,320 387,617 1,071,937
Deposits 328,965 654,104 983,069
Repurchase Agreements 82,258 (969) 81,289
Borrowings (161,857) 172,983 11,126
------------ ------------ ------------
Total Interest-Bearing
Liabilities 249,366 826,118 1,075,484
------------ ------------ ------------
Net Interest Income $ 434,954 $ (438,501) $ (3,547)
============ ============ ============
</TABLE>
Rate/Volume amounts 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
is appropriate since historically interest rates tend to rise faster than they
decline.
Approximately 22% 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 36% of
other loans in the Bank's portfolio that are based on short-term rate indices
such as the one-year treasury bill. An increase in short-term interest rates
will also increase deposit and FHLB advance rates, increasing the Company's
interest expense. Although the Company has experienced some net interest
margin compression, the impact on net interest income will depend on, among
other things, actual rates charged on the Bank's loan portfolio, deposit and
advance rates paid by the Bank, and loan volume.
The provision for loan losses was $578,427 for fiscal 1997 compared to $602,860
and $640,634 for 1996 and 1995, respectively. Net charge-offs amounted to
$610,427 during fiscal 1997 versus $449,860 and $707,634 for 1996 and 1995,
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 $2,011,856 for the year ended June 30, 1997, $2,097,191
for June 30, 1996 and $2,116,442 for June 30, 1995. Generally, the Bank
continues to generate an increasing level of non-interest income through
service charges and fees for other services. This component totaled $775,874
for the year ended June 30, 1997, $737,229 for the year ended June 30, 1996 and
$679,495 for June 30, 1995. The increase in 1997 was primarily due to growth in
the deposit accounts and other branch services.
<PAGE> 32
Net securities gains were $259,430, $278,895, and $419,313 for fiscal 1997,
1996 and 1995, respectively. The major reason for the increase in 1995 was that
the Company sold some of its available for sale and trading securities, taking
advantage of the fluctuation in higher market prices.
Gains on the sale of loans amounted to $201,418 for fiscal 1997 and was a
decrease of $50,179 compared to the balance in fiscal 1996. Gains on the sale
of loans amounted to $251,597 for fiscal 1996 and was an increase of $90,615
compared to $160,982 for fiscal 1995. The decrease in gain on sales of loans in
1997, compared to 1996, was primarily due to the Bank's reduced volume in
underwriting and selling Freddie Mac, Fannie Mae and SBA guaranteed commercial
loans. Gains on the sale of loans in fiscal 1996 increased due to increased
volume in underwriting Freddie Mac and Fannie Mae loans. The Company's loan
sales activity is dependent on market interest rates as well as local
competition. The Company receives income from servicing mortgage loans for
others that the Bank originated and sold. The outstanding balance of such loans
decreased from approximately $39,940,000 at June 30, 1996 to $34,683,000 at
June 30, 1997. In addition to loans originated and sold by the Company, during
1993 the Company purchased loan servicing rights from another institution. The
balance of the loans serviced under this agreement was approximately $7,826,000
and $9,676,000 at June 30, 1997 and 1996, respectively. Fees for servicing
loans were $275,496 for the year ended June 30, 1997 versus $302,261 and
$306,220 for the years ended June 30, 1996 and 1995, respectively.
Total non-interest expense for the Company was $8,547,773 for fiscal 1997,
$8,448,757 for fiscal 1996, and $7,987,877 for fiscal 1995. The increase in
non-interest expense of $99,016 for fiscal 1997 compared to 1996 was due, in
part, to the following items: (I) occupancy expense increased by $25,811 due to
the expenses associated with the opening of the new Auburn retail branch, (II)
equipment expense increased by $32,005 due to the depreciation expense
associated with the new Auburn branch equipment as well as general maintenance
costs, and (III) FDIC deposit insurance increased by $248,833 primarily due to
the SAIF assessment described above. The non-interest expense increases above
were offset by the reduction of $119,782 in compensation expense due to the
Company restructuring its internal departments.
Other operating expenses decreased by $87,851 in fiscal 1997 compared to 1996
primarily due to the following: a decrease of $12,000 in business insurances
and computer services due to the savings in merging the two subsidiary banks, a
decrease of $56,000 in other real estate owned expenses, a decrease of $15,000
in deposit expenses due to the merger of the subsidiary banks, a decrease of
$21,000 in telephone expenses due to the Company's telephone network system, a
decrease of $17,000 in postage due to savings in bulk mailing prices, a
decrease of $30,000 in travel & meeting expenses, a decrease of $36,000 in
correspondent banking fees due to the merger of the subsidiary banks, and a
decrease of $84,000 in the Company's other general business expenses. These
decreases in other expenses were primarily offset by the following increases:
an increase of $86,000 due to hiring third party consultants for marketing and
compliance and an increase of $98,000 in advertising expense to continue the
Company's strategy in increasing market exposure.
The increase in non-interest expense of $460,880 for fiscal 1996 compared to
1995 was due, in part, to the following items: (I) compensation expenses
increased by $175,360 as the result of the additional employees from the Key
Bank branch acquisition, general growth in the Company, as well as annual
salary increases and other benefits expenses, (II) occupancy expense increased
<PAGE> 33
by $100,647 due to the expense associated with the branches acquired from Key
Bank and general maintenance on existing locations, and (III) equipment expense
increased by $69,957 due to depreciation on new assets, as well as increased
maintenance costs from new assets acquired and the equipment acquired from Key
Bank.
Other operating expenses increased by $114,916 in fiscal 1996 compared to 1995
due to the following: an increase of $58,000 in computer servicing expense due
to the merger of the two subsidiary banks and increased ATM services, an
increase of $54,000 in collection expense due to non-performing loans, an
increase of $25,000 in postage expense due to additional customer mailings
concerning the merger of the two subsidiary banks, an increase of $74,000 in
goodwill expense due to a full years recognition of goodwill from the
acquisition of the Key Bank branches, an increase of $94,000 due to the
write-down on equity securities to current market values, a one time expense of
$166,000 due to direct expenses associated with the merger and name change of
the two subsidiary banks, and increases due to normal business growth. These
increases in other expenses were offset by the following reductions: a decrease
of $169,000 in deposit insurance expense due to the FDIC reducing its BIF
deposit insurance assessment from $.23 per $100 of deposits to an annual fee of
$2,000, a decrease of $38,000 in supplies expense due to savings from bulk
orders, a decrease of $53,000 in telephone expense due to the Company's new
telephone network system, and a $93,000 decrease in the Company's other general
business expenses.
PENDING MERGER
- --------------
On May 9, 1997 the Company entered into a definitive agreement to merge the
Bank with Cushnoc Bank and Trust Company ("Cushnoc") of Augusta, Maine. The
agreement has been approved by the Company's and Cushnoc's Board of Directors
and is subject to approval by Cushnoc's shareholders. On August 29, 1997, the
Company received approval from OTS, subject to certain conditions, to merge the
Bank and Cushnoc. At March 31, 1997, Cushnoc had approximately $21,000,000 in
total assets and $2,200,000 in stockholder's equity. Under the terms of the
agreement, the Company will issue 2.089 shares of its common stock for each
share of Cushnoc, which has 90,000 common shares outstanding. The acquisition
will be accounted for under the pooling of interest method. The merger of
Cushnoc and the Bank is expected to occur during the fourth quarter of calendar
year 1997.
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 monitors and coordinates the
Company's sources, uses and pricing of funds. The committee is also involved in
<PAGE> 34
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 has undertaken steps to
increase the percentage of variable rate assets, as a percentage of its total
earning assets. In recent years, the focus has been to originate adjustable
rate residential and commercial real estate loans, which reprice or mature more
quickly than fixed-rate real estate loans. The Company also originates
adjustable-rate consumer loans and commercial business loans. The Company's
adjustable-rate loans are primarily tied to published indices, such as the Wall
Street Journal prime rate and one year U.S. Treasury Bills.
The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate rise or fall in interest rates (rate
shock) over a twelve and twenty-four month period. The model is based on the
actual maturity and repricing characteristics of interest-rate sensitive assets
and liabilities. The model incorporates assumptions regarding the impact of
changing interest rates on the prepayment rate of certain assets and
liabilities. The assumptions are based on the Company's historical prepayment
speeds on assets and liabilities when interest rates increase or decrease by
200 basis points or greater. The model factors in projections for anticipated
activity levels by product lines offered by the Company. The simulation model
also takes into account the Company's increased ability to control the rates on
deposit products than over adjustable-rate loans tied to published indices.
Based on the information and assumptions in effect at June 30, 1997, management
believes that a 200 basis point rate shock over a twelve month period, up or
down, would not significantly affect the Company's annualized net interest
income.
The table below represents in tabular form contractual balances of the
Company's on balance sheet financial instruments in U.S. dollars at the
expected maturity dates as well as the fair value of those on balance sheet
financial instruments for the period ended June 30, 1997. The expected maturity
categories take into consideration historical prepayment speeds as well as
actual amortization of principal and does not take into consideration
reinvestment of cash. Principal prepayments are the amounts of principal
reduction, over and above normal amortization, that the Company has experienced
in the past twenty four months. The Company's assets and liabilities that do
not have a stated maturity date, as in cash equivalents and certain deposits,
are considered to be long term in nature by the Company and are reported in the
thereafter column. The Company does not consider these financial instruments
materially sensitive to interest rate fluctuations and historically the
balances have remained fairly constant over various economic conditions. The
weighted average interest rates for the various assets and liabilities
presented are actual as of June 30, 1997.
The fair value of cash, interest bearing deposits at other banks, and interest
receivable approximate their book values due to their short maturities. The
fair value of available for sale securities are based on bid quotations from
security dealers or on bid prices published in financial newspapers. FHL Bank
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
<PAGE> 35
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.
Market Risk
6/30/97
(In Thousands)
<TABLE>
<CAPTION>
Expected Maturity Date
There- Fair
6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 after Total Value
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash $ -- $ -- $ -- $ -- $ -- $ 5,152 $ 5,152 $ 5,152
Weighted Average
Interest Rate -- -- -- -- -- -- -- --
Interest Bearning
Deposits at other Banks
Variable Rate -- -- -- -- -- 10,509 10,509 10,509
Weighted Average
Interest Rate -- -- -- -- -- 5.77% 5.77%
Available for Sale
Securities
US Government
Treasuries & Agencies
Fixed Rate 249 -- -- 250 -- 1,000 1,499 1,455
Weighted Average
Interest Rate 5.35% -- -- 5.40% -- 7.18% 6.57%
Corporate Bonds
Fixed Rate -- -- -- -- -- 149 149 143
Weighted Average
Interest Rate -- -- -- -- -- 5.95% 5.95%
Mortgage Backed
<PAGE> 36
Securities
Fixed Rate 1,742 1,917 2,110 2,320 2,553 14,416 25,058 24,648
Weighted Average
Interest Rate 7.15% 7.15% 7.15% 7.15% 7.15% 7.15% 7.15%
Equity Securities 897 -- -- -- -- -- 897 851
Dividend Yield 3.82% -- -- -- -- -- 3.82%
FHLB Stock -- -- -- -- -- 3,950 3,950 3,950 (1)
Weighted Average
Interest Rate -- -- -- -- -- 6.50% 6.50%
Loans Held For Sale
Fixed Rate 240 -- -- -- -- -- 240 242
Weighted Average
Interest Rate 8.19% -- -- -- -- -- 8.19%
Loans
Residential Mortgages
Fixed Rate 9,211 9,263 10,165 11,139 12,225 12,497 64,500 65,950
Weighted Average
Interest Rate 8.80% 8.94% 8.93% 8.93% 8.93% 8.92% 8.91%
Variable Rate 10,144 10,624 11,760 12,537 13,420 13,205 71,690 71,402
Weighted Average
Interest Rate 8.89% 8.82% 8.82% 8.78% 8.74% 8.71% 8.79%
Commercial Real Estate
Fixed Rate 605 711 746 1,087 1,082 933 5,164 4,705
Weighted Average
Interest Rate 9.35% 9.40% 9.17% 9.20% 9.19% 9.09% 9.22%
Variable Rate 5,810 4,409 5,640 5,041 5,220 7,664 33,784 32,982
Weighted Average
Interest Rate 10.03% 10.10% 10.14% 10.15% 10.12% 10.12% 10.11%
Commercial
Fixed Rate 1,315 644 1,020 1,013 193 28 4,213 4,060
Weighted Average
Interest Rate 11.05% 9.93% 10.23% 10.13% 9.24% 8.67% 10.37%
Variable Rate 4,400 2,022 1,173 1,653 1,311 1,690 12,249 11,896
Weighted Average
Interest Rate 9.81% 9.91% 10.51% 10.46% 10.53% 10.72% 10.18%
Consumer
Fixed Rate 1,911 2,209 2,447 2,845 1,351 2,822 13,585 13,016
Weighted Average
Interest Rate 10.25% 10.39% 10.23% 9.63% 11.18% 11.15% 10.42%
Variable Rate 254 132 216 137 142 290 1,171 1,154
Weighted Average
Interest Rate 9.51% 8.56% 8.75% 8.46% 8.57% 8.89% 8.87%
Interest Receivable 1,480 -- -- -- -- -- 1,480 1,480
Weighted Average
<PAGE> 37
Interest Rate -- -- -- -- -- -- --
Finanical Liabilities:
Deposits (with no
stated maturity)
Demand Deposits -- -- -- -- -- 12,056 12,056 12,056
Weighted Average
Interest Rate -- -- -- -- -- -- --
NOW -- -- -- -- -- 11,429 11,429 11,429
Weighted Average
Interest Rate -- -- -- -- -- 1.26% 1.26%
Money Market -- -- -- -- -- 12,318 12,318 12,318
Weighted Average
Interest Rate -- -- -- -- -- 3.44% 3.44%
Regular Savings -- -- -- -- -- 20,389 20,389 20,389
Weighted Average
Interest Rate -- -- -- -- -- 2.60% 2.60%
Time Deposits
Fixed Rate 69,621 15,259 5,088 2,451 4,670 10 97,099 97,591
Weighted Average
Interest Rate 6.55% 5.89% 6.35% 6.20% 6.44% 5.00% 6.42%
Variable Rate 759 361 -- -- -- -- 1,120 1,120
Weighted Average
Interest Rate 5.01% 5.06% -- -- -- -- 5.03%
Repurchase Agreements
Fixed Rate 616 -- -- -- -- -- 616 616
Weighted Average
Interest Rate 5.18% -- -- -- -- -- 5.18%
Variable Rate 4,483 -- -- -- -- -- 4,483 4,483
Weighted Average
Interest Rate 4.12% -- -- -- -- -- 4.12%
FHLB Advances
Fixed Rate 53,408 15,606 3,000 273 1,442 4,264 77,993 77,987
Weighted Average
Interest Rate 5.71% 5.72% 6.27% 6.40% 6.30% 6.58% 5.80%
Variable Rate 1,000 -- -- -- -- -- 1,000 1,003
Weighted Average
Interest Rate 6.20% -- -- -- -- -- 6.20%
Notes Payable
Fixed Rate 306 306 306 306 75 -- 1,299 1,299
Weighted Average
Interest Rate 8.00% 8.00% 8.00% 8.00% 8.00% -- 8.00%
</TABLE>
(1) FHLB stock does not have a market; therefore, its fair value is unknown.
<PAGE> 38
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 many 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.
RECENT ACCOUNTING DEVELOPMENTS
- ------------------------------
In February, 1997, FASB issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("Statement 128"). Statement 128 supersedes APB
Opinion No. 15,"Earnings Per Share" (APB 15) and specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. It replaces
the presentation of primary EPS with a presentation of basic EPS and fully
diluted EPS with diluted EPS. Statement 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS data
presented shall be restated to conform with Statement 128. Management has not
determined the impact of Statement 128.
In February 1997, FASB issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure"("Statement 129"). This
Statement was issued in connection with Statement 128,"Earnings Per Share". It
is not expected that the issuance of Statement 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions. Statement 129 is effective for financial statements for periods
ending after December 15, 1997. Management does not expect the requirements of
Statement 129 to have a material impact on capital disclosures.
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement 130"). Statement 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. This Statement requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed in equal prominence with the other financial statements. It requires
that an enterprise display an amount representing total comprehensive income
for each period. It does not require per share amounts of comprehensive income
to be disclosed. Statement 130 is effective for both interim and annual periods
after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. Management has not
determined the impact of the adoption of Statement No. 130.
In June of 1997, FASB issued Statement of Financial Accounting Standards No.
131,"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 establishes standards for the way public
business enterprises are to report information about operating segments in
<PAGE> 39
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 is
effective for financial statements for periods beginning after December 15,
1997. Earlier application is encouraged. In the initial year of application,
comparative information for earlier years is to be restated, unless it is
impracticable to do so. Management has not determined the impact of the
adoption of Statement 131.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based on
various assumptions (some of which are beyond the Company's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology; such as "may", "will", "believe", "expect",
"estimate", "anticipate", "continue", or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the Company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk
management, asset/liability management, the financial securities markets, and
the availability of and the costs associated with sources of liquidity.
Item 7A. Quantiture and Qualitative Disclosure about Market Risk
-------------------------------------------------------
See Item 7, above.
Item 8. Financial Statements and Supplementary Data
___________________________________________
a. Financial Statements Required by Regulation S-X
_________________________________________________
<TABLE>
<CAPTION>
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
ASSETS 1997 1996
______ _______________ _______________
<S> <C> <C>
Cash and due from banks $ 5,152,222 $ 3,386,263
Interest bearing deposits 443,021 650,430
Federal Home Loan Bank overnight deposits 10,066,000 7,529,435
_______________ _______________
15,661,243 11,566,128
Trading account securities, at market value 25,000 197,621
Available for sale securities, at market
<PAGE> 40
value (notes 2, 8 and 10) 27,096,931 29,650,319
Loans held for sale (note 3) 240,000 448,475
Loans receivable (notes 4 and 8):
Mortgage loans:
Residential real estate 135,607,761 111,901,516
Construction loans 3,220,448 5,012,583
Commercial real estate 37,567,609 27,123,743
_______________ _______________
176,395,818 144,037,842
Less:
Undisbursed portion of construction loans 1,076,936 2,243,814
Net deferred loan origination fees 151,609 289,340
_______________ _______________
Total mortgage loans 175,167,273 141,504,688
Commercial loans 16,432,937 13,990,220
Consumer and other loans 14,755,927 14,356,016
_______________ _______________
206,356,137 169,850,924
Less allowance for loan losses 2,517,000 2,549,000
_______________ _______________
Net loans 203,839,137 167,301,924
Premises and equipment - net (note 5) 3,960,703 3,576,386
Other real estate owned - net (note 6) 492,411 513,831
Real estate held for investment - net of an
allowance for losses of $100,000 at June
30, 1997 and $0 at June 30, 1996 361,654 459,820
Accrued interest receivable - loans 1,220,463 1,094,555
Accrued interest receivable - investments 259,666 257,708
Federal Home Loan Bank stock, at cost
(note 8) 3,949,700 2,656,200
Goodwill, net of accumulated amortization of
$1,236,433 in 1997 and $940,059 in 1996
(note 16) 2,220,289 2,557,913
Other assets (note 15) 2,472,509 2,008,735
_______________ _______________
$ 261,799,706 $ 222,289,615
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
____________________________________ _______________ _______________
Liabilities:
Deposits (note 7):
Demand $ 12,056,336 $ 11,424,481
NOW 11,428,705 13,516,135
Money market 12,317,349 12,291,543
Regular savings 20,389,221 21,884,843
Brokered deposits 7,185,566 5,647,138
Certificates of deposit under $100,000 74,259,842 64,962,559
Certificates of deposit $100,000 or more 16,773,668 15,468,670
_______________ _______________
Total deposits 154,410,687 145,195,369
FHLB Borrowings (note 8) 78,993,361 52,123,000
Notes payable (note 9) 1,298,611 1,502,192
Securities sold under repurchase
<PAGE> 41
agreements (notes 2 and 10) 5,098,622 3,762,966
Other liabilities 2,097,812 1,554,846
_______________ _______________
Total liabilities 241,899,093 204,138,373
Commitments and contingent liabilities
(notes 9, 16, 17 and 18)
Stockholders' equity (notes 11, 12, 13
and 17):
Series A cumulative convertible preferred
stock; $1 par value, 1,000,000 shares
authorized; 45,454 shares issued and
outstanding 999,988 999,988
Series B cumulative convertible preferred
stock; $1 par value, 1,000,000 shares
authorized; 71,428 shares issued and
outstanding 999,992 999,992
Common stock, $1 par value, 3,000,000
shares authorized; 1,274,969 and 1,234,010
shares issued at June 30, 1997 and 1996,
respectively; 1,274,969 and 1,229,910
shares outstanding in 1997 and 1996,
respectively 1,274,969 1,234,010
Additional paid-in capital 5,639,507 5,455,852
Retained earnings 11,320,332 10,351,031
Net unrealized losses on available for
sale securities (note 2) (334,175) (837,354)
Treasury stock at cost, 4,100 shares at
June 30, 1996 - (52,277)
_______________ _______________
Total stockholders' equity 19,900,613 18,151,242
_______________ _______________
$ 261,799,706 $ 222,289,615
=============== ===============
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
Years Ended June 30, 1997, 1996, and 1995
1997 1996 1995
_____________ _____________ _____________
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans $ 17,225,937 $ 16,010,685 $ 15,085,138
Interest on Federal Home Loan
Bank overnight deposits 391,059 567,915 393,497
Interest on investments held to
maturity, excluding mortgage
backed securities - - 75,691
Interest and dividends on
<PAGE> 42
available for sale securities 135,307 89,684 60,159
Interest on mortgage backed
securities 2,029,224 1,149,407 1,088,420
Dividends on Federal Home Loan
Bank stock 219,916 148,762 189,980
Other interest income 27,697 28,409 30,040
_____________ _____________ _____________
Total interest income 20,029,140 17,994,862 16,922,925
Interest expense:
Deposits (note 7) 6,354,803 6,426,172 5,443,103
Repurchase agreements 199,453 166,210 84,921
Borrowed funds 3,945,840 2,536,022 2,524,896
_____________ _____________ _____________
Total interest expense 10,500,096 9,128,404 8,052,920
_____________ _____________ _____________
Net interest income before
provision for loan losses 9,529,044 8,866,458 8,870,005
Provision for loan losses (note 4) 578,427 602,860 640,634
_____________ _____________ _____________
Net interest income after
provision for loan losses 8,950,617 8,263,598 8,229,371
Noninterest income:
Fees and service charges on loans 181,490 188,410 200,782
Fees for other services to
customers 594,384 548,819 478,713
Net securities gains (note 2) 171,080 231,344 49,045
Gain on trading securities 88,350 47,551 370,268
Gain on sales of loans (note 3) 201,418 251,597 160,982
Loan servicing fees 275,496 302,261 306,220
Other income 499,638 527,209 550,432
_____________ _____________ _____________
Total noninterest income 2,011,856 2,097,191 2,116,442
Noninterest expense:
Salaries and employee benefits
(note 17) $ 4,033,378 $ 4,153,160 $ 3,977,800
Occupancy expense (note 5) 636,818 611,007 510,360
Equipment expense (note 5) 793,550 761,545 691,588
FDIC insurance expense (note 11) 387,275 138,442 307,173
Other (notes 2 and 14) 2,696,752 2,784,603 2,500,956
_____________ _____________ _____________
Total noninterest expense 8,547,773 8,448,757 7,987,877
_____________ _____________ _____________
Income before income taxes 2,414,700 1,912,032 2,357,936
Income tax expense (note 15) 907,597 718,612 868,555
_____________ _____________ _____________
Net income $ 1,507,103 $ 1,193,420 $ 1,489,381
============= ============= =============
Net income per common share
(notes 12 and 17):
Primary earnings per share 1.03 .83 1.10
Fully diluted earnings per share .96 .79 1.02
<PAGE> 43
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1997, 1996 and 1995
Preferred Stock Common
Series A and B Stock
_______________ _______________
<S> <C> <C>
Balance at June 30, 1994 $ 1,999,980 $ 547,400
Net income - -
Decrease in net unrealized losses on
available for sale securities - -
Issuance of common stock - 102
Dividends on preferred stock - -
Dividends on common stock at $.32 per share - -
_______________ _______________
Balance at June 30, 1995 1,999,980 547,502
Net income - -
Common stock - warrants exercised - 50,000
Stock split in the form of a dividend - 597,743
Increase in net unrealized losses on
available for sale securities - -
Treasury stock purchased - -
Issuance of common stock - 765
Stock options exercised - 38,000
Dividends on preferred stock - -
Dividends on common stock at $.32 per share - -
_______________ _______________
Balance at June 30, 1996 1,999,980 1,234,010
Net income - -
Issuance of common stock through exercise
of stock options and purchase of treasury
stock - 20,000
Exercise of stock warrants - 19,940
Decrease in net unrealized losses on
available for sale securities - -
Treasury stock issued - employee stock
bonus - -
Issuance of common stock - 1,019
Dividends on preferred stock - -
Dividends on common stock at $.32 per share - -
_______________ _______________
Balance at June 30, 1997 $ 1,999,980 $ 1,274,969
=============== ===============
</TABLE>
<PAGE> 44
See accompanying notes.
<TABLE>
<CAPTION>
Net Unrealized
Additional Losses on
Paid-in Treasury Retained Available for
Capital Stock Earnings Sale Securities Total
______________ ______________ ______________ _______________ ______________
<C> <C> <C> <C> <C>
$ 4,640,968 $ - $ 9,006,038 $ (438,023) $ 15,756,363
- - 1,489,381 - 1,489,381
- - - 342,516 342,516
2,091 - - - 2,193
- - (140,000) - (140,000)
- - (175,175) - (175,175)
______________ ______________ ______________ _______________ ______________
4,643,059 - 10,180,244 (95,507) 17,275,278
- - 1,193,420 - 1,193,420
650,000 - - - 700,000
- - (597,743) - -
- - - (741,847) (741,847)
- (52,277) - - (52,277)
10,793 - - - 11,558
152,000 - - - 190,000
- - (139,999) - (139,999)
- - (284,891) - (284,891)
______________ ______________ ______________ _______________ ______________
5,455,852 (52,277) 10,351,031 (837,354) 18,151,242
- - 1,507,103 - 1,507,103
83,450 (28,420) - - 75,030
88,005 67,055 - - 175,000
- - - 503,179 503,179
(268) 13,642 - - 13,374
12,468 - - - 13,487
- - (139,997) - (139,997)
- - (397,805) - (397,805)
______________ ______________ ______________ _______________ ______________
$ 5,639,507 $ - $ 11,320,332 $ (334,175) $ 19,900,613
============== ============== ============== =============== ==============
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1996 and 1995
<PAGE> 45
1997 1996 1995
______________ ______________ ______________
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 1,507,103 $ 1,193,420 $ 1,489,381
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 578,427 602,860 640,634
Provision for losses on other
real estate owned 39,000 94,711 107,173
Provision for losses on real
estate held for investment 100,000 - -
Treasury stock bonused to
employees 13,374 - -
Deferred income tax expense
(benefit) (72,290) 19,236 122,143
Depreciation of premises and
equipment and other 597,573 675,232 606,604
Goodwill amortization 296,374 308,913 235,098
Net gain on sale of available
for sale securities (171,080) (231,344) (49,045)
Net gains on sale of loans (201,418) (251,597) (160,982)
Originations of loans held
for sale (2,178,115) (11,585,640) (4,273,878)
Proceeds from sale of loans
held for sale 2,430,823 11,781,652 4,325,745
Net change in trading account
securities 172,621 (196,246) 171,696
Other (98,542) (52,921) (26,174)
Change in other assets and
liabilities:
Increase in interest
receivable (127,866) (213,557) (291,215)
Increase in other assets
and liabilities (54,046) (39,262) (326,872)
______________ ______________ ______________
Net cash provided by operating
activities 2,831,938 2,105,457 2,570,308
Cash flows from investing
activities:
Proceeds from the sale of
available for sale securities 12,379,650 16,858,222 12,179,897
Purchase of available for sale
securities (11,277,560) (38,104,596) (1,265,840)
Proceeds from maturities and
principal payments on
available for sale securities 2,384,771 851,639 335,432
Proceeds from maturities and
principal payments on held to
maturity securities - - 1,645,454
Purchase of held to maturity
securities - - (12,399,309)
Purchases of loans (25,425,642) - -
<PAGE> 46
Net increase in loans (11,933,101) (142,079) (11,905,988)
Additions to premises and
equipment (1,028,625) (398,937) (936,647)
Proceeds from sale of
investment in real estate - 24,251 238,189
Purchase of investment in real
estate and improvements (6,156) (40,068) (13,397)
Proceeds from sale of other
real estate owned 519,871 585,798 581,880
(Purchase) sale of Federal Home
Loan Bank stock (1,293,500) (506,200) 195,000
Cash received from acquisition
of bank branches - - 25,547,199
______________ ______________ ______________
Net cash (used) provided by
investing activities (35,680,292) (20,871,970) 14,201,870
Cash flows from financing
activities:
Net increase (decrease) in
deposits $ 9,215,318 $ (1,924,501) $ (4,930,902)
Net increase in repurchase
agreements 1,335,656 1,177,579 2,585,387
Dividends paid (537,802) (424,890) (315,175)
Treasury stock purchased (28,420) (52,277) -
Stock options exercised 103,450 190,000 -
Warrants exercised 175,000 700,000 -
Issuance of common stock 13,487 11,558 2,193
Net borrowings (payments) from
(to) Federal Home Loan Bank 26,870,361 16,423,000 (10,200,000)
Principal payments on notes
payable (203,581) (507,899) (510,115)
______________ ______________ ______________
Net cash provided (used) by
financing activities 36,943,469 15,592,570 (13,368,612)
______________ ______________ ______________
Net increase (decrease) in cash
and cash equivalents 4,095,115 (3,173,943) 3,403,566
Cash and cash equivalents,
beginning of year 11,566,128 14,740,071 11,336,505
______________ ______________ ______________
Cash and cash equivalents, end
of year $ 15,661,243 $ 11,566,128 $ 14,740,071
============== ============== ==============
Supplemental schedule of cash
flow information:
Interest paid $ 10,356,006 $ 9,103,639 $ 7,997,123
Income taxes paid 620,000 913,000 794,000
Supplemental schedule of noncash
investing and financing
activities:
Transfer from loans to other
real estate owned $ 538,019 $ 314,718 $ 827,304
Transfer from other real
<PAGE> 47
estate owned to loans - - 382,718
Loans originated to finance
the sales of other real
estate owned - 184,732 399,550
Transfer of securities into
available for sale securities,
at fair value - - 18,821,933
Transfer of securities out of
held to maturity securities,
at amortized cost - - (18,774,672)
Net change in valuation for
unrealized losses on available
for sale securities 503,179 741,847 (295,255)
Net change in deferred taxes
for unrealized losses on
available for sale securities 259,214 382,164 (176,446)
</TABLE>
In connection with the acquisition of bank branches in 1995, the Company
assumed deposit liabilities (see note 16).
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
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
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. Prior to July 1, 1996, the Company conducted business as
Bethel Bancorp.
Basis of Financial Statement Presentation
_________________________________________
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and income and
expenses for the period. Actual results could differ significantly from
<PAGE> 48
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 (85%) of the Company's loans are secured by real
estate in the State of Maine. In addition, all of the real estate acquired
through foreclosure is located in the same market. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan
portfolio and the recovery of the carrying amount of real estate acquired
through foreclosure are susceptible to changes in market conditions in
Maine.
Principles of Consolidation
___________________________
The accompanying consolidated financial statements include the accounts of
Northeast Bancorp, a savings and loan holding company, and its wholly-owned
subsidiary, Northeast Bank, F.S.B. (including the bank's wholly-owned
subsidiary, Northeast Financial Services, Inc.)
All significant intercompany transactions and balances have been eliminated
in consolidation.
Cash Equivalents
________________
Cash equivalents consist of cash and due from banks, Federal Home Loan Bank
overnight deposits and interest bearing deposits. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents. The Company is required to maintain a certain reserve balance
in the form of cash or deposits with the Federal Reserve Bank. At June 30,
1997, the reserve balance was approximately $503,000.
Investments
___________
Trading Account Securities
__________________________
Trading account securities, consisting of equity securities purchased with
the intent to be subsequently sold to provide net securities gains, are
carried at market value. Realized and unrealized gains and losses on
trading account securities are recognized in the statements of income as
they occur. Transactions are accounted for as of the trade date using the
specific identification method.
Available for Sale Securities
_____________________________
<PAGE> 49
Equity securities, and debt securities which may be sold prior to
maturity, are classified as available for sale and are carried at market
value. Changes in market value, net of applicable income taxes, are
reported as a separate component of stockholders' equity. When a decline
in market value of a security is considered other than temporary, the loss
is charged to other expense in the consolidated statements of income as a
writedown. Premiums and discounts are amortized and accreted over the
term of the securities on the level yield method adjusted for prepayments.
Gains and losses on the sale of securities are recognized at the time of
the sale 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 estimated market value, estimated based on bid
quotations from loan dealers.
Effective July 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 122, Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement No. 65.
Statement No. 122 requires that the Company recognize as separate assets the
rights to service mortgage loans for others, and requires the assessment of
capitalized mortgage servicing rights for impairment based on the current
fair value of those rights. This assessment includes servicing rights
capitalized prior to adoption of Statement No. 122. As required by
Statement No. 122, the Company capitalizes mortgage servicing rights at
their allocated cost based on the relative fair values upon the sale of the
related loans. The impact of adoption of Statement No. 122 was not material
to the Company's financial position, liquidity or results of operations.
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The impact of adoption of Statement No. 125
was not material to the Company's financial position, liquidity or results
of operations.
The Company's mortgage servicing rights asset at June 30, 1997 and 1996 is
not material and is included in other assets in the consolidated statements
of financial position.
Gains and losses on sales of mortgage loans are determined using the
specific identification method and recorded as gain on sales of mortgage
loans in the consolidated statements of income. The gains and losses
resulting from the sales of loans with servicing retained are adjusted to
recognize the present value of future servicing fee income over the
estimated lives of the related loans.
Mortgage servicing rights are amortized on an accelerated method over the
estimated weighted average life of the loans. Amortization is recorded as
a charge against loan servicing fee income. The Company's assumptions with
respect to prepayments, which affect the estimated average life of the
<PAGE> 50
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.
Mortgage servicing fees received from investors for servicing their loan
portfolios are recorded as loan servicing fees income when received. Loan
servicing costs are charged to noninterest expenses when incurred.
Loans
_____
Loans are carried at the principal amounts outstanding plus premiums paid
reduced by partial charge-offs and net deferred loan fees. 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. Loans are generally placed on nonaccrual status
when they are past due 90 days as to either principal or interest, or when
in management's judgment the collectibility of interest or principal of the
loan has been significantly impaired. When a loan has been placed on
nonaccrual status, previously accrued and uncollected interest is reversed
against interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has performed
for a period of time, generally six months. Loans are classified as
impaired when it is probable that the Company will not be able to collect
all amounts due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status and collateral value.
Allowance for Loan Losses
_________________________
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the
allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses based on evaluations of collectibility and prior
loss experience. The evaluation takes into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio
quality, specific problem loans, and current and anticipated economic
conditions that may affect the borrowers' ability to repay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, changing
economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
Premises and Equipment
______________________
<PAGE> 51
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line and accelerated methods over
the estimated useful lives of the assets or the term of the lease, if
shorter. Maintenance and repairs are charged to current expense as incurred
and the cost of major renewals and betterments are capitalized.
Long-lived assets are evaluated periodically for other-than-temporary
impairment. An assessment of recoverability is performed prior to any
writedown of the asset. If circumstances suggest that their value may be
permanently impaired, then an expense would be charged in the current
period.
Income Taxes
____________
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Other Real Estate Owned
_______________________
Other real estate owned is comprised of (1) properties or other assets
acquired through foreclosure proceedings, or acceptance of a deed or title
in lieu of foreclosure and (2) other assets repossessed in connection with
non-real estate loans. Other real estate owned is carried at the lower of
cost or fair value of the collateral less estimated selling expenses.
Losses arising from the acquisition of such properties are charged against
the allowance for loan losses. Operating expenses and any subsequent
provisions to reduce the carrying value are charged to current period
earnings. Gains and losses upon disposition are reflected in earnings as
realized.
Real Estate Held for Investment
_______________________________
Real estate properties held for investment are carried at the lower of cost,
including costs of improvements and amenities incurred subsequent to
acquisition, or fair value. Costs relating to development and improvement
of property are capitalized, whereas costs relating to holding property are
expensed. The Company recorded an allowance for losses of $100,000 during
the year ended June 30, 1997 in accordance with the provisions of FASB
Statement No. 121. The provision has been included as a reduction to other
income on the statement of income.
Goodwill
________
Goodwill arising from acquisitions is being amortized on a straight-line
basis over ten to fifteen years. Goodwill is reviewed for possible
impairment when events or changed circumstances may affect the underlying
<PAGE> 52
basis of the asset.
Advertising Expense
___________________
Advertising costs are expensed as incurred. Advertising costs were
approximately $145,000, $47,000 and $55,000, for the years ended June 30,
1997, 1996 and 1995, respectively.
Reclassification
________________
Certain prior year accounts and balances in the consolidated financial
statements have been reclassified to conform to the current year
presentation.
2. Available for Sale Securities
_____________________________
A summary of the cost and approximate fair values of available for sale
securities at June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
________________________ ________________________
Fair Fair
Cost Value Cost Value
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Debt securities issued
by the U.S. Treasury
and other U.S.
Government corporations
and agencies $ 1,498,913 $ 1,455,788 $ 1,497,111 $ 1,424,690
Corporate bonds 149,694 142,750 149,646 139,005
Equity securities 896,739 850,582 462,167 440,330
Mortgage-backed
securities 25,057,910 24,647,811 28,810,113 27,646,294
___________ ___________ ___________ ___________
$27,603,256 $27,096,931 $30,919,037 $29,650,319
=========== =========== =========== ===========
</TABLE>
The gross unrealized gains and unrealized losses on available for sale
securities are as follows:
<TABLE>
<CAPTION>
1997 1996
________________________ ________________________
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
<PAGE> 53
Debt securities issued
by the U. S. Treasury
and other U. S.
Government corporations
and agencies $ - $ 43,125 $ - $ 72,421
Corporate bonds - 6,944 - 10,641
Equity securities 28,965 75,122 5,321 27,158
Mortgage-backed
securities 37,503 447,602 17,664 1,181,483
___________ ___________ ___________ ___________
$ 66,468 $ 572,793 $ 22,985 $ 1,291,703
=========== =========== =========== ===========
</TABLE>
At June 30, 1997, investment securities with a market value of approximately
$9,161,000 were pledged as collateral to secure outstanding repurchase
agreements.
At June 30, 1997 and 1996, included in net unrealized losses on available
for sale securities as a reduction to stockholders' equity are net
unrealized losses of $506,325 and $1,268,718, respectively, net of the
deferred tax effect of $172,150 and $431,364, respectively.
The cost and fair values of available for sale securities at June 30, 1997
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.
<TABLE>
<CAPTION>
Fair
Cost Value
____________ ____________
<S> <C> <C>
Due in one year $ 248,913 $ 248,913
Due after one year through five years 250,000 242,500
Due after five years through ten years 149,694 142,750
Due after ten years 1,000,000 964,375
____________ ____________
1,648,607 1,598,538
Mortgage-backed securities (including
securities with interest rates ranging
from 5.15% to 8.5% maturing September 2003
to January 2027) 25,057,910 24,647,811
Equity securities 896,739 850,582
____________ ____________
$27,603,256 $27,096,931
============ ============
</TABLE>
The realized gains and losses on available for sale securities for the year
ended June 30, 1997 were $171,205 and $125, respectively, for the year ended
June 30, 1996 were $248,542 and $17,198, respectively, and for the year
ended June 30, 1995 were $280,257 and $231,212, respectively.
Based on management's assessment of available for sale securities, there has
<PAGE> 54
been more than a temporary decline in fair value of certain securities. At
June 30, 1997, 1996 and 1995, write-downs of available for sale securities
were $110,000, $93,819 and $0, respectively, and are included in other
expense in the statements of income.
During 1995, the Company purchased $12,399,000 in securities it classified
as held to maturity, since at the time of acquisition Company management had
the intention, and the Company had the ability, to hold such securities
until maturity. In the last quarter of fiscal 1995, as a result of its
planning process and changes in market conditions, Company management
determined that it no longer possessed the intent to hold such securities to
maturity. Consequently, the Company transferred its entire held to maturity
portfolio, with an aggregate cost of $18,775,000 and an aggregate fair value
of $18,822,000 (including unrealized gains and losses of $191,000 and
$144,000, respectively) to available for sale. The Company subsequently
sold selected of the aforementioned securities with an aggregate cost of
$11,900,000 and realized gains of $273,000 and realized losses of $225,000.
The Company's decision not to hold these securities to maturity does not
satisfy the limited criteria of Financial Accounting Standards No. 115 which
specifies circumstances in which it is permissible to sell or transfer held
to maturity securities. Consequently, the Company will, for the foreseeable
future, classify its securities portfolio as available for sale, or trading.
3. Loans Held for Sale
___________________
A summary of the carrying value and market value of loans held for sale at
June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
_______________________ _______________________
Carrying Market Carrying Market
Value Value Value Value
__________ __________ __________ __________
<S> <C> <C> <C> <C>
Real estate mortgages $ 240,000 $ 242,400 $ 448,475 $ 452,960
========== ========== ========== ==========
</TABLE>
At June 30, 1997 and 1996, gross unrealized gains on loans held for sale
were $2,400 and $4,485, respectively, and there were no unrealized losses.
4. Loans
_____
The Company's lending activities are conducted in south central and western
Maine. 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. 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
<PAGE> 55
the real estate economic sector in the borrowers' geographic area and the
general economy.
In the ordinary course of business, the Company has loan transactions with
its officers, directors and their associates and affiliated companies
("related parties") at substantially the same terms as those prevailing at
the time for comparable transactions with others. Such loans amounted to
$1,693,737 and $2,229,045 at June 30, 1997 and 1996, respectively. New
loans granted to related parties in 1997 totaled $305,863; payments and
reductions amounted to $841,171. In 1996, new loans granted to related
parties totaled $478,166; payments and reductions amounted to $813,351.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
________________________________________
1997 1996 1995
____________ ____________ ____________
<S> <C> <C> <C>
Balance at beginning of year $ 2,549,000 $ 2,396,000 $ 2,463,000
Provision charged to operating
expenses 578,427 602,860 640,634
Loans charged off (739,969) (525,653) (760,733)
Recoveries on loans charged off 129,542 75,793 53,099
____________ ____________ ____________
Net loans charged off (610,427) (449,860) (707,634)
____________ ____________ ____________
Balance at end of year $ 2,517,000 $ 2,549,000 $ 2,396,000
============ ============ ============
</TABLE>
Commercial and commercial real estate loans with balances greater than
$25,000 are considered impaired when it is probable that the Company will
not collect all amounts due in accordance with the contractual terms of the
loan. Except for certain restructured loans, impaired loans are loans that
are on nonaccrual status. Loans that are returned to accrual status are no
longer considered to be impaired. Certain loans are exempt from individual
impairment evaluation, including large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment, such as consumer and
residential mortgage loans and commercial loans with balances less than
$25,000.
The 1997 and 1996 allowance for loan losses related to loans that are
identified as impaired includes impairment reserves, which are based on
discounted cash flows using the loan's effective interest rate, or the fair
value of the collateral for collateral-dependent loans, or the observable
market price of the impaired loan. When foreclosure is probable, impairment
is measured based on the fair value of the collateral. Loans that
experience insignificant payment delays (less than 60 days) and
insignificant shortfalls in payment amounts (less than 10%) generally are
not classified as impaired, as well as, commercial loans with balances less
than $25,000. Restructured loans are reported as impaired in the year of
restructuring. Thereafter, such loans may be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated
terms. A loan is classified as an insubstance foreclosure when the Company
<PAGE> 56
has taken possession of the collateral, regardless of whether formal
foreclosure proceedings take place.
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. At June 30, 1996,
total impaired loans were $1,530,650 of which $1,063,720 had related
allowances of $499,200. During the year ended June 30, 1996, the income
recognized related to impaired loans was $87,128 and the average balance of
outstanding impaired loans was $1,799,087. 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, 1997 and 1996 totaled approximately $2,424,000 and $2,603,000,
respectively. Interest income that would have been recorded under the
original terms of such loans, net of interest income actually recognized for
the years ended June 30, 1997, 1996 and 1995, totaled approximately
$176,000, $228,000 and $266,000, 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 originated and sold of
approximately $34,683,000, $39,940,000 and $32,560,000 at June 30, 1997,
1996 and 1995, respectively. In the past, the Company purchased loan
servicing rights from another institution. The balance of the loans
serviced under this agreement was approximately $7,826,000, $9,676,000 and
$12,983,000 at June 30, 1997, 1996 and 1995, respectively.
5. Premises and Equipment
______________________
Premises and equipment at June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
____________ ____________
<S> <C> <C>
Land $ 784,109 $ 784,109
Buildings 2,114,006 2,149,215
Leasehold and building improvements 1,007,931 636,814
Furniture, fixtures and equipment 3,630,525 3,119,569
____________ ____________
7,536,571 6,689,707
Less accumulated depreciation 3,575,868 3,113,321
____________ ____________
Net premises and equipment $ 3,960,703 $ 3,576,386
============ ============
</TABLE>
Depreciation and amortization of premises and equipment, included in
<PAGE> 57
occupancy and equipment expense, was $593,251, $670,774 and $599,868 for
the years ended June 30, 1997, 1996 and 1995, respectively.
6. Other Real Estate Owned
_______________________
The following table summarizes the composition of other real estate owned
at June 30:
<TABLE>
<CAPTION>
1997 1996
____________ ____________
<S> <C> <C>
Real estate properties acquired in settlement
of loans $ 543,250 $ 613,831
Less allowance for losses 50,839 100,000
____________ ____________
$ 492,411 $ 513,831
============ ============
</TABLE>
Activity in the allowance for losses on other real estate owned was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
__________ __________ __________
<S> <C> <C> <C>
Balance at beginning of year $ 100,000 $ 5,289 $ 49,405
Provision for losses on other real
estate owned 39,000 94,711 107,173
Other real estate owned write-downs (88,161) - (151,289)
__________ __________ __________
Balance at end of year $ 50,839 $ 100,000 $ 5,289
========== ========== ==========
</TABLE>
7. Deposits
________
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate 1997 1996
at June _____________________ _____________________
30,1997 Amount Percent Amount Percent
________ _____________ _______ _____________ _______
<S> <C> <C> <C> <C> <C>
Demand 0.00% $ 12,056,336 7.8% $ 11,424,481 7.9%
NOW 1.26 11,428,705 7.4 13,516,135 9.3
<PAGE> 58
Money market 3.44 12,317,349 8.0 12,291,543 8.5
Regular savings 2.60 20,389,221 13.2 21,884,843 15.1
Certificates of
deposit:
1.00 - 3.75% 1.32 314,846 .2 256,272 .2
3.76 - 5.75% 5.34 50,355,740 32.6 51,745,006 35.6
5.76 - 7.75% 6.23 47,415,692 30.7 32,963,106 22.7
7.76 - 9.75% 8.75 132,798 .1 1,113,983 .7
________ _____________ _______ _____________ _______
4.38% $154,410,687 100.0% $145,195,369 100.0%
======== ============= ======= ============= =======
</TABLE>
At June 30, 1997, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
There-
1998 1999 2000 2001 2002 after
___________ __________ __________ __________ __________ _______
<S> <C> <C> <C> <C> <C> <C>
1.00 - 3.75% $ 283,598 $ 6,992 $ 24,256 $ - $ - $ -
3.76 - 5.75% 43,717,335 5,675,311 455,143 422,665 75,243 10,043
5.76 - 7.75% 26,248,599 9,935,796 4,608,497 2,028,549 4,594,251 -
7.76 - 9.75% 131,183 1,615 - - - -
</TABLE>
Interest expense on deposits for the years ended June 30, 1997, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
____________ ____________ ____________
<S> <C> <C> <C>
NOW $ 158,485 $ 265,551 $ 264,143
Money market 439,058 446,950 455,080
Regular savings 542,652 596,863 610,415
Certificates of deposit 5,214,608 5,116,808 4,113,465
____________ ____________ ____________
$ 6,354,803 $ 6,426,172 $ 5,443,103
============ ============ ============
</TABLE>
8. Federal Home Loan Bank Borrowings
---------------------------------
A summary of borrowings from the Federal Home Loan Bank are as follows:
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------
Principal Interest Maturity
<PAGE> 59
Amounts Rates Dates
--------------- --------------- ---------------
<C> <C> <C>
$ 54,407,706 4.97% - 6.39% 1998
15,606,482 5.64% - 6.20% 1999
3,000,000 6.27% 2000
273,080 6.40% 2001
1,441,827 6.21% - 6.49% 2002
290,652 6.61% 2003
1,973,614 6.36% - 6.67% 2004
2,000,000 6.65% 2005
---------------
$ 78,993,361
===============
June 30, 1996
-------------------------------------------------------
Principal Interest Maturity
Amounts Rates Dates
--------------- --------------- ---------------
$ 31,400,000 5.17% - 8.30% 1997
5,573,000 4.97% - 6.86% 1998
14,500,000 5.64% - 6.35% 1999
325,000 6.40% 2001
325,000 6.61% 2003
---------------
$ 52,123,000
===============
</TABLE>
Mortgages, free of liens, pledges and encumbrances, investment securities
not otherwise pledged, and the Company's Federal Home Loan Bank stock
equal to at least 200% of the borrowings from that bank have been pledged
to secure these borrowings. The Company is required to own stock of the
Federal Home Loan Bank of Boston in order to borrow from the Federal Home
Loan Bank. One of the Federal Home Loan Bank borrowings held at June 30,
1997 is adjustable and, therefore, the rate is subject to change.
9. Notes Payable
-------------
Notes payable at June 30, 1997 and 1996 primarily consisted of a $2.5
million loan from an unrelated financial institution for the acquisition
of a bank. The note is payable in eighteen equal quarterly principal
payments of $76,389. Interest is payable monthly at 8%. The Company has
pledged Northeast Bank F.S.B. common stock and a $1 million key man life
insurance policy as collateral for the loan.
The loan agreement contains certain covenants which limits capital
expenditures of the Company and the amount of nonperforming loans and
requires minimum loan loss reserves, capital, return on assets, and the
Company is required to obtain approval from the lender before the Company
can commit to a merger or consolidation with another entity. At June 30,
1997, the Company complied with these covenants with the exception of the
merger and consolidation covenant which was approved by the lender.
<PAGE> 60
10. Securities Sold Under Repurchase Agreements
-------------------------------------------
During 1997 and 1996, the Company sold securities under agreements to
repurchase. The weighted average interest rate on repurchase agreements
was 4.25% at June 30, 1997 and 1996. These borrowings, which were
scheduled to mature within 180 days, were collateralized by FHLMC and GNMA
securities with a market value of $9,161,000 and amortized cost of
$9,300,000 at June 30, 1997, and a market value of $5,689,000 and
amortized cost of $5,875,000 at June 30, 1996. The repurchase agreements
averaged $4,566,000 and $3,516,000 during the years ended June 30, 1997
and 1996, respectively. The maximum amount outstanding at any month-end
during 1997 and 1996 was $5,214,000 and $4,201,000, respectively.
Securities sold under these agreements were under the control of the
Company during 1997 and 1996.
11. Regulatory Capital and Other Matters
------------------------------------
The Company 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company'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."
Management believes that as of June 30, 1997 and June 30, 1996, the
Company meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the OTS categorized
the Company as well capitalized. There are no conditions or events since
that notification that management believes have changed the Company's
category. The following is a summary of the actual capital amounts and
ratios, as of June 30, 1997 and June 30, 1996, compared to the OTS minimum
bank capital adequacy requirements and their requirements for
classification as a well capitalized institution.
<TABLE>
<CAPTION>
For
Minimum Classification As
Actual Capital Adequacy Well Capitalized
-------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ---------- ----- --------- ------
<PAGE> 61
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
As of June 30, 1997:
Tangible capital:
Northeast Bancorp $15,984 6.2% >$ 3,898 >1.5% >$ 3,898 > 1.5%
Northeast Bank 17,733 6.8% > 3,892 >1.5% > 3,892 > 1.5%
Core capital:
Northeast Bancorp $15,984 6.2% >$ 7,797 >3.0% >$12,994 > 5.0%
Northeast Bank 17,733 6.8% > 7,785 >3.0% > 12,975 > 5.0%
Risked-based capital
(total capital):
Northeast Bancorp $17,096 10.8% >$ 12,709 >8.0% >$15,886 >10.0%
Northeast Bank 18,840 11.9% > 12,677 >8.0% > 15,847 >10.0%
As of June 30, 1996:
Tangible capital:
Northeast Bancorp $14,415 6.5% >$ 3,305 >1.5% >$ 3,305 > 1.5%
Northeast Bank 15,386 7.0% > 3,291 >1.5% > 3,291 > 1.5%
Core capital:
Northeast Bancorp $14,415 6.5% >$ 6,611 >3.0% >$11,018 > 5.0%
Northeast Bank 15,386 7.0% > 6,582 >3.0% > 10,970 > 5.0%
Risked-based capital
(total capital):
Northeast Bancorp $15,378 11.8% >$ 10,438 >8.0% >$13,048 >10.0%
Northeast Bank 16,349 12.6% > 10,362 >8.0% > 12,952 >10.0%
</TABLE>
The Company is also subject to certain capital requirements established by
the FDIC. At June 30, 1997 and June 30, 1996, the Company's capital
exceeded the regulatory requirements.
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 OTS.
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.
12. Earnings Per Share
------------------
Earnings per share have been computed on the basis of the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding were: 1,329,000, 1,270,000 and 1,227,400 for the
years ended June 30, 1997, 1996 and 1995, respectively. Common stock
equivalents and potentially dilutive securities were considered in the
calculations of weighted average shares outstanding, since their effect
was dilutive. Preferred stock dividends have been deducted from net income
<PAGE> 62
in the calculation of earnings per share for each of the years.
In February 1997, the FASB issued Statement No. 128, Earnings Per Share.
This Statement requires disclosure of "basic" and "diluted" earnings per
share. The Statement is required to be implemented retroactively in the
second quarter of fiscal year 1998. Management has not determined the
impact of the adoption of Statement No. 128.
13. Preferred Stock
---------------
The preferred stock, Series A and B, may be converted to common stock on a
two to one ratio at the option of the holder and carries voting rights.
Dividends are to be paid to the holder of the preferred stock quarterly at
a rate equal to interest at prime rate less two percent but in no event
less than 7% per annum. The Series B preferred stock was issued with
warrants attached for a term of seven years to purchase shares of the
Company's common stock at $7 per share. During 1997 25,000 such warrants
were exercised for a total of $175,000. At June 30, 1997, there remains
outstanding warrants to purchase 108,764 shares of the Company's common
stock which expire May 1999.
14. Other Expenses
--------------
Other expenses includes the following for the years ended June 30, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Professional fees $ 338,670 $ 305,721 $ 304,547
Insurance 106,057 117,998 110,029
Supplies 234,052 211,126 248,951
Real estate owned expenses 64,907 87,442 99,272
Provision for losses on OREO 39,000 94,711 107,173
Goodwill amortization 296,374 308,913 235,098
Write-down on securities 110,000 93,819 --
Other 1,507,692 1,564,873 1,395,886
------------ ------------ ------------
$ 2,696,752 $ 2,784,603 $ 2,500,956
============ ============ ============
</TABLE>
15. Income Taxes
------------
The current and deferred components of income tax expense (benefit) were
as follows for the years ended June 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Federal:
Current $ 941,276 $ 668,441 $ 714,055
<PAGE> 63
Deferred (72,290) 19,236 122,143
------------ ------------ ------------
868,986 687,677 836,198
State and local - current 38,611 30,935 32,357
------------ ------------ ------------
$ 907,597 $ 718,612 $ 868,555
============ ============ ============
</TABLE>
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Expected income
tax expense at
federal tax rate $ 820,998 34.0% $ 650,091 34.0% $ 801,698 34.0%
State tax, net of
federal tax benefit 25,483 1.1 20,417 1.1 21,562 .9
Amortization of
goodwill 42,192 1.7 42,192 2.2 34,671 1.5
Dividend received
deduction (6,873) (.3) (6,903) (.4) (5,333) (.2)
Low income/
rehabilitation
credit (20,000) (.8) (20,000) (1.0) (20,000) (.9)
Other 45,797 1.9 32,815 1.7 35,957 1.5
---------- ------ ---------- ------ ---------- ------
$ 907,597 37.6% $ 718,612 37.6% $ 868,555 36.8%
========== ====== ========== ====== ========== ======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for
loan losses $ 842,000 $ 650,000
Deferred gain on loan sales 67,000 59,000
Interest on nonperforming loans 60,000 77,000
<PAGE> 64
Difference in tax and financial statement
bases of investments 241,000 492,000
Difference in tax and financial statement
amortization of goodwill 73,000 48,000
Other 63,000 82,000
----------- -----------
Total deferred tax assets 1,346,000 1,408,000
Deferred tax liabilities:
Loan loss reserve - tax (73,000) (61,000)
Other (32,000) (35,000)
----------- -----------
Total deferred tax liabilities (105,000) (96,000)
----------- -----------
Net deferred tax assets, included in
other assets $1,241,000 $1,312,000
=========== ===========
</TABLE>
The Company has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset of $1,346,000.
Accordingly, no valuation allowance has been recorded at June 30, 1997 and
1996.
During 1997, as a result of an IRS examination and other factors, the
Company's deferred tax asset was increased on a net basis by $116,000,
with an offset to current taxes payable.
In August 1996, the provisions repealing the then current thrift bad debt
rules were passed by Congress. The new rules eliminate the 8% of taxable
income method for deducting additions to the tax bad debt reserves for all
thrifts for tax years beginning after December 31, 1995. These rules also
require that all thrift institutions recapture all or a portion of their
tax bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Company has previously recorded a
deferred tax liability equal to the tax bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax
expense.
The unrecaptured base year reserves will not be subject to recapture as
long as the Company continues to carry on the business of banking. In
addition, the balance of the pre-1988 tax bad debt reserves continue to be
subject to provisions of present law that require recapture in the case of
certain excess distributions to stockholders. For federal income tax
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.
16. Mergers and Acquisitions
------------------------
Merger of Bank
--------------
On May 9, 1997, the Company entered into a definitive agreement to merge
with Cushnoc Bank and Trust Company (Cushnoc) of Augusta, Maine. The
agreement, which has been approved by the Company's Board of Directors and
<PAGE> 65
by the Board of Directors of Cushnoc, is subject to approval by Cushnoc's
stockholders and receipt of the necessary regulatory approvals and is
expected to be consummated during the third or fourth quarter of calendar
year 1997.
At March 31, 1997, Cushnoc had approximately $20,939,000 in total assets
and stockholders' equity of approximately $2,174,000. Under the terms of
the agreement, the Company will issue 2.089 shares of its common stock for
each common share of Cushnoc outstanding. At March 31, 1997, Cushnoc had
90,000 common shares outstanding. The acquisition will be accounted for
using the pooling of interests method. At the closing, Cushnoc will be
merged into the Company's banking subsidiary, Northeast Bank, F.S.B. Pro
forma financial information is not presented due to immateriality.
Acquisition of Bank Branches
----------------------------
During 1995, the Company acquired four branches from Key Bank of Maine.
The total deposits assumed were $27,749,000. The premium paid to Key Bank
for these deposits was $1,590,228. In addition to the assumed deposits,
the Company acquired real estate, buildings and furniture totalling
$498,500 and other miscellaneous assets and liabilities which are
immaterial. The excess of cost over the net assets acquired is being
amortized over 10 years. The acquisition was accounted for using purchase
accounting.
17. 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 for the profit sharing plan for the years ended June
30, 1997, 1996 and 1995 were $130,000, $99,000 and $76,000, respectively.
401(k) Plan
-----------
The Company offers a contributory 401(k) plan which is available to all
full-time salaried and hourly-paid employees who are regularly scheduled
to work 1,000 hours or more in a Plan year, have attained age 21, and have
completed one year of employment. Employees may contribute between 1% and
15% of their base compensation to which the Company will match 50% up to
the first 3% contributed. For the years ended June 30, 1997, 1996 and
1995, the Company contributed approximately $38,300, $36,800 and $30,800,
respectively.
Stock Option Plans
------------------
The Company adopted Stock Option Plans in 1987, 1989 and 1992. Both
"incentive stock options" and "nonqualified stock options" may be granted
pursuant to the Option Plans. Under the Option Plans, incentive stock
options may only be granted at the fair market value to employees of the
Company. In the case of nonqualified stock options, which may be granted
to employees and nonemployee directors, the difference between the
exercise price and the fair market value of the common stock on the date
of exercise will be a tax deductible expense to the Company. All options
<PAGE> 66
granted under the Option Plans will be required to have an exercise price
per share equal to at least the fair market value of the 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 236,000 shares of
unissued common stock are reserved for issuance pursuant to incentive
stock options and 60,000 shares of unissued common stock are reserved for
issuance pursuant to nonqualified stock options.
A summary of option activity for the years ended June 30 follows. There
was no activity related to the non-qualified plan in 1997, 1996 and 1995,
nor were any such options outstanding:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 93,000 $ 7.66 136,000 $ 7.05 95,000 $ 5.24
Granted 15,000 12.50 -- -- 45,000 11.25
Exercised (20,000) 5.17 (38,000) 5.00 -- --
Forfeited (1,000) 12.50 (5,000) 11.25 (4,000) 11.25
-------- --------- -------- --------- -------- ---------
Outstanding at
end of year 87,000 $ 9.02 93,000 $ 7.66 136,000 $ 7.05
======== ========= ======== ========= ======== =========
Options
exercisable at
year end 87,000 $ 9.02 93,000 $ 7.66 136,000 $ 7.05
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices June 30, 1997 Contractual Life Exercise Price
---------------- ---------------- ---------------- ----------------
<C> <C> <C> <C>
$ 5.37 to $5.69 37,000 2.0 years $ 5.52
<PAGE> 67
$11.25 to $13.63 50,000 8.0 11.62
----------------
$ 5.37 to $13.63 87,000 6.0 9.02
================
</TABLE>
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation, which became effective on July 1, 1996 for the
Company. This Statement establishes a fair value based method of
accounting for stock-based compensation plans under which compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period.
The per share weighted average fair value of stock options granted during
1997 was $3.15 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, 2.21%; risk-free interest rate,
6.45%; expected life, 8 years; and expected volatility, 10.84%.
Statement No. 123 allows the Company to continue to measure compensation
cost for such plans under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. Under APB Opinion No. 25, 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. The Company has elected to continue to follow the accounting under
APB Opinion No. 25 and, accordingly, no cost has been recognized for its
stock options in the financial statements. Had the Company determined cost
based on the fair value at the grant date for its stock options under
Statement No. 123, the Company's net income and earnings per share for the
year ended June 30, 1997 would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
Earnings Per Share
Net -------------------------------
Income Primary Fully Diluted
------------- ------------- -------------
<S> <C> <C> <C>
As reported $ 1,507,103 $ 1.03 $ 0.96
Pro forma $ 1,480,311 $ 1.01 $ 0.94
</TABLE>
The pro forma amounts reflect only stock options granted in 1997.
Therefore, the full impact of calculating the cost for stock options under
Statement No. 123 is not reflected in the pro forma amounts presented
above because the cost for options granted prior to July 1, 1995 is not
considered under the requirements of Statement No. 123.
Stock Purchase Plan
-------------------
The Company has a stock purchase plan which covers substantially all full-
time employees with one year of service. Offerings under the Plan are
made quarterly at the market value on the offering termination date. The
maximum number of shares which may be granted under the plan is 104,000
shares.
<PAGE> 68
18. 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:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Commitments to originate loans:
Residential real estate mortgages $ 2,134,000 $ 4,975,000
Commercial real estate mortgages,
including multi-family residential
real estate 2,113,000 4,045,000
Commercial business loans 1,068,000 1,565,000
------------ ------------
5,315,000 10,585,000
Unused lines of credit 9,265,000 6,321,000
Standby letters of credit 452,000 221,000
Unadvanced portions of construction loans 1,077,000 2,244,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counter party. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the
<PAGE> 69
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 $180,000, $101,000 and $95,000 for
the years ended June 30, 1997, 1996 and 1995, respectively.
Approximate minimum lease payments over the remaining terms of the leases
at June 30, 1997 are as follows:
<TABLE>
<C> <C>
1998 $ 256,000
1999 258,000
2000 162,000
2001 132,000
2002 132,000
2003 and after 612,000
------------
$ 1,552,000
============
</TABLE>
19. Condensed Parent Information
----------------------------
Condensed financial statements for Northeast Bancorp at June 30, 1997 and
1996 and for each of the years in the three year period ended June 30,
1997 are presented below.
Balance Sheets
--------------
<TABLE>
<PAGE> 70
<CAPTION>
June 30,
-----------------------------------
Assets 1997 1996
------------------------------- --------------- ---------------
<S> <C> <C>
Cash and due from banks $ 818,965 $ 1,235,116
Investment in subsidiary 18,834,184 16,556,065
Premises and equipment, net 376,012 625,632
Goodwill, net 815,793 917,766
Other assets 367,118 385,848
--------------- ---------------
Total assets $ 21,212,072 $ 19,720,427
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Note payable $ 1,298,611 $ 1,500,000
Other liabilities 12,848 69,185
--------------- ---------------
1,311,459 1,569,185
Stockholders' equity 19,900,613 18,151,242
--------------- ---------------
Total liabilities and stockholders'
equity $ 21,212,072 $ 19,720,427
=============== ===============
</TABLE>
Statements of Income
--------------------
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Dividends from banking subsidiary $ -- $1,436,000 $ --
Management fees charged to
subsidiary -- 2,119,992 1,673,179
Other income 16,232 25,100 30,083
----------- ----------- -----------
Total income 16,232 3,581,092 1,703,262
Expenses:
Amortization expense 101,973 114,513 102,939
Interest on note payable 112,753 176,140 205,869
Salaries and benefits -- 1,326,271 1,318,246
Occupancy expense 65,257 140,065 125,289
Equipment expense -- 179,977 159,161
General and administrative expenses 86,457 422,411 383,980
----------- ----------- -----------
Total expenses 366,440 2,359,377 2,295,484
----------- ----------- -----------
<PAGE> 71
Income (loss) before income tax
benefit, and equity (deficit) in
undistributed net income of
subsidiary (350,208) 1,221,715 (592,222)
Income tax benefit 82,371 31,771 166,182
----------- ----------- -----------
Income (loss) before equity
(deficit) in undistributed
net income of subsidiary (267,837) 1,253,486 (426,040)
Equity (deficit) in undistributed
net income of subsidiary 1,774,940 (60,066) 1,915,421
----------- ----------- -----------
Net income $1,507,103 $1,193,420 $1,489,381
=========== =========== ===========
Years Ended June 30,
Statements of Cash Flows 1997 1996 1995
------------------------ ----------- ----------- -----------
Cash flows from operating
activities:
Net income $1,507,103 $1,193,420 $1,489,381
Adjustments to reconcile net
income to net cash provided
(used) by operations:
Depreciation and amortization 114,775 253,569 208,003
Treasury stock bonused 13,374 -- --
Undistributed (earnings) deficit
of subsidiary (1,774,940) 60,066 (1,915,421)
Decrease (increase) in other
assets 17,467 (72,132) 24,182
(Decrease) increase in other
liabilities (56,337) (70,375) 23,242
----------- ----------- -----------
Net cash (used) provided by
operating activities (178,558) 1,364,548 (170,613)
Cash flows from investing
activities:
Proceeds from sale of premises
and equipment to subsidiary 245,167 24,473 --
Purchase of premises and
equipment (7,086) (167,217) (84,439)
----------- ----------- -----------
Net cash provided (used) by
investing activities 238,081 (142,744) (84,439)
Cash flows from financing
activities:
Principal payments on note payable (201,389) (500,000) (500,000)
Stock options exercised 103,450 190,000 --
Proceeds from issuance of common
stock 13,487 11,558 2,193
Treasury stock purchased (28,420) (52,277) --
<PAGE> 72
Dividends paid to stockholders (537,802) (424,890) (315,175)
Warrants exercised 175,000 700,000 --
----------- ----------- -----------
Net cash flow used by financing
activities (475,674) (75,609) (812,982)
----------- ----------- -----------
Net (decrease) increase in cash (416,151) 1,146,195 (1,068,034)
Cash and cash equivalents,
beginning of year 1,235,116 88,921 1,156,955
----------- ----------- -----------
Cash and cash equivalents,
end of year $ 818,965 $1,235,116 $ 88,921
=========== =========== ===========
Supplemental schedule of cash
flow information:
Interest paid $ 111,490 $ 157,959 $ 201,126
Income taxes paid 620,000 913,000 794,000
</TABLE>
20. Fair Value of Financial Instruments
-----------------------------------
Fair value estimates, methods, and assumptions are set forth below for the
Company's significant financial instruments.
Cash and Cash Equivalents
-------------------------
The fair value of cash, due from banks, interest bearing deposits and FHLB
overnight deposits approximates their relative book values, as these
financial instruments have short maturities.
Trading Account Securities and Available for Sale Securities
------------------------------------------------------------
The fair value of investment securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
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
<PAGE> 73
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 market value of this financial instrument approximates the book
value as this financial instrument has a short maturity. It is the
Company's policy to stop accruing interest on loans past due by more than
ninety days. Therefore this financial instrument has been adjusted for
estimated credit loss.
Deposits
--------
The fair value of deposits with no stated maturity, such as non-interest-
bearing demand deposits, savings, NOW accounts and money market accounts,
is equal to the amount payable on demand. The fair values of certificates
of deposit are based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market. If that value was considered, the fair
value of the Company's net assets could increase.
Borrowed Funds, Notes 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 notes 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
-----------
<PAGE> 74
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These values do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
a particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial instruments include the
deferred tax asset, premises and equipment, and other real estate owned.
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
The following table presents the estimated fair value of the Company's
significant financial instruments at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Non-Trading
Instruments:
-------------
Financal assets:
Cash and cash
equivalents $ 15,661,000 $ 15,661,000 $ 11,566,000 $ 11,566,000
Available for sale
securities 27,097,000 27,097,000 29,650,000 29,650,000
Loans held for sale 240,000 242,000 448,000 452,000
Loans 203,839,000 205,165,000 167,302,000 165,730,000
Interest receivable 1,480,000 1,480,000 1,352,000 1,352,000
Financial liabilities:
Deposits (with no
stated maturity) 56,192,000 56,192,000 59,117,000 59,117,000
Time deposits 98,219,000 98,711,000 86,078,000 85,995,000
Borrowed funds 78,993,000 78,990,000 52,123,000 51,888,000
Notes payable 1,299,000 1,299,000 1,502,000 1,502,000
Repurchase agreements 5,099,000 5,099,000 3,763,000 3,763,000
Trading Instruments:
--------------------
Financial assets:
<PAGE> 75
Trading account
securities 25,000 25,000 198,000 198,000
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northeast Bancorp and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Northeast Bancorp and Subsidiary as of June 30, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northeast Bancorp
and Subsidiary as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
Portland, Maine /s/ Baker Newman & Noyes
-------------------------
August 6, 1997 Limited Liability Company
(b) Supplementary Financial Information
-----------------------------------
Northeast Bancorp Consolidated
Distribution of Assets, Liabilities and Net Worth
Interest Rates and Interest Differential
Years Ending June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
June 30, 1997
- -------------
Interest Average
Average Income/ Yield/
Balance Expense Rate
------------- ------------- -----------
<S> <C> <C> <C>
<PAGE> 76
Assets:
Earning Assets:
Securities Held to Maturity -- -- --
Securities Available for Sale 2,383,410 135,307 5.68%
Trading Securities 118,954 7,426 6.24%
Mortgage-backed Securities 27,746,934 2,029,223 7.31%
FHLB Stock 3,416,358 219,916 6.44%
Loans (3) 186,950,210 17,225,937 9.21%
FHLB Overnight Deposits & Other 7,770,626 411,331 5.29%
------------- ------------- -----------
Total Earning Assets 228,386,492 20,029,140 8.77%
------------- ------------- -----------
Non-interest Earning Assets:
Cash & Due from Banks 3,280,253
Premise & Equip Net 3,763,788
Other Assets 6,747,915
(Allowance for Loan Loss) (2,549,274)
-------------
Total Assets $239,629,174
=============
Liabilities & Net Worth:
Interest Bearing Liabilities:
Deposits
Now $ 12,348,929 158,485 1.28%
Money Market 13,045,542 439,058 3.37%
Savings 20,407,224 542,652 2.66%
Time 90,942,748 5,214,608 5.73%
------------- ------------- -----------
Total Deposits 136,744,443 6,354,803 4.65%
Repurchase Agreements 4,566,385 199,453 4.37%
Other Borrowed Funds 66,302,613 3,945,840 5.95%
------------- ------------- -----------
Total Interest Bearing Liabilities 207,613,441 10,500,096 5.06%
------------- ------------- -----------
Non-interest Bearing Liabilities
Demand 11,565,488
Other 1,523,687
Net Worth 18,926,558
-------------
Total Liabilities & Net Worth $239,629,174
=============
Net Interest Income $ 9,529,044
=============
Interest Rate Spread (1) 3.71%
Net yield on Interest Earning Assets (2) 4.17%
Equity to Assets Ratio (4) 7.90%
June 30, 1996
- -------------
Interest Average
Average Income/ Yield/
<PAGE> 77
Balance Expense Rate
------------- ------------- -----------
Assets:
Earning Assets:
Securities Held to Maturity -- -- --
Securities Available for Sale 1,432,475 89,684 6.26%
Trading Securities 162,430 5,474 3.37%
Mortgage-backed Securities 16,013,118 1,149,407 7.18%
FHLB Stock 2,270,262 148,762 6.55%
Loan (3) 169,908,865 16,010,685 9.42%
FHLB Overnight Deposits & Other 10,523,674 590,850 5.61%
------------- ------------- -----------
Total Earning Assets 200,310,824 17,994,862 8.98%
------------- ------------- -----------
Non-interest Earning Assets:
Cash & Due from Banks 3,318,095
Premise & Equip Net 3,784,213
Other Assets 7,444,099
(Allowance for Loan Loss) (2,482,368)
-------------
Total Assets $212,374,863
=============
Liabilities & Net Worth:
Interest Bearing Liabilities:
Deposits
Now $ 14,801,458 265,551 1.79%
Money Market 12,980,882 446,950 3.44%
Savings 22,258,232 596,863 2.68%
Time 87,364,527 5,116,808 5.86%
------------- ------------- -----------
Total Deposits 137,405,099 6,426,172 4.68%
Repurchase Agreements 3,516,283 166,210 4.73%
Other Borrowed Funds 40,797,048 2,536,022 6.22%
------------- ------------- -----------
Total Interest Bearing Liabilities 181,718,430 9,128,404 5.02%
------------- ------------- -----------
Non-interest Bearing Liabilities
Demand 10,019,506
Other 2,323,046
Net Worth 18,313,881
-------------
Total Liabilities & Net Worth $212,374,863
=============
Net Interest Income $ 8,866,458
=============
Interest Rate Spread (1) 3.96%
Net yield on Interest Earning Assets (2) 4.43%
Equity to Assets Ratio (4) 8.62%
June 30, 1995
<PAGE> 78
- -------------
Interest Average
Average Income/ Yield/
Balance Expense Rate
------------- ------------- -----------
Assets:
Earning Assets:
Securities Held to Maturity $ 897,691 $ 75,691 8.43%
Securities Available for Sale 971,763 60,159 6.19%
Trading Securities 186,757 1,165 0.62%
Mortgage-backed Securities 15,181,721 1,088,420 7.17%
FHLB Stock 2,470,616 189,980 7.69%
Loans (3) 164,344,609 15,085,138 9.18%
FHLB Overnight Deposits & Other 7,763,217 422,372 5.44%
------------- ------------- -----------
Total Earning Assets 191,816,374 16,922,925 8.82%
------------- ------------- -----------
Non-interest Earning Assets:
Cash & Due from Banks 3,342,796
Premise & Equip Net 3,594,335
Other Assets 8,078,832
(Allowance for Loan Loss) (2,569,032)
-------------
Total Assets $204,263,305
=============
Liabilities & Net Worth:
Interest Bearing Liabilities:
Deposits
Now $ 14,673,951 264,143 1.80%
Money Market 14,352,970 455,080 3.17%
Savings 23,027,846 610,415 2.65%
Time 80,114,965 4,113,465 5.13%
------------- ------------- -----------
Total Deposits 132,169,732 5,443,103 4.12%
Repurchase Agreements 1,776,296 84,921 4.78%
Other Borrowed Funds 43,496,049 2,524,896 5.80%
------------- ------------- -----------
Total Interest Bearing Liabilities 177,442,077 8,052,920 4.54%
------------- ------------- -----------
Non-interest Bearing Liabilities
Demand 8,526,363
Other 1,904,767
Net Worth 16,390,098
-------------
Total Liabilities & Net Worth $204,263,305
=============
Net Interest Income $ 8,870,005
=============
Interest Rate Spread (1) 4.28%
Net yield on Interest Earning Assets (2) 4.62%
Equity to Assets Ratio (4) 8.02%
</TABLE>
<PAGE> 79
(1) Interest rate spread is the difference between the yield on earning assets
and the rates paid on interest-bearing liabilities.
(2) Net yield on interest earning assets is net interest income divided by
average earning assets.
(3) Non-accruing loans are included in the average of net loans.
(4) Average equity divided by average assets.
Northeast Bancorp Consolidated
Changes in Net Interest Income
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
June 30, 1997 Compared to June 30, 1996
- ---------------------------------------
Variance Variance Variance
Due to Due to Due to Total
Rate Volume Rate/Volume Variance
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Earning Assets:
Securities Held to Maturity $ 0 $ 0 $ 0 $ 0
Securities Available for Sale (8,362) 59,536 (5,551) 45,623
Trading Securities 4,666 (1,465) (1,249) 1,952
Mortgage-backed Securities 21,684 842,243 15,889 879,816
FHLB Stock (2,622) 75,099 (1,323) 71,154
Loans (354,969) 1,605,823 (35,602) 1,215,252
FHLB Overnight Deposits & Other (33,789) (154,569) 8,839 (179,519)
----------- ----------- ----------- -----------
Total Income on Earning Assets (373,392) 2,426,667 (18,997) 2,034,278
----------- ----------- ----------- -----------
Interest Bearing Liabilities:
Deposits:
Now (75,590) (44,000) 12,524 (107,066)
Money Market (10,068) 2,226 (50) (7,892)
Savings (4,991) (49,635) 415 (54,211)
Time (107,373) 209,571 (4,398) 97,800
----------- ----------- ----------- -----------
Total Deposits (198,022) 118,162 8,491 (71,369)
Repurchase Agreements (12,624) 49,637 (3,770) 33,243
Borrowed funds (57,351) 1,501,117 (33,948) 1,409,818
----------- ----------- ----------- -----------
Total Interest Expense (267,997) 1,668,916 (29,227) 1,371,692
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Change in Net interest Income $ (105,395) $ 757,751 $ 10,230 $ 662,586
=========== =========== =========== ===========
June 30, 1996 Compared to June 30, 1995
- ---------------------------------------
Variance Variance Variance
Due to Due to Due to Total
<PAGE> 80
Rate Volume Rate/Volume Variance
----------- ----------- ----------- -----------
Interest Earning Assets:
Securities Held to Maturity $ 0 $ (75,691) $ 0 $ (75,691)
Securities Available for Sale 681 28,521 323 29,525
Trading Securities 5,129 (152) (668) 4,309
Mortgage-backed Securities 1,310 59,605 72 60,987
FHLB Stock (28,090) (15,406) 2,278 (41,218)
Loans 401,222 510,741 13,584 925,547
FHLB Overnight Deposits & Other 13,493 150,188 4,797 168,478
----------- ----------- ----------- -----------
Total Income on Earning Assets 393,745 657,806 20,386 1,071,937
----------- ----------- ----------- -----------
Interest Bearing Liabilities:
Deposits:
Now (880) 2,295 (7) 1,408
Money Market 39,113 (43,504) (3,739) (8,130)
Savings 7,085 (20,401) (236) (13,552)
Time 578,747 372,225 52,371 1,003,343
----------- ----------- ----------- -----------
Total Deposits 624,065 310,615 48,389 983,069
Repurchase Agreements (958) 83,185 (938) 81,289
Borrowed funds 178,901 (156,674) (11,101) 11,126
----------- ----------- ----------- -----------
Total Interest Expense 802,008 237,126 36,350 1,075,484
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Change in Net interest Income $ (408,263) $ 420,680 $ (15,964) $ (3,547)
=========== =========== =========== ===========
</TABLE>
This table reflects changes in net interest income attributable to the change
in interest rates and the change in the volume of interest-bearing assets and
liabilities. Amounts attributable to the change in rate are based upon the
change in rate multiplied by the prior year's volume. Amounts attributable to
the change in volume are based upon the changes in volume multiplied by the
prior year's rate. The combined effect of changes in both volume and rate are
calculated by multiplying the change in rate by the change in volume.
Northeast Bancorp Consolidated
Maturities and Repricing of Loans
As of June 30, 1997
<TABLE>
<CAPTION>
1 Year 1 to 5 5 to 10 Over 10 Total
or Less Years Years Years Loans
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Mortgages:
Residential $58,315,267 $13,211,892 $ 9,698,026 $54,193,232 $135,418,417
<PAGE> 81
Commercial 20,441,870 12,502,542 3,173,014 1,458,653 37,576,079
Construction 2,068,512 75,000 0 0 2,143,512
Non-Mortgage Loans:
Commercial 12,263,956 3,370,799 234,416 593,029 16,462,200
Consumer 2,026,418 5,589,156 2,385,080 4,755,274 14,755,928
----------- ----------- ----------- ----------- ------------
Total Loans $95,116,023 $34,749,389 $15,490,536 $61,000,188 $206,356,136
=========== =========== =========== =========== ============
Loans due after
1 year:
Fixed $85,482,056
Variable 25,758,057
-----------
Total due after
1 year: 111,240,113
===========
</TABLE>
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
<TABLE>
<CAPTION>
June 30, June 30, June 30,
Securities Available for Sale As of 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Market Value (thousands)
U.S. Government and Agency Obligations $ 1,456 $ 1,425 $ 239
Mortgage-backed Securities 24,648 27,646 9,298
Other Bonds 143 139 141
Equity Securities 850 440 470
---------- ---------- ----------
Total Securities Available for Sale $ 27,097 $ 29,650 $ 10,148
========== ========== ==========
</TABLE>
This table sets forth the market value of securities available for sale at the
dates indicated.
Northeast Bancorp Consolidated
Investment Maturity
<TABLE>
<CAPTION>
<PAGE> 82
Weighted
Securities Available for Sale Average Carrying
As of June 30, 1997 Rate Value
- ------------------------------------------- ---------- ----------
<S> <C> <C>
Due in one Year 5.35% $ 249
Due after one year through five years 5.40% 243
Due after five years through ten years 5.95% 143
Due after ten years 7.18% 964
Mortgage-backed securities maturing
September 2003 to January 2027 7.15% 24,648
---------- ----------
Total Securities Available for Sale 7.11% $ 26,247
========== ==========
</TABLE>
This table sets forth the anticipated maturities of debt securities available
for sale and the respective weighted average rates within these ranges.
Northeast Bancorp Consolidated
Loan Portfolio
As of June 30,
<TABLE>
<CAPTION>
June 30, 1997
- -------------
Percent of
Amount Total Loans
------------ ------------
<S> <C> <C>
Loan Portfolio (thousands)
Residential Mortgage $ 136,190 66.00%
Consumer & Other 14,756 7.15%
Commercial Mortgage 38,948 18.87%
Commercial 16,462 7.98%
------------ ------------
Total Loans 206,356 100.00%
------------ ------------
Less: Allowance for loan losses 2,517
------------
Net Loans $ 203,839
============
June 30, 1996
- -------------
Percent of
Amount Total Loans
------------ ------------
Residential Mortgage $ 113,622 66.89%
Consumer & Other 14,356 8.45%
Commercial Mortgage 27,883 16.42%
Commercial 13,990 8.24%
<PAGE> 83
------------ ------------
Total Loans 169,851 100.00%
------------ ------------
Less: Allowance for loan losses 2,549
------------
Net Loans $ 167,302
============
June 30, 1995
- -------------
Percent of
Amount Total Loans
------------ ------------
Loan Portfolio (thousands)
Residential Mortgage $ 117,795 69.24%
Consumer & Other 16,115 9.47%
Commercial Mortgage 23,975 14.09%
Commercial 12,255 7.20%
------------ ------------
Total Loans 170,140 100.00%
------------ ------------
Less: Allowance for loan losses 2,396
------------
Net Loans $ 167,744
============
June 30, 1994
- -------------
Percent of
Amount Total Loans
------------ ------------
Loan Portfolio (thousands)
Residential Mortgage $ 110,461 69.71%
Consumer & Other 14,076 8.88%
Commercial Mortgage 22,463 14.18%
Commercial 11,461 7.23%
------------ ------------
Total Loans 158,461 100.00%
------------ ------------
Less: Allowance for loan losses 2,463
------------
Net Loans $ 155,998
============
June 30, 1993
- -------------
Percent of
Amount Total Loans
------------ ------------
Loan Portfolio (thousands)
Residential Mortgage $ 108,079 71.69%
Consumer & Other 12,129 8.05%
<PAGE> 84
Commercial Mortgage 20,051 13.30%
Commercial 10,497 6.96%
------------ ------------
Total Loans 150,756 100.00%
------------ ------------
Less: Allowance for loan losses 2,123
------------
Net Loans $ 148,633
============
</TABLE>
This table shows the Company's loan distribution at the end of each of the last
five years.
Northeast Bancorp Consolidated
Allowance for Loan Losses
As of June 30, 1997
<TABLE>
<CAPTION>
June 30, 1997
- -------------
Percent of
Loans in Each
Category to
Amount Total Loans
------------- -------------
<S> <C> <C>
Allowance for Loan Losses (thousands)
Real Estate $ 283 66.00%
Commercial Mortgage 754 18.87%
Commercial 400 7.98%
Consumer 146 7.15%
Unallocated 934 0.00%
------------- -------------
Total $ 2,517 100.00%
============= =============
June 30, 1996
- -------------
Percent of
Loans in Each
Category to
Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 247 66.89%
Commercial Mortgage 738 16.42%
Commercial 463 8.24%
Consumer 140 8.45%
Unallocated 961 0.00%
------------- -------------
<PAGE> 85
Total $ 2,549 100.00%
============= =============
June 30, 1995
- -------------
Percent of
Loans in Each
Category to
Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 593 69.24%
Commercial Mortgage 237 14.09%
Commercial 123 7.20%
Consumer 251 9.47%
Unallocated 1,192 0.00%
------------- -------------
Total $ 2,396 100.00%
============= =============
June 30, 1994
- -------------
Percent of
Loans in Each
Category to
Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 640 69.71%
Commercial Mortgage 252 14.18%
Commercial 129 7.23%
Consumer 246 8.88%
Unallocated 1,196 0.00%
------------- -------------
Total $ 2,463 100.00%
============= =============
June 30, 1993
- -------------
Percent of
Loans in Each
Category to
Amount Total Loans
------------- -------------
Allowance for Loan Losses (thousands)
Real Estate $ 1,221 71.69%
Commercial Mortgage 256 13.30%
Commercial 159 6.96%
Consumer 231 8.05%
Unallocated 256 0.00%
------------- -------------
Total $ 2,123 100.00%
============= =============
<PAGE> 86
</TABLE>
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
As of June 30,
<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30, June 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-performing loans
(thousands)
Mortgages $ 1,896 $ 2,246 $ 2,383 $ 2,047 $ 2,308
Other 528 357 187 676 181
-------- -------- -------- -------- --------
Total non-performing loans 2,424 2,603 2,570 2,723 2,489
Other Real Estate Owned 492 514 1,069 1,994 2,308
-------- -------- -------- -------- --------
Total non-performing assets $ 2,916 $ 3,117 $ 3,639 $ 4,717 $ 4,797
======== ======== ======== ======== ========
Total non-performing loans -------- -------- -------- -------- --------
to total loans 1.17% 1.53% 1.51% 1.72% 1.65%
======== ======== ======== ======== ========
Total non-performing assets -------- -------- -------- -------- --------
to total assets 1.11% 1.40% 1.75% 2.47% 2.68%
======== ======== ======== ======== ========
</TABLE>
This table sets forth certain information concerning non-performing loans and
assets and the ratios of non-performing loans to total loans and non-performing
assets to total assets at the dates indicated.
Non-performing loans are problem loan accounts for which the Company has ceased
accrual of interest because the loan is 90 days past due or because
<PAGE> 87
collectability is doubtful, whichever is earlier.
Management believes that all loans that are considered potential problems are
disclosed in the current non-performing loans table above with the exception of
loans internally rated substandard. At June 30, 1997, the Company had
approximately $586,000 of loans classified as substandard that could
potentially become non-performing due to previous delinquencies or marginal
cash flows.
No loans greater than 90 days past due are on accrual status and there are no
troubled debt restructurings not disclosed above.
Refer to the financial statement footnotes #1 & #4 for further discussion of
the Company's non-performing loan policy and interest income recognition.
Northeast Bancorp Consolidated
Summary of Loan Losses Experience (in thousands)
As of June 30,
<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30, June 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average net loans outstanding,
During period $184,155 $166,965 $161,342 $153,476 $149,051
======== ======== ======== ======== ========
Net loans outstanding,
End of period $203,839 $167,302 $167,440 $155,998 $148,633
======== ======== ======== ======== ========
Allowance for loan losses,
Beginning of period $ 2,549 $ 2,396 $ 2,463 $ 2,123 $ 1,555
Loans charged off:
Residential Mortgage 295 132 136 230 177
Commercial Real Estate 128 236 283 122 26
Commercial 154 53 194 285 64
Installment 163 105 148 93 46
-------- -------- -------- -------- --------
Total loans charged off 740 526 761 730 313
-------- -------- -------- -------- --------
Recoveries on amounts
previously charged off:
Residential Mortgage 36 10 7 25 1
Commercial Real Estate 49 34 1 0 1
Commercial 13 11 16 6 9
Installment 32 21 29 18 18
-------- -------- -------- -------- --------
Total Recoveries 130 76 53 49 29
-------- -------- -------- -------- --------
Net loans charged off 610 450 708 681 284
Provision for loan losses 578 603 641 1,021 852
Allowance for loan losses, -------- -------- -------- -------- --------
End of period $ 2,517 $ 2,549 $ 2,396 $ 2,463 $ 2,123
<PAGE> 88
======== ======== ======== ======== ========
Net loans charged-off as a -------- -------- -------- -------- --------
percentage of average loans
outstanding 0.33% 0.27% 0.44% 0.44% 0.19%
======== ======== ======== ======== ========
Allowance for loan losses, -------- -------- -------- -------- --------
as a percentage of net loans
outstanding at the end of
period 1.23% 1.52% 1.43% 1.58% 1.43%
======== ======== ======== ======== ========
</TABLE>
The reduction in the June 30, 1997 allowance for loan loss percentage to net
loans is primarily due to the purchase of $25,000,000 of residential mortgages
during fiscal year 1997.
This table summarizes loans outstanding at the end of each period indicated,
net of unearned income, at the end of each period indicated and the average
amount of loans outstanding, changes in the allowance for loan losses and other
selected statistics during each period indicated.
Northeast Bancorp Consolidated
Average Deposits and Rates (thousands)
As of June 30,
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996 June 30, 1995
--------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Average Deposits:
Non-interest bearing demand
deposits $ 11,566 0.00% $ 10,020 0.00% $ 8,526 0.00%
Regular savings 20,407 2.66% 22,258 2.68% 23,028 2.65%
NOW and Money Market 25,394 2.35% 27,782 2.56% 29,027 2.48%
Time deposits 90,943 5.73% 87,365 5.86% 80,115 5.13%
-------- ----- -------- ----- -------- -----
Total Average Deposits $148,310 3.67% $147,425 3.69% $140,696 3.87%
======== ===== ======== ===== ======== =====
</TABLE>
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, 1997
<TABLE>
<CAPTION>
Balance
<PAGE> 89
-----------
<S> <C>
Time Deposits $100,000 & Over (in thousands):
3 months or less $ 2,004
Over 3 through 6 months 2,152
Over 6 through 12 months 4,926
Over 12 months 7,692
-----------
Total Time Deposits $100,000 & Over $ 16,774
===========
</TABLE>
Northeast Bancorp Consolidated
Maturities and Repricing of Earning Assets & Interest-bearing Liabilities
As of June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Less Than 1-5 Over 5 % of
1 Year Years Years Total Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Real Estate Loans:
Fixed $ 898 $ 2,591 $ 66,276 $ 69,765 28.11%
Variable 79,927 23,198 2,248 105,373 42.46%
--------- --------- --------- --------- ---------
Total Real Estate Loans 80,825 25,789 68,524 175,138 70.57%
--------- --------- --------- --------- ---------
Non-Real Estate Loans:
Fixed 1,715 8,648 7,967 18,330 7.39%
Variable 12,576 312 0 12,888 5.19%
--------- --------- --------- --------- ---------
Total Non-Real Estate Loans 14,291 8,960 7,967 31,218 12.58%
--------- --------- --------- --------- ---------
Investment Securities &
Other Earning Assets 11,023 243 30,555 41,821 16.85%
--------- --------- --------- --------- ---------
Total Earning Assets $106,139 $ 34,992 $107,046 $248,177 100.00%
========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES
Deposits:
Regular savings, value,
& club accounts $ 20,389 20,389 8.95%
NOW Accounts 11,429 11,429 5.02%
Money market accounts 12,317 12,317 5.40%
Certificates of deposit 70,381 27,828 10 98,219 43.13%
--------- --------- --------- --------- ---------
Total Deposits 114,516 27,828 10 142,354 62.50%
--------- --------- --------- --------- ---------
Repurchase Agreements 5,099 0 0 5,099 2.24%
<PAGE> 90
Borrowings & Notes Payable 54,713 21,315 4,264 80,292 35.26%
--------- --------- --------- --------- ---------
Total Interest-bearing
Liabilities $174,328 $ 49,143 $ 4,274 $227,745 100.00%
========= ========= ========= ========= =========
Excess(deficiency) of earning --------- --------- --------- ---------
assets over interest-bearing
liabilities (68,189) (14,151) 102,772 20,432
========= ========= ========= =========
Cumulative excess (deficiency)--------- --------- --------- ---------
of earning assets over
interest-bearing liabilities (68,189) (82,340) 20,432 20,432
========= ========= ========= =========
Cumulative excess (deficiency)--------- --------- --------- ---------
of earning assets over
interest-bearing liabilities
as a % of total assets (30.68%) (37.04%) 9.19% 9.19%
========= ========= ========= =========
</TABLE>
This table summarizes the anticipated maturities and repricing of the Company's
earning assets and interest-bearing liabilities at June 30, 1997.
The Company's internal asset/liability analysis considers regular savings, NOW
and money market accounts core deposits. Due to this consideration, the
Company's internal asset/liabilitiy model has these core deposits designated in
a five year or greater maturity category and not one year or less as the above
schedule shows. Because of this difference, the Company does not consider its
position to be as negative as presented in the schedule above.
Northeast Bancorp Consolidated
Quarterly Data
As of June 30, 1997
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1996 1996 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income
Interest on loans $ 3,987,260 $ 4,209,837 $ 4,405,483 $ 4,623,357
Interest & dividends
on investments &
available for sale
securities 729,374 707,752 692,600 673,477
------------ ------------ ------------ ------------
Total Interest Income 4,716,634 4,917,589 5,098,083 5,296,834
------------ ------------ ------------ ------------
Interest Expense
Interest on Deposits 1,539,567 1,533,721 1,586,983 1,694,532
Interest on Repurchase
<PAGE> 91
Agreements 38,269 54,686 50,745 55,753
Interest on Borrowings 854,846 929,928 1,079,816 1,081,250
------------ ------------ ------------ ------------
Total Interest Expense 2,432,682 2,518,335 2,717,544 2,831,535
------------ ------------ ------------ ------------
Net Interest Income 2,283,952 2,399,254 2,380,539 2,465,299
Provision for Loan
Losses 144,814 144,443 144,452 144,718
------------ ------------ ------------ ------------
Net Interest Income
after Provision for
Loan Losses 2,139,138 2,254,811 2,236,087 2,320,581
Securities Transactions 89,666 34,876 75,493 59,395
Other Operating Income 416,018 356,180 568,045 412,183
Other Operating Expense 2,343,829 1,819,013 2,153,840 2,231,091
------------ ------------ ------------ ------------
Income Before Income
Taxes 300,993 826,854 725,785 561,068
Income Tax Expense 116,732 299,694 274,796 216,375
------------ ------------ ------------ ------------
Net Income $ 184,261 $ 527,160 $ 450,989 $ 344,693
============ ============ ============ ============
Net Income Per Common
Share:
Primary earnings
per share $ 0.11 $ 0.37 $ 0.31 $ 0.24
Fully diluted
earnings per share $ 0.11 $ 0.33 $ 0.29 $ 0.23
</TABLE>
Northeast Bancorp Consolidated
Quarterly Data
As of June 30, 1996
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1995 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income
Interest on loans $ 4,098,178 $ 4,059,758 $ 4,003,840 $ 3,848,909
Interest & dividends
on investments &
available for sale
securities 384,493 445,954 522,346 631,385
------------ ------------ ------------ ------------
Total Interest Income 4,482,671 4,505,712 4,526,186 4,480,294
------------ ------------ ------------ ------------
Interest Expense
Interest on Deposits 1,635,482 1,652,178 1,611,581 1,526,929
Interest on Repurchase
Agreements 33,913 48,880 42,872 40,545
<PAGE> 92
Interest on Borrowings 599,959 592,950 654,874 688,239
------------ ------------ ------------ ------------
Total Interest Expense 2,269,354 2,294,008 2,309,327 2,255,713
------------ ------------ ------------ ------------
Net Interest Income 2,213,317 2,211,704 2,216,859 2,224,581
Provision for Loan
Losses 147,855 147,708 159,960 147,337
------------ ------------ ------------ ------------
Net Interest Income
after Provision for
Loan Losses 2,065,462 2,063,996 2,056,899 2,077,244
Securities Transactions 120,593 92,797 35,280 30,225
Other Operating Income 493,700 457,681 420,186 446,727
Other Operating Expense 2,015,938 1,916,693 2,029,985 2,486,141
------------ ------------ ------------ ------------
Income Before Income
Taxes 663,817 697,781 482,380 68,055
Income Tax Expense 242,180 254,345 180,575 41,512
------------ ------------ ------------ ------------
Net Income $ 421,637 $ 443,436 $ 301,805 $ 26,543
============ ============ ============ ============
Net Income Per Common
Share:
Primary earnings per
share $ 0.32 $ 0.32 $ 0.20 $ (0.01)
Fully diluted
earnings per share $ 0.29 $ 0.29 $ 0.19 $ 0.02
</TABLE>
The decrease in net income for the quarter ending June 30, 1997 is primarily
due to the writedown of equity securities and the provision for real estate
held for investment.
The reduction of net income for the quarter ending September 30, 1996 is
primarily due to the FDIC-SAIF deposit assessment of $380,000.
The reduction of net income for the quarter ending June 30, 1996 is primarily
a result of increased operating expenses due to the Bank merger, the writedown
of equity securities and the provision for other real estate owned.
(2) Information on the Effects of Changing Prices
_____________________________________________
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 many 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
<PAGE> 93
inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude
as inflation.
(3) Information About Oil and Gas Producing Activities
__________________________________________________
Not Applicable.
Item 9. Changes in and Disagreements with Accountants on
________________________________________________
Accounting and Financial Disclosure.
____________________________________
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
___________________________________________________
The "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the Company's
definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 11. Executive Compensation
______________________
The "Executive Compensation and Other Information" section of the
Company's definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________
The "Election of Directors" and "Common Stock Ownership of
Certain Beneficial Owners" sections of the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
______________________________________________
The "Transactions with Management" section of the Company's
definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
<PAGE> 94
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,
1997 and 1996
Consolidated Statements of Income for the years ended June 30,
1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended June
30, 1997, 1996 and 1995
(b) Reports on Form 8-K
___________________
The Company filed a Form 8-K on May 22, 1997, reporting the
execution of an 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.
(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
<PAGE> 95
Registration Statement on Form S-4 (No.333-31797) filed with the
Securities and Exchange Commission
3.2 Bylaws of Northeast Bancorp, incorporated by reference to Exhibit
3.2 to amendment No.1 to Northeast Bancorp's Registration
Statement on Form S-4(No.333-31797) filed with the Securities and
Exchange Commission
10.1* 1987 Stock Option Plan of Northeast Bancorp (formerly known as
Bethel Bancorp), incorporated by reference to Bethel Bancorp's
Registration Statement on Form S-1 (No. 33-12815), filed with the
Securities and Exchange Commission.
10.2* 1989 Stock Option Plan of Northeast Bancorp (formerly known as
Bethel Bancorp) is incorporated by reference to Exhibit 10.6 to
Bethel Bancorp's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994
10.3* 1992 Stock Option Plan of Northeast Bancorp (formerly known as
Bethel Bancorp), incorporated by reference to Exhibit 10.7 to
Bethel Bancorp's Annual Report on Form 10-K for the year ended
June 30, 1992
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 19, 1997 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.
<PAGE> 96
Name Title Date
_________________________ ____________________ ___________________
/s/ John B. Bouchard Director September 19, 1997
- -------------------------
John B. Bouchard
/s/ A. William Cannan Director, September 19, 1997
- ------------------------- Executive Vice President
A. William Cannan
/s/ James D. Delamater Director, September 19, 1997
- ------------------------- President and Chief
James D. Delamater Executive Officer
(Principal
Executive Officer)
/s/ Ronald J. Goguen Director September 19, 1997
- -------------------------
Ronald J. Goguen
/s/ Philip C. Jackson Director September 19, 1997
- ------------------------- Vice President
Philip C. Jackson
/s/ Ronald C. Kendall Director September 19, 1997
- -------------------------
Ronald C. Kendall
/s/ Judith W. Hayes Director September 19, 1997
- -------------------------
Judith W. Hayes
/s/ Normand R. Houde Director September 19, 1997
- -------------------------
Normand R. Houde
/s/ John W. Trinward, DMD Chairman of the September 19, 1997
- ------------------------- Board
John W. Trinward, DMD
/s/ Edmond J. Vachon Director September 19, 1997
- -------------------------
Edmond J. Vachon
/s/ Stephen W. Wight Director September 19, 1997
- -------------------------
Stephen W. Wight
<PAGE> 97
/s/ Dennis A. Wilson Director September 19, 1997
- -------------------------
Dennis A. Wilson
/s/ Richard E. Wyman, Jr. Chief Financial September 19, 1997
- ------------------------- Officer (Principal
Richard E. Wyman, Jr. Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
2.1 Agreement for the Purchase and Sale of Assets and Assumption of
Liabilities dated as of May 4, 1994 between Bethel Savings Bank and
Key Bank of Maine, incorporated by reference to Exhibit 2.1 to Bethel
Bancorp's Current Report on Form 8-K dated May 4, 1994
2.2 Agreement for the Purchase and Sale of Assets and Assumption of
Liabilities dated as of May 4, 1994 between Brunswick Federal Savings
Bank and Key Bank of Maine, incorporated by reference to Exhibit 2.2
to Bethel Bancorp's Current Report on Form 8-K dated May 4, 1994
2.3 Agreement and Plan of Merger dated as of May 9, 1997 by and among
Northeast Bancorp, Northeast Bank, FSB and Cushnoc and Trust Company,
incorporated by reference to Exhibit 2 to Northeast Bancorp's
Registration Statement on Form S-4 (No. 333-31797) filed with the
Securities and Exchange Commission
3.1 Conformed Articles of Incorporation of Northeast Bancorp,
incorporated by reference to Exhibit 3.1 to Northeast Bancorp's
Registration Statement on Form S-4 (333-31797) filed with the
Securities and Exchange Commission
3.2 Bylaws of Northeast Bancorp, incorporated by reference to Exhibit
3.2 to amendment No.1 to Northeast Bancorp's Registration Statement
on Form S-4(No.333-31797) filed with the Securities and Exchange
Commission
10.1* 1987 Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp), incorporated by reference to Bethel Bancorp's Registration
Statement on Form S-1 (No. 33-12815), filed with the Securities and
Exchange Commission.
10.2* 1989 Stock Option Plan of Northeast Bancorp (formerly known as Bethel
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
<PAGE> 98
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(c) of Form 10-K
Exhibit 11. Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
EQUIVALENT SHARES:
Average Shares Outstanding 1,247,103 1,183,987
Total Equivalent Shares 1,247,103 1,183,987
Total Primary Shares 1,329,061 1,270,097
Total Fully Diluted Shares 1,569,979 1,512,593
Net Income $ 1,507,103 $ 1,193,420
Less Preferred Stock Dividend 139,999 139,999
------------- -------------
Net Income after Preferred Dividend $ 1,367,104 $ 1,053,421
============= =============
Primary Earnings Per Share on Net Income $ 1.03 $ 0.83
Fully Diluted Earnings Per Share on Net Income $ 0.96 $ 0.79
</TABLE>
Exhibit 21. Securities of Registrant
<PAGE> 99
Year Percentage
Jurisdiction Acquired of Voting
Name of Subsidiary of Incorporation or Formed Securities Owned
- ------------------ ---------------- --------- ----------------
ASI Data Services Inc. Maine 1993 100%
Northeast Savings Bank, Maine 1987 100%
F.S.B. (and its 100% owned
subsidiary, Northeast
Financial Service Corp. and
100% owned second tier
subsidiary, First New England
Benefits, Inc.)
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Northeast Bancorp
We consent to incorporation by reference in the Registration Statement, Form
S-4 (No. 333-31797) and in the related Prospectus, and in the Registration
Statements on Form S-8 (No. 33-32095), (No. 33-58538), (No. 33-32096) and
(No. 33-87976) of Northeast Bancorp of our report dated August 6, 1997, with
respect to the consolidated financial statements of Northeast Bancorp and
Subsidiary included in the Annual Report (Form 10-K) for the year ended June
30, 1997.
Portland, Maine /s/ Baker Newman & Noyes
---------------------------
September 22, 1997 Limited Liability Company
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
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0
1,999,980
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