SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
_X_ Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended December 31,1998
________________
or
___ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1 - 14588
_________
Northeast Bancorp
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Maine 01 - 0425066
_____________________________________ _____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
232 Center Street, Auburn, Maine 04210
_____________________________________ _____________________________________
(Address of principal executive (Zip Code)
offices)
(207) 777 - 6411
_______________________________________________________________________________
Registrant's telephone number, including area code
Not Applicable
_______________________________________________________________________________
<PAGE> 1
Former name, former address and former fiscal year, if changed since last
report.
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares outstanding as of February 10, 1999: 2,765,576 of common stock, $1.00
par value per share.
_______________________________________________________________________________
NORTHEAST BANCORP
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
December 31, 1998 and June 30, 1998
Consolidated Statements of Income
Three Months ended December 31, 1998 and 1997
Consolidated Statements of Income
Six Months ended December 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity
Six Months ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows
Six Months ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
<PAGE> 2
Item 6. Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
_______________ _______________
<S> <C> <C>
Assets
Cash and due from bank $ 5,092,834 $ 6,821,574
Interest bearing deposits in other banks 593,064 421,392
Federal Home Loan Bank overnight deposits 13,172,000 4,909,000
Trading account securities at market -- 50,000
Available for sale securities 17,372,783 13,608,823
Federal Home Loan Bank stock 5,680,500 5,680,500
Loans held for sale 949,601 369,500
Loans 284,313,294 282,030,950
Less allowance for loan losses 2,869,000 2,978,000
_______________ _______________
Net loans 281,444,294 279,052,950
Bank premises and equipment, net 4,794,612 4,473,885
Assets acquired through foreclosure 273,515 381,288
Goodwill (net of accumulated amortization of
$1,680,995 at 12/31/98 and $1,532,808 at
6/30/98) 1,775,728 1,923,915
Other assets 5,046,060 4,839,767
_______________ _______________
Total Assets 336,194,991 322,532,594
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 201,930,962 $ 184,024,097
Repurchase Agreements 9,278,719 5,205,594
Advances from Federal Home Loan Bank 92,109,544 104,439,952
Notes payable 840,278 993,055
Other Liabilities 5,836,232 2,730,369
_______________ _______________
Total Liabilities 309,995,735 297,393,067
Shareholders' Equity
Preferred stock, Series A 0 999,988
Common stock, par value $1, 2,755,076 and
2,614,285 shares issued and outstanding at
12/31/98 and 6/30/98, respectively 2,755,076 2,614,285
Additional paid in capital 10,156,814 9,258,107
<PAGE> 3
Retained earnings 13,365,169 12,331,595
_______________ _______________
26,277,059 25,203,975
Accumulated other comprehensive income (loss) (77,803) (64,448)
_______________ _______________
Total Shareholders' Equity 26,199,256 25,139,527
_______________ _______________
Total Liabilities and Shareholders' Equity $ 336,194,991 $ 322,532,594
=============== ===============
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
_______________ _______________
<S> <C> <C>
Interest and Dividend Income
Interest on FHLB overnight deposits $ 73,860 $ 121,584
Interest on loans & loans held for sale 6,179,727 5,256,343
Interest on available for sale securities 177,051 437,952
Dividends on Federal Home Loan Bank stock 91,635 71,904
Other Interest Income 5,443 4,596
_______________ _______________
Total Interest Income 6,527,716 5,892,379
Interest Expense
Deposits 2,157,908 1,901,610
Repurchase agreements 86,531 54,618
Other borrowings 1,379,940 1,128,589
_______________ _______________
Total Interest Expense 3,624,379 3,084,817
_______________ _______________
Net Interest Income 2,903,337 2,807,562
Provision for loan losses 164,491 227,663
_______________ _______________
Net Interest Income after Provision for
Loan Losses 2,738,846 2,579,899
Other Income
Service charges 269,536 237,235
Net securities gains 47,699 99,696
Net gain on trading securities 5,120 0
Other 519,115 405,177
_______________ _______________
Total Other Income 841,470 742,108
Other Expenses
Salaries and employee benefits 1,191,497 1,272,952
Net occupancy expense 219,399 221,148
Equipment expense 210,958 234,410
Goodwill amortization 74,094 74,094
<PAGE> 4
Other 789,131 963,019
_______________ _______________
Total Other Expenses 2,485,079 2,765,623
_______________ _______________
Income Before Income Taxes 1,095,237 556,384
Income tax expense 394,669 200,318
_______________ _______________
Net Income $ 700,568 $ 356,066
=============== ===============
Earnings Per Share
Basic $ 0.26 $ 0.14
Diluted $ 0.25 $ 0.13
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
_______________ _______________
<S> <C> <C>
Interest and Dividend Income
Interest on FHLB overnight deposits $ 190,094 $ 263,677
Interest on loans & loans held for sale 12,488,988 10,428,625
Interest on available for sale securities 371,438 926,435
Dividends on Federal Home Loan Bank stock 181,838 141,741
Other Interest Income 10,515 9,377
_______________ _______________
Total Interest Income 13,242,873 11,769,855
Interest Expense
Deposits 4,287,652 3,785,093
Repurchase agreements 139,276 103,056
Other borrowings 2,817,018 2,308,883
_______________ _______________
Total Interest Expense 7,243,946 6,197,032
_______________ _______________
Net Interest Income 5,998,927 5,572,823
Provision for loan losses 369,421 390,163
_______________ _______________
Net Interest Income after Provision for
Loan Losses 5,629,506 5,182,660
Other Income
Service charges 522,921 513,640
Net securities gains 58,490 207,692
Net gain on trading securities 10,732 1,797
Other 670,997 573,420
<PAGE> 5
_______________ _______________
Total Other Income 1,263,140 1,296,549
Other Expenses
Salaries and employee benefits 2,388,228 2,436,566
Net occupancy expense 354,309 442,534
Equipment expense 392,963 454,096
Goodwill amortization 148,187 148,187
Other 1,519,199 1,560,839
_______________ _______________
Total Other Expenses 4,802,886 5,042,222
_______________ _______________
Income Before Income Taxes 2,089,760 1,436,987
Income tax expense 753,155 510,356
_______________ _______________
Net Income $ 1,336,605 $ 926,631
=============== ===============
Earnings Per Share
Basic $ 0.49 $ 0.39
Diluted $ 0.48 $ 0.35
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Additional Comprehensive
Preferred Stock at Paid in Retained Income Treasury
Stock $1.00 Par Capital Earnings (Loss) Stock Total
____________ ___________ ___________ _____________ _____________ _____________ ____________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 1,999,980 $1,462,909 $7,699,883 $ 11,266,984 $ (334,175) $ -- $22,095,581
Net income for six months
ended December 31, 1997 -- -- -- 926,631 -- -- 926,631
Other comprehensive income,
net of tax: Adjustment of
valuation reserve for
securities available for sale -- -- -- -- 195,948 -- 195,948
<PAGE> 6
Comprehensive income -- -- -- -- -- -- 1,122,579
Cash dividends declared on
common stock -- -- -- (206,875) -- -- (206,875)
Cash dividends declared on
preferred stock -- -- -- (69,999) -- -- (69,999)
Stock Split in the form of
a dividend -- 740,807 -- (741,902) -- -- (1,095)
Common stock issued in
connection with employee
benefit and stock option plans -- 18,975 74,513 -- -- (44,988) 48,500
Treasury Stock Purchased -- -- -- -- -- 44,988 44,988
____________ ___________ ___________ _____________ _____________ _____________ ____________
Balance December 31, 1997 $ 1,999,980 $2,222,691 $7,774,396 $ 11,174,839 $ (138,227) $ 0 $23,033,679
============ =========== =========== ============= ============= ============= ============
Balance at June 30, 1998 999,988 2,614,285 9,258,107 12,331,595 (64,448) -- 25,139,527
Net income for six months
ended December 31, 1998 -- -- -- 1,336,605 -- -- 1,336,605
Other comprehensive income,
net of tax: Adjustment of
valuation reserve for
securities available for sale -- -- -- -- (13,355) -- (13,355)
Comprehensive income -- -- -- -- -- -- 1,323,250
Cash dividends declared on
common stock -- -- -- (277,364) -- -- (277,364)
Cash dividends declared on
preferred stock -- -- -- (25,667) -- -- (25,667)
Preferred Stock Converted
to Common Stock (999,988) 136,362 863,626 -- -- -- 0
Common stock issued in
connection with employee
benefit and stock option plans -- 4,429 35,081 -- -- -- 39,510
____________ ___________ ___________ _____________ _____________ _____________ ____________
Balance December 31, 1998 $ 0 $2,755,076 $10,156,814 $ 13,365,169 $ (77,803) $ 0 $26,199,256
============ =========== =========== ============= ============= ============= ============
</TABLE>
<PAGE> 7
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
_______________ _______________
<S> <C> <C>
Cash used in (provided by) operating
activities $ (338,406) $ 654,801
Cash flows from investing activities:
FHLB stock purchased -- (243,000)
Available for sale securities purchased (8,699,888) (14,775,583)
Available for sale securities matured 2,387,746 1,499,614
Available for sale securities sold 6,537,024 23,662,251
New loans, net of repayments & charge offs (2,090,976) (5,759,169)
Net capital expenditures (672,016) (141,207)
Assets acquired through foreclosure sold 299,163 87,038
Real estate held for investment sold 50,000 68,743
_______________ _______________
Net cash used in (provided by) investing
activities (2,188,947) 4,398,687
Cash flows from financing activities:
Net change in deposits 17,906,866 1,439,952
Net change in repurchase agreements 4,073,125 638,499
Dividends paid (303,031) (276,874)
Proceeds from stock issuance 39,510 93,488
Net decrease in advances from Federal
Home Loan Bank of Boston (12,330,408) (7,930,746)
Net change in notes payable (152,778) (152,778)
_______________ _______________
Net cash provided by (used in) financing
activities 9,233,284 (6,188,459)
_______________ _______________
Net increase (decrease) in cash and cash
equivalents 6,705,931 (1,134,971)
Cash and cash equivalents, beginning of period 12,151,966 18,774,344
_______________ _______________
Cash and cash equivalents, end of period $ 18,857,897 $ 17,639,373
=============== ===============
Cash and cash equivalents include cash on
hand, amounts due from banks, interest
bearing deposits and federal funds sold
Supplemental schedule of noncash investing
activities:
<PAGE> 8
Net change in valuation for unrealized market
value adjustments on available for sale
securities (13,355) 195,948
Net transfer (to) from Loans to Other Real
Estate Owned 153,657 56,325
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds 856,000 366,000
Interest paid 7,298,563 6,229,407
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
1. Basis of Presentation
_____________________
The accompanying unaudited condensed and consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six month
period ended December 31, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 1999. For further
information, refer to the audited consolidated financial statements and
footnotes thereto for the fiscal year ended June 30, 1998 included in the
Company's Annual Report on Form 10-K.
2. Reporting Comprehensive Income
______________________________
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. Such components of total comprehensive income for the
Company are net income and net unrealized gains (losses) on securities
available for sale, net of tax. The Company has adopted SFAS No. 130 effective
for the quarter ended September 30, 1998.
3. Securities
__________
Securities available for sale at cost and approximate market values are
summarized below.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
<PAGE> 9
_________________________ _________________________
Market Market
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 $ 348,167 $ 350,730 $ 4,696,659 $ 4,698,266
Corporate bonds 202,429 205,336 202,952 203,484
Mortgage-backed securities 15,608,884 15,619,847 7,723,843 7,714,332
Equity securities 1,331,187 1,196,870 1,083,018 992,741
____________ ____________ ____________ ____________
$17,490,667 $17,372,783 $13,706,472 $13,608,823
============ ============ ============ ============
December 31, 1998 June 30, 1998
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Due in one year or less $ 248,167 $ 248,167 $ 347,253 $ 347,253
Due after one year through
five years 202,429 205,336 452,952 450,984
Due after five years
through ten years 100,000 102,563 1,100,000 1,103,200
Due after ten years -- -- 2,999,406 3,000,313
Mortgage-backed securities
(including securities with
interest rates ranging
from 5.15% to 9.0% maturing
September 2003 to December
2028) 15,608,884 15,619,847 7,723,843 7,714,332
Equity securities 1,331,187 1,196,870 1,083,018 992,741
____________ ____________ ____________ ____________
$17,490,667 $17,372,783 $13,706,472 $13,608,823
============ ============ ============ ============
</TABLE>
4. Allowance for Loan Losses
_________________________
The following is an analysis of transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
_______________ _______________
<S> <C> <C>
Balance at beginning of year $ 2,978,000 $ 2,741,809
Add provision charged to operations 369,421 390,163
Recoveries on loans previously charged off 63,954 90,350
_______________ _______________
<PAGE> 10
3,411,375 3,222,322
Less loans charged off 542,375 449,322
_______________ _______________
Balance at end of period $ 2,869,000 $ 2,773,000
=============== ===============
</TABLE>
5. Advances from Federal Home Loan Bank
____________________________________
A summary of borrowings from the Federal Home Loan Bank is as follows:
<TABLE>
<CAPTION>
December 31, 1998
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
<C> <C> <C>
$ 28,800,000 4.64% - 5.96% 1999
5,000,000 4.85% - 6.27% 2000
4,160,873 5.38% - 6.49% 2001
5,000,000 5.71% 2002
6,148,671 5.69% - 6.67% 2003
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
______________
$ 92,109,544
==============
June 30, 1998
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 43,745,440 5.55% - 6.00% 1999
4,000,000 5.88% - 6.27% 2000
1,212,676 5.56% - 6.40% 2001
1,138,627 6.21% - 6.49% 2002
9,631,854 5.69% - 6.64% 2003
1,711,355 6.36% - 6.67% 2004
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
______________
$ 104,439,952
==============
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
_______________________________________________________________________
of Operation
____________
<PAGE> 11
General
_______
This Management's Discussion and Analysis of Financial Condition and Results of
Operations presents a review of the material changes in the financial condition
of the Company from June 30, 1998 to December 31,1998, and the results of
operations for the three and six months period ended December 31, 1998 and
1997. This discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company. Accordingly,
this section should be read in conjunction with the condensed consolidated
financial statements and the related notes contained herein.
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, year 2000
readiness, simulation of changes in interest rates, prospective results of
operations, capital spending and financing sources, and revenue sources.
Forward-looking statements, which are based on various assumptions (some of
which are beyond the Company's control), may be identified by reference to a
future period or periods, or by the use of forward-looking terminology; such as
"may", "will", "believe", "expect", "estimate", "anticipate", "continue", or
similar terms or variations on those terms, or the negative of those terms.
Such forward-looking statements reflect the current view of management and are
based on information currently available to them, and upon current
expectations, estimates, and projections regarding the Company and its
industry, management's belief with respect there to, and certain assumptions
made by management. These forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties, and other factors.
Accordingly, actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and
the integration of acquired businesses, credit risk management, asset/liability
management, changes in technology, changes in the securities markets, and the
availability of and the costs associated with sources of liquidity.
Description of Operations
_________________________
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company and is primarily regulated by the Office of Thrift Supervision ("OTS").
The Company has one wholly-owned subsidiary, Northeast Bank, FSB (the "Bank"),
which has branches located in Auburn, Augusta, Bethel, Harrison, South Paris,
Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine.
Financial Condition
___________________
Total consolidated assets were $336,194,991 on December 31, 1998, which
represents an increase of $13,662,397 from June 30, 1998. Total net loans
increased by $2,391,344, from June 30, 1998 to December 31, 1998. Cash
equivalents and securities increased by $6,705,931 and $3,713,960,
<PAGE> 12
respectively, during the same period. Total deposits and repurchase agreements
increased by $21,979,990, while Federal Home Loan Bank ("FHLB") borrowings
decreased by $12,330,408 from June 30, 1998 to December 31, 1998.
The increase in cash equivalents and the decrease in total net loans from June
30, 1998 was due, in part, to the sale of approximately $6,700,000 of indirect
auto loans during the December 31, 1998 quarter. The increase in deposits and
repurchase agreements were utilized to support the increase in securities and
to repay FHLB borrowings from June 30, 1998 to December 31, 1998.
At December 31, 1998, the carrying value of securities available for sale by
the Company was $17,372,783, which is $117,883 less than the cost of the
underlying securities. The difference between the carrying value and the cost
of the securities was primarily attributable to the decline in the market value
of equity securities from the prices at the time of purchase. Management
attributes the reduction in the market value of equity securities to the
decline of the stock market, which had a greater affect on the market value of
the Company's investments in small cap technology stocks. 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.
Total loans increased by $2,282,344 for the six months ended December 31, 1998.
The loan portfolio growth was in consumer installment and commercial loans. In
the December 1998 quarter, the Bank sold approximately $6,700,000 of indirect
auto loans. The Bank anticipates holding approximately $15,000,000 to
$20,000,000 of indirect auto loans in its portfolio and currently holds
approximately $13,000,000 as of December 31, 1998. As the Bank continues to
grow the indirect auto portfolio, it is the Bank's intent to build
relationships with other institutions for future sales of indirect auto loans.
In the September 1998 quarter, the Bank purchased approximately $5,900,000 of
1-4 family mortgages. The purchase consisted of 1-4 family fixed rate
mortgages secured by property located primarily in the State of New York. The
continued expansion into new markets diversifies the credit risk and the
potential economic risks of the credits held in the Bank's purchased loan
portfolio, such that the portfolio is not effected solely by the local State of
Maine economy. The Bank's local market, as well as the secondary market,
continues to be very competitive for loan origination volume. The local
competitive environment and customer response to favorable secondary market
rates have affected the Bank's ability to increase the loan portfolio. In an
effort to increase loan volume, the Bank's offering rates for its loan products
have been reduced to compete in the various markets. The Bank will experience
some margin compression due to decreased loan rates.
The loan portfolio contains elements of credit and interest rate risk. The
Bank primarily lends within its local market areas, which management believes
helps them to better evaluate credit risk. As the Bank expands its purchase of
loans in other states, management researches the strength of the economy in the
respective state and underwrites every loan before purchase. These steps are
taken to better evaluate and minimize the credit risk of out-of-state
purchases. The Bank also maintains a well collateralized position in real
estate mortgages.
At December 31, 1998, residential real estate mortgages made up 60% of the
total loan portfolio, of which 48% of the residential loans are variable rate
<PAGE> 13
products, as compared to 62% and 59%, respectively, at December 31, 1997.
Although the Bank has purchased fixed rate loans, it is management's intent,
where market opportunities arise, to increase the volume in variable rate
residential loans to reduce the interest rate risk in this area.
At December 31, 1998, 18% of the Bank's total loan portfolio balance is
commercial real estate mortgages. Commercial real estate loans have minimal
interest rate risk as 88% of the portfolio consists of variable rate products.
At December 31, 1997, commercial real estate mortgages made up 21% of the
total loan portfolio, of which 89% of the commercial real estate loans were
variable rate products. The Bank tries to mitigate credit risk by lending in
its local market area as well as maintaining a well collateralized position in
real estate.
Commercial loans make up 10% of the total loan portfolio, of which 53% are
variable rate instruments at December 31, 1998. At December 31, 1997 commercial
loans made up 10% of the total loan portfolio, of which 70% were variable rate
instruments The credit loss exposure on commercial loans is highly dependent on
the cash flow of the customer's business. The Bank mitigates losses by
strictly adhering to the Company's underwriting and credit policies.
Consumer and other loans make up 12% of the loan portfolio as of December 31,
1998 as compared to 7% at December 31, 1997. Since these loans are primarily
fixed rate products, they have interest rate risk when market rates increase.
These loans also have credit risk with minimal security. The increase in
consumer loans was primarily due to the volume generated from the automobile
dealer finance department. This department underwrites all the automobile
dealer finance loans to protect credit quality. The Bank primarily pays a
nominal one time origination fee on the loans. The fees are deferred and
amortized over the life of the loans as a yield adjustment. Management
attempts to mitigate credit and interest rate risk by keeping the products
offered short-term, receiving a rate of return commensurate with the risk, and
lending to individuals in the Bank's known market areas.
The Bank's allowance for loan losses was $2,869,000 as of December 31, 1998
versus $2,978,000 as of June 30, 1998, representing 1.01% and 1.06% of total
loans, respectively. The Bank had non-performing loans totaling $1,594,000 at
December 30, 1998 compared to $2,248,000 at June 30, 1998. Non-performing
loans represented 0.47% and 0.70% of total assets at December 31, 1998 and June
30, 1998, respectively. The Bank's allowance for loan losses was equal to 180%
and 132% of the total non-performing loans at December 31, 1998 and June 30,
1998, respectively. At December 31, 1998, the Bank had approximately $614,000
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. These substandard loans increased by $514,000 when
compared to the $100,000 at June 30, 1998. The increase was attributed to
management downgrading certain loans during its internal review process.
The following table represents the Bank's non-performing loans as of December
31, 1998 and June 30, 1998, respectively:
<TABLE>
<CAPTION>
December 31, June 30,
Description 1998 1998
_________________________ _______________ _______________
<S> <C> <C>
<PAGE> 14
1-4 Family Mortgages $ 972,000 $ 783,000
Commercial Mortgages 478,000 956,000
Commercial Loans 22,000 509,000
Consumer Installment 122,000 0
_______________ _______________
Total non-performing $ 1,594,000 $ 2,248,000
=============== ===============
</TABLE>
The following table reflects the quarterly trend of total delinquencies 30 days
or more past due, including non-performing loans, for the Bank as a percentage
of total loans:
<TABLE>
<CAPTION>
03-31-98 06-30-98 09-30-98 12-31-98
________ ________ ________ ________
<C> <C> <C> <C>
1.44% 1.09% 0.89% 1.27%
</TABLE>
At December 31, 1998, loans classified as non-performing included approximately
$375,000 of loan balances that are current and paying as agreed, but which the
Bank maintains as non-performing until the borrower has demonstrated a
sustainable period of performance. Excluding these loans, the Bank's total
delinquencies 30 days or more past due, as a percentage of total loans, would
be 1.14% as of December 31, 1998. Based on reviewing the credit risk and
collateral of delinquent, non-performing and classified loans, management
considers the allowance for loan losses to be adequate.
On a regular and ongoing basis, management evaluates the adequacy of the
allowance for loan losses. The process to evaluate the allowance involves a
high degree of management judgement. 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.
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 judgements about information available to them at the
time of their examination. The Bank's most recent examination by the OTS was
on November 30, 1998. At the time of the exam the regulators proposed no
additions to the allowance for loan losses.
The bank's premises and equipment increased by $320,727 from June 30, 1998 to
December 31, 1998. The increase was due to the purchase and replacement of the
Bank's mainframe and software.
The Bank's other liabilities was $5,836,232 as of December 31, 1998, which was
<PAGE> 15
an increase of $3,105,863 when compared to June 30, 1998. The increase was due
to an amount due to the broker for the purchase of available for sale
securities.
Capital Resources and Liquidity
_______________________________
Cash provided by operating activities in the consolidated statements of cash
flow decreased by $993,207 from December 31, 1997 to December 31, 1998 as a
result of reduction in other liabilities due to transaction timing differences.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered certificate of deposits
("C.D.s") when national deposit interest rates are less than the interest rates
on local market deposits. Brokered C.D.s are also used to supplement the
growth in earning assets. Brokered C.D.s carry the same risk as local deposit
C.D.s, in that both are interest rate sensitive with respect to the Bank's
ability to retain the funds. The Bank also utilizes FHLB advances, as
alternative sources of funds, when the interest rates of the advances are less
than market deposit interest rates. FHLB advances are also used to fund
short-term liquidity demands.
Total deposits were $201,930,962 and securities sold under repurchase
agreements were $9,278,719 as of December 31, 1998. These amounts represent an
increase of $17,906,866 and $4,073,125, respectively, compared to June 30,
1998. The increase in deposits was primarily due to the $10,000,000 increase
in NOW demand deposits and a $9,000,000 increase in time deposits. The
increase in NOW deposits was attributable to the development of a demand
account where the interest rate increases as deposit balances increase.
Brokered deposits represented $8,804,744 of the total deposits at December 31,
1998, which increased by $1,230,034 compared to the $7,574,710 balance as of
June 30, 1998. Cross selling strategies are employed by the Bank to develop
deposit growth. Even though deposit interest rates have remained competitive,
the rates of return are much higher with 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 deposits.
Total advances from the FHLB were $92,109,544 as of December 31, 1998, a
decrease of $12,330,408 compared to June 30, 1998. The cash received from the
increase in the Bank's deposits was utilized to repay FHLB advances. 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 December 31, 1998
advances. Mortgages, free of liens, pledges and encumbrances are required to
be pledged to secure FHLB advances. The Bank's ability to access principal
sources of funds is immediate and with the borrowing capacity at the Federal
Home Loan Bank, the normal growth in bank deposits and repurchase agreements
and the immediate availability of the Bank's cash equivalents as well as
securities available for sale, management believes that the Company's available
liquidity resources are sufficient to support the Company's needs.
Total equity of the Company was $26,199,256 as of December 31, 1998 versus
$25,139,527 at June 30, 1998. Book value per common share was $9.51 as of
December 31, 1998 versus $9.23 at June 30, 1998. The total equity to total
assets ratio of the Company was 7.79% as of December 31, and June 30, 1998.
In November of 1998 Square Lake Holding Corporation converted its Series A
<PAGE> 16
preferred stock into 136,362 shares of common stock. Square Lake Holding
Corporation is a Maine corporation and a subsidiary of a Canadian corporation
of which Ronald Goguen is a 95% shareholder and director. Mr. Goguen, also is
a director, and, through the ownership of his affiliates, a principal
shareholder of the Company.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
contains various provisions intended to capitalize the Bank Insurance Fund
("BIF") and also affects a number of regulatory reforms that impact all insured
depository institutions, regardless of the insurance fund in which they
participate. Among other things, FDICIA grants the OTS broader regulatory
authority to take prompt corrective action against insured institutions that do
not meet capital requirements, including placing undercapitalized institutions
into conservatorship or receivership. FDICIA also grants the OTS broader
regulatory authority to take corrective action against insured institutions
that are otherwise operating in an unsafe and unsound manner.
FDICIA defines specific capital categories based on an institution's capital
ratios. The OTS has issued regulations requiring a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, core capital of 3.0%, leverage
capital of 4.0% and a risk-based capital standard of 8.0%. The prompt
corrective action regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". As of
December 31,1998, the most recent notification from the OTS categorized the
Bank as well capitalized. There are no conditions or events since that
notification that management believes has changed the institution's category.
At December 31, 1998, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
_________ ________ _________ ________ _________ ________
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
As of December 31,
1998:
Tier 1 (Core) capital
(to risk weighted
assets) $ 24,213 10.91% $ 8,880 4.00% $ 13,320 6.00%
Tier 1 (Core) capital
(to total assets) $ 24,213 7.24% $ 13,373 4.00% $ 16,716 5.00%
Total Capital (to risk
weighted assets) $ 25,791 11.62% $ 17,760 8.00% $ 22,220 10.00%
</TABLE>
Results of Operations
<PAGE> 17
_____________________
Net income for the quarter ended December 31, 1998 was $700,568 or basic
earnings per share of $0.26 and diluted earnings per share of $0.25. This
compares to earnings of $356,066 or basic earnings per share of $0.14 and
diluted earnings per share of $0.13 for the quarter ended December 31, 1997.
Net income for the six months ended December 31, 1998 was $1,336,605 versus
$926,631 for the period ended December 31, 1997. Basic earnings per share were
$.49 and diluted earnings per share were $.48 for the six months ended December
31, 1998 versus basic earnings per share of $.39 and diluted earnings per share
of $.35 for the period ended December 31, 1997.
The Company completed the acquisition of Cushnoc in the quarter ended December
31, 1997. The one-time costs associated with the acquisition totaled
approximately $283,000 after tax of which $276,000 after tax was recognized in
the quarter ended December 31, 1997. The Company's net operating income,
before the aforementioned one-time charge, was $631,665, basic earnings per
share were $.27 and diluted earnings per share were $.23 for the three months
ended December 31, 1997, and $1,209,390, basic earnings per share were $.51 and
diluted earnings per share were $.45, for the six months ended December 31,
1997.
On September 30, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Comparative financial information in the Statements of
Changes in Shareholders' Equity for earlier periods have been reclassified in
accordance with the requirement of Statement No. 130.
The Company's net interest income was $5,998,927 for the six months ended
December 30, 1998, versus $5,572,823 for the six months ended December 31,
1997, an increase of $426,104. Total interest income increased $1,473,018
during the six months ended December 31, 1998 compared to the six months ended
December 31, 1997, resulting primarily from an increase in the volume of loans
offset in part by a decrease in rates. The increase in total interest expense
of $1,046,914 for the six months ended December 31, 1998 resulted primarily
from the increased volume of deposits and borrowings.
The changes in net interest income are presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the six months ended
December 31, 1998 versus December 31, 1997
<TABLE>
<CAPTION>
Difference Due to
Volume Rate Total
___________ ___________ ___________
<S> <C> <C> <C>
Investments $ (459,709) $ (54,705) $ (514,414)
Loans 2,762,863 (702,500) 2,060,363
FHLB & Other Deposits (70,498) (2,433) (72,931)
_____________________________________
Total 2,232,656 (759,638) 1,473,018
Deposits 378,836 123,723 502,559
Repurchase Agreements 35,604 616 36,220
<PAGE> 18
Borrowings 597,075 (88,940) 508,135
_____________________________________
Total 1,011,515 35,399 1,046,914
_____________________________________
Net Interest Income $1,221,141 $ (795,037) $ 426,104
=====================================
</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 categorizes its core deposits as long term liabilities which are
then matched to long term assets. As a result, the Bank will generally
experience a contraction in its net interest margins during a period of falling
rates. Management believes that the maintenance of a slight asset sensitive
position is appropriate since historically interest rates tend to rise faster
than they decline.
Approximately 21% of the Bank's loan portfolio is comprised of floating rate
loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as on approximately 29% 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 Bank's
interest expense. Although the Bank 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 net interest margin compression at
the Bank has been primarily due to the decrease in loan rates. Loan yields
have decreased due to the effect of the Federal Reserve easing the prime
lending rate in September and October of 1998 as well as loans within the Bank
refinancing to lower current market rates. As of December 31, 1998 the Bank's
net loan yields have decreased by 11 basis points when compared to net loan
yields at September 30,1998.
Total non-interest income was $841,470 and $1,263,140 for the three and six
months ended December 31, 1998 versus $742,108 and $1,296,549 for the three and
six months ended December 31, 1997. Service fee income was $269,536 and
$522,921 for the three and six months ended December 31, 1998 versus $237,235
and $513,640 for the three and six months ended December 31, 1997. The $32,301
and $9,281 service fee increase for the three and six months ended December 31,
1998, respectively, was primarily due to an increase in loan servicing and
deposit fee income. Gains from available for sale securities were $47,699 and
$58,490 for the three and six months ended December 31, 1998 versus $99,696 and
$207,692 for the three and six months ended December 31, 1997. The Company
sold a larger volume of its available for sale securities during the three and
six month period ended December 31, 1997, taking advantage of the fluctuation
in market prices in the mortgage-backed security portfolio.
Other income was $519,115 and $670,997 for the three and six months ended
December 31, 1998, which was an increase of $113,938 and $97,577 when compared
to other income of $405,177 and $573,420 for the three and six months ended
December 31, 1997, respectively. The increase in other income in the three and
six months ended December 31,1998, was primarily due to gains from 1-4 family
mortgage and indirect auto loan sales.
<PAGE> 19
Total non-interest expense for the Company was $2,485,079 and $4,802,886 for
the three and six months ended December 31, 1998, which was a decrease of
$280,544 and $239,336, respectively, when compared to total non-interest
expense of $2,765,623 and $5,042,222 for the three and six months ended
December 31, 1997. Total non-interest expense for the Company was higher for
the three and six month period ended December 31, 1997 primarily due to
acquisition costs associated with Cushnoc Bank.
Impact of Inflation
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, substantially all of the assets and virtually all of the
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Year 2000
_________
The Company is currently addressing the Year 2000 issue. Many existing
computer programs and hardware configurations use only two digits to identify a
year in the date field. Since these programs did not take into consideration
the upcoming change in the century, many computer applications could create
erroneous results by the year 2000 if not corrected. The Year 2000 issue will
affect this Company and it will affect virtually all companies and
organizations, including the Company's borrowers. The Company has organized a
Year 2000 committee to research, develop and implement a plan that will correct
this issue before the year 2000. The OTS, which primarily regulates thrifts,
savings and loan associations, and savings and loan holding companies, has
issued a formal regulation and comprehensive plan concerning the Year 2000
issue for such financial institutions. The Company has adopted the regulatory
comprehensive plan which has the following phases:
Awareness Phase
_______________
This phase consists of defining the Year 2000 problem; developing the resources
necessary to perform compliance work, establishing a Year 2000 program
committee and developing an overall strategy that encompasses in-house systems,
service bureaus for systems that are outsourced, vendors, auditors, customers,
and suppliers (including correspondents). This phase has been completed by the
Company's committee.
Assessment Phase
________________
This phase consists of assessing the size and complexity of the problem and
detailing the magnitude of the effort necessary to address the Year 2000 issue.
This phase must identify all hardware, software, networks, automated teller
machines, other various processing platforms, and customer and vendor
interdependencies affected by the Year 2000 date change. The assessment must
go beyond information systems and include environmental systems that are
dependent on embedded microchips, such as security systems, elevators and
<PAGE> 20
vaults. During this phase management also must evaluate the Year 2000 effect
on other strategic business initiatives. The assessment should consider the
potential effect that mergers and acquisitions, major system development,
corporate alliances, and system interdependencies will have on existing systems
and/or the potential Year 2000 issues that may arise from acquired systems.
The financial institution or vendor should also identify resource needs,
establish time frames and sequencing of Year 2000 efforts. Resource needs
include appropriately skilled personnel, contractors, vendor support, budget
allocations, and hardware capacity. This phase should clearly identify
corporate accountability throughout the project, and policies should define
reporting, monitoring, and notification requirements. Finally, contingency
plans should be developed to cover unforeseen obstacles during the renovation
and validation phases and include plans to deal with lesser priority systems
that would be fixed later in the renovation phase.
The assessment phase has been materially completed, but is considered an
ongoing phase for the Company. The Company is in the process of developing its
contingency plan and anticipates its completion by June 30, 1999. The Company
has instituted a comprehensive plan to communicate with all its borrowers that
the Company considers to be at risk concerning the Year 2000 issue. The
Company considers this plan necessary to mitigate the risk associated with
borrowers not having the ability to make loan payments due to a Year 2000
issue. The company has currently estimated the following costs associated with
the Year 2000 issue, (i) computer hardware replacement $130,000, (ii) software
replacement $72,000, (iii) testing and administrative costs $84,000, and (iv)
potential contingency costs $60,000. As of December 31, 1998, the Company has
incurred approximately $37,333 of capitalized purchases and $84,600 of
cumulative Year 2000 expenses. These costs are under continuous review and
will be revised as needed. There can be no assurance that actual costs will
not exceed the Company's estimates. During the quarter ended December 31,
1998, the Company replaced its computer mainframe and software as planned to
accommodate the growth of the Company through merger and acquisitions. The
previous mainframe and software had been fully depreciated through the normal
course of its depreciable life and the costs associated with the replacement of
these items was in the Company's general business plan for fiscal 1999. The
anticipated Year 2000 hardware and software costs indicated above are in
addition to the Company's costs associated with the replacement of the
mainframe and software.
Renovation Phase
________________
This phase includes code enhancements, hardware and software upgrades, system
replacements, vendor certification, and other associated changes. Work should
be prioritized based on information gathered during the assessment phase. For
institutions relying on outside services or third-party software providers,
ongoing discussions and monitoring of vendor progress are necessary. The
Company has limited out-side services and vendors. Each servicer and vendor
has been contacted and has or will provide information to the Company
concerning their efforts to comply with the Year 2000 issue. The Company has
materially completed this phase and is in the process of converting the data
communications network. The Company anticipates completion of this phase by
March 31, 1999. However, there can be no assurance that these services or
vendors will become Year 2000 compliant in a timely manner.
Validation Phase
________________
<PAGE> 21
Testing is a multifaceted process that is critical to the Year 2000 project and
inherent in each phase of the project management plan. This process includes
the testing of incremental changes to hardware and software components. In
addition to testing upgraded components, connections with other systems must be
verified, and all changes should be accepted by internal and external users.
Management will establish controls to assure the effective and timely
completion of all hardware and software testing prior to final implementation.
As with the renovation phase, the Company will be in ongoing discussions with
their vendors on the success of their validation efforts. The Company has
completed the testing all of its critical systems and will implement the data
communications testing after conversion. The Company anticipates completion of
this phase by March 31, 1999.
Implementation Phase
____________________
In this phase, systems should be certified as Year 2000 compliant and be
accepted by the business users. For any system failing certification, the
business effect must be assessed clearly and the organization's Year 2000
contingency plans should be implemented. Any potentially non-compliant mission-
critical system should be brought to the attention of executive management
immediately for resolution. In addition, this phase must ensure that any new
systems or subsequent changes to verified systems are compliant with Year 2000
requirements. The Company anticipates completion of this phase by June 30,
1999.
In summary, the Company recognizes the Year 2000 as a global issue with
potentially catastrophic results if not addressed. The Company has and will
continue to undertake all the necessary steps to protect itself and its
customers concerning the Year 2000 issue. Management is confident that all the
instituted phases will be completed and in place prior to the year 2000.
However, failure to meet the Year 2000 deadlines could have a material adverse
effect on the Company.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
_________________________________________________________
There have been no material changes in the Company's market risk from June 30,
1998. For information regarding the Company's market risk, refer to the
Company's Annual Report on Form 10-K dated as of June 30, 1998.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
_________________
None.
Item 2. Changes in Securities
_____________________
None.
Item 3. Defaults Upon Senior Securities
_______________________________
None.
<PAGE> 22
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
SUMMARY OF VOTING AT 11/10/98 ANNUAL SHAREHOLDERS' MEETING
__________________________________________________________
At the Annual Meeting of Shareholders held in Auburn, Maine on November 10,
1998, the following matters were submitted to a vote of, and approved by, the
Company's shareholders, each such proposal receiving the vote of the Company's
outstanding common and preferred shares, voting as one class, as follows:
Proposal 1 - Election of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
_______________ ________________
<S> <C> <C>
John W. Trinward, D.M.D. 2,082,411 61,350
John B. Bouchard 2,081,411 62,350
A. William Cannan 2,082,411 61,350
Ronald J. Goguen 2,079,411 64,350
Judith W. Hayes 2,082,411 61,350
John Rosmarin 2,081,411 62,350
John Schiavi 2,077,061 66,700
Stephen W. Wight 2,075,911 67,850
Dennis A. Wilson 2,082,411 61,350
</TABLE>
Proposal 2 - Approval of increased Number of Shares of Authorized Common Stock.
Proposal to approve and adopt an amendment to the Articles of Incorporation of
the Company to increase the number of its shares of authorized common stock to
15 million shares.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstain Non-Vote
_______________ _______________ _______________ _______________
<C> <C> <C> <C>
1,971,287 154,222 15,625 2,627
</TABLE>
Proposal 3 - Ratification of Appointment of Auditors. Proposal to ratify the
appointment of Baker, Newman & Noyes, Limited Liability Company, as the
Company's auditors for the 1999 fiscal year.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstain
_______________ _______________ _______________
<C> <C> <C>
2,132,156 3,640 7,965
<PAGE> 23
</TABLE>
Item 5. Other Information
_________________
None.
Item 6. Exhibits and Reports on Form 8 - K
__________________________________
(a) Exhibits
________
3.1 Conformed Articles of Incorporation of Northeast Bancorp as amended
November 10, 1998.
11 Statement regarding computation of per share earnings.
27 Financial data schedule
(b) Reports on Form 8 - K
_____________________
No reports on Form 8-K have been filed during the quarter ended December
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: February 10, 1999 NORTHEAST BANCORP
By: /s/ James D. Delamater
_____________________________________
James D. Delamater
President and CEO
By: /s/ Richard Wyman
_____________________________________
Richard Wyman
Chief Financial Officer
NORTHEAST BANCORP
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1 Conformed Articles of Incorporation of Northeast Bancorp as
amended November 10, 1998.
11 Statement regarding computation of per share earnings
<PAGE> 24
27 Financial data schedule
NORTHEAST BANCORP
ARTICLES OF INCORPORATION
FIRST: The name of the corporation is NORTHEAST BANCORP.
SECOND: The name of its Clerk, who must be a Maine resident and the address
of its registered office shall be:
Mary Ann Brown
232 Center Street, Auburn, Maine 04212
THIRD: The number of directors constituting the initial board of directors
of the corporation is nine, as follows:
Gordon M. Gillies, 3 Broad St, Bethel, Maine 04217
E. Louise Lincoln, PO Box 527, Bethel, Maine 04217
John W. Trinward, 8 Vernon St, Bethel, Maine 04217
Stephen W. Wight, RFD 2, Box 1688, Bethel, Maine 04217
Edmond J. Vachon, Paradise St, Bethel, Maine 04217
Ronald C. Kendall, PO Box 1, Bethel, Maine 04217
Norris T. Brown, Clark St, Bethel, Maine 04217
Philip C. Jackson, 12 Smith St, Bethel, Maine 04217
James D. Delamater, Route 121, Oxford, Maine 04270
FOURTH: The board of directors is authorized to increase or decrease the
number of directors. The minimum number shall be nine directors and
the maximum number shall be twelve directors.
FIFTH: SHARES - There shall be 15,000,000 authorized shares of $1.00 par
value Common Stock, which may be issued by the Corporation from time
to time by vote of the Board without the approval of the holders of
the Common Stock. Upon payment of lawful consideration, such shares
shall be deemed fully paid and nonassessable. Except as the Board
shall have otherwise specified or except as otherwise provided by
law, voting power shall be vested exclusively in the Common Stock.
The holders of the Common Stock shall be entitled to one vote for
each share of Common Stock owned. Dividends, as declared by the
Board out of lawfully available funds, shall be payable on the
Common Stock subject to any rights or preferences of the Preferred
Stock.
There shall be 1,000,000 authorized shares of $1.00 par value
Preferred Stock which may be issued from time to time in one or more
series as may be determined by the Board of Directors of the
Corporation. Each series of Preferred is to be distinctly
designated to distinguish the shares in the series from the shares
of all other series and classes. The relative rights and
preferences of the Preferred Stock and the variations of rights and
preferences between different series of Preferred Stock may be fixed
<PAGE> 25
and determined by the Board of Directors by resolution or
resolutions adopted prior to the issuance of any shares of a
particular series of Preferred Stock. All shares of Preferred shall
be identical except as to the following relative rights and
preferences, as to which there may be variations between different
series:
a. The rate of dividend;
b. Whether shares may be redeemed and, if so, the redemption price
and the terms and conditions of redemption;
c. The amount payable upon shares in event of voluntary and
involuntary liquidation;
d. Sinking fund provisions, if any, for the redemption or purchase
of shares;
e. The terms and conditions, if any, on which shares may be
converted; or
f. Voting rights, if any.
Upon any liquidation, dissolution or winding up of the affairs of
the Corporation, whether voluntary or involuntary, holders of Common
Stock are entitled to receive pro rata the remaining assets of the
Corporation after the holders of Preferred Stock have been paid in
full any sums to which they may be entitled.
There shall be no cumulative voting for Directors or otherwise.
SUMMARY
The aggregate par value of all authorized shares (of all classes)
having a par value is $16,000,000. The total number of authorized
shares (of all classes) without par value is zero shares.
SIXTH: Meetings of the shareholders may be held outside the State of Maine.
SEVENTH: There are no preemptive rights.
EIGHTH: INTERNAL AFFAIRS OF THE CORPORATION
Section 1.
- ----------
(a) Number, Qualifications and Term of Office.
------------------------------------------
Subject to the provisions hereof relating to the initial Board, the
number of directors of the corporation shall be no less than 9 and
no more than 12. The exact number of Directors within the minimum
and maximum limitations specified in the preceding sentence shall be
fixed from time to time by the Board pursuant to a resolution
adopted by the majority of the entire Board. No decrease in the
number of directors constituting the Board shall shorten the term of
any incumbent director. Each Director elected to succeed those
directors whose terms expire at or after the 1997 annual meeting of
Shareholders shall be elected to serve until the next annual meeting
of shareholders and until his or her successor is elected and
qualified. Directors need not be Shareholders or residents of the
State of Maine.
<PAGE> 26
(b) Vacancies.
----------
Any vacancy in the Board caused by death, resignation, retirement,
disqualification, removal or other cause, shall be filled by a
majority vote of the remaining Directors, though less than a
quorum. A Director so chosen shall hold office for the unexpired
term of their predecessors in office. Any Directorship to be filled
by reason of an increase in the authorized number of directors may
be filled by the Board for a term of office continuing only until
the next election of Directors by Shareholders.
(c) Removal of Directors.
---------------------
At any meeting of Shareholders called expressly for the purpose, any
Director may be removed from office by the affirmative vote of the
holders of seventy-five percent (75%) of the shares entitled to vote
or if removal is for cause, then by a majority of the shares then
entitled to vote. For "cause" shall mean a final adjudication by a
court of competent jurisdiction that the Director (i) is liable for
negligence or misconduct in the performance of his duty, (ii) guilty
of a felony conviction, or (iii) has failed to act or has acted in a
manner which is in derogation of the Director's duties.
(d) Nomination of Directors.
------------------------
In addition to the right of the Board to make nominations for the
election of Directors, nominations for the election of Directors may
be made by any Shareholder entitled to vote for the election of
Directors if that Shareholder complies with all of the following
provisions:
a. Advance notice of such proposed nomination shall be received by
the Secretary of the Corporation not less than thirty (30) days
nor more than sixty (60) days prior to any meeting of the
Shareholders called for the election of the Directors; provided,
however, that if fewer than fourteen (14) days' notice of the
meeting is given to Shareholders, such written notice of a
proposed nomination shall be received not later than the close of
the tenth day following the day on which the notice of the
meeting was mailed to Shareholders.
b. Each notice shall set forth (i) the name, age, business address
and, if known, residence address of each nominee proposed in such
notice, (ii) the principal occupation or employment of each such
nominee; and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee.
In addition, the Shareholder making such nomination shall
promptly provide any other information reasonably requested by
the Corporation.
c. The nomination made by a Shareholder may only be made in a
meeting of the Shareholders of the Corporation called for the
election of Directors at which such Shareholder is present in
person or by proxy, and can only be made by a Shareholder who has
complied with the notice provisions of (a) and (b) above.
d. The Chairman of the meeting may in his discretion determine and
<PAGE> 27
declare to the meeting that a nomination was not made in
accordance with the foregoing procedures, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 2. Voting for Business Combinations.
- --------------------------------------------
(a) Neither the Corporation nor any subsidiary of which the Corporation
owns at least a majority of the equity securities ordinarily
entitled to vote for the election of Directors ("Subsidiary"), shall
be a party to any of the transactions specified herein (a "Business
Combination") or enter into any agreement providing for any Business
Combination unless the conditions specified in (b), (c) and (d)
below shall have been satisfied:
(i) any merger or consolidation (whether in a single transaction or a
series of related transactions) other than a merger or
consolidation of the Corporation and any of its subsidiaries or
a merger or consolidation of any subsidiaries of the Corporation;
or
(ii) any sale, lease, exchange, transfer or distribution of all or
substantially all or a substantial portion of the property or
assets of the Corporation or any of its subsidiaries, including
its goodwill; or
(iii) the issuance of any securities, or of any rights warrants or
options to acquire any securities of the Corporation or any of
its subsidiaries, to any Shareholders other than by stock
dividend declared and paid to all Shareholders of the Corporation
or pursuant to an employee stock ownership plan or an employee
stock option plan established by the Corporation; or
(iv) any reclassification of the stock of the Corporation or any of
its subsidiaries or any recapitalization or other transaction
(other than a redemption of stock) which has the effect, directly
or indirectly, of increasing the proportionate share of stock of
the Corporation or any of its subsidiaries held by any person; or
(v) the dissolution of the Corporation or any subsidiary thereof or
any partial or complete liquidation of the Corporation or any
subsidiary thereof.
(b) The vote of the holders of at least eighty percent (80%) of the
outstanding shares entitled to vote for the election of Directors
shall be required to approve or authorize any Business Combination
to which the Corporation or any Subsidiary is party unless the
aggregate of the cash and fair market value of the consideration to
be paid to all the holders of the Common Stock of the Corporation in
connection with the Business Combination (when adjusted for stock
splits, stock dividends, reclassification of shares or otherwise)
shall be equal to the highest price per share paid by the other
party or parties to the Business Combination (the "Acquiring Party")
in acquiring any of the Corporation's Common Stock; provided
however, that the consideration to be paid to the holders of the
Common Stock of the Corporation shall be in the same form as that
paid by the Acquiring Party in acquiring the shares of the Common
<PAGE> 28
Stock held by it except to the extent that any Stockholder of the
Corporation shall otherwise agree.
(c) Subject to the provisions in (b) above, the vote of the holders of
at least seventy-five percent (75%) of the outstanding shares
entitled to vote for the election of Directors shall be required to
approve or authorize any Business Combination to which the
Corporation or any Subsidiary is a party unless the Business
Combination shall have been approved by at least two-thirds (2/3) of
the Directors of the Corporation who are not affiliated with, or
Shareholders of, the Acquiring Party.
In connection with the exercise of its judgment in determining what
is in the best interests of the Corporation and of the Shareholders,
when evaluating a Business Combination or a proposal by another
person or persons to make a Business Combination or a tender or
exchange offer, the Board may, in addition to considering the
adequacy of the amount to be paid in connection with any such
transaction, consider all of the following factors and other factors
which it deems relevant: (i) the social and economic effects of the
transaction on the Corporation and its subsidiaries, employees,
depositors, loan and other customers, creditors and other elements
of the communities in which the Corporation and its subsidiaries
operate or are located; (ii) the business and financial condition
and earnings prospects of the acquiring person or persons, including
but not limited to debt service and other existing financial
obligations, financial obligations to be incurred in connection with
the acquisition, and other likely financial obligations of the
acquiring person or persons, and the possible effect of such
conditions upon the Corporation and its subsidiaries and the other
elements of the communities in which the Corporation and its
subsidiaries operate or are located; and (iii) the competence,
experience and integrity of the acquiring person or persons and its
or their management.
(d) In the event that all of the conditions set forth in (b) and (c)
above are met, the Corporation or any Subsidiary may enter into any
Business Combination under the terms and conditions specified in the
Maine Business Corporation Act.
(e) The affirmative vote of the holders of at least eighty percent (80%)
of all of the shares of the Corporation entitled to vote for the
election of Directors shall be required to amend or repeal, or to
adopt any provisions in contravention of or inconsistent with this
Section 2, notwithstanding the fact that a lesser percentage may be
specified by law.
Section 3. Special Meetings and Consent Meetings.
- -------------------------------------------------
Special meetings of the Shareholders may be called by the Chairman,
President, the Board, or by the Secretary upon written request of
the holders of not less than ten percent (10%) of all the shares
entitled to vote.
Section 4. Acquisition of Stock.
- --------------------------------
(a) Restrictions on Offers and Acquisitions.
<PAGE> 29
For a period of five (5) years from the effective date of the
conversion, no person shall directly or indirectly offer to acquire
or acquire the beneficial ownership of (i) more than ten percent
(10%) of the issued and outstanding shares of any class of an equity
security of the Corporation; (ii) more than ten percent (10%) of any
class of securities convertible into, or exercisable for, any class
of an equity security of the Corporation; (iii) any securities
convertible into, or exercisable for, any equity securities of the
Corporation if assuming conversion or exercise by such person of all
securities of which such person is the beneficial owner which are
convertible into, or exercisable for, such equity securities (but of
no securities convertible into, or exercisable for, such equity
securities of which such person is not the beneficial owner), such
person would be the beneficial owner of more than ten percent (10%)
of any class of an equity security of the Corporation.
For the same five year period, each share beneficially owned in
violation of the foregoing percentage limitation, as determined by
the Board, shall not be voted by any person or counted as voting
shares in connection with any matter submitted to the shareholders
for a vote.
For the purposes of this Section 4:
(i) The term "person" shall mean and include any individual,
group acting in concert, Corporation, partnership, or other
organization or entity, together with its affiliates and
associates; and
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or
request or invitation for tenders of, a security (including,
without limitation, shares of any class of capital stock of
the Corporation) or interest in a security for value.
(iii) The term "conversion" shall mean the completed process
whereby Bethel Savings, FSB Bank will be converted from a
federally chartered mutual savings bank to a federally
charted stock savings bank and Bethel Bancorp shall become
the holding company for Bethel Savings Bank, FSB.
(b) Exclusion for Underwriters, Directors, Officers and Employees.
--------------------------------------------------------------
The restriction contained in this Section 4 shall not apply to any
offer with a view toward public resale made exclusively to the
Corporation or the underwriters or a selling group acting on its
behalf. In addition, the Directors, Officers and employees of the
Corporation or any subsidiary thereof shall not be deemed to be a
group with respect to their individual acquisition of equity stock
of the Corporation.
(c) Readoption of Restriction by Shareholders.
------------------------------------------
This Section 4 may be readopted for additional one-year or longer
periods by vote of the holders of a majority of the outstanding
voting shares present or represented at a duly convened annual or
<PAGE> 30
special meeting of Shareholders of the Corporation.
(d) Exception in Cases of Advance Approval.
---------------------------------------
This Section 4 shall not apply to any offer or acquisition referred
to in (a) above if such offer or acquisition was approved in advance
of such offer or acquisition by two-thirds (2/3) of the entire Board
utilizing the standard set forth in Section 2(c).
(e) Enforcement of this Section 4.
------------------------------
The Corporation may by law or by resolution of the Directors adopt
such provisions or resolutions as are necessary to provide for the
enforcement of this Section 4.
(f) Amendments of this Section 4.
-----------------------------
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, and notwithstanding
the fact that some lesser percentage may be specified by law, this
Section 4 shall not be amended, altered, changed or repealed
without:
a. the affirmative vote of two-thirds (2/3) of the Board; and
b. the affirmative vote by the holders of at least two-thirds (2/3)
of the outstanding shares entitled to vote.
This vote shall be in addition to any vote of the Preferred Stock as
may be required by the provisions of any series thereof or
applicable by law.
The readoption of Section 4 for additional one-year or longer
periods, as provided in (c) above, shall not be an amendment,
alteration or change for the purposes of this paragraph.
Section 5. Amendments.
- ----------------------
(a) Amendments to Articles of Incorporation.
----------------------------------------
Except as otherwise provided for in the Articles above, the
affirmative vote of the holders of at least two-thirds (2/3) of all
of the shares of the Corporation entitled to vote for the election
of Directors, shall be required to amend or repeal, or to adopt any
provision in contravention of or inconsistent with these Articles
notwithstanding the fact that a lesser percentage may be specified
by law.
(b) Amendments to By-Laws.
----------------------
The By-Laws of the Corporation may be amended at any time by the
affirmative vote of a majority of the entire Board, subject to
repeal, change or adoption of any contravening or inconsistent
provision only by vote of the holders of at least two-thirds (2/3)
of all the shares entitled to vote on the matter at a meetings
expressly called for that purpose.
Section 6. Right of Shareholders Following Control Transaction.
<PAGE> 31
- ----------------------------------------------------------------
The provisions of ME Rev. Stat. Ann.Title 13-A, Section 910 shall not be
applicable to the Corporation.
NORTHEAST BANCORP
Exhibit 11. Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
____________________ ____________________
<S> <C> <C>
EQUIVALENT SHARES:
Weighted Average Shares Outstanding 2,692,802 2,222,543
Total Diluted Shares 2,786,889 2,753,434
Net Income $ 700,568 $ 356,066
Less Preferred Stock Dividend 8,167 35,000
____________________ ____________________
Income Available to Common
Stockholders $ 692,401 $ 321,066
==================== ====================
Basic Earnings Per Share $ 0.26 $ 0.14
Diluted Earnings Per Share $ 0.25 $ 0.13
Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997
____________________ ____________________
EQUIVALENT SHARES:
Weighted Average Shares Outstanding 2,654,158 2,220,297
Total Diluted Shares 2,790,300 2,734,423
Net Income $ 1,336,605 $ 926,631
Less Preferred Stock Dividend 25,667 69,999
____________________ ____________________
Income Available to Common
Stockholders $ 1,310,938 $ 856,632
==================== ====================
Basic Earnings Per Share $ 0.49 $ 0.39
Diluted Earnings Per Share $ 0.48 $ 0.35
<PAGE> 32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 5,092,834
<INT-BEARING-DEPOSITS> 13,765,064
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,372,783
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 284,313,294
<ALLOWANCE> 2,869,000
<TOTAL-ASSETS> 336,194,991
<DEPOSITS> 201,930,962
<SHORT-TERM> 38,384,275
<LIABILITIES-OTHER> 5,836,232
<LONG-TERM> 63,844,266
0
0
<COMMON> 2,755,076
<OTHER-SE> 23,444,180
<TOTAL-LIABILITIES-AND-EQUITY> 336,194,991
<INTEREST-LOAN> 12,488,988
<INTEREST-INVEST> 371,438
<INTEREST-OTHER> 382,447
<INTEREST-TOTAL> 13,242,873
<INTEREST-DEPOSIT> 4,287,652
<INTEREST-EXPENSE> 7,243,946
<INTEREST-INCOME-NET> 5,998,927
<LOAN-LOSSES> 369,421
<SECURITIES-GAINS> 58,490
<EXPENSE-OTHER> 4,802,886
<INCOME-PRETAX> 2,089,760
<INCOME-PRE-EXTRAORDINARY> 2,089,760
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,336,605
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 3.725
<LOANS-NON> 1,594,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 184,896
<LOANS-PROBLEM> 614,056
<ALLOWANCE-OPEN> 2,978,000
<CHARGE-OFFS> 542,375
<RECOVERIES> 63,954
<ALLOWANCE-CLOSE> 2,869,000
<ALLOWANCE-DOMESTIC> 74,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,795,000
</TABLE>
