<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999
REGISTRATION STATEMENT NOS. 333-88853 AND 333-88853-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
NBN CAPITAL TRUST
NORTHEAST BANCORP
(Exact Name of Registrants as Specified in Their Charters)
<TABLE>
<S> <C>
DELAWARE [APPLIED FOR]
MAINE 65-0624640
(States or Other Jurisdictions of (I.R.S. Employer
Incorporation or Organization) Identification Nos.)
</TABLE>
232 CENTER STREET
AUBURN, MAINE 04210
(207) 777-6411
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrants' Principal Executive Offices)
---------------------
JAMES D. DELAMATER, PRESIDENT
NORTHEAST BANCORP
232 CENTER STREET
AUBURN, MAINE 04210
(207) 777-6411
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of Agent For Service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD A. DENMON, ESQ. WILLIAM W. BOUTON, III, ESQ.
CARLTON, FIELDS, WARD, EMMANUEL, TYLER COOPER & ALCORN, LLP
SMITH & CUTLER, P.A. CITY PLACE - 35TH FLOOR
777 SOUTH HARBOUR ISLAND BOULEVARD HARTFORD, CONNECTICUT 06103
TAMPA, FLORIDA 33602
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] .
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED OCTOBER 27, 1999
PROSPECTUS
$10,500,000
NBN CAPITAL TRUST
% PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED AS DESCRIBED IN THIS PROSPECTUS, BY
NORTHEAST BANCORP
---------------------
NBN Capital Trust is offering preferred securities for sale to the public
which Northeast Bancorp will fully and unconditionally guarantee, to the extent
described in this prospectus, based on its obligations under a guarantee, a
trust agreement, and an indenture.
NORTHEAST BANCORP --
- - We are a unitary savings and loan holding corporation that offers a full range
of financial and banking services and products to its customers in the state
of Maine through our wholly-owned banking subsidiary, Northeast Bank, F.S.B.
- - We will purchase all of the common securities of the Trust.
THE TRUST --
- - NBN Capital Trust is a Delaware business trust.
- - The Trust will sell preferred securities to the public and common securities
to Northeast Bancorp. The proceeds will be used to purchase an equal amount of
our junior subordinated debentures.
THE PREFERRED SECURITIES --
- - The preferred securities represent beneficial interests in the assets of the
Trust, which will include the junior subordinated debentures and payments on
the junior subordinated debentures.
- - Holders of the preferred securities are entitled to receive cumulative cash
distributions at an annual rate of % on March 31, June 30, September 30,
and December 31 of each year, beginning on December 31, 1999.
- - The preferred securities mature on , 2029.
- - The Trust may redeem the preferred securities for cash or in exchange for the
junior subordinated debentures.
- - If we defer interest payments on the junior subordinated debentures, the Trust
will defer distributions on the preferred securities.
THE JUNIOR SUBORDINATED DEBENTURES --
- - We will sell $ of our % junior subordinated debentures to the
Trust.
- - The junior subordinated debentures are scheduled to mature on , 2029,
but we may shorten this time period.
- - We may defer interest payments on the junior subordinated debentures from time
to time.
We have applied for listing of the preferred securities on the American
Stock Exchange under the trading symbol "NBN.Pr".
---------------------
INVESTING IN THE PREFERRED SECURITIES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NONE OF THE SECURITIES OFFERED BY THIS PROSPECTUS ARE DEPOSITS OR SAVINGS
ACCOUNTS OF A BANK, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
<TABLE>
<CAPTION>
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PER PREFERRED SECURITY TOTAL
<S> <C> <C>
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Public offering price....................................... $10.00 $10,500,000
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Underwriting fees (to be paid by Northeast Bancorp)......... $ $
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Proceeds to NBN Capital Trust, before expenses.............. $ $
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</TABLE>
The underwriter also may purchase up to an additional 157,500 preferred
securities at the public offering price within 30 days after the date of this
prospectus to cover any over-allotments.
The Trust expects the preferred securities to be ready for delivery in book
entry only form through the Depository Trust Company on or about ,
1999.
---------------------
ADVEST, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER , 1999
<PAGE> 3
(NORTHEAST BANCORP MAP)
2
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A Note About Forward-Looking Statements..................... 3
Prospectus Summary.......................................... 5
Risk Factors................................................ 13
NBN Capital Trust........................................... 21
Use of Proceeds............................................. 21
Capitalization.............................................. 22
Accounting Treatment........................................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 50
Description of Preferred Securities......................... 59
Description of Junior Subordinated Debentures............... 72
Description of Guarantee.................................... 82
Relationship Among the Preferred Securities, the Junior
Subordinated Debentures, and the Guarantee................ 84
Certain Federal Income Tax Consequences..................... 86
Certain ERISA Considerations................................ 90
Supervision and Regulation.................................. 90
Underwriting................................................ 100
Validity of Securities...................................... 101
Experts..................................................... 102
Where Can You Find More Information......................... 102
Documents Incorporated by Reference......................... 102
Index to Financial Statements............................... F-1
</TABLE>
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, such as statements relating to our financial condition,
results of operations, plans, objectives, future performance and business
operations. These statements relate to expectations concerning matters that are
not historical fact. These forward-looking statements are typically identified
by words or phrases such as "believes" , "expects", "anticipates", "plans",
"estimates", "approximately", "intend", and other similar words and phrases, or
future or conditional verbs such as "will", "should", "would", "could", and
"may". These forward-looking statements are based largely on our expectations
and involve inherent risks and uncertainties. Although we believe our
expectations are based on reasonable assumptions, a number of important factors
could cause actual results to differ materially from those in the
forward-looking statements. Some factors include those described under "Risk
Factors" and the following:
- general economic conditions, either nationally or in Maine, may be less
favorable than expected, resulting in, among other things, a
deterioration in credit quality or a decreased demand for our services
and products;
- changes in the interest rate environment which could reduce our margins
and increase defaults in our loan portfolio;
- a significant increase in competitive pressures in the banking or
financial services industry;
- changes in political conditions or in the legislative or regulatory
environment which adversely affect the businesses in which we will be
engaged or limit the payment of dividends by us or the Bank;
- changes occurring in consumer spending, saving, and borrowing habits;
3
<PAGE> 5
- changes in accounting policies and practices, as may be adopted by
regulatory agencies as well as the Financial Accounting Standards Board;
- changes in technology and challenges associated with Year 2000 issues;
- changes in trade, tax, monetary or fiscal policies; and
- money market and monetary fluctuations, and changes in inflation and in
the securities markets.
Many of these factors are beyond our control and you should read carefully
the factors described in the "Risk Factors" section beginning on page 13 of this
prospectus.
4
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that is
important to you. You should carefully read this prospectus and the information
that is incorporated by reference into this prospectus, in their entirety,
before you decide to invest in the preferred securities.
NORTHEAST BANCORP
GENERAL
Northeast Bancorp is a unitary savings and loan holding company,
incorporated under the laws of the State of Maine in 1987. Northeast Bancorp,
through its subsidiary, is a full service financial institution able to deliver
a broad array of financial services and products to our customers. We originate
residential real estate loans, commercial real estate and business loans, and
consumer loans, primarily in the State of Maine, through our principal
subsidiary, Northeast Bank, F.S.B. We also purchase wholesale residential loans
from third parties and make other permitted investments. Our Bank's trust
department offers trust services, including administration of retirement plans
such as profit sharing, pension, and 401(k) plans. Further, financial planning,
investment, and insurance products are provided to customers by Northeast
Financial Services Corporation, a subsidiary of the Bank. In this regard,
Northeast Financial Services Corporation provides brokerage services to our
customers through an arrangement with Commonwealth Equity Services, Inc., a New
York securities firm, and uses relationships with several insurance companies
and agencies in order to provide access to a full range of insurance products
for our customers. We serve our customers from 12 full service retail banking
branches located in Auburn, Lewiston, Augusta, Bethel, Harrison, South Paris,
Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine. The Bank
also maintains a facility in Falmouth, Maine from which it accepts loan
applications and offers investment, insurance, and financial planning products.
As of June 30, 1999, we had total consolidated assets of approximately $364.4
million, deposits of $219.4 million, and stockholders' equity of $26.7 million.
The Bank:
- is a federally-chartered savings bank and is subject to examination and
comprehensive regulation by the Office of Thrift Supervision;
- is a member of the Federal Home Loan Bank of Boston;
- has deposits which are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law;
- was formerly known as Bethel Savings Bank F.S.B. and was originally
organized in 1872 as a Maine-chartered mutual savings bank; and
- converted into a federal savings bank in fiscal 1984, and in 1987
restructured into a stock form of ownership.
In 1991 we purchased Brunswick Federal Savings, F.A. and in 1996 merged Bethel
and Brunswick. Bethel was the surviving savings bank and its name was changed to
Northeast Bank, F.S.B.
The Bank currently offers its customers access to a broad range of
financial services and products including: (a) real estate, commercial, and
consumer loans, (b) deposit and investment services, (c) trust services, (d)
debit cards, (e) electronic transfer services, and (f) other related products.
In addition, through relationships and arrangements developed by us, we are able
to provide our customers with access to insurance products, brokerage services,
and ATMs. Historically, the Bank has served primarily as a residential mortgage
lender and its business has mainly consisted of attracting deposits from the
general public through its retail banking offices and utilizing those funds
primarily for loans. In particular, the Bank has applied these funds to
originate, retain, service, invest in, and sell first mortgage loans on single
and multi-family residential
5
<PAGE> 7
real estate. In recent years, the Bank has expanded its efforts in the consumer,
small business, home equity, and commercial lending areas, including indirect
lending through local automobile dealerships.
STRATEGY
Northeast Bancorp's overall strategy is to increase the core earnings of
the Bank by developing stronger interest margins, improving non-interest fee
income, and increasing the volume of banking products and services through the
expansion of the Bank's market areas. To this end, the Bank seeks to be an
all-inclusive financial center able to provide its customers with nearly every
financial service and product that they may require. Specifically, the Bank
provides personalized financial planning services to assist its clients in
assessing their financial needs. After determining the customers' financial
needs, we provide the financial products or services which most beneficially
meet those needs. We believe that the ability to provide such personalized
service and advice will be one of the primary bases on which financial
institutions will compete for business in the future. As a result, over the past
few years the Bank has invested a substantial amount of resources in developing
its ability to offer a high level of personalized service with an emphasis on
financial planning and delivery of financial advisory services responsive to a
broad range of customer needs.
We believe that our emphasis on personalized financial planning and advice,
together with the local character of the Bank's business and its "community
bank" management philosophy will allow it to continue to compete effectively in
its market area. The Bank's community bank approach provides its customers at
each branch location with:
- local decision-making authority,
- employees who are familiar with the customers' needs, their business
environment, and competitive demands, and
- employees who are able to develop and customize personalized financial
solutions to the customer's needs on a turn-key basis.
We believe that our strategy of providing "one-stop shopping" for our
customers' financial needs, together with our community bank approach, will
continue to foster the development of profitable long-term banking relationships
between the Bank and its customers.
Our principal executive offices are located at 232 Center Street, Auburn,
Maine, 04210, and our telephone number is (207) 777-6411.
NBN CAPITAL TRUST
NBN Capital Trust is a Delaware statutory business trust that we created
for the limited purpose of:
- issuing its preferred securities and the common securities;
- investing the proceeds that it receives from issuing the preferred
securities and the common securities in an equivalent amount of junior
subordinated debentures issued by us; and
- engaging only in those activities related to the activities described
above.
The Trust will issue all of the preferred securities to the purchasers in
this offering. We will purchase all of the common securities. The common
securities will represent an aggregate liquidation amount equal to at least 3%
of the total capital of the Trust.
The junior subordinated debentures will be the only assets of the Trust,
and payments under the junior subordinated debentures will be the only revenue
of the Trust.
The Trust will be governed by a trust agreement among us, as depositor,
Bankers Trust (Delaware), as Delaware trustee, and Bankers Trust Company, as
property trustee. The Trust will continue in existence for 31 years unless it is
dissolved earlier under the terms of the trust agreement.
The principal executive offices of the Trust is c/o Northeast Bancorp at
232 Center Street, Auburn, Maine 04210, and its telephone number is (207)
777-6411.
6
<PAGE> 8
THE OFFERING
The Issuer.................... NBN Capital Trust, a Delaware statutory
business trust.
The Securities Being
Offered....................... 1,050,000 preferred securities having a
liquidation amount of $10 per preferred
security. The preferred securities represent
preferred undivided beneficial interests in the
assets of the Trust, which will consist solely
of the junior subordinated debentures. We will
guarantee payments on the preferred securities
to the extent of funds in the Trust. The Trust
has granted the underwriter an option,
exercisable within 30 days after the date of
this prospectus, to purchase up to an
additional 157,500 preferred securities at the
initial offering price, solely to cover
over-allotments, if any.
The Offering Price............ $10 per preferred security, plus accrued
distributions, if any, from ,
1999.
The Payment of
Distributions................. The Trust will pay distributions to you on each
preferred security at an annual rate of %.
The distributions will be cumulative, will
accumulate from , 1999 (the
date that the preferred securities are issued),
and will be payable in arrears at the end of
each calendar quarter, commencing
, 1999.
Junior Subordinated
Debentures.................... The Trust will invest the proceeds from the
issuance of the preferred securities and the
common securities in an equivalent amount of
our % junior subordinated debentures. The
junior subordinated debentures are scheduled to
mature on , 2029, unless we
shorten the maturity date. We will not shorten
the maturity date unless we have first received
any required regulatory approvals.
We Have the Option to Extend
the Interest Payment Period... At any time we are not in default under the
junior subordinated debentures, we may defer
payments of interest on the junior subordinated
debentures for up to 20 consecutive quarters,
but not beyond their stated maturity date. If
we defer payment on the junior subordinated
debentures, the Trust will defer quarterly
distributions on the preferred securities.
Deferred quarterly distributions will continue
to accumulate additional distributions at an
annual rate of % compounded quarterly.
During any period that we are deferring
interest payments, we may not declare or pay
any cash distributions on our capital stock or
debt securities that are of equal or lower rank
than the junior subordinated debentures. After
the end of any period in which we defer
interest payments, we may again defer payments
if we have paid all the previously deferred and
current interest due under the junior
subordinate debentures. If we defer interest
payments, you will be required to include
deferred interest income in your gross income
for United States federal income tax purposes
even if you have not yet received your cash
distribution from such deferred interest
payments.
Redemption of the Preferred
Securities.................... The Trust must redeem the preferred securities
when payment is made on the junior subordinated
debentures on their scheduled
7
<PAGE> 9
maturity date, or following any earlier
redemption of the junior subordinated
debentures. Subject to any regulatory approvals
that may then be required, we may redeem the
junior subordinated debentures prior to their
scheduled maturity (1) in whole or in part at
any time on or after , 2004, or (2)
in whole, but not in part, within 90 days
after:
- certain tax events occur or become likely to
occur;
- the Trust is or becomes likely to be deemed
an investment company; or
- there is a change in the capital treatment of
the preferred securities under applicable
banking regulations.
Following the repayment of the junior
subordinated debentures at their scheduled
maturity or upon any earlier redemption, we
will use the cash proceeds from such repayment
to pay to you a liquidation amount for the
preferred securities. The liquidation amount
that you will receive will be $10 per preferred
security plus any accrued and unpaid
distributions through the date of redemption.
How the Securities Will Rank
in Right of Payment........... - The preferred securities will rank equally
with the common securities. The Trust will
pay distributions on the preferred securities
and the common securities pro rata. However,
if we default on the junior subordinated
debentures by failing to make interest
payments, then no distributions will be paid
on the common securities until all
accumulated and unpaid distributions on the
preferred securities have been paid.
- Our obligations under the junior subordinated
debentures and the guarantee are unsecured
and generally will rank junior in priority to
our senior and other subordinated
indebtedness.
- Because we are a holding company, the junior
subordinated debentures and the guarantee
will effectively be subordinated to all
existing and future liabilities and
obligations of our subsidiaries.
The Junior Subordinated
Debentures May Be Distributed
to You...................... Under certain circumstances, we may dissolve
the Trust after obtaining any necessary
regulatory approvals. If we dissolve the Trust,
after satisfaction of any of the Trust's
liabilities to creditors, the Trust will
distribute your pro rata share of the junior
subordinated debentures to you in liquidation
of the Trust.
Our Guarantee of Payments..... We will fully and unconditionally guarantee the
obligations of the preferred securities through
the following:
- our obligation to make payments on the junior
subordinated debentures;
- our obligations under the guarantee executed
for the benefit of the holders of the
preferred securities; and
- our obligations under the trust agreement.
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If we do not make payments under the junior
subordinated debentures, the Trust will not
have sufficient funds to make payments on the
preferred securities. The guarantee does not
cover payments when the Trust does not have
sufficient funds.
Voting Rights................. You will have no voting rights except in
limited circumstances.
Use of Proceeds............... The Issuer will invest all of the proceeds from
the sale of the preferred securities and the
common securities in our junior subordinated
debentures. We intend to use the net proceeds
from the sale of our junior subordinated
debentures to:
- Make contributions to the capital of the Bank
to support the capital needs of the Bank and
its subsidiary,
- Finance possible future acquisitions if, and
when, suitable opportunities arise, and
- Fund any potential repurchase of our common
stock.
ERISA Considerations.......... You must carefully consider the information set
forth under "Certain ERISA Considerations."
AMEX Trading Symbol........... We have applied to have the preferred
securities approved for listing on the American
Stock Exchange under the symbol "NBN.Pr."
Book-entry.................... The preferred securities will be represented by
a global security that will be deposited with
and registered in the name of the Depository
Trust Company, New York, New York, or its
nominee. This means that you will not receive a
certificate for your preferred securities.
RISK FACTORS
Before purchasing the preferred securities offered by this prospectus you
should carefully consider the "Risk Factors" beginning on page 13.
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<PAGE> 11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following is our selected financial information. You should read this
selected financial information in conjunction with our consolidated financial
statements and the related notes that begin on page F-1. This information has
been restated to include our acquisition of Cushnoc Bank & Trust in 1997
accounted for as a pooling of interests.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED JUNE 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
NORTHEAST BANCORP --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Interest income........................................... $ 26,857 $ 24,283 $ 21,936 $ 20,105 $ 18,953
Interest expense.......................................... 14,550 12,810 11,291 10,087 8,841
-------- -------- -------- -------- --------
Net interest income....................................... 12,307 11,473 10,645 10,018 10,112
Provision for loan losses................................. 610 706 614 639 691
Other operating income(1)................................. 2,621 2,384 1,827 1,909 1,760
Net securities gains...................................... 95 288 259 279 419
Other operating expenses(2)............................... 10,570 9,732 9,718 9,536 9,093
-------- -------- -------- -------- --------
Income before income taxes................................ 3,843 3,707 2,399 2,031 2,507
Income tax expense........................................ 1,433 1,303 909 738 878
-------- -------- -------- -------- --------
Net Income................................................ $ 2,410 $ 2,404 $ 1,490 $ 1,293 $ 1,629
======== ======== ======== ======== ========
CONSOLIDATED PER SHARE DATA(3):
Net income:
Basic................................................... $ 0.88 $ 1.00 $ 0.63 $ 0.56 $ 0.77
Diluted................................................. $ 0.86 $ 0.86 $ 0.56 $ 0.50 $ 0.66
Cash dividends............................................ $ 0.21 $ 0.21 $ 0.21 $ 0.16 $ 0.11
SELECTED BALANCE SHEET DATA:
Total assets.............................................. $364,383 $322,533 $284,077 $244,782 $231,856
Loans receivable.......................................... 318,986 282,031 222,682 187,210 187,777
Deposits.................................................. 219,364 184,024 172,921 164,855 168,682
Borrowings................................................ 104,569 105,433 81,793 54,140 38,274
Total stockholders' equity................................ 26,683 25,140 22,096 20,364 19,388
PERFORMANCE RATIOS:
Return on average assets.................................. 0.71% 0.83% 0.57% 0.55% 0.71%
Return on average equity.................................. 9.18 10.35 7.05 6.31 8.81
Average equity to average total assets.................... 7.73 7.99 8.09 8.67 8.10
Efficiency ratio(4)....................................... 70.36 68.80 76.33 78.13 73.98
Net interest margin....................................... 3.30 3.63 3.83 4.04 4.28
Common dividend payout ratio(3)........................... 24.42 24.42 37.50 32.00 16.67
ASSET QUALITY RATIOS:
Allowance for loan losses to total loans.................. 0.92 1.06 1.23 1.47 1.41
Allowance for loan losses to non-performing loans......... 255.59 132.47 95.18 86.77 100.15
Net charge-offs to average loans.......................... 0.23 0.20 0.32 0.29 0.42
RATIOS OF EARNINGS TO FIXED CHARGES(5):
Excluding interest on deposits............................ 165.47 170.97 157.28 174.15 194.50
Including interest on deposits............................ 126.41 128.94 121.25 120.13 128.36
</TABLE>
- ---------------
(1) Includes fees for services to customers, gains on sales of loans, and other
income.
(2) Includes salaries, employee benefits, occupancy, equipment, and other
expenses.
(3) Per share data includes restatement to reflect (a) a 100% stock dividend
paid in December 1995, (b) a 50% stock dividend paid in 1997, and (c)
adoption of FASB No. 128 "Earnings Per Share" and its retroactive
application to periods prior to and including 1997. In 1999, the decrease in
basic net income per share was primarily attributable to the conversion of
outstanding preferred stock into common stock.
(4) Non-interest expense divided by net interest income plus non-interest
income.
(5) The consolidated ratio of earnings to fixed charges has been computed by
dividing income before income taxes and fixed charges by fixed charges.
Fixed charges represent all interest expense (ratios are presented both
excluding and including interest on deposits). There was no amortization of
notes expense nor was any portion of net rental expense deemed to be
equivalent to interest on debt. Interest expense (other than on deposits)
includes interest on notes, federal funds purchased, securities sold under
agreements to repurchase, and Federal Home Loan Bank advances.
10
<PAGE> 12
RECENT DEVELOPMENTS
SELECTED FINANCIAL AND OTHER INFORMATION
RESULTS OF OPERATIONS. Northeast Bancorp's net income for the quarter
ended September 30, 1999 was $801,722, or basic and diluted earnings per share
of $0.29, as compared to $636,037, or basic earnings of $0.24 per share and
diluted earnings per share of $0.23, for the quarter ended September 30, 1998.
This represents a 26% increase in earnings from the comparable period last year.
Annualized return on assets and on equity were 0.83% and 11.78%, respectively,
for the quarter ended September 30, 1999, and compared to 0.77% and 9.90% for
the same period ended September 30, 1998. The primary reason for the increase in
net income was the continued growth in loan volume and non-interest income.
Net interest income increased approximately $394,902 for the quarter ended
September 30, 1999, or 12.76% relative to the quarter ended September 30, 1998.
The increase in net interest income was primarily the result of increased loan
volume which was offset, in part, by a decrease in loan rates and an increase in
deposit and borrowing volumes. The provision for loan losses taken for the three
month period ended September 30, 1999, was $295,229, representing an increase of
$90,298 in the loan loss provision taken for the comparable three month period
ended September 30, 1998. The increase reflects the growth in loan volume
experienced during the recently completed quarter.
Non-interest income for the quarter ended September 30, 1999 was $627,324,
an increase of $120,803, or 23.85%, from the comparable period in 1998. The
increase in non-interest income was primarily the result of the growth of other
non-interest income to $356,976 for the recent quarter, compared to $236,733 for
the quarter ended September 30, 1998. Included in other income was fee income
from trust and investment services. This increase in other non-interest income
was offset, in part, by a decline in income received from gains on investments.
Non-interest expenses increased to $2,587,545 in the quarter ended
September 30, 1999, from $2,402,657 in the same period of 1998. The increases
were due to compensation, occupancy, and equipment expense.
FINANCIAL CONDITION. Northeast Bancorp's total assets at September 30,
1999 were approximately $385.1 million, an increase of $20.7 million and $56.4
million, or approximately 5.68% and 17.16%, from June 30, 1999 to September 30,
1998, respectively. During the quarter ended September 30, 1999, loans increased
approximately $23.0 million and $51.9 million, and investments increased
approximately $0.7 million and $6.3 million, as compared to June 30, 1999 and
September 30, 1998, respectively.
Northeast Bancorp's portfolio loans at September 30, 1999, were
approximately $342.0 million, or 88.1% of total assets. The allowance for loan
losses increased to $3,046,000 at September 30, 1999 from $2,924,000 and
$2,870,000 at June 30, 1999 and September 30, 1998, respectively. This allowance
represented 0.89% of total loans at September 30, 1999, as compared with 0.92%
and 0.99% at June 30, 1999 and September 30, 1998, respectively. We believe that
the current allowance for loan losses is sufficient to cover reasonably expected
losses in the loan portfolio.
Deposits at September 30, 1999 were $225.3 million, an increase of $5.9
million and $29.9 million from June 30, 1999, and September 30, 1998,
respectively. The increase in deposits was almost entirely the result of
internal growth. FHLB advances and securities sold under repurchase agreements
were $128.4 million, an increase of $12.7 million and $23.9 million from June
30, 1999 and September 30, 1998, respectively, primarily due to increased
borrowing from the Federal Home Loan Bank used to finance our loan growth and
general operating expenses.
The following table sets forth our selected financial and other information
at the dates and for the periods indicated. The financial information presented
as of September 30, 1999, and for the three months ended on September 30, 1999
and 1998, are unaudited. In the opinion of our management, the unaudited interim
financial information of Northeast Bancorp set forth below includes all
adjustments and other normal reoccurring accruals which are necessary for a fair
presentation of the financial position and results of operations for the periods
presented. The results of Northeast Bancorp for the three month period ended
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September 30, 1999, are not necessarily indicative of the results that can be
expected for the year ending June 30, 2000, or for any other period.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA AND
RATIOS)
<S> <C> <C>
SELECTED OPERATIONS DATA:
Interest income........................................... $ 7,469 $ 6,715
Interest expense.......................................... 3,978 3,620
-------- --------
Net interest income....................................... 3,491 3,095
Provision for loan losses................................. 295 205
Non-interest income(1).................................... 627 507
Non-income expense(2)..................................... 2,588 2,403
Income before income taxes................................ 1,235 994
-------- --------
Provision for income taxes................................ 433 358
Net Income................................................ $ 802 $ 636
======== ========
CONSOLIDATED PER SHARE DATA:
Net income:
Basic.................................................. $0.29 $0.24
Diluted................................................ $0.29 $0.23
SELECTED BALANCE SHEET DATA:
Total assets.............................................. $385,069 $328,661
Loans receivable.......................................... 341,991 290,057
Deposits.................................................. 225,273 195,395
Borrowings................................................ 115,387 99,004
Total stockholders' equity................................ 27,220 25,709
SELECTED RATIOS:
Return on average assets(3)............................... 0.86% 0.78%
Return on average equity(3)............................... 11.80 9.99
Efficiency ratio(4)....................................... 62.84 66.70
Net interest margin....................................... 3.58 3.58
ASSET QUALITY RATIOS:
Allowance for loan losses to total loans.................. 0.89 0.99
Allowance for loan losses to non-performing loans......... 293.17 162.06
Non-performing loans to total loans....................... 0.30 0.61
Non-performing loans to total assets...................... 0.27 0.54
Net charge-offs to average loans.......................... 0.07 0.12
</TABLE>
- ---------------
(1) Includes fees for services to customers, gains on sales of loans, and other
income.
(2) Includes salaries, employee benefits, occupancy, equipment, and other
expenses.
(3) Information for the interim periods ended September 30 have been annualized.
(4) Non-interest expense divided by net interest income plus non-interest
income.
DIVIDENDS ON COMMON STOCK
On October 15, 1999, the Board of Directors of Northeast Bancorp declared a
cash dividend of $0.053 per share payable on November 19, 1999 to shareholders
of record at the close of business on October 29, 1999.
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RISK FACTORS
You should carefully review and consider the following risks as well as
other information contained in this prospectus before you decide to purchase the
preferred securities. To the extent any of the information contained in this
prospectus constitutes forward-looking information, the risk factors set forth
below are cautionary statements identifying important factors that could cause
Northeast Bancorp's actual results for various financial reporting periods to
differ materially from those expressed in any forward-looking statements made by
or on behalf of Northeast Bancorp or the Trust.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
IF WE DO NOT MAKE PAYMENTS ON THE JUNIOR SUBORDINATED DEBENTURES, THE TRUST WILL
NOT BE ABLE TO MAKE PAYMENTS TO YOU UNDER THE PREFERRED SECURITIES.
The Trust will depend solely on our payments under the junior subordinated
debentures to pay the amounts due to you under the preferred securities. We are
a holding company and we conduct substantially all of our operations through the
Bank. Because we are a separate legal entity from the Bank and do not have
significant operations of our own, our ability to make our payments on the
junior subordinated debentures will depend principally on any dividends we
receive from the Bank and on our cash and liquid investments.
OUR OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES ARE
SUBORDINATE TO MOST OF OUR OTHER CREDITORS.
Our obligations under the guarantee and the junior subordinated debentures
are unsecured and subordinate in right of payment to all of our existing and
future senior debt. This means that in an event of bankruptcy, liquidation,
reorganization, or dissolution, our assets must be used to pay off our senior
debt in full before any payments may be made on the junior subordinated
debentures or the guarantee. Because we are a holding company, the creditors of
our subsidiaries also will have priority over us and you in any distribution of
the subsidiaries' assets in a bankruptcy, liquidation, reorganization, or
dissolution, except to the extent that we are recognized as a creditor of our
subsidiaries. The junior subordinated debentures will be effectively
subordinated to all existing and future liabilities of our subsidiaries, and you
should look only to our assets for payments on the junior subordinated
debentures.
At June 30, 1999, our subsidiaries had outstanding debt and other
liabilities, including deposits, of approximately $337.7 million. Our ability to
incur additional senior debt is not limited by the indenture pursuant to which
the junior subordinated debentures will be issued, the guarantee, or the
declaration of trust which created the Trust.
WE HAVE THE ABILITY TO DEFER INTEREST PAYMENTS ON THE JUNIOR SUBORDINATED
DEBENTURES AND ANY SUCH DEFERRAL MAY HAVE ADVERSE CONSEQUENCES FOR YOU.
So long as we are not in default under the junior subordinated debentures,
we have the right to defer the payment of interest on the junior subordinated
debentures at any time or from time to time for a period not exceeding 20
consecutive quarters. No deferral, however, may extend beyond the stated
maturity date of the junior subordinated debentures.
Because interest payments on the junior subordinated debentures will fund
distributions on the preferred securities, the Trust will defer quarterly
payments on the preferred securities during any period that we defer the payment
of interest on the junior subordinated debentures. Distributions on the
preferred securities will accumulate during any deferral period at an annual
rate of % compounded quarterly from the relevant distribution date.
If we defer interest payments on the junior subordinated debentures, you
will be required to accrue interest income for United States federal income tax
purposes in respect of your proportionate share of the deferred interest on the
junior subordinated debentures held by the Trust. As a result, you would be
required to include the accrued interest in your gross income for United States
federal income tax purposes before you
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<PAGE> 15
actually receive any cash attributable to that income. If you sell your
preferred securities prior to the record date for the first distribution after a
deferral period, you would not receive the cash related to the accrued interest
that you reported for tax purposes. In addition, during a deferral period your
tax basis in the preferred securities will increase by the amount of accrued but
unpaid distributions. If you sell your preferred securities during a deferral
period, your increased tax basis will decrease the amount of capital gain or
increase the amount of capital loss that you may have otherwise realized on the
sale. A capital loss, except in limited circumstances, cannot be applied to
offset ordinary income. As a result, a deferral of distributions could result in
ordinary income, a related tax liability for the holder, and a capital loss that
can only be used to offset a capital gain.
We do not currently intend to exercise our right to defer paying interest
on the junior subordinated debentures. However, if we should decide to defer
paying interest in the future, the market price of the preferred securities is
likely to be adversely affected. Even if we do not do so, our right to defer
interest payments could mean that the market price of the preferred securities
may be more volatile than the market price of other securities without interest
deferral rights.
THE PREFERRED SECURITIES MAY BE REDEEMED PRIOR TO MATURITY; YOU MAY BE TAXED ON
THE PROCEEDS AND YOU MAY BE UNABLE TO REINVEST THE PROCEEDS AT THE SAME OR A
HIGHER RATE OF RETURN.
We may redeem the junior subordinated debentures before their stated
maturity date under the following circumstances:
- We may redeem all of the junior subordinated debentures in whole, but not
in part, within 90 days following the occurrence of certain special
events relating to changes in the tax law, the Investment Company Act of
1940, or the treatment of the preferred securities for bank regulatory
capital purposes.
You should be aware that Congress has from time to time considered and in
the future may enact legislation that would adversely affect our ability
to deduct the interest we pay on the junior subordinated debentures or
that otherwise results in unfavorable tax consequences for us or the
Trust. This legislation may cause us to redeem the junior subordinated
debentures.
- We also may shorten the maturity date of the junior subordinated
debentures to a date not earlier than , 2004.
We will not exercise our redemption right unless we have received prior
regulatory approval, if such approval is then required. If we redeem the junior
subordinated debentures, the Trust must use the proceeds to redeem all the
preferred securities at a redemption price equal to the $10 liquidation amount,
plus accumulated and unpaid distributions through the redemption date.
Under current United States federal income tax law, the redemption of the
preferred securities would be a taxable event to you. In addition, you may not
be able to reinvest the money you receive in the redemption at a rate that is
equal to or higher than the rate of return you were earning on the preferred
securities.
THE GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS THE CASH AVAILABLE.
If we do not make our principal or interest payments on the junior
subordinated debentures, the Trust will not have sufficient funds to pay
distributions on, or the $10 liquidation amount of, the preferred securities. In
that case you will not be able to rely on the guarantee for payment of those
amounts because the guarantee only applies if we make a payment of principal or
interest on the junior subordinated debentures. Instead, you or the property
trustee, Bankers Trust Company, may have to proceed directly against us to
enforce the payment of amounts due under the junior subordinated debentures.
YOU MAY NOT BE ABLE TO ENFORCE YOUR RIGHTS AGAINST US DIRECTLY IF AN EVENT OF
DEFAULT OCCURS AND YOU MAY HAVE TO RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR
RIGHTS.
You are not always able to directly enforce rights against us if an event
of default occurs. If an event of default under the junior subordinated
debentures occurs and is continuing, that event also will be an event of
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<PAGE> 16
default under the preferred securities. In that case, you would rely on the
property trustee, as the holder of the junior subordinated debentures, to
enforce its rights against us.
You may only sue us directly under the following circumstances:
- if the holders of at least 25% in liquidation amount of the preferred
securities direct the property trustee to enforce its rights under the
indenture but it does not enforce its rights as directed, and holders of
a majority in liquidation amount do not direct the trustee differently.
- if the event of default under the trust agreement occurs because of our
failure to pay interest or principal on the junior subordinated
debentures, you may sue us directly.
The trust agreement provides that you agree to the provisions of the
guarantee and the indenture relating to the junior subordinated debentures by
accepting your preferred securities.
THE HOLDERS OF THE PREFERRED SECURITIES AND THE JUNIOR SUBORDINATED DEBENTURES
ARE NOT PROTECTED BY COVENANTS IN THE INDENTURE AND THE TRUST AGREEMENT.
The indenture, which sets forth the terms of the junior subordinated
debentures, contains few covenants restricting our actions, and there are no
such covenants in the trust agreement, the document which sets forth the terms
of the preferred securities and the common securities. As a result, neither the
indenture nor the trust agreement:
- protects you or the Trust in the event of a material adverse change in
our financial condition or results of operations,
- limits our ability or the ability of any of our subsidiaries to incur or
assume additional indebtedness or other obligations, or
- contains any financial ratios or specified levels of liquidity to which
we must adhere.
Therefore, you should not consider the provisions of these governing
instruments a significant factor in evaluating whether we will be able to comply
or will comply with our obligations under the junior subordinated debentures or
the guarantee.
WE CAN DISSOLVE THE TRUST AND DISTRIBUTE THE JUNIOR SUBORDINATED DEBENTURES TO
HOLDERS OF THE PREFERRED SECURITIES, AND THE JUNIOR SUBORDINATED DEBENTURES MAY
TRADE AT A LOWER PRICE THAN WHAT YOU PAID FOR THE PREFERRED SECURITIES.
Since we hold all of the common securities, we have the right to dissolve
the Trust prior to its expiration, either as a result of the occurrence of
adverse tax or regulatory events or at our option. Before exercising this right,
we must receive all required regulatory approvals, if any such approvals are
then required. If we decide to exercise our right to dissolve the Trust, subject
to the terms of the trust agreement and the prior satisfaction of the Trust's
liabilities to its creditors, the trustees may distribute the junior
subordinated debentures to holders of the preferred securities.
We cannot predict the market prices for the junior subordinated debentures
that may be distributed. Accordingly, the junior subordinated debentures that
you receive upon a distribution, or the preferred securities you hold pending
the distribution, may trade at a lower price than what you paid to purchase the
preferred securities.
Under current United States federal income tax law, a distribution of
junior subordinated debentures upon the termination of the Trust generally would
not be taxable to you. If, however, the Trust is characterized as an association
taxable as a corporation at the time of its liquidation, the distribution of the
junior subordinated debentures would be taxable to you. Moreover, upon
occurrence of an adverse change in tax laws, a dissolution of the trust in which
you receive cash may be taxable to you.
Because the Trust will rely on the payments it receives on the junior
subordinated debentures to fund all payments on the preferred securities and
because you may receive junior subordinated debentures in
15
<PAGE> 17
exchange for preferred securities, you also are making an investment decision
with regard to the junior subordinated debentures as well as the preferred
securities. You should carefully review all the information included in this
prospectus regarding Northeast Bancorp, which is solely responsible for payments
on the junior subordinated debentures. We also urge you to review the terms of
the junior subordinated debentures and the preferred securities contained in
this prospectus.
WE GENERALLY WILL CONTROL THE TRUST BECAUSE THE VOTING RIGHTS OF THE HOLDERS OF
THE PREFERRED SECURITIES ARE VERY LIMITED.
You will have no voting rights in the Trust except in limited circumstances
relating only to the modification of the preferred securities and the guarantee
and the exercise of the Trust's rights as holder of the junior subordinated
debentures. In general, you will not be able to elect, remove, or replace any
trustees. As the sole holder of the common securities, only we will have such
rights. The trust agreement does provide that the holders of a majority in
liquidation amount of preferred securities may remove the trustees (a) for
cause, or (b) if there is an event of default under the indenture. We and the
property trustee may amend the trust agreement without your consent to ensure
that the Trust will not be classified as a corporation for United States federal
income tax purposes, or to ensure that the Trust will not be required to
register as an investment company under the Investment Company Act, even if such
action adversely affects your interests.
AN ACTIVE TRADING MARKET FOR THE PREFERRED SECURITIES MAY NOT DEVELOP OR BE
MAINTAINED.
Although we have applied for listing of the preferred securities on the
American Stock Exchange, there is no current public market for the preferred
securities. We cannot assure you that the preferred securities, if approved for
listing, will continue to be listed on the American Stock Exchange or any other
stock exchange or inter-dealer quotation system. In addition, a listing does not
guarantee that an established and liquid trading market will develop or, if
developed, will be maintained or sustained following the issuance of the
preferred securities. The underwriter has informed the Trust and us that it
intends to make a market in the preferred securities. However, the underwriter
is not obligated to do so and may discontinue such market making activity at any
time without notice. Accordingly, you may experience difficulty reselling the
preferred securities or may be unable to sell them at all. Even if an active
trading market does develop, there is no guarantee that the market price for the
preferred securities will equal or exceed the price that you paid for the
preferred securities. Prices will be determined in the marketplace and may be
influenced by a variety of factors, including many which are outside of our
control.
THE RECEIPT OF DISTRIBUTIONS ON THE PREFERRED SECURITIES WILL BE AFFECTED BY THE
PREFERRED SECURITIES BEING REPRESENTED BY A GLOBAL CERTIFICATE.
The preferred securities will be represented by one or more global
certificates registered in the name of the Depository Trust Company or its
nominees. The Trust's obligations, as well as the obligations of its trustees
and those of any third parties employed by the Trust or the trustees, run only
to persons who are registered as holders of the preferred securities. For
example, once the Trust makes distributions to the registered holder, the Trust
has no further responsibility for the distribution even if that holder is
legally required to pass that distribution along to you -- as an indirect
holder -- but does not do so. As an indirect holder, your rights relating to a
global preferred security will be governed by the account rules of your
financial institution and of the Depository Trust Company, as well as general
laws relating to securities transfers.
You should be aware that when the Trust issues preferred securities in the
form of a global preferred security:
- you cannot have the preferred securities registered in your name;
- you cannot receive physical certificates for your interest in the
preferred securities;
- you must look to your bank or brokerage firm for payments on the
preferred securities and protection of your legal rights relating to the
preferred securities; and
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<PAGE> 18
- the Depository Trust Company's policies will govern payments, transfers,
exchanges, and other matters relating to your interest in the global
preferred securities. The Trust and its trustees have no responsibility
for any aspect of the actions of the Depository Trust Company or for its
records of ownership interests in the global preferred securities. The
Trust and its trustees do not supervise the Depository Trust Company in
any way.
NEITHER THE PREFERRED SECURITIES NOR THE JUNIOR SUBORDINATED DEBENTURES ARE
INSURED.
Neither the Federal Deposit Insurance Corporation or any other governmental
agency, nor any private insurer, has insured the preferred securities or the
junior subordinated debentures.
RISK FACTORS RELATING TO NORTHEAST BANCORP AND ITS INDUSTRY
CHANGES IN MARKET INTEREST RATES MAY ADVERSELY AFFECT OUR PERFORMANCE.
Most of our assets and liabilities are monetary in nature and subject us to
significant risks from changes in interest rates. Changes in interest rates can
impact our net interest income as well as the valuation of our assets and
liabilities.
Our profitability depends to a large extent on our net interest income. Net
interest income is the difference between:
- interest income on interest-earning assets, such as loans and
investments, and
- interest expense on interest-bearing liabilities, such as deposits,
borrowings, and other sources of funds.
This difference is referred to as the interest rate spread. Like most
financial institutions, our results of operations are largely impacted by
changes in interest rates and our ability to manage interest rate risks. Changes
in market interest rates, or changes in the relationships between short-term and
long-term market interest rates, or changes in the relationships between
different interest rate indices, can affect the interest rates charged on
interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. This difference could result in an increase in
interest expense relative to interest income, or a decrease in our interest rate
spread. In recent years, interest rate spreads at financial institutions,
including ours, have narrowed due to changing market conditions and competitive
pricing pressures.
We cannot predict or control changes in interest rates. Regional and local
economic conditions and policies of regulatory authorities, including the
monetary policies of the Federal Reserve Board, affect interest rates and
influence interest rate spreads. While we continually take measures to mitigate
the impact of changes in market interest rates, we cannot assure you that we
will be successful. Despite our strategies to manage interest rate risks,
changes in interest rates can still have a material adverse impact on our
profitability.
OUR CONCENTRATION IN REAL ESTATE LOANS COULD ADVERSELY AFFECT OUR PERFORMANCE.
Based on the composition of our loan portfolio and the nature of our
assets, a decline in the real estate markets in which we conduct our business or
in the economy generally could have a material adverse affect on our operations.
At June 30, 1999, approximately 58% of the loans in our loan portfolio were
secured by mortgages on 1 - 4 family residential real estate. Furthermore,
approximately 73% of the principal amount of such loans were secured by
properties located in the State of Maine. Additionally, the Bank has originated
home equity and mobile home consumer loans, most of which relate to mobile homes
and properties also located in the State of Maine. A decline in the real estate
market could have an adverse impact on the ability of our mortgage lending
operations to make loans, and a decline in real estate values in Maine may
increase the risk of loan defaults.
In addition, at June 30, 1999, approximately 17% of the principal amount of
our loans were secured by commercial real estate. Commercial real estate loans
generally present a higher level of risk than loans secured by one-to-four
family residences due to the concentration of principal in a limited number of
loans
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and borrowers, the effects of general economic conditions on commercial
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Typically, the repayment of loans secured by commercial real
estate is dependent on the successful operation of the related business
activities. A decline in general economic conditions increases the possibility
of business failures and the incurrence of defaults on commercial real estate
loans.
OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES.
As a lender, we are exposed to the risk that our customers will be unable
to repay their loans according to their terms and that any collateral securing
the payment of their loans may not be sufficient to assure repayment. Credit
losses are inherent in the business of making loans and could have a material
adverse effect on our operating results. Our credit risk with respect to our
real estate and construction loan portfolio relates principally to the
creditworthiness of individuals and the value of the real estate serving as
security for the repayment of loans. Our credit risk with respect to our
commercial and consumer loan portfolio relates principally to the general
creditworthiness of businesses and individuals within our local markets.
We make various assumptions and judgments about the collectability of our
loan portfolio and provide an allowance for potential loan losses based on a
number of factors. If our assumptions or judgments are wrong, our allowance for
loan losses may not be sufficient to cover our actual loan losses. Further, we
may have to increase our allowance in the future to adjust for changing
conditions and assumptions or as a result of any deterioration in the quality of
our loan portfolio. Material additions to our allowance for loan losses would
decrease our net income. This could adversely affect the ability of the Bank to
pay us dividends which will be used by us to make payments under the junior
subordinated debentures.
CHANGES IN LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR LOAN PORTFOLIO.
Our success depends to a certain extent upon general economic conditions
and the geographic markets that we serve. Unlike larger banks that are more
geographically diversified, we provide banking and financial services primarily
to customers located throughout the western, central, and mid-coastal regions of
the State of Maine, where our banking facilities are located. The ability of our
customers to repay their loans will be impacted by the local economic
conditions. If the State of Maine should experience a recession for a prolonged
period of time, we would likely experience significant increases in
nonperforming loans which could lead to operating losses, impaired liquidity,
and eroding capital.
THE GROWTH IN OUR CONSUMER LOAN PORTFOLIO SUBJECTS US TO GREATER CREDIT RISK AND
A HIGHER LEVEL OF CHARGE-OFFS.
During the past several years we have experienced significant growth in our
consumer loan portfolio. A significant amount of these loans were indirect
automobile loans. Indirect automobile loans are those that are originated by the
automobile dealers rather than directly by us. Consumer loans, especially
indirect automobile loans, carry more credit risk than other types of loans,
such as residential real estate or home equity loans. They generally result in a
higher level of charge-offs than other types of loans. Charge-offs are amounts
of loans written off as uncollectible. These adversely affect our results of
operations and an increase in charge-offs could cause us to increase our loan
loss allowance.
WE MAY INCUR SIGNIFICANT COSTS IF WE FORECLOSE ON ENVIRONMENTALLY CONTAMINATED
REAL ESTATE.
If we foreclose on a defaulted mortgage loan to recover our investment in
the mortgage loan, then we may be exposed to environmental liabilities in
connection with the underlying property. These liabilities could exceed the fair
value of the real property. It also is possible that hazardous substances or
wastes, contaminants, pollutants, or their sources, as defined by state and
federal laws and regulations, may be discovered on properties during our
ownership or after they are sold to a third party. If they are discovered on a
property that we have acquired through foreclosure or otherwise, we may be
required to remove those substances and clean up the property. We may have to
pay for the entire cost of any removal and clean up without the contribution of
any other third parties. These costs also may exceed the fair value of the
property.
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<PAGE> 20
We also may be liable to tenants and other users of neighboring properties.
Further, we may find it difficult or impossible to sell the property before or
following any clean-up. These events may have a material adverse impact on our
results of operations and our ability to make payments under the junior
subordinated debentures.
WE NEED TO STAY CURRENT ON TECHNOLOGICAL CHANGES IN ORDER TO COMPETE AND MEET
CUSTOMER DEMANDS.
The financial services market, including banking services, is undergoing
rapid changes with frequent introductions of new technology-driven products and
services. These technological advances include developments in
telecommunications, data processing, computers, automation, Internet-based
banking, telebanking, debit cards, and so-called "smart" cards. In addition to
better serving customers, the effective use of technology increases efficiency
and enables banks to reduce costs. Our ability to compete successfully in the
future will depend on whether we can anticipate and respond to technological
changes. To be competitive, we may need to spend significant amounts of money on
the development of these and other technologies, additional computer hardware
and software, and for technical personnel. Many of our competitors have
substantially greater resources to invest in technology improvements. Although
we will continually invest in new technology, we cannot assure you that we will
have sufficient resources or access to the necessary proprietary technology to
remain competitive or that we will be able to successfully implement or market
any new technology-driven products and services.
THE BANKING BUSINESS IS HIGHLY COMPETITIVE.
Our profitability depends on our ability to compete in our market areas. We
operate in a highly competitive environment. In the markets in which we operate,
we face competition from other savings and loan associations, commercial banks,
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking firms, and other financial intermediaries that offer
similar services. Many of these competitors have significantly greater resources
and lending limits and may offer certain services that our subsidiaries do not
currently provide. In addition, some of our nonbank competitors are not subject
to the same extensive regulations that govern both us and the Bank. On October
22, 1999, representatives of the White House and Congress resolved disagreements
on several major provisions of the Financial Services Modernization Act of 1999.
This act is being redrafted to reflect those agreements, and is expected to be
passed by both the House of Representatives and the Senate and to be signed by
the President. The Financial Services Modernization Act, in essence, repeals the
Glass-Steagall Act and permits, among other things, financial institutions,
insurance companies, and securities firms to engage in the same businesses and
to acquire one another. See "Supervision and Regulation -- Recent Legislation."
In addition, this legislation will prevent nonfinancial institutions from buying
or chartering unitary thrift holding companies. The potential impact of the
legislation on the competitive environment for Northeast Bancorp is unclear at
this time.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION WHICH COULD HAVE AN ADVERSE
IMPACT ON OUR OPERATIONS AND THE BANK'S ABILITY TO PAY DIVIDENDS.
The banking industry is extensively regulated and supervised under both
federal and state law. We are subject to the regulation and supervision of the
Office of Thrift Supervision and by the State of Maine Bureau of Banking. The
Bank is subject to regulation and examination by the OTS and the FDIC. These
regulations are intended primarily to protect depositors and the FDIC, not our
creditors or stockholders. These regulations can sometimes impose significant
limitations on our operations. Northeast Bancorp and the Bank are subject to
changes in federal and state law, as well as regulation and governmental
policies, income tax laws, and accounting principles. Regulations affecting
banks are undergoing continuous change, and the ultimate effect of such changes
cannot be predicted. Regulations and laws may be modified at any time, and new
legislation enacted that will affect us and our subsidiaries. We cannot assure
you that such modifications or new laws will not adversely affect us. In this
regard, the Financial Services Modernization Act of 1999 is expected to be
passed by the House and the Senate and signed by the President. See "Supervision
and Regulation -- Recent Legislation."
19
<PAGE> 21
As indicated above, our ability to make payments on the junior subordinated
debentures will depend on our receipt of dividends from the Bank. The payment of
dividends by the Bank is subject to regulatory restrictions, including those
imposed by the OTS. The capital level of the Bank and its supervisory status
with the OTS, as well as its net income and capital surplus levels, will
determine the level of distributions that the Bank is permitted to make to us
under OTS regulations. Under current OTS regulations, at June 30, 1999, the Bank
could pay approximately $1.8 million in dividends to us so long as the Bank
sends prior notification to the OTS. We cannot assure you that the Bank will
continue to satisfy the necessary capital requirements or that its net income or
capital surplus will be sufficient in the future to permit the payment of
dividends to us in amounts necessary to make all of our payments under the
junior subordinated debentures.
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS.
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. Any computer programs or
equipment that use dates may recognize a date using "00" as the year 1900 rather
than the year 2000. As with other financial institutions, we engage in a
significant amount of business and reporting activity that depends on accurate
date information, such as the calculation of interest and other calculations
pertaining to loans, deposits, assets, and investments. As a result, Year 2000
problems could result in a system failure or miscalculations that disrupt our
operations. The following are the principal risks posed by the Year 2000 problem
to our business:
- disruption of our business due to our failure to achieve Year 2000
readiness;
- disruption of our business due to the failure of third parties, including
our service providers, to achieve Year 2000 readiness, which may affect
their ability to provide us services;
- disruption in our loan operations due to the failure of our borrowers to
achieve Year 2000 readiness, which may affect their ability to repay
loans; and
- litigation due to Year 2000 noncompliance by customers, borrowers and
suppliers as a result of both internal and third party system failures.
We have undertaken various initiatives intended to ensure that our computer
applications will function properly with respect to dates in the Year 2000. In
this regard, we have established a Year 2000 action plan based on the guidelines
outlined in the Federal Financial Institutions Examination Council's "The Effect
of 2000 on Computer Systems." However, we cannot assure you that our initiatives
and action plan have identified all costs, risks, or possible losses that we may
experience with respect to Year 2000 issues. Most of our data processing is
provided by third-party vendors who have indicated that their software, systems,
and equipment will be Year 2000 compliant in a timely manner. However, we have
no control over the effective implementation of our vendors' Year 2000
compliance programs and we cannot assure you that they will make the necessary
modifications, conversions, or equipment replacements in a timely fashion. The
failure of our vendors to be Year 2000 compliant in a timely fashion could have
a material adverse impact on our operations. Due to the uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third party vendors, borrowers, and customers, we are unable to
determine whether the consequences of the Year 2000 problem will have a material
impact on the results of our operations.
THE LOSS OF CERTAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS.
Our success depends on the retention of our key senior executive officers,
including Mr. James D. Delamater, our President and Chief Executive Officer. We
would likely undergo a difficult transition period if we should lose the
services of any or all of these individuals. In recognition of this risk, we own
and are the beneficiary of an insurance policy on the life of Mr. Delamater
providing benefits of $400,000. However, none of the key members of management
have a written employment agreement with us or the Bank.
20
<PAGE> 22
NBN CAPITAL TRUST
The Trust is a statutory business trust created under Delaware law pursuant
to the filing of a Certificate of Trust with the Delaware Secretary of State on
October 4, 1999. The Trust will be governed by the trust agreement among
Northeast Bancorp, as depositor, Bankers Trust (Delaware), as Delaware trustee,
Bankers Trust Company, as property trustee, two individuals, as administrators,
and holders, from time to time of undivided beneficial interests in the assets
of the Trust. As the sole holder of the common securities, Northeast Bancorp
will select two individuals who are employees or officers of or affiliated with
Northeast Bancorp to serve as the administrators of the Trust. See "Description
of Preferred Securities -- Miscellaneous." The Trust exists for the exclusive
purposes of:
- issuing and selling its preferred and common securities;
- investing the proceeds from the sale of the preferred and common
securities to acquire the junior subordinated debentures issued by
Northeast Bancorp; and
- engaging in only those other activities necessary, convenient, or
incidental thereto (such as registering the transfer of the preferred and
common securities).
Accordingly, the junior subordinated debentures will be the sole assets of
the Trust, and payments under the junior subordinated debentures will be the
sole source of revenue of the Trust.
Northeast Bancorp will initially own all of the common securities. The
common securities generally will rank equally, and payments will be made pro
rata, with the preferred securities. However, if Northeast Bancorp defaults on
the junior subordinated debentures by failing to pay any amounts due under the
junior subordinated debentures, then for so long as such default continues the
rights of the holder of the common securities to receive distributions and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of the preferred securities. See "Description of Preferred
Securities -- Subordination of Common Securities". Northeast Bancorp will
acquire common securities in an aggregate liquidation amount equal to at least
3% of the total capital of the Trust. The Trust has a term of 31 years, but may
dissolve earlier as provided in the trust agreement.
The address of the Delaware trustee is Bankers Trust (Delaware), 1011
Centre Road, Suite 200, Trust Department, Wilmington, Delaware 19805, and the
telephone number is (302) 636-3301.
The address of the property trustee, the guarantee trustee and the
debenture trustee is Bankers Trust Company, Four Albany Street, 4th Floor, New
York, New York 10006, and the telephone number is (212) 250-2500.
USE OF PROCEEDS
All the proceeds to the Trust from the sale of the preferred securities
will be invested by the Trust in the junior subordinated debentures. The net
proceeds to Northeast Bancorp from the sale of the junior subordinated
debentures are expected to be approximately $ ($ if the
over-allotment option is exercised in full). The net proceeds from the sale of
the junior subordinated debentures will be used by Northeast Bancorp for general
corporate purposes, including:
- contributions to the capital of the Bank to support the capital needs of
the Bank and its subsidiaries,
- financing of possible future acquisitions if, and when, suitable
opportunities arise, and
- a potential repurchase of shares of our common stock.
Pending any such use, Northeast Bancorp may invest the net proceeds in
short-to-medium-term investments. The precise amounts and timing of the
application of proceeds will depend upon the funding requirements of Northeast
Bancorp and its subsidiaries and the availability of other funds.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth (1) the consolidated capitalization of
Northeast Bancorp at June 30, 1999, and (2) the consolidated capitalization of
Northeast Bancorp giving effect to the issuance of the preferred securities. The
table assumes application of the proceeds from the corresponding sale of junior
subordinated debentures to the Trust as if the sale of the preferred securities
had been consummated on June 30, 1999, and as if the underwriter's
over-allotment option was not exercised.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------
ACTUAL AS ADJUSTED(1)
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GUARANTEED PREFERRED BENEFICIAL INTEREST IN
NORTHEAST BANCORP'S SUBORDINATED DEBT (2)............... $ 0 $10,500
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 par value, 15,000,000 shares
authorized and 2,768,624 shares issued and
outstanding............................................. 2,769 2,769
Preferred Stock, $1.00 par value, 1,000,000 shares
authorized; none issued and outstanding................. 0 0
Additional paid-in capital................................ 10,208 10,208
Retained earnings......................................... 14,146 14,146
Unrealized loss on investment securities available for
sale, net............................................... (440) (440)
------- -------
Total stockholders' equity......................... $26,683 $26,683
------- -------
Total capitalization............................... $26,683 $37,183
======= =======
</TABLE>
- ---------------
(1) The amount reflected assumes that the over-allotment option granted to the
underwriter is not exercised.
(2) Preferred securities representing beneficial interests in the aggregate
principal amount of $10,500,000 of the % junior subordinated debentures
of Northeast Bancorp. The junior subordinated debentures will mature on
, 2029.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of Northeast Bancorp and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of Northeast Bancorp. The
preferred securities will be included in the consolidated statement of financial
condition of Northeast Bancorp and appropriate disclosures about the preferred
securities, the guarantee, and the junior subordinated debentures will be
included in the notes to the consolidated financial statements of Northeast
Bancorp. For financial reporting purposes, Northeast Bancorp will record
distributions on the preferred securities as interest expense in the
consolidated statements of income of Northeast Bancorp.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Northeast Bancorp's principal asset is its ownership of the Bank.
Accordingly, Northeast Bancorp's results of operations are primarily dependent
on the results of the operations of the Bank. The principal business of the Bank
consists of attracting deposits from the general public and applying those funds
to originate or acquire residential, commercial, and consumer loans and to make
other permitted investments such as the purchase of investment securities. The
Bank's profitability depends primarily on net interest income, which is the
difference between interest income earned from interest-earning assets (i.e.,
loans and investments) and interest expense incurred on interest-bearing
liabilities (i.e., customer deposits and borrowed funds). Net interest income is
affected by the relative balances of interest-earning assets and
interest-bearing liabilities, and the interest rate paid on these balances.
Net interest income is dependent upon the Bank's interest rate spread,
which is the difference between the average yield earned on its interest-earning
assets and the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The interest
rate spread is impacted by interest rates, deposit flows, and loan demands.
Northeast Bancorp's profitability also is affected by such factors as the
level of non-interest income and expenses of Northeast Bancorp and the Bank, the
provision for loan losses, and the effective tax rate. Non-interest income
consists primarily of service fees and gains on the sale of loans and investment
securities. Non-interest expenses consist of compensation and benefits,
occupancy related expenses, deposit insurance premiums paid to the FDIC,
expenses of opening branch offices, and other operating expenses.
Although historically the Bank has been primarily a residential mortgage
lender, during the past few years the Bank has begun to expand its commercial
and consumer loan business, increase its line of financial products and
services, and expand its market area. We believe that this strategy will
increase core earnings in the long term by developing stronger interest margins,
additional non-interest income, and increased loan volume. See "-- Financial
Condition -- Lending Activities" and "Business". As part of its expansion and
growth strategy, in fiscal 1998 Cushnoc Bank and Trust Company, a commercial
bank located in Augusta, Maine, was merged into the Bank. In fiscal 1999 the
Bank opened a new full service branch in Lewiston, Maine, and a facility in
Falmouth, Maine from which the Bank accepts loan applications and offers
investment, insurance, and financial planning products.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations presents a review of the consolidated operating results
and financial condition of Northeast Bancorp for the fiscal years ended June 30,
1999, 1998, and 1997. This discussion and analysis is intended to assist you in
understanding the financial condition and results of operation of Northeast
Bancorp and the Bank. You should read this discussion together with your review
of the consolidated financial statements and the related notes and the other
statistical information contained in this prospectus.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
For the year ended June 30, 1999, Northeast Bancorp reported net income of
$2,410,452, or basic earnings per share of $0.88 and diluted earnings per share
of $0.86, as compared to $2,403,783, or basic earnings of $1.00 per share and
diluted earnings per share of $0.86, for the year ended June 30, 1998. In 1999,
the decrease in basic net income per share was primarily attributable to the
conversion of outstanding preferred stock into common stock.
Net income in fiscal 1999 was approximately the same as fiscal 1998
although the components of net income changed. While net income was up only
$6,669, or 0.3% for the year ended June 30, 1999, net interest
23
<PAGE> 25
income increased by $833,611, or 7.3%, relative to the 1998 fiscal year. The
increase in net interest income was primarily the result of increased loan
volume which was offset, in part, by a decrease in loan rates. In addition,
non-interest income for the year ended June 30, 1999, increased by approximately
$44,821, or 1.68% as compared to 1998. The net operating income in 1999 also was
benefited from a $96,083 reduction in the provision for loan losses.
This increase in income was offset by a $838,126 increase in non-interest
expense. The increase in non-interest expense was due, in part, to (a) the costs
associated with opening the new branch in Lewiston, Maine and the facility in
Falmouth, Maine, (b) the increased commissions paid to brokers in the investment
sales division due to growth in sales revenue, (c) increased costs associated
with the Company's health insurance and benefit plans, (d) expenses associated
with the relocation of our benefit administration department, and (e) expenses
associated with the upgrade and replacement of our computer and
telecommunication systems.
In the fourth quarter of 1999, Northeast Bancorp dissolved the First New
England Benefits division of the Bank ("FNEB") because it did not attain
sufficient growth to meet revenue expectations. FNEB was a pension and 401(k)
administration company that was purchased by Northeast Bancorp in 1993. A
portion of the operations and certain administrative support staff of FNEB were
transferred to the Bank's trust department. Due to the closure of FNEB,
Northeast Bancorp experienced one-time pretax expense of $290,133 for goodwill,
receivables, and fixed asset write-offs, as well as approximately $140,000 in
pretax other general one-time business expenses that related to the operations
of FNEB during fiscal 1999.
Earnings in 1998 were affected by costs incurred in connection with the
merger of Cushnoc. The one-time costs associated with the merger were
approximately $435,000, before tax, during the year ended June 30, 1998 and were
charged against 1998 earnings. Before taking into account these one-time
charges, Northeast Bancorp's net operating income for the year ended June 30,
1998 would have been $2,686,542.
Northeast Bancorp's total assets at June 30, 1999 were approximately $364.4
million, an increase of $41.9 million, or approximately 13.0%, from June 30,
1998. Most of the increase in assets was the result of an increase of
approximately $37 million in loans. Asset growth was funded by an increase in
deposits and through securities sold under repurchase agreements.
Northeast Bancorp's portfolio loans at June 30, 1999, were approximately
$319.0 million, or 87.5% of total assets. The allowance for loan losses
decreased slightly to $2,924,000 at June 30, 1999 from $2,978,000 at June 30,
1998. This allowance represented 0.92% of total loans at June 30, 1999, as
compared with 1.06% at June 30, 1998. We believe that the current allowance for
loan losses is sufficient to cover reasonably expected losses in the loan
portfolio. See "-- Result of Operations -- Provision for Loan Losses" and
"-- Financial Condition -- Allowance for Loan Losses".
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
For the year ended June 30, 1998, Northeast Bancorp reported net income of
$2,403,783, or basic earnings per share of $1.00 and diluted earnings per share
of $0.86, as compared to net income of $1,489,745, or basic earnings per share
of $0.63 and diluted earnings per share of $0.56 for the year ended June 30,
1997. The return on average assets was 0.83% for the year ended June 30, 1998,
as compared to 0.57% for 1997. From the fiscal year ended June 30, 1997 to June
30, 1998, net interest income increased by $828,107 and non-interest income
increased by $585,290.
The increase in interest income was primarily the result of increased loan
volume. Non-interest income increased from 1997 to 1998 for a number of reasons,
including increases in the gains on the sale of loans and the income generated
by the Bank's trust department. Income also was affected by costs incurred in
connection with the acquisition of Cushnoc in 1998 and the special BIF-SAIF
deposit insurance assessment made in 1997 on its savings and loan deposits, both
of which were one-time costs charged against earnings for the periods in which
they were incurred. The Cushnoc acquisition resulted in acquisition costs of
approximately $435,000. Without this one-time charge, the net income of
Northeast Bancorp for the 1998 fiscal year would have been $2,686,542. Further,
pursuant to federal legislation, institutions with SAIF deposits were required
to pay a special assessment on such deposits and, in 1997, the amount of this
special
24
<PAGE> 26
assessment paid by the Bank was approximately $296,860. Because of the one-time
non-interest expenses experienced in 1998 and 1997, overall non-interest
expenses remained relatively flat and increased only slightly during the fiscal
year ended June 30, 1998.
Northeast Bancorp's total assets at June 30, 1998 were approximately $322.5
million, an increase of $38.5 million, or approximately 13.5%, from June 30,
1997. The majority of the increase was invested in loans. Asset growth was
funded by an increase in deposits from continued growth at new and existing
branches, from the sale of investment securities held for sale, and from FHLB
borrowings.
Northeast Bancorp's loan portfolio at June 30, 1998 was approximately
$282.0 million, or 87.4% of total assets. The increase in portfolio loans
included not only mortgage loans, but also a significant increase in consumer
and commercial loans. The allowance for loan losses increased to $2,978,000 at
June 30, 1998 from $2,741,809 at June 30, 1997. The allowance for loan losses
represented 1.06% of total loans at June 30, 1998, as compared with 1.23% at
June 30, 1997.
NET INTEREST INCOME
Net interest income, which constitutes the principal source of income for
Northeast Bancorp, is the difference between interest earned on its
interest-earning assets and the interest accrued on interest-bearing
liabilities. The principal interest-earning assets are loans, investment
securities, FHLB stock, and short-term investments. Interest-bearing liabilities
primarily consist of customer deposits (such as interest paying checking
accounts or NOW accounts, retail savings deposits, money market accounts, and
time deposits), repurchase agreements, and other borrowings. Funds attracted by
these interest-bearing liabilities are invested by the Bank in interest-earning
assets. Accordingly, net interest income will depend on the volume of average
interest-earning assets and average interest-bearing liabilities and the
interest rates earned or paid on them.
Total interest income for the fiscal years ended June 30, 1999, 1998, and
1997 was $26.9 million, $24.3 million, and $21.9 million, respectively, on
average outstanding balances of interest earning assets of approximately $325.9
million, $277.3 million, and $248.0 million, respectively. This increase was due
to the growth in the volume of the total average interest earning assets over
these periods offset by a decrease in the average yield of interest-earning
assets. Interest income from loans for the fiscal years ended June 30, 1999,
1998, and 1997, comprised approximately 93.8%, 90.6%, and 86.5% of the total
interest income from interest-earning assets.
Total interest expense over this period also has grown steadily as the
Bank's deposit liabilities and borrowings have increased. Total interest expense
for the fiscal years 1999, 1998, and 1997, was approximately $14.6 million,
$12.8 million, and $11.3 million, respectively. The increases were due primarily
to the increases in the volume of deposits attracted by the Bank and an
increased level of borrowings by the Bank. The average cost of these
interest-bearing liabilities for the fiscal years ended June 30, 1999, 1998,
1997, was 4.94%, 5.13%, and 5.02%, respectively.
Net interest income was $12.3 million, $11.5 million, and $10.6 million for
each of the fiscal years ended June 30, 1999, 1998, and 1997. The increases in
net interest income during this period were due to the growth in loan volume
which was partially offset by the growth in deposits and borrowings and a
decrease in the net yield on interest-earning assets. The net yield on average
earning assets was 3.78%, 4.14%, and 4.29%, for 1999, 1998, and 1997,
respectively. This decrease in the net yield of average earning assets was due
to the steady decrease in interest rates earned on interest-earning assets
because of the declining interest rate environment in the marketplace.
25
<PAGE> 27
COMPARATIVE AVERAGE BALANCES, INTEREST, AND AVERAGE YIELDS
The following table shows for each category of interest-earning assets and
interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the years
ended June 30, 1999, 1998, and 1997. This table also show the average rate
earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities, and the net yield on average interest-earning
assets for the same periods.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities (1).......... $ 15,413 $ 958 6.22% $ 21,799 $ 1,461 6.70% $ 32,024 $ 2,285 7.14%
Loans (2)(3)....................... 297,690 25,179 8.46 240,859 21,989 9.13 203,934 18,974 9.30
FHLB stock......................... 5,680 364 6.41 4,647 301 6.48 3,531 227 6.43
Short-term investments (4)......... 7,157 356 4.97 9,951 532 5.35 8,474 450 5.31
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets/interest
income/average rates
earned..................... $325,940 $26,857 8.24% $277,256 $24,283 8.76% $247,963 $21,936 8.85%
-------- ------- ---- -------- ------- ---- -------- ------- ----
NON-INTEREST EARNING ASSETS:
Cash and due from banks............ $ 5,099 $ 4,516 $ 4,182
Bank premises and equipment, net... 4,839 4,597 4,609
Other assets....................... 6,912 7,061 7,038
Allowance for loan losses.......... (2,955) (2,867) (2,769)
-------- -------- --------
Total non-interest earning
assets..................... 13,895 13,307 13,060
-------- -------- --------
Total assets................. $339,835 $290,563 $261,023
======== ======== ========
INTEREST-BEARING LIABILITIES:
NOW................................ $ 31,162 $ 933 2.99% $ 15,400 $ 269 1.75% $ 14,813 $ 216 1.46%
Money market....................... 8,938 210 2.35 14,002 467 3.34 15,902 537 3.38
Savings............................ 20,068 515 2.57 21,289 570 2.68 22,142 592 2.67
Time............................... 125,802 7,022 5.58 108,580 6,281 5.78 100,485 5,758 5.73
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
deposits................... 185,970 8,680 4.67 159,271 7,587 4.76 153,342 7,103 4.63
-------- ------- ---- -------- ------- ---- -------- ------- ----
Repurchase agreements.............. 8,202 340 4.15 4,917 206 4.19 4,566 200 4.38
Borrowed funds..................... 100,074 5,530 5.53 85,686 5,017 5.86 67,037 3,988 5.95
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities/interest
expense/average rate
paid....................... $294,246 $14,550 4.94% $249,874 $12,810 5.13% $224,945 $11,291 5.02%
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL NON-INTEREST BEARING
LIABILITIES:
Demand deposit and escrow
accounts......................... $ 17,132 $ 15,480 $ 13,380
Other liabilities.................. 2,194 1,983 1,576
-------- -------- --------
Total liabilities............ $313,572 $267,337 $239,901
Stockholders' equity............... 26,263 23,226 21,122
-------- -------- --------
Total liabilities and
stockholders' equity....... $339,835 $290,563 $261,023
======== ======== ========
Net interest income................ $12,307 $11,473 $10,645
======= ======= =======
Interest rate spread............... 3.30% 3.63% 3.83%
==== ==== ====
Net yield on average earning assets
(5).............................. 3.78% 4.14% 4.29%
==== ==== ====
</TABLE>
- ---------------
(1) Principally taxable. The yield information does not give effect to changes
in fair value that are reflected as a component of stockholders' equity.
(2) Non-accruing loans are included in computation of average balance.
(3) Interest income on loans includes fees (costs) of ($590) in 1999, ($10) in
1998, and $35 in 1997.
(4) Short-term investments include FHLB overnight deposits, and interest-earning
deposits and dividends.
(5) The net yield on average earning assets is the net interest income divided
by average interest-earning assets.
The effect on interest income, interest expense, and net interest income
for the periods indicated, of changes in average balance and rate, is shown
below for Northeast Bancorp. The effect of a change in average balance has been
determined by applying the average rate at the year-end for the earlier period
to the change
26
<PAGE> 28
in average balance at the year-end for the later period. Changes from average
balance/rate are spread proportionately between changes resulting from volume
and changes resulting from rate.
RATE/VOLUME INTEREST ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
--------------------------------------- ---------------------------------------
INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE TO CHANGE IN:
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL
VOLUME(1) RATE CHANGE VOLUME(1) RATE CHANGE
------------ ---------- --------- ------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investment securities................ $ (398) $ (105) $ (503) $ (795) $ (29) $ (824)
Loans, net (2)....................... 4,898 (1,708) 3,190 3,377 (362) 3,015
FHLB stock........................... 66 (3) 63 72 1 73
Short-term investments (3)........... (141) (35) (176) 79 4 83
------ ------- ------ ------ ----- ------
Total interest income......... $4,425 $(1,851) $2,574 $2,733 $(386) $2,347
====== ======= ====== ====== ===== ======
INTEREST BEARING LIABILITIES:
NOW.................................. $ 391 $ 272 $ 663 $ 9 $ 44 $ 53
Money market......................... (141) (116) (257) (64) (7) (71)
Savings.............................. (32) (23) (55) (23) 1 (22)
Time................................. 968 (226) 742 468 55 523
------ ------- ------ ------ ----- ------
Total interest on deposits.... 1,186 (93) 1,093 390 93 483
Repurchase agreements................ 136 (3) 133 15 (8) 7
Borrowed funds....................... 756 (242) 514 1,093 (64) 1,029
------ ------- ------ ------ ----- ------
Total interest expense........ $2,078 $ (338) $1,740 $1,498 $ 21 $1,519
====== ======= ====== ====== ===== ======
Change in net interest income.......... $2,347 $(1,513) $ 834 $1,235 $(407) $ 828
====== ======= ====== ====== ===== ======
</TABLE>
- ---------------
(1) Non-accruing loans are excluded from the average volumes used in calculating
this table.
(2) Includes loan fees (costs) of ($590) in 1999, ($10) in 1998, and $35 in
1997.
(3) Short-term investments include FHLB overnight deposits, and interest-earning
deposits and dividends.
PROVISION FOR LOAN LOSSES
The loan loss provision recorded for the fiscal year ended June 30, 1999
was $610,017 as compared to $706,100 and $614,427 for 1998 and 1997,
respectively. The decrease in the loan loss provision in 1999 as compared to
1998 was consistent with a decrease in delinquent and non-performing loans. The
level of the resulting allowance for loan loss, however, was a lower percentage
of Northeast Bancorp's total loans. See "--Financial Condition -- Allowance for
Loan Losses."
NON-INTEREST INCOME
Non-interest income for the fiscal year ended June 30, 1999 was $2,716,352,
as compared to $2,671,531 for the fiscal year ended June 30, 1998, and
$2,086,241 for the fiscal year ended June 30, 1997. The increase in non-interest
income in 1999 as compared to 1998 was primarily due to an increase on the sale
of loans and in service charges and fees. Service charges and fees increased in
1999 as compared to 1998 as a result of loan and deposit growth. Gains on the
sale of loans amounted to $817,084 for fiscal 1999, which represents an increase
of $90,485 from fiscal 1998. The increase in gain on sale of loans in fiscal
1999, when compared to 1998, was due to an increase of $4,329,681 in loans sold,
including in 1999, indirect automobile loans. The increase in non-interest
income for this period was offset, in part, by a decrease in the gains received
from the sale of securities. The increase in non-interest income in 1998 as
compared to 1997 was primarily the result of a $525,181 increase in gains on the
sale of loans in 1998. This was due to sales of residential and SBA guaranteed
loans. During both 1999 and 1998, loans were sold from Northeast Bancorp's
portfolio to improve its asset/liability management position while at the same
time taking advantage of market prices.
27
<PAGE> 29
During 1999, Northeast Bancorp also experienced an increase in revenue of
approximately $67,888 in other income generated primarily from its trust
department, insurance division, and revenues from the sale of investments to
customers through its relationship with Commonwealth Financial Services, Inc.
The following table summarizes the major components of non-interest income
for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fees and service charges on loans...................... $ 288 $ 207 $ 194
Fees for other services to customers................... 660 596 658
Gain on sale of securities............................. 95 288 259
Gain on sale of loans.................................. 817 727 201
Loan servicing fees.................................... 161 227 276
Other income........................................... 695 627 498
------ ------ ------
Total........................................ $2,716 $2,672 $2,086
====== ====== ======
</TABLE>
NON-INTEREST EXPENSE
Non-interest expenses for the fiscal year ended June 30, 1999 were
$10,569,843, as compared to $9,731,717 for the fiscal year ended June 30, 1998
and $9,718,337 for the fiscal year ended June 30, 1997. For the years ended June
30, 1999, 1998, and 1997, non-interest expenses were 3.1%, 3.3%, and 3.7%,
respectively, of average assets. The largest component, salaries and employee
benefits, were approximately 46.3%, 47.7%, and 47.5%, respectively, of such
non-interest expenses for 1999, 1998, and 1997. The increase in non-interest
expenses in 1999 was due primarily to the expenses associated with the opening
of the new Lewiston, Maine branch office, the Falmouth facility, and the
dissolution of FNEB.
As a result of these activities, during the 1999 fiscal year Northeast
Bancorp paid:
- increased salary and compensation expenses for the additional staff hired
for the new facilities;
- increased occupancy expenses for:
-- additional lease obligations, and
-- a one-time penalty incurred for terminating an existing lease in
connection with the relocation of the benefits administration
department; and
- increased costs for supplies and equipment.
Salaries and benefits also increased as the result of rising costs
associated with Northeast Bancorp's health insurance plan. Such amounts include
increased commissions paid to brokers in the investment sales division due to
growth in sales revenue.
Due to the closure of FNEB during the fourth quarter of fiscal 1999,
Northeast Bancorp has experienced one-time pretax expenses of $290,133 for
goodwill, receivables, and fixed asset write-offs, as well as approximately
$140,000 in pretax other one-time general expenses related to the operations of
FNEB.
The increase in non-interest expenses in 1998 was due primarily to
increases in operating expenses related to the growth of Northeast Bancorp's
assets and the expenses associated with the acquisition of Cushnoc. These
expenses were offset, in part, by a reduction in the costs of FDIC insurance
premiums in 1998 as compared to 1997 when a special FDIC insurance payment was
assessed on the Bank's SAIF-insured deposits.
28
<PAGE> 30
The following table summarizes the various categories of non-interest
expense for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1999 1998 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits........................ $ 4,889 $4,639 $4,615
Occupancy expense..................................... 975 904 783
Equipment expenses.................................... 888 864 894
FDIC Insurance........................................ 63 60 390
Goodwill amortization................................. 462 296 296
Other expenses........................................ 3,293 2,969 2,740
------- ------ ------
Total....................................... $10,570 $9,732 $9,718
======= ====== ======
</TABLE>
INCOME TAX EXPENSE
For the three years ended June 30, 1999, 1998, and 1997, income tax
provisions totaling $1,432,591, $1,302,871, and $908,565, were recorded. The
increases in the tax provision for 1999 from 1998, and for 1998 from 1997, were
a result of increased earnings during each succeeding period. The goodwill
write-off for FNEB did not impact the 1999 income tax expense since it is not a
tax deductible expense. The combined effective tax rates for the years ended
1999, 1998, and 1997 were 37.4%, 35.1%, and 37.9% respectively.
ASSET/LIABILITY MANAGEMENT
Northeast Bancorp's business primarily consists of the savings and loan
activities of the Bank. Accordingly, the success of Northeast Bancorp is largely
dependent on its ability to manage interest rate risk. This is the risk that
changes in interest rates may adversely affect net interest income.
Generally, interest rate risk results from differences in repricing
intervals or maturities between interest-earning assets and interest-bearing
liabilities, the components of which comprise the interest rate spread. When
such differences exist, a change in the level of interest rates will most likely
result in an increase or decrease in net interest income. Although Northeast
Bancorp regularly manages other risks, such as credit and liquidity risk,
management considers interest rate risk to be one of the most significant
factors that affects earnings. Asset liability management refers to efforts to
minimize the fluctuations in net interest income caused by interest rate
changes. Interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the board of
directors of the Bank. The ALCO meets regularly to establish policies that
monitor and coordinate the sources, uses, and pricing of funds and to review the
Bank's progress in reducing its vulnerability to changing interest rates. The
ALCO is involved in formulating the economic projections for the Bank's budget
and strategic plan.
One measure of Northeast Bancorp's exposure to interest rate risk is the
difference between interest rate sensitive assets and liabilities for the
periods being measured, commonly referred to as the "gap" for such period. An
asset or liability is considered interest rate sensitive if it will reprice or
mature within the time period being analyzed. Controlling the maturity or
repricing of an institution's liabilities and assets in order to minimize
interest rate risk is commonly referred to as gap management. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. When the opposite occurs, the
gap is considered to be negative. During periods of increasing interest rates,
negative gap would tend to adversely affect income while a positive gap would
tend to result in net interest income. During periods of decreasing interest
rates, the inverse would tend to occur. If the maturities of interest rate
sensitive assets and liabilities were equally flexible and moved concurrently,
the impact of any material or prolonged increase or decrease in interest rates
or net interest income on existing assets or liabilities would be minimal. It is
common to focus on the one year gap, which is the difference between the dollar
amount of assets and the dollar amount of liabilities maturing or repricing
within the next twelve months.
Principal among the asset/liability management strategies has been the
emphasis on managing its interest rate sensitive liabilities in a manner
designed to attempt to reduce exposure during periods of fluctuating
29
<PAGE> 31
interest rates. To accomplish this, management has undertaken steps to increase
the percentage of variable rate assets as a percentage of its total
interest-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 Bank also originates
adjustable-rate consumer loans and commercial business loans. The Bank'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. Further, because
Northeast Bancorp has designated its regular savings, NOW, and money market
accounts as core deposits for the purpose of its internal asset/liability
analysis and has assigned these deposits in the five year or greater maturity
category (rather than in the one year or less category), we do not consider our
gap position to be as negative as it would otherwise appear to be. We believe
that the Bank is slightly asset sensitive based on our own internal analysis
which matches core deposits to long term assets. We believe that a slightly
asset sensitive position is appropriate for the Bank since interest rates
historically tend to rise faster than they decline.
30
<PAGE> 32
The following table presents the interest rate sensitive assets and
liabilities of Northeast Bancorp at June 30, 1999, which are expected to mature
or are subject to repricing in each of the time periods indicated. The tables
may not be indicative of Northeast Bancorp's rate sensitive position at other
points in time. The balances have been derived based on the financial
characteristics of the various assets and liabilities. Adjustable and floating
rate assets are included in the period in which interest rates are next
scheduled to adjust rather than their scheduled maturity dates. Fixed rate loans
are shown in the periods in which they are scheduled to be repaid.
INTEREST RATE SENSITIVITY ANALYSIS AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
TERM TO REPRICING OR MATURITY
------------------------------------------------------------------------------
91-180 181 DAYS DUE WITHIN DUE AFTER % OF
90 DAYS DAYS TO 365 DAYS 1-5 YEARS 5-YEARS TOTAL TOTAL
-------- -------- ----------- ---------- --------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities........... $ 1,727 $ 0 $ 0 $ 344 $ 15,983 $ 18,054 5.18%
FHLB Stock...................... 0 0 0 0 5,680 5,680 1.63
Short-term investments (1)...... 7,441 0 0 0 0 7,441 2.13
Mortgage loans:
Residential mortgages:
Fixed rate loans............ 41 2 239 1,815 105,926 108,023 30.97
Variable loans.............. 15,964 12,153 18,300 27,701 103 74,221 21.28
Commercial real estate........ 14,594 1,311 3,099 32,622 3,812 55,438 15.89
Construction.................. 685 475 526 0 0 1,686 0.48
Other Loans:
Commercial.................... 12,314 54 434 16,627 5,218 34,647 9.93
Consumer and installment...... 1,687 134 317 17,649 23,856 43,643 12.51
-------- -------- --------- -------- -------- -------- ------
Total loans.............. 45,285 14,129 22,915 96,414 138,915 317,658 91.06
-------- -------- --------- -------- -------- -------- ------
Total interest-earning
assets................. 54,453 14,129 22,915 96,758 160,578 348,833 100.00
-------- -------- --------- -------- -------- -------- ------
INTEREST-BEARING LIABILITIES:
Customer deposits:
NOW accounts.................. 31,203 0 0 0 0 31,203 9.82
Money market accounts......... 7,156 0 0 0 0 7,156 2.25
Regular savings............... 22,000 0 0 0 0 22,000 6.92
Certificates of deposit....... 31,112 21,557 45,779 42,627 38 141,113 44.39
-------- -------- --------- -------- -------- -------- ------
Total customer
deposits............... 91,471 21,557 45,779 42,627 38 201,472 63.38
Borrowings:
Repurchase agreements......... $ 11,868 $ 0 $ 0 $ 0 $ 0 $ 11,868 $ 3.73
Other borrowings.............. 25,076 2,077 15,153 19,264 43,000 104,570 32.89
-------- -------- --------- -------- -------- -------- ------
Total borrowings......... 36,944 2,077 15,153 19,264 43,000 116,438 36.62
======== ======== ========= ======== ======== ======== ======
Total interest-bearing
liabilities................. $128,415 $ 23,634 $ 60,932 $ 61,891 $ 43,038 $317,910 100.00%
======== ======== ========= ======== ======== ======== ======
Interest sensitivity gap.......... $(73,962) $ (9,505) $ (38,017) $ 34,867 $117,540 $ 30,923
======== ======== ========= ======== ======== ======== ======
Cumulative gap.................... $(73,962) $(83,467) $(121,484) $(86,617) $ 30,923
-------- -------- --------- -------- --------
Cumulative gap ratio.............. 42.40 45.11 42.96 68.49 109.73
-------- -------- --------- -------- --------
Cumulative gap as a percentage of
total assets.................... -20.30% -22.91% -33.34% -23.77% 8.49%
======== ======== ========= ======== ========
</TABLE>
- ---------------
(1) Includes investment securities, FHLB overnight deposits, interest earning
deposits, and loans held for sale.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO also evaluates how the repayment of particular
assets and liabilities is impacted by changes in interest rates. Income
associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes
31
<PAGE> 33
in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in general market rates. In
addition, certain assets, such as adjustable rate mortgage loans, have features
(generally referred to as "interest rate caps") which limit changes in interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, prepayment and early withdrawal levels also could
deviate significantly from those assumed in calculating the interest rate gap.
The ability of many borrowers to service their debts also may decrease in the
event of an interest rate increase.
The table below presents in tabular form contractual balances of Northeast
Bancorp's financial instruments that are interest rate sensitive at the expected
maturity dates as well as the fair value of those financial instruments that are
interest rate sensitive for the period ended June 30, 1999, with comparative
summary balances for 1998. The expected maturity categories take into
consideration historical prepayment speeds as well as actual amortization of
principal and do not take into consideration reinvestment of cash. Principal
prepayments are the amounts of principal reduction, over and above normal
amortization, that Northeast Bancorp has experienced in the past twenty-four
months. Northeast Bancorp'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 Northeast Bancorp and are reported in the "Thereafter"
column. Northeast Bancorp does not consider these financial instruments
materially sensitive to interest rate fluctuations and historically the balances
have remained fairly consistent over various economic conditions. The interest
rate table for loans reflects contractual maturity and does not indicate
repricing in variable rate loans. Variable rate loans reprice in the fiscal
years as follows:
- Fiscal year 2000 -- $76,960,496
- Fiscal year 2001 -- $13,479,884
- Fiscal year 2002 -- $22,668,642
- Fiscal year 2003 -- $9,411,503
- Fiscal year 2004 -- $13,408,882
The weighted average interest rates for the various assets and liabilities
presented are actual as of June 30, 1999.
The fair value of interest bearing deposits at other banks and interest
receivable approximate their book values due to their short maturities. The fair
value of available for sale securities are based on bid quotations from security
dealers or on bid prices published in financial newspapers. FHLB stock does not
have a market and the fair value is unknown. The fair value of loans are
estimated in portfolios with similar financial characteristics and takes into
consideration discounted cash flows through the estimated maturity or repricing
dates using estimated market discount rates that reflect credit risk. The fair
value of loans held for sale is based on bid quotations from loan dealers. The
fair value of demand deposits, NOW, money market, and savings accounts is the
amount payable upon demand. The fair value of time deposits is based upon the
discounted value of contractual cash flows, which is estimated using current
rates offered for deposits of similar remaining terms. The fair value of
repurchase agreements approximates the carrying value due to their short
maturity. The fair value of FHLB borrowings is estimated by discounting the cash
flows through maturity or the next repricing date based on current rates offered
by the FHLB for borrowings with similar maturities. The fair value of the note
payable approximates the carrying value due to the note payable's interest rate
approximating market rates. There have been no substantial changes in Northeast
Bancorp's market risk from the preceding year and the assumptions are consistent
with prior year assumptions.
32
<PAGE> 34
MARKET RISK TABLE AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------------------------------
1999
6/30/00 6/30/01 6/30/02 6/30/03 6/30/04 THEREAFTER TOTAL
------- ------- ------- ------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Interest Bearing
Deposits
Variable Rate...... $ -- $ -- $ -- $ -- $ -- $7,130 $ 7,130
Weighted Average
Interest Rate.... -- -- -- -- -- 5.54% 5.54%
Available for Sale
Securities........... 2,831 1,225 1,291 1,420 1,755 10,198 18,720
Weighted Average
Interest Rate.... 6.31% 6.60% 6.57% 6.57% 6.48% 6.58% 6.52%
FHLB Stock (1)......... -- -- -- -- -- 5,681 5,681
Weighted Average
Interest Rate.... -- -- -- -- -- 6.55% 6.55%
Loans Held For Sale
Fixed Rate......... 312 -- -- -- -- -- 312
Weighted Average
Interest Rate.... 7.53% -- -- -- -- -- 7.53%
Loans
Fixed Rate Loans... 16,181 16,877 20,539 25,376 35,080 68,100 182,153
Weighted Average
Interest Rate.... 8.58% 8.90% 9.00% 9.19% 9.10% 8.45% 8.75%
Variable Rate
Loans............ 16,821 13,109 13,491 16,960 20,053 56,399 136,833
Weighted Average
Interest Rate.... 8.73% 8.63% 8.64% 8.54% 8.46% 8.54% 8.58%
Interest Receivable.... 1,991 -- -- -- -- -- 1,991
FINANCIAL LIABILITIES:
NOW/Money
Market/Savings....... -- -- -- -- -- 60,359 60,359
Weighted Average
Interest Rate.... -- -- -- -- -- 2.41% 2.41%
Time Deposits.......... 98,448 30,405 9,190 1,996 1,036 38 141,113
Weighted Average
Interest Rate.... 5.26% 5.47% 6.11% 5.58% 5.30% 4.97% 5.37%
Repurchase Agreements
Fixed Rate......... -- -- -- -- -- -- --
Weighted Average
Interest Rate.... -- -- -- -- -- -- --
Variable Rate...... 11,868 -- -- -- -- -- 11,868
Weighted Average
Interest Rate.... 4.07% -- -- -- -- -- 4.07%
FHLB Advances
Fixed Rate......... 42,000 3,148 2,816 9,516 3,402 43,000 103,882
Weighted Average
Interest Rate.... 5.29% 5.23% 5.65% 5.75% 5.95% 5.29% 5.36%
Variable Rate...... -- -- -- -- -- -- --
Weighted Average
Interest Rate.... -- -- -- -- -- -- --
Note Payable
Fixed Rate......... 306 306 76 -- -- -- 688
Weighted Average
Interest Rate.... 8.00% 8.00% 8.00% -- -- -- 8.00%
<CAPTION>
EXPECTED MATURITY DATE
----------------------------------
1999 1998 1998
FAIR VALUE TOTAL FAIR VALUE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL ASSETS:
Interest Bearing
Deposits
Variable Rate...... $ 7,130 $ 5,330 $ 5,330
Weighted Average
Interest Rate.... 5.76%
Available for Sale
Securities........... 18,054 13,707 13,609
Weighted Average
Interest Rate.... 6.58%
FHLB Stock (1)......... 5,681 5,681 5,681
Weighted Average
Interest Rate.... 6.40%
Loans Held For Sale
Fixed Rate......... 315 370 372
Weighted Average
Interest Rate.... 7.08%
Loans
Fixed Rate Loans... 172,834 128,496 129,220
Weighted Average
Interest Rate.... 9.29%
Variable Rate
Loans............ 135,853 153,535 152,800
Weighted Average
Interest Rate.... 9.04%
Interest Receivable.... 1,991 1,934 1,934
FINANCIAL LIABILITIES:
NOW/Money
Market/Savings....... 60,359 55,729 55,729
Weighted Average
Interest Rate.... 2.90%
Time Deposits.......... 141,352 113,086 113,488
Weighted Average
Interest Rate.... 5.75%
Repurchase Agreements
Fixed Rate......... -- 504 504
Weighted Average
Interest Rate.... 5.20%
Variable Rate...... 11,868 4,702 4,702
Weighted Average
Interest Rate.... 4.09%
FHLB Advances
Fixed Rate......... 99,986 103,440 101,052
Weighted Average
Interest Rate.... 5.55%
Variable Rate...... -- 1,000 1,000
Weighted Average
Interest Rate.... 5.95%
Note Payable
Fixed Rate......... 688 993 993
Weighted Average
Interest Rate.... 8.00%
</TABLE>
- ---------------
(1) FHLB stock does not have a market; therefore, its fair value is unknown.
Because a gap analysis may not adequately address the interest rate risk,
Northeast Bancorp also 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
33
<PAGE> 35
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
Northeast Bancorp'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 Northeast Bancorp. The simulation model also takes into account Northeast
Bancorp's increased ability to control the rates on deposit products rather than
over adjustable-rate loans tied to published indices. Based on the information
and assumptions in effect at June 30, 1999, management believes that a 200 basis
point rate shock over a twelve month period, up or down, would not significantly
affect Northeast Bancorp's annualized net interest income.
FINANCIAL CONDITION
Northeast Bancorp had total assets of $364,382,905 and $322,532,594 at June
30, 1999 and June 30, 1998, respectively, an increase of approximately 13.0%.
The increase in assets is primarily due to loan growth. Loan volume has been
enhanced during the 1999 fiscal year due to whole loan purchases on the
secondary market, increased generation of commercial loans, and its
participation in the indirect automobile lending market. The increase in loans
has been funded with increased deposits and securities sold under repurchase
agreements. Northeast Bancorp has focused its business development efforts on
full service credit packages and financial services, as well as competitively
priced mortgage packages. Northeast Bancorp believes that its level of capital
is adequate. Its current capital plan, which includes the net proceeds from this
offering, 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 Northeast Bancorp. As of
June 30, 1999 and June 30, 1998, respectively, Northeast Bancorp's total equity
represented approximately 7.32% and 7.79% of its total assets.
LENDING ACTIVITIES
The Bank, as a savings institution, has historically focused its lending
activities on originating and purchasing conventional mortgage loans for the
purpose of constructing, financing, or refinancing one-to-four family
residential properties, multifamily (i.e., more than four units) properties, and
commercial properties. During the past few years, however, additional emphasis
has been placed on consumer lending and small business, home equity, and
commercial loans. The Bank also has developed the ability to generate, and
pursues, indirect lending through local automobile dealerships and sellers of
mobile homes.
LOAN PORTFOLIO COMPOSITION. At June 30, 1999 and 1998, total loans
included portfolio loans of approximately $319.0 million and $282.0 million,
respectively. Loans held for sale are immaterial in amount. Portfolio loans
represent approximately 87.5% and 87.4% of Northeast Bancorp's total assets at
June 30, 1999 and 1998, respectively. The growth in net loans for the fiscal
years ended June 30, 1999 and 1998 primarily consisted of an increase in 1-4
family residential, consumer and commercial loans.
From time to time, Northeast Bancorp also has purchased mortgage loans in
the secondary market to increase its overall portfolio yield, reduce the average
maturity of its portfolio, diversify its geographic risk, and utilize excess
liquidity. During the year ended June 30, 1999, Northeast Bancorp purchased
approximately $27.9 million in fixed rate residential mortgages secured by
property located primarily in the States of North Carolina and New York. During
the 1998 fiscal year, Northeast Bancorp purchased approximately $66.3 million in
adjustable and fixed rate residential mortgages secured by property located
primarily in the State of Maine and various midwestern states. The continued
expansion into new markets diversifies the credit risk and the potential
economic risks of the credits held in Northeast Bancorp's purchased loan
portfolio. Northeast Bancorp'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 adversely affected Northeast Bancorp's ability to increase the loan
portfolio. In an effort to increase loan volume, the Bank's interest rates for
its loan products have been reduced to compete in the various markets. Northeast
Bancorp has experienced margin compression due to decreased loan rates and
34
<PAGE> 36
anticipates that margin compression will continue for the foreseeable future
until loan volume increases in the current rising interest rate environment.
Approximately 20% of the Bank's loan portfolio is comprised of floating
rate loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as approximately 23% of other
loans in the Bank's portfolio that are based on short-term rate indices such as
the one-year treasury bill. An increase in short-term interest rates also will
increase deposit and FHLB advance rates, increasing the Bank's interest expense.
Although the Bank has experienced net interest margin compression, the impact on
net interest income will depend on, among other things, actual rates charged on
the Bank's loan portfolio, deposit and advance rates paid by the Bank, and loan
volume.
In 1998, Northeast Bancorp established a new automobile dealer finance
department to generate indirect automobile loans, and the increase in consumer
loans was due, in part, to the volume generated from this department. During the
1999 fiscal year, Northeast Bancorp sold approximately $9.8 million of indirect
automobile loans. Northeast Bancorp anticipates holding approximately $15.0
million to $20.0 million of indirect automobile loans in its portfolio and, as
of June 30, 1999, Northeast Bancorp held approximately $18.1 million of these
loans. As Northeast Bancorp continues to grow the indirect automobile portfolio,
Northeast Bancorp intends to build relationships with other institutions for
future sales of its indirect automobile loans.
The following table summarizes the composition of Northeast Bancorp's loan
portfolio (excluding loans held for sale) by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Residential mortgage..... $182,244 57.4 $171,903 61.1 $139,633 62.7 $116,273 62.0 $120,762 64.2
Commercial real estate... 55,438 17.5 47,053 16.7 46,443 20.8 37,270 19.9 33,000 17.5
Construction............. 1,686 0.5 2,100 0.8 2,597 1.2 2,769 1.5 2,391 1.3
Commercial............... 34,647 10.9 26,967 9.6 19,421 8.7 16,761 8.9 15,597 8.3
Consumer and other....... 43,643 13.7 33,305 11.8 14,792 6.6 14,491 7.7 16,400 8.7
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans....... 317,658 100 281,328 100 222,886 100 187,564 100 188,150 100
==== ==== ==== ==== ====
LESS:
Allowance for loan
losses................. (2,924) (2,978) (2,742) (2,761) (2,661)
Net deferred costs
(fees)................. 1,328 703 (204) (354) (373)
-------- -------- -------- -------- --------
Total loans,
net............. $316,062 $279,053 $219,940 $184,449 $185,116
======== ======== ======== ======== ========
</TABLE>
Real Estate Loans. Real estate loans represent the largest class of loans
of Northeast Bancorp. Real estate loans are classified as follows:
- 1 to 4 Family Residential. Loans in this category consist primarily of
owner-occupied residential loans. As of June 30, 1999 and 1998, the
percentage of these loans which were variable rate loans was 40% and 54%,
respectively. It has been management's intent to increase the proportion
of variable rate residential real estate loans to reduce the interest
rate risk. Northeast Bancorp has primarily purchased adjustable rate
residential loans and sold fixed rate residential loans. However, during
fiscal 1999, Northeast Bancorp purchased $27,913,995 of residential whole
loans on the secondary market which consisted of 1-4 family fixed rate
residential loans secured by property in North Carolina and New York. The
purchase of fixed rate loans improved Northeast Bancorp's asset/liability
management position during the declining rate environment earlier in the
fiscal year. Interest rates began to rise late in the fiscal year. Due to
this change in the interest rate environment, management will return to
its strategy of increasing the percentage of variable rate loans held in
its total loan portfolio in an effort to manage its interest rate risk.
35
<PAGE> 37
- Commercial real estate. Commercial real estate loans have increased
consistently with the overall increase in the loan portfolio of the Bank,
representing approximately the same percentage of total loans at June 30,
1999 as at June 30, 1998. Most of these loans are variable rate
mortgages. However, the aggregate dollar amount of such variable rate
loans have decreased slightly from June 30, 1998 to June 30, 1999.
- Construction. Construction lending consists primarily of residential
mortgages with terms of one year or less. The amount of these loans has
decreased slightly from June 30, 1998 to June 30, 1999.
- Held for Sale. Loans held for sale represent residential loans intended
to be sold in the secondary market. These loans are immaterial in amount.
Commercial Loans. This category of loan is comprised of loans to local
businesses involved primarily in light manufacturing, service, retail, and
wholesale activities. The amount of these loans held by Northeast Bancorp has
increased slightly as a percentage of the total loan portfolio.
Consumer and Other Loans. This category of loans is comprised of consumer
and other loans that include automobile, mobile home, boat, and personal lines
of credit. The increase in these loans in recent periods is primarily due to the
volume generated from the automobile dealer finance department. These loans are
mostly fixed rate loans.
LOAN MATURITY SCHEDULE. The following table sets forth the maturities of
loans outstanding as of June 30, 1999.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
------------------------------------------------------------------------
DUE AFTER 1 DUE AFTER 5
DUE IN 1 YEAR BUT YEARS BUT DUE AFTER
YEAR OR LESS BEFORE 5 YEARS BEFORE 10 YEARS 10 YEARS TOTAL
------------ -------------- --------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Residential.......................... $46,699 $29,516 $12,420 $ 93,609 $182,244
Commercial........................... 19,004 32,622 1,156 2,656 55,438
Construction......................... 1,686 0 0 0 1,686
NON-MORTGAGE LOANS:
Commercial........................... 12,802 16,626 2,139 3,080 34,647
Consumer and other................... 2,139 17,649 7,715 16,140 43,643
------- ------- ------- -------- --------
Total loans (1)............... $82,330 $96,413 $23,430 $115,485 $317,658
======= ======= ======= ======== ========
</TABLE>
- ---------------
(1) Excluding deferred fees or costs, allowance for loan losses, and loans held
for sale.
SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The following table
sets forth as of June 30, 1999, the dollar amounts of loans due after one year
which had predetermined interest rates and loans due after one year which had
floating or adjustable interest rates.
<TABLE>
<CAPTION>
DOLLAR AMOUNT OF LOANS
----------------------
JUNE 30, 1999
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Type of Interest Rate:
Predetermined rate, maturity greater than one year........ $175,680
Floating or adjustable rate due after one year............ 59,649
--------
Total............................................. $235,329
========
</TABLE>
LOAN CLASSIFICATION
Management seeks to maintain a level of high quality assets through
conservative underwriting and sound lending practices. In an effort to maintain
the quality of the loan portfolio, management seeks to minimize higher risk
types of lending and additional precautions have been taken when such loans are
made in order to reduce Northeast Bancorp's risk of loss.
36
<PAGE> 38
The majority of loans held in Northeast Bancorp's loan portfolio are
collateralized by real estate mortgages. At June 30, 1999, approximately 58% of
Northeast Bancorp's loan portfolio was collateralized by first liens on
owner-occupied residential homes which have historically carried a relatively
low credit risk. Northeast Bancorp also maintains a commercial real estate
portfolio comprised primarily of owner-occupied commercial businesses.
Generally, construction loans present a higher degree of risk to a lender
depending upon, among other things, whether the borrower has permanent financing
at the end of the loan period, whether the project is an income producing
transaction in the interim, and the nature of changing economic conditions
including changing interest rates. While there is no assurance that Northeast
Bancorp will not suffer losses on its construction loans or its commercial real
estate loans, management believes that it has reduced the risks associated with
such loans because construction loans are made primarily for building individual
owner-occupied houses and commercial real estate loans primarily relate to
owner-occupied projects where the borrower has demonstrated that its business
will generate sufficient income to repay the loan.
Commercial loans also entail certain risks since they usually involve large
loan balances to single borrowers or a related group of borrowers, resulting in
a more concentrated loan portfolio. Further, since their repayment is usually
dependent upon the successful operation of the commercial enterprise, they also
are subject to adverse conditions in the economy. Commercial loans are generally
riskier than residential mortgages because they are typically made on the basis
of the ability to repay from the cash flow of a business rather than on the
ability of the borrower or guarantor to repay. Further, the collateral
underlying commercial loans may depreciate over time, and occasionally cannot be
appraised with as much precision as residential real estate, and may fluctuate
in value based on the success of the business. While there is no assurance that
Northeast Bancorp will not suffer any losses on its commercial loans, management
believes that it has reduced the risks associated therewith because, among other
things, substantially all of such loans relate to projects where the borrower
has demonstrated to management that its business will generate sufficient income
to repay the loan.
Consumer and installment loans are primarily fixed rate products, and, as a
result, they have interest rate risk when market rates increase. These loans
also have credit risk with minimal security. In an effort to protect the credit
quality of its indirect automobile dealer loans, Northeast Bancorp underwrites
all of these loans. 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 known in its market
areas.
In addition to maintaining high quality assets, management attempts to
limit Northeast Bancorp's risk exposure to any one borrower or borrowers with
similar or related entities. As of June 30, 1999, Northeast Bancorp had extended
credit or credit availability in excess of $1 million to twelve borrowers.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities which would cause them to be similarly impacted by
economic or other conditions. Northeast Bancorp, on a routine basis, evaluates
these concentrations in order to make necessary adjustments in its lending
practices that most clearly reflect the economic times, loan to deposit ratios,
and industry trends. As of June 30, 1999, total loans to any particular group of
customers engaged in similar activities or having similar economic
characteristics did not exceed 10% of total loans.
The Board of Directors of Northeast Bancorp directs a substantial portion
of its efforts and resources, and that of its senior management and lending
officials, on loan review and underwriting procedures. In addition, Northeast
Bancorp utilizes the services of an independent consultant to perform periodic
loan documentation and compliance reviews as well as deposit and operations
compliance reviews. Internal controls include a loan review specialist employed
by Northeast Bancorp, who performs on-going reviews of new and existing loans to
monitor documentation and ensure the existence and valuations of collateral.
37
<PAGE> 39
NON-PERFORMING ASSETS AND ASSET QUALITY
The senior credit officer of Northeast Bancorp is charged with monitoring
asset quality, establishing credit policies and procedures, and seeking
consistent application of these procedures. A loan review process is in place
with the objective of quickly identifying, evaluating, and initiating necessary
corrective action for substandard loans. Combined, these components are integral
elements of Northeast Bancorp's loan program which has resulted in its loan
portfolio performance to date. Nonetheless, management maintains a cautious
outlook in anticipating the potential effects of uncertain economic conditions
(both locally and nationally) and the possibility of more stringent regulatory
standards.
Loans, including impaired loans, are generally classified by Northeast
Bancorp as non-accrual loans if they are past due as to maturity or payment of
principal or interest for a period of more than ninety days, unless such loans
are well collateralized and in the process of collection. If a loan or a portion
of a loan is classified as doubtful or is partially charged off, the loan is
classified as a non-accrual loan. Loans that are on a current payment status or
past due less than ninety days may also be classified as non-accrual if
repayment in full of principal and/or interest is in doubt. Loans are not
returned to accrual status until the principal and interest payments are brought
current and future payments appear certain.
Interest accrued and unpaid at the time a loan is placed in non-accrual
status is charged against interest income. While a loan is classified as
non-accrual and the future collectability of the recorded loan balance is
doubtful, collections of interest and principal are generally applied as a
reduction to principal outstanding. When the future collectability of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a non-accrual loan had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
allowance for loan losses until prior charge-offs have been fully recovered.
Real estate acquired by Northeast Bancorp as a result of foreclosure or
acceptance of deeds in lieu of foreclosure is classified as foreclosed real
estate. These properties are recorded on the date acquired at the lower of fair
value less estimated selling costs or the recorded investment in the related
loan. If the fair value after deducting the estimated selling costs of the
acquired property is less than the recorded investment in the related loan, the
estimated loss is charged to the allowance for loan losses at that time. The
resulting carrying value established at the date of foreclosure becomes the new
cost basis for subsequent accounting. After foreclosure, if the fair value less
estimated selling costs of the property becomes less than its cost, the
deficiency is charged to the provision for losses on foreclosed real estate.
Costs relating to the developmental improvement of the property are capitalized,
whereas those relating to holding the property for sale are charged as an
expense.
As of June 30, 1999, Northeast Bancorp had 22 loans on non-accrual status
totaling $1,144,000 or 0.36% of total loans, and at June 30, 1998, Northeast
Bancorp had 28 loans on non-accrual status totalling $2,248,000, or 0.80% of
total loans. At June 30, 1999 and 1998, respectively, Northeast Bancorp had
other real estate owned ("OREO") of approximately $193,850 and $350,496, which
consisted of two single family residences each year. Non-performing loans and
OREO together represented 0.37% and 0.81% of total assets at June 30, 1999 and
1998, respectively.
38
<PAGE> 40
The following table represents the Bank's non-performing loans as of June
30, 1999 and 1998:
<TABLE>
<CAPTION>
AT JUNE 30,
---------------
1999 1998
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
LOAN TYPES
1-4 Family mortgages........................................ $ 293 $ 783
Commercial mortgages........................................ 654 956
Commercial loans............................................ 0 509
Consumer and other.......................................... 197 0
------ ------
Total non-performing............................... $1,144 $2,248
====== ======
</TABLE>
In addition, Northeast Bancorp performs ongoing reviews of its new and
existing loans to identify, evaluate, and initiate corrective action for
substandard loans. As of June 30, 1999, Northeast Bancorp has identified
commercial and commercial real estate loans to 7 borrowers to be monitored on
its list of loans classified as substandard, representing aggregate borrowings
of approximately $741,000 (exclusive of non-performing loans). These loans have
been considered by management in its assessment of the allowance for loan losses
and none of these borrowers have failed to comply with their present loan
repayment terms. Management takes an aggressive posture in reviewing its loan
portfolio to determine whether loans should be classified as substandard.
Although non-performing and delinquent loans have decreased in the past few
years, management continues to allocate substantial resources to its collection
area in an effort to control the amount of such non-performing loans. The Bank's
delinquent loan accounts decreased as a percentage of total loans during the
1999 fiscal year. This decrease was largely due to improved collection efforts,
increased charge-offs, and an 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>
<CAPTION>
AT JUNE 30,
- --------------------------------------------
1999 1998 1997 1996
- --------- --------- --------- ---------
<S> <C> <C> <C>
0.76% 1.09% 1.93% 3.24%
</TABLE>
At June 30, 1999, loans classified as non-performing included $117,169 of
loan balances that are current and paying as agreed, but which continue to be so
classified until the borrower has demonstrated a sustainable period of
performance. Excluding these loans, the Bank's total delinquencies 30 days or
more past due, as a percentage of total loans, would be 0.72% as of June 30,
1999.
39
<PAGE> 41
The following table sets forth certain information, as of the date
indicated, regarding non-accrual loans, restructured loans, and loans 90 days or
more past due:
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Residential mortgage.................................. $ 235 $ 640 $1,023 $1,043 $ 650
Commercial real estate................................ 595 317 541 895 1,223
Commercial loans...................................... 0 468 54 308 381
Consumer and other.................................... 197 0 41 76 33
------ ------ ------ ------ ------
Total non-accrual loans........................ 1,027 1,425 1,659 2,322 2,287
Accruing loans contractually past due 90 days or more... 117 823 1,222 860 370
------ ------ ------ ------ ------
TOTAL NON-PERFORMING LOANS.............................. 1,144 2,248 2,881 3,182 2,657
Other real estate owned................................. 194 350 563 585 1,169
------ ------ ------ ------ ------
TOTAL NON-PERFORMING ASSETS............................. $1,338 $2,598 $3,444 $3,767 $3,826
====== ====== ====== ====== ======
Non-performing loans to total loans..................... 0.36% 0.80% 1.29% 1.70% 1.42%
Non-performing assets to total assets................... 0.37% 0.81% 1.21% 1.54% 1.65%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
In originating loans, Northeast Bancorp recognizes that loan losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a collateralized loan, the quality of the
collateral for the loan as well as general economic conditions. 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.
On a regular and ongoing basis management actively monitors Northeast
Bancorp's asset quality to evaluate the adequacy of the allowance for loan
losses and, when appropriate, to charge-off loans against the allowance for loan
losses when appropriate or to provide specific loss allowances when necessary.
Management believes that the allowance for loan losses is adequate
considering the level of risk in the loan portfolio. While management believes
that it uses the best information available to make its determinations with
respect to the allowance, management can not assure you that future adjustments
will not be necessary 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 allowance for loan losses. Such agencies may require additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination. The Bank's most recent examination by
the Office of Thrift Supervision was on November 30, 1998. At the time of the
exam the regulators proposed no additions to the allowance for loan losses.
At June 30, 1999, the Bank had a total of $193,850 in OREO as compared to
$350,496 at June 30, 1998. An allowance for losses on OREO was established to
provide for declines in real estate values and to consider estimated selling
costs. The allowance for losses on OREO totaled $27,725, $5,100, and $50,839,
respectively for the years ended June 30, 1999, 1998 and 1997. Northeast Bancorp
provided for this allowance through a charge against earnings of $47,000,
$62,300, and $39,000 for the years ended June 30, 1999, 1998, and 1997,
respectively. In 1999, 1998, and 1997, write downs of OREO totaled $24,375,
$108,039, and $88,161, respectively. Management periodically receives
independent appraisals to assist in its valuation of the OREO portfolio. As a
result of its review of the independent appraisals and the OREO portfolio,
Northeast Bancorp believes the allowance for losses on OREO is adequate to state
the portfolio at lower of cost, or fair value less estimated selling costs.
40
<PAGE> 42
The following table sets forth an analysis of Northeast Bancorp's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net loans outstanding during the period....... $294,207 $237,791 $200,919 $183,947 $178,736
======== ======== ======== ======== ========
Net loans at end of period (1)........................ $316,062 $279,053 $219,940 $184,449 $185,116
======== ======== ======== ======== ========
Allowance at beginning of period...................... $ 2,978 $ 2,742 $ 2,761 $ 2,661 $ 2,728
-------- -------- -------- -------- --------
LOANS CHARGED-OFF DURING THE PERIOD:
Residential mortgage................................ (232) (196) (319) (151) (162)
Commercial real estate.............................. (26) (432) (128) (236) (296)
Commercial.......................................... (272) (42) (154) (125) (205)
Consumer and other.................................. (396) (115) (171) (108) (151)
-------- -------- -------- -------- --------
Total loans charged-off...................... (926) (785) (772) (620) (814)
-------- -------- -------- -------- --------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Residential mortgage................................ 12 87 43 10 7
Commercial real estate.............................. 109 83 49 34 1
Commercial.......................................... 20 87 13 12 16
Consumer and other.................................. 121 58 34 25 32
-------- -------- -------- -------- --------
Total recoveries............................. 262 315 139 81 56
-------- -------- -------- -------- --------
Net loans charged-off during the period............... (664) (470) (633) (539) (758)
Provisions for loan losses............................ 610 706 614 639 691
-------- -------- -------- -------- --------
Allowance at end of period............................ $ 2,924 $ 2,978 $ 2,742 $ 2,761 $ 2,661
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding......................................... 0.23% 0.20% 0.32% 0.29% 0.42%
Allowance as a percentage of total portfolio loans.... 0.92 1.06 1.23 1.47 1.41
Allowance as a percentage of non-performing and
non-accrual loans................................... 255.59 132.47 95.18 86.77 100.15
</TABLE>
- ---------------
(1) Excludes loans held for sale.
The level of the allowance for loan losses decreased as a percentage of
total loans for 1999 as compared to 1998. This decrease in the level of
allowance as a percentage of total loans reflects the increased volume of loans
in 1999 as compared to 1998, the asset quality, charge-offs experienced, and
credit risk of these loans, and the lower level of delinquencies experienced in
1999. The growth of loans included the purchase of residential mortgages which
carry less credit risk. However, the allowance for loan losses increased as a
percentage of non-performing and non-accrual loans for 1999 as compared to 1998
due to a decrease in non-performing and non-accrued loan balances.
The ratio of net charge-offs to average loans outstanding has remained
relatively constant during the last five fiscal years.
At June 30, 1999, total impaired loans were $612,867, of which $241,420 had
related allowances of $77,200. This compares to total impaired loans of
$1,623,720, of which $927,355 had related allowances of $251,474, at June 30,
1998. During the year ended June 30, 1999, the income recognized related to
impaired loans was $66,030 and the average balance of outstanding impaired loans
was $1,229,987. This compares to income recognized related to impaired loans of
$19,693 and the average balance of impaired loans of $1,956,488 at June 30,
1998. The Bank recognizes interest on impaired loans on a cash basis when the
ability to collect the principal balance is not in doubt; otherwise, cash
received is applied to the principal balance of the loan.
41
<PAGE> 43
The following table sets forth a breakdown of the allowance for loan losses
by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of an allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
LOANS LOANS LOANS LOANS LOANS
TO TO TO TO TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage.......... $ 378 57.4% $ 352 61.1% $ 308 62.7% $ 268 62.0% $ 658 64.2%
Commercial mortgage........... 882 17.5 762 16.7 821 20.8 799 19.9 263 17.5
Construction.................. 0 0.5 0 0.8 0 1.2 0 1.5 0 1.3
Commercial.................... 508 10.9 582 9.6 436 8.7 501 8.9 137 8.3
Consumer...................... 497 13.7 380 11.8 159 6.6 152 7.7 279 8.7
Unallocated................... 659 0.0 902 0.0 1,018 0.0 1,041 0.0 1,324 0.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan
losses.................. $2,924 100.0% $2,978 100.0% $2,742 100.0% $2,761 100.0% $2,661 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The measurement of impaired loans is based on the fair value of the loan's
collateral. The measurement of non-collateral dependent loans is based on the
present value of expected future cash flows discounted at the historical
effective interest rate. The components for the allowance for loan losses are as
follows:
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------
1999 1998 1997
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Impaired loans.............................................. $ 77 $ 251 $ 369
Other....................................................... 2,847 2,727 2,373
------ ------ ------
$2,924 $2,978 $2,742
====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
At June 30, 1999, 1998, and 1997, Northeast Bancorp's investment portfolio
totalled approximately $18,054,000, $13,609,000, and $28,811,000, respectively.
The investment portfolio consists of federal agency securities, mortgage-backed
securities, bonds, and equity securities. Maturities range from one month to
thirty years with a debt portfolio average maturity of approximately 25 years.
Funds generated by Northeast Bancorp as a result of increases in deposits
or decreases in loans which are not immediately used by Northeast Bancorp are
invested in securities held in its investment portfolio. The investment
portfolio is used as a source of liquidity for Northeast Bancorp. The investment
portfolio is structured so that it provides for an ongoing source of funds for
meeting loan and deposit demands and for reinvestment opportunities to take
advantage of changes in the interest rate environment.
Equity securities, and debt securities which may be sold prior to maturity,
are classified as available for sale and are carried at market value. Northeast
Bancorp's investment portfolio has been primarily classified as available for
sale at June 30, 1999 and 1998. Changes in market value, net of applicable
income taxes, are reported as a separate component of stockholders' equity.
Gains and losses on the sale of securities are recognized at the time of the
sale using the specific identification method. The amortized cost and market
value of available for sale securities at June 30, 1999 was $18,720,268 and
$18,054,317, respectively. The increase of $5,013,796 in the cost of securities
available for sale, from June 30, 1998 to June 30, 1999, was due to the purchase
of mortgage-backed securities for collateral for the increased volume in
securities sold under repurchase agreements. The net unrealized loss on
mortgage-backed securities has increased from $9,511 at June 30, 1998 to
$626,274 at June 30, 1999 due to rising interest rates. Substantially all of the
mortgage-backed securities are high grade government backed securities. As in
any long term earning asset in which the interest rate is fixed, the market
value of mortgage-backed securities will fluctuate based on changes in
42
<PAGE> 44
market interest rates from the time of purchase. Since these mortgage-backed
securities are backed by the U.S. Government, there is a minimal risk of loss of
principal. Management believes that the yields currently received on this
portfolio are satisfactory and intends to hold these securities for the
foreseeable future.
Management reviews the portfolio of investments on an ongoing basis to
determine if there has been an other-than-temporary decline in value. Some of
the considerations management makes in the determination are market valuations
of particular securities and economic analysis of the securities' sustainable
market values based on the underlying companies' profitability. If the decline
in value is not considered to be temporary, management writes down the value of
such securities through an adjustment against earnings. Based on management's
assessment of available for sale securities, there has been more than a
temporary decline in fair value of certain securities. For the years ended June
30, 1999, 1998, and 1997, write-downs of available for sale securities were
$95,728, $172,235, and $110,000, respectively, and are included in other
expenses in the consolidated statements of income.
The following table summarizes Northeast Bancorp's investment portfolio as
of the dates indicated.
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------
1999 1998 1997
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE (1):
U.S. Government agencies.................................. $ 598 $ 4,698 $ 2,905
Mortgage-backed securities................................ 16,027 7,714 24,802
Other bonds............................................... 200 204 253
Equity securities......................................... 1,229 993 851
------- -------- -------
Total available for sale (2):..................... $18,054 $ 13,609 $28,811
======= ======== =======
</TABLE>
- ---------------
(1) Carried at estimated market value. Northeast Bancorp does not have any
securities being held to maturity.
(2) Cost of such securities was $18,720 as of June 30, 1999, $13,706 as of June
30, 1998, and $29,317 as of June 30, 1997.
The following table summarizes Northeast Bancorp's securities (excluding
the restricted FHLB Stock) by maturity and weighted average yields at June 30,
1999. Yields on tax exempt securities are stated at their nominal rates and have
not been adjusted for tax rate differences.
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN ONE BUT WITHIN BUT WITHIN
YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
-------------- -------------- ---------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------- ------ ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT JUNE 30, 1999:
U.S. Government agencies......... $ 498 4.62% $100 7.23% $ 0 0.00% $ 0 0.00% $ 598 5.06%
Mortgage-backed securities....... 0 0.00 44 5.15 572 7.04 15,411 6.59 16,027 6.60
Other bonds...................... 0 0.00 200 6.28 0 0.00 0 0.00 200 6.28
Equity securities................ 1,229 6.76 0 0.00 0 0.00 0 0.00 1,229 6.76
------ ---- ---- ---- ------ ---- ------- ---- ------- ----
$1,727 6.14% $344 6.41% $ 572 7.04% $15,411 6.59% $18,054 6.56%
====== ==== ==== ==== ====== ==== ======= ==== ======= ====
AT JUNE 30, 1998:
U.S. Government agencies......... $ 347 5.87% $248 5.40% $1,103 7.02% $ 3,000 7.17% $ 4,698 6.95%
Mortgage-backed securities....... 0 0.00 99 5.15 24 8.50 7,591 6.91 7,714 6.89
Other bonds...................... 0 0.00 204 6.28 0 0.00 0 0.00 204 6.28
Equity securities................ 993 2.64 0 0.00 0 0.00 0 0.00 993 2.64
------ ---- ---- ---- ------ ---- ------- ---- ------- ----
$1,340 3.48% $551 5.68% $1,127 7.05% $10,591 6.98% $13,609 6.59%
====== ==== ==== ==== ====== ==== ======= ==== ======= ====
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposit accounts are the primary source of funds of Northeast
Bancorp for use in lending and other investment purposes. In addition to
deposits, Northeast Bancorp draws funds from interest payments, loan principal
payments, loan and securities sales, securities sold under repurchase
agreements, and funds
43
<PAGE> 45
from operations (including various types of loan fees). Scheduled loan payments
of principal and interest are a relatively stable source of funds, while deposit
inflows and outflows are significantly influenced by general interest rates and
money market conditions. Northeast Bancorp utilizes, as alternative sources of
funds, brokered certificates of deposit when national deposit interest rates are
less than the interest rates on local market deposits. Brokered certificates of
deposit are also used to supplement the growth in earning assets. Brokered
certificates of deposit present the same risk as local certificates of deposit,
in that both are interest rate sensitive with respect to Northeast Bancorp's
ability to retain the funds. Northeast Bancorp uses borrowings on a short-term
basis, if necessary, to compensate for reductions in the availability of other
sources of funds, or borrowings may be used on a longer term basis for general
business purposes. In this regard, Northeast Bancorp also uses FHLB advances as
a source 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.
DEPOSIT ACTIVITIES. Northeast Bancorp continues to attract new local
deposit relationships. These deposits are attracted principally through the
offering of a broad variety of deposit instruments, including checking accounts,
money market accounts, savings accounts, certificates of deposit (including
jumbo certificates in denominations of $100,000 or more), and retirement savings
plans. Total deposits were $219,364,035 as of June 30, 1999, and $184,024,097 as
of June 30, 1998. The increase in deposits of $35,339,938 from June 30, 1998 to
June 30, 1999 was primarily due to a $7,773,835 increase in NOW demand deposits
and a $22,143,247 increase in time deposits. The increase in NOW deposits was
attributable to the development of a demand account where the interest rate
increases as deposit balances increase. Time deposits increased due to various
special offerings as well as normal growth from the branch market areas.
Brokered certificates of deposit represented $13,458,257 of total deposits at
June 30, 1999, which was an increase of $5,883,547 compared to June 30, 1998.
Maturity terms, service fees, and withdrawal penalties are established by
Northeast Bancorp on a periodic basis. The determination of rates and terms is
predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
DEPOSIT FLOWS AND AVERAGE BALANCE AND RATES. The following table sets
forth the average balance and weighted average rates for Northeast Bancorp's
categories of deposits for the period indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF
BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS
-------- ------- -------- -------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits.......................... $ 17,132 0.00% 8.4 $ 15,481 0.00% 8.9 $ 13,380 0.00% 8.0
NOW and money market.............. 40,100 2.85 19.7 29,401 2.50 16.8 30,716 2.45 18.4
Regular savings................... 20,068 2.57 9.9 21,289 2.68 12.2 22,141 2.67 13.3
Time deposits..................... 125,802 5.58 62.0 108,580 5.78 62.1 100,485 5.73 60.3
-------- ---- ----- -------- ---- ----- -------- ---- -----
Total average deposits............ $203,102 4.27% 100.0 $174,751 4.34% 100.0 $166,722 4.26% 100.0
======== ==== ===== ======== ==== ===== ======== ==== =====
</TABLE>
CERTIFICATES OF DEPOSIT. At June 30, 1999, certificates of deposit,
including brokered deposits, represented approximately 64.3% of Northeast
Bancorp's total deposits, as compared to 61.5% of total deposits at June 30,
1998. Northeast Bancorp does not have a concentration of deposits from any one
source, the loss of which would have a material adverse effect on the business
of Northeast Bancorp.
The following table summarizes the amount of Northeast Bancorp's
certificates of deposit of $100,000 or more by time remaining until maturity at
June 30, 1999.
<TABLE>
<CAPTION>
MATURITY PERIOD JUNE 30, 1999
- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C>
Less than three months...................................... $ 1,579
Over three months through six months........................ 1,648
Over six months through twelve months....................... 6,944
Over twelve months.......................................... 14,181
-------
Total....................................................... $24,352
=======
</TABLE>
44
<PAGE> 46
DEPOSIT ACTIVITY. The following table sets forth the deposit flows of
Northeast Bancorp during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1999 1998 1997
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net increase before interest credited....................... $28,090 $ 4,501 $1,848
Net credited................................................ 7,250 6,602 6,218
------- ------- ------
Net deposit increase........................................ $35,340 $11,103 $8,066
======= ======= ======
</TABLE>
BORROWINGS. The Bank relies upon deposits, loan repayments, and loan sales
as its major sources of funds. When Northeast Bancorp's primary sources of funds
are not sufficient to meet deposit outflows, loan originations and purchases,
and other cash requirements, Northeast Bancorp may borrow funds from the FHLB of
Boston or other sources. In addition, Northeast Bancorp uses securities sold
under agreements to repurchase, or repurchase agreements as they are sometimes
called, in order to increase available funds.
The FHLB of Boston functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB of Boston and
is authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally securities that are obligations
of or guaranteed by the United States), provided that certain standards related
to creditworthiness have been met. FHLB borrowings, known as "advances," are
made on a secured basis, and the terms and rates charged for FHLB advances vary
in response to general economic conditions. A wide variety of borrowing plans
are offered by the FHLB of Boston, each with its own maturity and interest rate.
The FHLB of Boston will consider various factors, including an institution's
regulatory capital position, net income, quality and composition of assets,
lending policies and practices, and level of current borrowings from all sources
in determining the amount of credit to extend to an institution. In addition, an
institution that fails to meet the qualified thrift lender test may have
restrictions imposed on its ability to obtain FHLB advances. The Bank currently
meets the qualified thrift lender test. Northeast Bancorp's current advance
availability, subject to the satisfaction of certain conditions, is
approximately $130 million, of which $104 million has been advanced through June
30, 1999.
Northeast Bancorp has access to the following principal sources of funds:
- borrowing capacity with the FHLB,
- normal growth of Bank deposits,
- issuance of repurchase agreements for cash equivalents, and
- securities available for resale.
45
<PAGE> 47
The following table sets forth information as to Northeast Bancorp's
borrowings activity for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PERIOD END BALANCE:
Advances from FHLB of Boston................. $103,882 5.36% $104,440 5.55% $80,494 5.81%
Repurchase agreements(1)..................... 11,868 4.07 5,206 4.20 5,099 4.25
-------- ---- -------- ---- ------- ----
Total................................. $115,750 5.23% $109,646 5.49% $85,593 5.72%
======== ==== ======== ==== ======= ====
AVERAGE OUTSTANDING DURING YEAR:
Advances from FHLB of Boston................. $100,074 5.53% $ 85,686 5.86% $67,037 5.95%
Repurchase agreements(1)..................... 8,202 4.15 4,917 4.19 4,566 4.38
-------- ---- -------- ---- ------- ----
Total................................. $108,276 5.43% $ 90,603 5.77% $71,603 5.85%
======== ==== ======== ==== ======= ====
HIGH MAXIMUM OUTSTANDING AT ANY MONTH END:
Advances from FHLB of Boston................. $106,979 5.24% $109,962 5.61% $81,512 5.85%
Repurchase agreements(1)..................... 11,868 4.07 5,737 4.25 5,214 4.42
-------- ---- -------- ---- ------- ----
Total................................. $118,847 5.12% $115,699 5.54% $86,726 5.76%
======== ==== ======== ==== ======= ====
</TABLE>
- ---------------
(1) These borrowings were scheduled to mature within 180 days and were
collateralized by GNMA and FHLMC securities with the market value and
amortized costs at June 30, 1999 of $14,938,000, $15,525,000, at June 30,
1998 of $8,547,000, and $8,558,000 and, at June 30, 1997 of $9,161,000, and
$9,300,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability of Northeast Bancorp to generate
sufficient cash to fund current loan demand, deposit withdrawals, other cash
demands and disbursement needs, and otherwise to operate on an ongoing basis.
Northeast Bancorp's principal sources of funds are deposits, principal and
interest payments on loans, sale of loans, interest on investments, and the sale
of investments. During the fiscal years ended June 30, 1999 and 1998, Northeast
Bancorp received $35.3 million and $11.1 million, respectively, from deposit
growth and $6.7 million and $0.1 million, respectively, from the sale of
repurchase agreements (included in deposit balances in 1999 and 1998 was
$13,458,257 and $7,574,710, respectively, in brokered certificates of deposit.)
In addition, through the FHLB advances program Northeast Bancorp also has the
ability to borrow from the FHLB to supplement its liquidity needs. Northeast
Bancorp's current advance availability, subject to the satisfaction of certain
conditions, is approximately $26 million over and above the 1999 end of year
advances.
At June 30, 1999, stockholders' equity was approximately $26,683,115, or
7.32% of total assets, as compared to $25,139,527 at June 30, 1998, or 7.79% of
total assets. Book value per common share was $9.64 as of June 30, 1999, as
compared to $9.23 at June 30, 1998.
In November 1998 Square Lake Holding Corporation converted its Northeast
Bancorp Series A Preferred Stock into 136,362 shares of Northeast Bancorp common
stock. Square Lake Holding Corporation is a Maine corporation and a subsidiary
of a Canadian corporation of which Mr. Ronald Goguen is a 95% shareholder and
director. Mr. Goguen also is a director of, and, through the stock ownership of
his affiliates, a principal shareholder of Northeast Bancorp.
Although no capital requirements are imposed on Northeast Bancorp, as a
savings institution the Bank is subject to such requirements as established by
the OTS. The OTS has issued regulations requiring savings institutions to
maintain 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
46
<PAGE> 48
categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." As of June 30, 1999, the Bank met the definition
of a "well capitalized" institution. There are no conditions or events since
that notification that management believes has changed the institution's
category.
At June 30, 1999, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
TO BE "WELL
CAPITALIZED"
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (Core) Capital (to risk weighted assets)....... $25,615 10.1% $10,159 4.0% $15,239 6.0%
Tier 1 (Core) Capital (to total assets)............... 25,615 7.1 14,533 4.0 18,166 5.0
Total Capital (to risk weighted assets)............... 27,233 10.7 20,318 8.0 25,398 10.0
</TABLE>
Management believes that there are adequate funding sources to meet its
future liquidity needs for the foreseeable future. However, in order to finance
the continued growth of the Bank at current levels, additional funds may be
necessary in order to provide sufficient capital to fund loan growth. In this
regard, Northeast Bancorp will use a portion of the net proceeds from this
offering to, among other things, make contributions to the capital of the Bank
to support its internal growth. Further, Northeast Bancorp may from time to time
consider and evaluate a variety of additional sources of funds, including other
debt financing vehicles, sales of equity securities, and other financing
alternatives. There can be no assurance that Northeast Bancorp will be able to
obtain such additional financing, if needed, or, if available, that it can be
obtained on terms favorable to Northeast Bancorp.
RETURN ON EQUITY AND ASSETS
The following table sets forth certain selected performance ratios of
Northeast Bancorp for the periods indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
Return on average assets................................... 0.71% 0.83% 0.57%
Return on average equity................................... 9.18 10.35 7.05
Dividend payout ratios..................................... 24.42 24.42 37.50
Average equity to average assets........................... 7.73 7.99 8.09
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein concerning Northeast Bancorp have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operations of Northeast
Bancorp is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, changes in interest rates have
a more significant impact on the performance of Northeast Bancorp than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
47
<PAGE> 49
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement requires all derivatives to
be recorded on the balance sheet at fair value and establishes standard
accounting methodologies for hedging activities. The standard will result in the
recognition of offsetting changes in value or cash flows of both the hedge and
the hedged item in earnings or comprehensive income in the same period. The
statement is effective for Northeast Bancorp's fiscal year ending June 30, 2001.
Management of Northeast Bancorp does not expect this statement to have a
significant effect on its financial position or results of operations based on
current activities of Northeast Bancorp.
FASB also has issued Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities retained after the securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Entity" ("SFAS 134"). This
statement amends SFAS No. 65 allowing mortgage-backed securities or other
retained interests arising from the securitization of mortgage loans to be
classified based on the mortgage banking entities' ability and intent to sell or
hold those securities. Previously these securities had to be held within a
trading account. This statement is effective for Northeast Bancorp's fiscal year
ending June 30, 2000. The adoption of this standard is not expected to have a
significant impact on the financial statements.
YEAR 2000 COMPLIANCE
Northeast Bancorp 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 Northeast Bancorp's borrowers. Northeast Bancorp has
organized a Year 2000 committee, comprised of senior officers, to research,
develop and implement a plan that will correct this issue within the time lines
established by Northeast Bancorp's regulators. The OTS has issued a formal
regulation and comprehensive plan concerning the Year 2000 issue for financial
institutions, for which the OTS has oversight. Northeast Bancorp 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 correspondence). This phase has
been completed by Northeast Bancorp's committee.
ASSESSMENT PHASE. This phase involves an assessment of the size and
complexity of the problem and determining the magnitude of the effort necessary
to address the Year 2000 issue. As part of this valuation, Northeast Bancorp
evaluated all hardware, software, networks, automated teller machines, other
various processing platforms, and customer and vendor interdependencies affected
by the Year 2000 date change. This assessment was not limited to a review of
information systems, it also encompassed environmental systems dependent on
embedded microchips, such as security systems, elevators and vaults. Management
also evaluated the Year 2000 effect on other strategic business initiatives,
including the potential effect that mergers and acquisitions, major system
development, corporate alliances, and system interdependencies will have on
existing systems and/or acquired systems. During this phase, both management and
its vendors identified resource needs and established time frames for their Year
2000 efforts. The resource needs for responding to this issue include
appropriately skilled personnel, contractors, vendor support, budget
allocations, and hardware capacity. Finally contingency plans should be
developed to cover unforeseen obstacles during the renovation and validation
phase and include plans to deal with lesser priority systems that would be fixed
later in the renovation phase.
The assessment phase has been completed, but is considered an ongoing phase
for Northeast Bancorp. Northeast Bancorp has instituted a comprehensive plan to
communicate with all its borrowers that it considers to be at risk concerning
the Year 2000 issue. Northeast Bancorp considers this plan necessary to
48
<PAGE> 50
mitigate the risk associated with borrowers not having the ability to make loan
payments due to a Year 2000 issue. Northeast Bancorp currently has estimated the
following costs associated with the Year 2000 issue: (1) computer hardware
replacement $40,000, (2) software replacement $42,000, (3) testing and
administrative costs $94,000, and (4) potential contingency costs $15,000. As of
June 30, 1999 the Company had incurred $37,333 of capitalized purchases and
$92,000 of cumulative Year 2000 expenses. These costs are under periodic review
and will be revised as needed. We cannot assure you that our actual cost will
not exceed our estimates. During the 1999 fiscal year, Northeast Bancorp
replaced its computer mainframe, software, and data communication systems as
planned to accommodate the growth experienced as a result of its merger and
acquisition activity and its branch expansion. 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 part of
Northeast Bancorp's general business plan for fiscal 1999. The anticipated Year
2000 expenses referred above are in addition to Northeast Bancorp's replacement
costs.
RENOVATION PHASE. This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes. Work will be prioritized based on information gathered
during the assessment phase. Each of our service providers and vendors has been
contacted and has or will provide information to us concerning their efforts to
comply with the Year 2000 issue. Northeast Bancorp has completed this phase.
However, we cannot assure you that these service providers and vendors will be
Year 2000 compliant in a timely manner.
VALIDATION PHASE. Testing is a multifaceted process that is critical to
the Year 2000 project and inherent in each phase of the project management plan.
This process includes the testing of incremental changes to hardware and
software components. In addition to testing upgraded components, connections
with other systems must be verified, and all changes should be accepted by
internal and external users. Management will establish controls to assure the
effective and timely completion of all hardware and software testing prior to
final implementation. As with the renovation phase, Northeast Bancorp will be in
ongoing discussions with its vendors on the success of their validation efforts.
Northeast Bancorp has completed testing on all of its critical systems and has
completed this phase.
IMPLEMENTATION PHASE. During this phase, systems are to be validated as
Year 2000 compliant and be accepted by the business users. For any system
failing certification, the business effect must be assessed clearly and the
organization's Year 2000 contingency plans should be implemented. Any
potentially noncompliant mission-critical system should be brought to the
attention of executive management immediately for resolution. In addition, this
phase must ensure that any new systems or subsequent changes to verified systems
are compliant with Year 2000 requirements. Northeast Bancorp has completed the
validation of its systems and has completed this phase.
Northeast Bancorp recognizes the Year 2000 problem as a global issue with
potentially catastrophic results if not addressed. We have and will continue to
take all necessary steps to protect Northeast Bancorp 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, the
inability of third party vendors to complete their Year 2000 remediation in a
timely fashion could result in delays in processing daily transactions and could
result in a material and adverse effect on our results of operations. We have
developed a contingency plan to address potential failures in these systems.
However, we cannot assure you that these plans will adequately protect the Bank
from the adverse consequences of such failures.
49
<PAGE> 51
BUSINESS
GENERAL
Northeast Bancorp, a Maine corporation chartered in April 1987, is a
unitary savings and loan holding company whose primary subsidiary and principal
asset is Northeast Bank, F.S.B. Prior to 1996, Northeast Bancorp operated under
the name Bethel Bancorp. Northeast Bancorp, through its ownership of the Bank,
is engaged principally in the business of originating residential real estate
loans, commercial real estate and business loans, and consumer loans, and its
primary source of earnings is derived from the income generated by the Bank.
Although historically the Bank has primarily originated residential and
commercial real estate loans, most of which are local, in the State of Maine, it
also generates commercial and consumer loans and provides other services and
products traditionally furnished to customers by full service banks. As of June
30, 1999, Northeast Bancorp, on a consolidated basis, had total assets of
approximately $364.4 million, total deposits of approximately $219.4 million,
and stockholders' equity of approximately $26.7 million.
The Bank (which was formerly known as Bethel Savings Bank F.S.B.) is a
federally-chartered savings bank which was originally organized in 1872 as a
Maine-chartered mutual savings bank. The Bank received its federal charter in
fiscal 1984. In 1987, Bethel converted to a stock form of ownership and in
subsequent years has engaged in a strategy of both geographic and product
expansion.
In October 1997, Northeast Bancorp completed its combination with Cushnoc
Bank & Trust, a commercial bank located in Augusta, Maine ("Cushnoc"), and
merged it into the Bank. As a result of the merger, the Bank added two branches
which expanded its market area to include Maine's capital city and surrounding
communities, an area that management believes offers significant growth
opportunities. In addition, during the LAST fiscal quarter, Northeast Bancorp
opened a new full service branch in Lewiston, Maine. With the opening of these
three branches, the Bank now has a total of 12 banking branches. In addition,
the Bank has opened a facility in Falmouth, Maine from which it accepts loan
applications and offers investment, insurance, and financial planning products
to its customers.
The Bank has broad powers, including the power to engage in non-residential
lending activities. In connection with its conversion into a federal savings
bank in fiscal 1984, the Bank retained its then-authorized powers as a
Maine-chartered mutual savings bank. Under applicable regulations, except as
otherwise determined by the OTS, the Bank retains the authority that it was
permitted to exercise as a mutual savings bank under the state law existing at
the time of the conversion. Historically, Maine-chartered savings banks have had
certain lending, investment, and other powers that have only recently been
granted to federal savings institutions, including commercial lending authority
and the ability to offer personal checking and negotiable order of withdrawal
("NOW") accounts.
From its 12 retail banking branches located throughout western, central,
and the mid-coastal regions of the State of Maine, and through the Bank's
subsidiary and other affiliations, the Bank offers its customers, or provides
access to, a broad range of financial services and products including, but not
limited to, real estate, commercial, and consumer loans and financial products,
deposit and investment services, brokerage services, trust services, insurance,
ATMs, debit cards, electronic transfer services, and other related products and
services.
The Bank is subject to examination and comprehensive regulation by the OTS
and its deposits are insured by the FDIC to the extent permitted by law. The
Bank also is a member of the FHLB of Boston. Although the Bank's deposits are
primarily insured through the Bank Insurance Fund, deposits at the Brunswick
branch, which represent approximately 24% of the Bank's total deposits, are
Savings Association Insurance Fund insured. See "Supervision and
Regulation -- Insurance of Deposit Accounts and Assessments."
The principal executive offices of Northeast Bancorp and the Bank are
located at 232 Center Street, Auburn, Maine, 04210, and their telephone number
is (207) 777-6411.
50
<PAGE> 52
STRATEGY
Northeast Bancorp's corporate strategy is to offer a wide array of
financial products and services with an emphasis on a high level of personalized
service. This strategy is designed to attract profitable long-term banking
relationships with its customers and to increase the Bank's core earnings by
developing stronger interest margins, non-interest income, and increasing volume
of banking products and services by expanding the Bank's market areas. In
keeping with this strategy, the Bank is making a concerted effort to become an
all-inclusive financial center that is able to provide its customers with nearly
every financial product and service that they may require. In this regard, the
Bank assists its clients in assessing their financial needs through its
personalized financial planning services. Once the customer's financial needs
have been identified, the Bank provides the customer with financial product or
service solutions designed to meet those needs. Management believes that the
ability to deliver such personalized service and advice will be one of the
primary competitive factors in the financial institutions industry in the
future. Accordingly, over the past few years the Bank has invested a substantial
amount of resources in developing its ability to offer a high level of
personalized service with an emphasis on financial planning and delivery of
financial advisory services that are responsive to a broad range of customer
needs.
To further support the corporate strategy, the Bank has recently expanded
the scope of lending and other financial services that it provides to its
customers. In the past, the Bank has focused primarily on its residential
mortgage lending business. As a result, its business has historically consisted
of attracting deposits from the general public through its retail banking
offices and applying those funds principally to the origination, retention,
servicing, investing in and selling first mortgage loans on single and
multi-family residential real estate. However, during the past several years,
the Bank has expanded the scope of its services by placing additional emphasis
on:
- consumer lending and small business, home equity, and commercial loans;
- lending funds to retail banking customers by means of home equity and
installment loans;
- originating loans secured by commercial property and multi-family
dwellings; and
- generating indirect dealer consumer loans used for the purchase of mobile
homes and automobiles.
Northeast Bancorp also offers to its customers financial planning,
investment services and all lines of insurance products through the Bank's
subsidiary, Northeast Financial Services Corporation. Northeast Financial
Services Corporation, which is located at Northeast Bancorp's headquarters in
Auburn, Maine, offers customers access to investment and annuity products
through an arrangement with Commonwealth Equity Services, Inc., an unaffiliated,
fully licensed New York securities firm, which licenses the brokers who sell
such products and services. It also offers a full line of insurance products to
customers through its relationships with several insurance agencies, including
one owned by Mr. Kendall, who is a director of Northeast Bancorp.
Trust services and employee benefit products are provided to Northeast
Bancorp customers through Northeast Trust, a division of the Bank. Since 1993,
employee benefit products were provided to Northeast Bancorp's customers through
FNEB, a division of the Bank. During fiscal 1999, Northeast Bancorp dissolved
FNEB because it did not attain sufficient revenue growth. These services are now
provided to customers through the Bank's trust department. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
The community banking strategy of Northeast Bancorp emphasizes the
development of long-term full banking relationships with customers at each
branch location by providing consistent, high quality service from:
- persons with local decision-making authority;
- employees who are familiar with the customers' needs, their business
environment and competitive demands;
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- employees who are able to develop and customize personalized financial
solutions that are tailored to the customers' needs.
We believe that our strategy of providing "one-stop shopping" for our
customers' financial needs, together with our community bank approach, will
continue to foster the development of profitable long-term relationships between
the Bank and its customers.
With the goal of providing a full range of banking services to its
customers and in an effort to develop strong long-term primary banking
relationships with businesses and individuals, the Bank has expanded its
commercial banking operations by selectively making commercial loans to small
and medium sized companies. In this regard, the Bank's business development
efforts have been directed towards full service credit packages and financial
services, as well as competitively priced mortgage packages. At June 30, 1999,
the Bank's loan portfolio consisted of 58% residential real estate mortgages,
17% commercial real estate mortgage, 11% commercial loans, and 14% consumer
loans. At June 30, 1999, the Bank's lending limit was approximately $4.0
million. To the extent that a customer's credit needs exceed these lending
limits, the Bank may seek participations in such loans with other banks.
MARKET AREA
Northeast Bancorp and the Bank are headquartered in Auburn, Maine with full
service branches located in Augusta, Bethel, Brunswick, Buckfield, Harrison,
Lewiston, Lisbon Falls, Mechanic Falls, Richmond, and South Paris, Maine. In
addition, the Bank maintains a facility in Falmouth, Maine, from which loan
applications are accepted and insurance, investment services and financial
planning services are offered. As a result of its recent acquisitions and
branching strategies, Northeast Bancorp's market areas cover western, central
and the mid-coastal regions of the State of Maine. Northeast Bancorp's market
areas are characterized by a diverse economy that have experienced moderate
growth in recent years.
In order to expand its geographic market and to diversify its uses of
funds, Northeast Bancorp has acquired two financial institutions in the State of
Maine and has opened new branches in strategic locations within its market area.
Northeast Bancorp will continue to evaluate other financial institutions as
potential acquisition candidates in geographic areas that management believes
would compliment its existing banking business.
MARKET FOR SERVICES AND COMPETITION
In its local markets, individuals and businesses are solicited through the
personal efforts of the directors and officers of both Northeast Bancorp and the
Bank. Management believes a locally-based independent bank is often perceived by
the local business community as possessing a clearer understanding of local
commerce and its needs. Consequently, Northeast Bancorp believes that it is able
to make prudent lending decisions to customers in its market areas more quickly
than its competitors without compromising asset quality or profitability.
In an effort to attract a broader base of long-term customer relationships
and diversity in its banking operations, Northeast Bancorp has recently expanded
its focus from primarily seeking residential loan customers to becoming a
"one-stop shopping" destination point for our customers' full financial needs.
Accordingly, during the past few years the Bank has significantly increased the
number and type of financial products, loans, and services that it makes
available to its customers.
Northeast Bancorp encounters strong competition in its market areas, both
in making loans and attracting deposits. The deregulation of the banking
industry and the widespread enactment of state laws which permit multi-bank
holding companies, as well as the availability of nationwide interstate banking,
has created a highly competitive environment for financial services providers.
In one or more aspects of its business, the Bank competes with other savings
banks, commercial banks, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, finance
companies, and other financial intermediaries operating in Maine and elsewhere.
Many of the Bank's primary competitors, some of which
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are affiliated with large bank holding companies or other larger financial-based
institutions, have substantially greater resources and have higher lending
limits.
The principal factors in competing for deposits are convenient office
locations, flexible hours, interest rates and services, while those relating to
loans are interest rates, the range of lending services offered and lending
fees. Additionally, Northeast Bancorp believes that an emphasis on personalized
financial planning and advice tailored to individual customer needs, together
with the local character of the Bank's business and its "community bank"
management philosophy will enhance its ability to compete successfully in its
market areas. Further, Northeast Bancorp now offers a wide range of financial
services to its customers, including not only basic loan and deposit services,
but also investment services, trust services, and insurance products. We believe
that our ability to provide such services and advice, and to provide the
financial services and products required by our customers, will be an attractive
alternative to consumers in our market area.
LENDING ACTIVITIES
GENERAL. The primary source of income generated by the Bank is from the
interest earned from the loan portfolio. The Bank maintains diversification when
considering the granting of loan requests.
The principal lending activities of the Bank are the origination and
purchase of conventional mortgages for the purpose of constructing, financing,
or re-financing one-to-four family residential properties and commercial
properties. The majority of the properties securing the mortgage loan portfolio
are located in the State of Maine. However, in an effort to diversify the
geographic scope of the real estate collateral held by it, the Bank does
purchase in the secondary market residential mortgage loans collateralized by
properties in other states. Interest rates and origination fees charged on loans
originated by the Bank are generally competitive with other financial
institutions and other mortgage originators in its general market area.
Although residential and commercial real estate lending remains a strong
component of the Bank's lending operations, consistent with its business
strategy Northeast Bancorp also actively seeks an increased volume of commercial
and consumer loans. Commercial loans are originated for commercial construction,
acquisition, remodeling, and general business purposes. In this regard, the
Bank, among other things, also originates loans to small businesses in
association with the Small Business Administration. Consumer loans include those
for the purchase of automobiles, boats, home improvements and personal
investments. Northeast Bancorp also pursues quality indirect lending through
local automobile dealerships.
RESIDENTIAL LENDING. The major component of the Bank's lending activities
consists of the origination of single-family residential mortgage loans
collateralized by owner-occupied property, most of which is located in its
primary service areas. The Bank offers a variety of mortgage loan products. Its
originations are generally for adjustable rate mortgages ("ARMs") or fixed rate
mortgage loans having a term of 15 years or 30 years amortized on a monthly
basis, with principal and interest due each month. Additionally, the Bank offers
second mortgage residential loans.
The Bank offers one-year ARMs with rate adjustments tied to the weekly
average rate of U.S. Treasury securities adjusted to a constant one-year
maturity with specified minimum and maximum interest rate adjustments. The
interest rates on a majority of these mortgages are adjusted yearly with
limitations on upward adjustments of 2% per adjustment period and 6% over the
life of the loan. The Bank also originates fixed-rate mortgage loans on
single-family residential real estate. The Bank generally charges a higher
interest rate if the property is not owner-occupied. It has been the Bank's
experience that the proportion of fixed-rate and adjustable-rate loan
originations depend in large part on the level of interest rates. As interest
rates fall, there is generally a reduced demand for ARMs and, as interest rates
rise, there is generally an increased demand for ARMs.
Fixed rate and adjustable rate mortgage loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 80% of appraised value. The Bank may, however, lend up to 95% of the
value of the property collateralizing the loan, but if such loans are required
to be made in excess of 80% of the value of the property, they must be insured
by private or federally guaranteed mortgage insurance. In the case of mortgage
loans, the Bank will procure mortgagee's title insurance to
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protect against defects in its lien on the property which may collateralize the
loan. The Bank in most cases requires title, fire, and extended casualty
insurance to be obtained by the borrower, and, where required by applicable
regulations, flood insurance. The Bank maintains its own errors and omissions
insurance policy to protect against loss in the event of failure of a mortgagor
to pay premiums on fire and other hazard insurance policies.
Although the contractual loan payment period for single-family residential
real estate loans is generally for a 15 to 30 year period, such loans often
remain outstanding for significantly shorter periods than their contractual
terms. In addition, the Bank charges no penalty for prepayment of mortgage
loans. Mortgage loans originated by the Bank customarily include a "due on sale"
clause giving the Bank the right to declare a loan immediately due and payable
in the event, among other matters, that the borrower sells or otherwise disposes
of the real property subject to a mortgage. In general, the Bank enforces due on
sale clauses. Borrowers are typically permitted to refinance or prepay loans at
their option without penalty.
The Bank generally applies the same underwriting criteria to residential
mortgage loans whether purchased or originated. In its loan purchases, the Bank
generally reserves the right to reject particular loans from a loan package
being purchased and does reject loans in a package that do not meet its
underwriting criteria. In connection with loan purchases, the Bank receives
various representations and warranties from the sellers of the loans regarding
the quality and characteristics of the loans. In determining whether to purchase
or originate a loan, the Bank assesses both the borrower's ability to repay the
loan and the adequacy of the proposed collateral. On originations, the Bank
obtains appraisals of the property securing the loan. On purchases, the Bank
reviews the appraisal obtained by the loan seller or originator. On purchases
and originations, the Bank reviews information concerning the income, financial
condition, employment and credit history of the applicant.
Northeast Bancorp has adopted written, non-discriminatory underwriting
standards for use in the underwriting and review of every loan considered for
origination or purchase. These underwriting standards are reviewed and approved
annually by its board of directors. Northeast Bancorp's underwriting standards
for fixed rate residential mortgage loans generally conform to standards
established by Fannie Mae ("FNMA") and the Federal Home Loan Mortgage
Corporation (the "FHLMC"). A loan application is obtained or reviewed by the
Bank's underwriters to determine the borrower's ability to repay, and
confirmation of the more significant information is obtained through the use of
credit reports, financial statements, and employment and other verifications.
The Bank generally uses appraisals to determine the value of collateral for
all loans it originates. When originating a real estate mortgage loan, the Bank
obtains a new appraisal of the property from an independent third party to
determine the adequacy of the collateral, and such appraisal is reviewed by one
of the underwriters. Otherwise, the collateral value is determined by reference
to the documentation contained in the original file.
The Bank also requires that a survey be conducted and title insurance be
obtained, insuring the priority of its mortgage lien. Pursuant to its
underwriting standards, the Bank generally requires private mortgage insurance
policies on newly originated mortgage loans with loan-to-value ratios greater
than 80%. All loans are reviewed by the Bank's underwriters to ensure that its
guidelines are met or that waivers are obtained in limited situations where
offsetting factors exist.
COMMERCIAL REAL ESTATE LENDING. The Bank originates both multi-family and
commercial real estate loans. Multi-family and commercial property loans
generally are made in amounts up to 80% of the lesser of the appraised value or
purchase price of the property. Although the largest multi-family or commercial
loan in Northeast Bancorp's portfolio at June 30, 1999 was approximately $2.1
million, the majority of such loans have balances under $500,000.
The Bank's permanent commercial real estate loans are secured by improved
property such as office buildings, medical facilities, retail centers,
warehouses, apartment buildings, condominiums, and other types of buildings,
which are located in its primary market area. Multi-family and commercial real
estate loans
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generally have fixed or variable interest rates indexed to FHLB rates with fixed
notes having terms of 3-5 years. Mortgage loan maturities have terms up to 15
years.
Loans secured by multi-family and commercial real estate generally are
larger and involve greater risks than one-to-four family residential mortgage
loans. Because payments on loans secured by multi-family and commercial
properties often are dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. Northeast Bancorp
seeks to minimize these risks in a variety of ways, including limiting the size
of its multi-family and commercial real estate loans and generally restricting
such loans to its primary market area. In determining whether to originate
multi-family or commercial real estate loans, Northeast Bancorp also considers
such factors as the financial condition of the borrower and the debt service
coverage of the property. Northeast Bancorp intends to continue to make
multi-family and commercial real estate loans as the market demands and economic
conditions permit.
COMMERCIAL LENDING. The Bank offers a variety of commercial loan services
including term loans, lines of credit, equipment, and receivables financing. A
broad range of short-to-medium term commercial loans, both collateralized and
uncollateralized, are made available to businesses for working capital
(including inventory and receivables), business expansion (including
acquisitions of real estate and improvements), and the purchase of equipment and
machinery. Equipment loans are typically originated on both a one year line of
credit basis and on a fixed-term basis ranging from one to five years. The
purpose of a particular loan generally determines its structure.
The Bank's commercial loans primarily are underwritten in Northeast
Bancorp's market areas on the basis of the borrowers' ability to service such
debt from income. As a general practice, the Bank takes as collateral a security
interest in any available real estate, equipment, or other chattel, although
such loans may be made on an uncollateralized basis. Collateralized working
capital loans are primarily collateralized by short-term assets whereas term
loans are primarily collateralized by long-term assets.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from the borrower's wages and other
income and which are collateralized by real property whose value tends to be
easily ascertainable, commercial loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of their business and
generally are collateralized by business assets, such as accounts receivable,
equipment, and inventory. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, the collateral underlying the loans, which may
depreciate over time, usually cannot be appraised with as much precision as
residential real estate, and may fluctuate in value based on the success of the
business.
CONSUMER LOANS. Consumer loans made by the Bank have included automobiles,
recreation vehicles, boats, second mortgages, home improvements, home equity
lines of credit, personal (collateralized and uncollateralized), and deposit
account collateralized loans. The Bank's consumer loan portfolio consists
primarily of loans to individuals for various consumer purposes, but includes
some business purpose loans which are payable on an installment basis. A
majority of these loans are for terms of less than 60 months and although
generally collateralized by liens on various personal assets of the borrower,
they may be originated without collateral. Consumer loans are made at fixed and
variable interest rates and may be made based on up to a 5 year amortization
schedule.
Consumer loans are attractive to Northeast Bancorp because they typically
have a shorter term and carry higher interest rates than that charged on other
types of loans. Consumer loans, however, do pose additional risks of
collectability when compared to traditional types of loans granted by commercial
banks such as residential mortgage loans. In many instances, the Bank is
required to rely on the borrower's ability to repay since the collateral may be
of reduced value at the time of collection. Accordingly, the initial
determination of the borrower's ability to repay is of primary importance in the
underwriting of consumer loans.
In 1998, the Bank entered the indirect automobile lending market. Indirect
automobile lending consists of automobile loans made by the Bank through the
purchase of contracts from automobile dealers. Generally,
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the Bank will obtain fixed-rate automobile loans indirectly through various
automobile dealerships located in its market areas. The indirect origination of
consumer loan products generally requires funding of dealer reserves. These
reserves are maintained for the benefit of the dealer who originated such loans,
but such funding is subject to performance of certain loan conditions. The
dealer is generally responsible to the Bank for the amount of the reserve only
if a loan giving rise to the reserve becomes delinquent or the loan has been
prepaid.
CONSTRUCTION LOANS. The Bank originates residential construction
contractor loans to finance the construction of single-family dwellings. Most of
the residential construction loans are made to individuals who intend to erect
owner-occupied housing on a purchased parcel of real estate. The Bank
construction loans to individuals typically range in size from $100,000 to
$200,000. Construction loans also are made to contractors to erect single-family
dwellings for resale. Construction loans are generally offered on the same basis
as other residential real estate loans, except that a larger percentage down
payment is typically required.
The Bank also may make residential construction loans to real estate
developers for the acquisition, development, and construction of residential
subdivisions. The Bank has limited involvement with this type of loan. Such
loans may involve additional risk attributable to the fact that funds will be
advanced to fund the project under construction, which is of uncertain value
prior to completion and because it is relatively difficult to evaluate
accurately the total amount of funds required to complete a project.
The Bank finances the construction of individual, owner-occupied houses on
the basis of written underwriting and construction loan management guidelines.
Construction loans are structured either to be converted to permanent loans with
the Bank at the end of the construction phase or to be paid off upon receiving
financing from another financial institution. Construction loans on residential
properties are generally made in amounts up to 80% of appraised value.
Construction loans to developers generally have terms of up to 12 months. Loan
proceeds on builders' projects are disbursed in increments as construction
progresses and as inspections warrant. The maximum loan amounts for construction
loans are based on the lesser of the current appraisal value or the purchase
price for the property.
Construction loans are generally considered to involve a higher degree of
risk than long-term financing collateralized by improved, occupied real estate.
A lender's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at the completion of
construction and estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, the lender could be
required to advance funds beyond the amount originally committed in order to
permit completion of the project. If the estimate of anticipated value proves to
be inaccurate, the lender may have collateral which has value insufficient to
assure full repayment.
Loans collateralized by subdivisions and multi-family residential real
estate generally are larger than loans collateralized by single-family,
owner-occupied housing and also generally involve a greater degree of risk.
Payments on these loans depend to a large degree on the results of operations
and management of the properties, and repayment of such loans may be more
subject to adverse conditions in the real estate market or the economy.
LOAN SOLICITATION AND PROCESSING
Loan originations are derived from a number of sources. Residential loan
originations can be attributed to real estate broker referrals, mortgage loan
brokers, direct solicitation by the Bank's loan officers, present savers and
borrowers, builders, attorneys, walk-in customers and, in some instances, other
lenders. Loan applications, whether originated through the Bank or through
mortgage brokers, are underwritten and closed based on the same standards, which
generally meet FNMA underwriting guidelines. Consumer and commercial real estate
loan originations emanate from many of the same sources. The legal lending limit
of the Bank, as of June 30, 1999, was approximately $4 million.
The loan underwriting procedures followed by the Bank conform to regulatory
specifications and are designed to assess the borrower's ability to make
principal and interest payments and the value of any assets or property serving
as collateral for the loan. Generally, as part of the process, a bank loan
officer meets with
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each applicant to obtain the appropriate employment and financial information as
well as any other required loan information. Upon receipt of the borrower's
completed loan application, the Bank then obtains reports with respect to the
borrower's credit record, and orders and reviews an appraisal of any collateral
for the loan (prepared for the Bank through an independent appraiser). The loan
information supplied by the borrower is independently verified. Loan officers or
other loan production personnel in a position to directly benefit monetarily
through loan solicitation fees from individual loan transactions do not have
approval authority. Once a loan application has been completed and all
information has been obtained and verified, the loan request is submitted to a
final review process. As part of the loan approval process, all uncollateralized
loans of $100,000 or more and all collateralized loans of $500,000 or more
require preapproval by the Bank's loan committee, which is currently comprised
of five directors of the Bank and meets on such basis as is deemed necessary to
promptly service loan demand. All loans of $2,000,000 or more require
preapproval by the Bank's Board of Directors, and borrowers requesting amounts
which will result in a loan relationship of $2,000,000 or more also must be
approved by the board of directors of the Bank.
Loan applicants are notified promptly of the decision of the Bank by
telephone and a letter. If the loan is approved, the commitment letter specifies
the terms and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required
collateral, and required insurance coverage. Prior to closing any long-term
loan, the borrower must provide proof of fire and casualty insurance on the
property serving as collateral which insurance must be maintained during the
full term of the loan. Title insurance is required on loans collateralized by
real property. Interest rates on committed loans are normally locked in at the
time of application for a 30 to 45 day period. The commitment issued at the time
of approval will be for the time remaining, based on the application date.
ACTIVITIES OF SUBSIDIARIES
Northeast Financial Services Corporation, a Maine corporation and
wholly-owned subsidiary of the Bank, was originally formed in 1982 as a vehicle
through which the Bank could participate in selected real estate development
projects. At June 30, 1999, investment in, and loans to, Northeast Financial
Services Corporation constituted 0.13% of Northeast Bancorp's total assets.
Generally, any proposed development project will be examined for its profit
potential and its ability to enhance the communities served by the Bank. At the
present time, there are no definitive plans for additional real estate
development projects.
Northeast Financial also supports the Bank's non-banking financial services
through its relationship with Commonwealth Financial Services, Inc., a fully
licensed New York securities firm, and a variety of insurance agencies,
including Kendall Insurance Agency, which allows the Bank to deliver insurance
products to its customers, and for which the Bank receives a flat fee from the
various relationships for referrals. Northeast Financial has not invested any
assets in its business relationship with Commonwealth.
EMPLOYEES
At June 30, 1999, Northeast Bancorp and the Bank together employed 128
full-time and 27 part-time employees. None of these employees are covered by a
collective bargaining agreement and we believe that our employee relations are
good.
PROPERTY OF NORTHEAST BANCORP
The principal executive and administrative offices of Northeast Bancorp and
the Bank are located at 232 Center Street, Auburn, Maine and consist of two
floors, containing a lobby, executive and customer service offices, teller
stations, and vault operations. These office facilities are subject to a lease
which expires in 2007, with an option to renew the lease for two additional
ten-year terms. This lease requires rental payments of $96,072 per year.
The Bank has 12 branching locations, including the banking facility located
at its executive offices. The branches located in Augusta (Western Avenue),
Bethel, Brunswick, Buckfield, Harrison, Lisbon, and Mechanic Falls, Maine, and
the facility located in Falmouth, Maine, are owned by the Bank in fee simple. In
addition to the Auburn facilities, the branches located in Augusta (Bangor
Street) Lewiston, and South
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Paris, Maine are leased by the Bank. The Bank also owns in fee simple certain
real property and improvements located in Auburn, Maine at which various
accounting and operations functions of Northeast Bancorp and the Bank are
performed. The facilities owned or occupied under lease by the Bank and its
subsidiaries are considered by management to be adequate.
LEGAL PROCEEDINGS
Northeast Bancorp and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, foreclose on loan defaults, claims involving the making
and servicing of real property loans, and other issues incidental to the Bank's
business. Management does not believe that there is any proceeding threatened or
pending against Northeast Bancorp or the Bank which, if determined adversely,
would have a material effect on the business or financial position of Northeast
Bancorp or the Bank.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Bank has had, and expects to have in the future, various loans and
other banking transactions in the ordinary course of business with the
directors, executive officers, and principal shareholders of the Bank and
Northeast Bancorp (or an associate of such person). All such transactions: (i)
have been and will be made in the ordinary course of business; (ii) have been
and will be made on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the time for comparable transactions
with unrelated persons; and (iii) in the opinion of management do not and will
not involve more than the normal risk of collectability or present other
unfavorable features. At June 30, 1999 and 1998, the total dollar amount of
extensions of credit to directors and executive officers identified above, and
their associates were $3,500,973 and $2,219,800, respectively, which represented
approximately 13.1% and 8.8% respectively, of total stockholders' equity.
In providing the Bank's customers with investment and insurance products,
certain directors of Northeast Bancorp have an interest in businesses which have
furnished such products to the Bank's customers on a non-exclusive basis.
Messrs. Goguen and Schiavi, directors of Northeast Bancorp, each hold a
22.5% equity interest, or an aggregate of 45%, in Saratoga Capital Management
("SCM"), a Delaware general partnership, which serves as the investment manager
of Saratoga Advantage Trust ("SAT"). SAT, an investment company organized under
the Investment Company Act of 1940, operates several mutual fund investments.
SCM has granted a license to the Bank's trust department to use the Saratoga
Capital Management Asset Allocation Software which assists its customers in
selecting an asset allocation mix which is tailored to the customers' specific
needs and investment goals. In addition, the SAT mutual funds are offered to the
trust department's customers on a non-exclusive basis. As a result of this
relationship, the trust department has placed approximately $14 million in SAT
mutual fund investments, which are indirectly under management by SCM. SCM
receives an annual asset allocation fee of 15 basis points, based on the
aggregate placement of funds in SAT portfolios, for the trust department's use
of its asset allocation software.
Except as described in this prospectus, outside of normal customer
relationships none of the directors or officers of Northeast Bancorp, and no
shareholder holding over 5% of the common stock of Northeast Bancorp and no
corporations or firms with which such persons or entities are associated,
currently maintains or has maintained since the beginning of the last fiscal
year, any significant business or personal relationship with Northeast or the
Bank, other than such as arises by virtue of such position or ownership interest
in Northeast Bancorp or the Bank.
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DESCRIPTION OF PREFERRED SECURITIES
The Trust will issue the preferred securities and the common securities
under the terms of the trust agreement for the Trust. The preferred securities
will represent preferred undivided beneficial interests in the assets of the
Trust which entitle holders of the preferred securities, in certain
circumstances, to a preference over common securities with respect to
distributions and amounts payable on redemption or liquidation, as well as other
benefits as described in the trust agreement.
This summary of the provisions of the preferred securities and the trust
agreement is not complete. You should read the form of trust agreement which is
filed as an exhibit to the registration statement of which this prospectus is a
part. Wherever particular defined terms of the trust agreement are referred to
in this prospectus, such defined terms are incorporated herein by reference. A
copy of the form of the trust agreement is available upon request from the
trustees.
GENERAL
The preferred securities will be limited to $10,500,000 aggregate
liquidation amount (as defined in the trust agreement) outstanding (which amount
may be increased by up to $1,575,000 aggregate liquidation amount of preferred
securities for exercise of the underwriter's over-allotment option). See
"Underwriting." The preferred securities will rank equally, and payments will be
made pro rata, with the common securities except as described under
"--Subordination of Common Securities." The junior subordinated debentures will
be registered in the name of the Trust and held by the property trustee in trust
for the benefit of the holders of the preferred securities and common
securities. The guarantee that Northeast will execute will be a guarantee on a
subordinated basis with respect to the preferred securities but will not
guarantee payment of distributions or amounts payable on redemption or
liquidation of the preferred securities when the Trust does not have funds on
hand available to make such payments. See "Description of Guarantee."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. You will receive distributions on each preferred
security at the annual rate of % of the stated liquidation amount of $10
per preferred security. The liquidation amount is the amount that holders of the
preferred securities are entitled to receive if the Trust is dissolved and its
assets are distributed to the holders of its securities. The Trust will pay
distributions quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, to record holders at the close of business on the 15th
day of the month in which the relevant distribution payments occur. Each date on
which distributions will be paid is referred to as a distribution date in this
prospectus. Distributions on the preferred securities will be cumulative.
Distributions will accumulate from , 1999. The first distribution
date for the preferred securities will be , 1999. The amount of
distributions payable for any period less than a full distribution period will
be computed on the basis of a 360-day year of twelve 30-day months and the
actual days elapsed in a partial month in such period. Distributions payable for
each full distribution period will be computed by dividing the rate per annum by
four. If any date on which distributions are payable on the preferred securities
is not a business day, then payment will be made on the next succeeding day that
is a business day (without any additional interest or other payment because of
the delay), except that, if such business day falls in the next calendar year,
such payment will be made on the immediately preceding business day.
EXTENSION PERIOD. So long as Northeast Bancorp is not in default on the
interest payments on the junior subordinated debentures, Northeast Bancorp has
the right to defer the payment of interest on the junior subordinated debentures
at any time, or from time to time, by extending the interest payment period for
an "extension period" not exceeding 20 consecutive quarters with respect to each
extension period, provided that no extension period may extend beyond the
maturity date of the junior subordinated debentures. As a consequence of any
such deferral, the Trust also would defer quarterly distributions on the
preferred securities during the extension period. Distributions payable to
holders of the preferred securities will continue to accumulate additional
distributions thereon at an annual rate of %, compounded quarterly during
the extension period. Such additional distributions will be computed on the
basis of a 360-day year of twelve 30-
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day months and the actual days elapsed in a partial month in such period.
Additional distributions payable for each full distribution period will be
computed by dividing the rate per annum by four. The term "distributions"
includes any such additional distributions payable unless otherwise stated.
If Northeast Bancorp defers interest payments on the junior subordinated
debentures, Northeast Bancorp would be prohibited from: (1) making any payment
of principal of, or interest or premium, if any, on or repaying, repurchasing,
or redeeming any debt securities of Northeast Bancorp that rank equally in all
respects with or junior in interest to the junior subordinated debentures, or
(2) declaring or paying any dividends or distributions on, or redeeming,
purchasing, acquiring or making a liquidation payment with respect to, any of
Northeast Bancorp's capital stock.
These prohibitions, however, do not apply to:
- repurchases, redemptions, or other acquisitions of shares of capital
stock of Northeast Bancorp in connection with any employment contract,
benefit plan, or other similar arrangement, a dividend reinvestment or
stockholder stock purchase plan, or the issuance of Northeast Bancorp
capital stock (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered
into prior to the applicable extension period;
- a reclassification, exchange, or conversion of any class or series of
Northeast Bancorp's capital stock (or any capital stock of its
subsidiaries) for any class or series of Northeast Bancorp's capital
stock, or of any class or series of Northeast Bancorp's indebtedness for
any class or series of Northeast Bancorp's capital stock;
- the purchase of fractional interests in shares of Northeast Bancorp's
capital stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged;
- any declaration of a dividend in connection with any stockholder's rights
plan, or the issuance of rights, stock or other property under any
stockholder's rights plan, or the redemption or repurchase of rights
pursuant thereto; or
- any dividend in the form of stock, warrants, options or other rights
where the dividend stock or the stock issuable upon exercise of such
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks equally with or junior to such stock.
Before the end of an extension period, Northeast Bancorp may further defer
the payment of interest. No extension period may exceed 20 consecutive quarterly
periods or extend beyond the maturity date of the junior subordinated
debentures. Upon the termination of any such extension period and the payment of
all amounts then due, Northeast Bancorp may elect to begin a new extension
period. No interest shall be due and payable during an extension period, except
at the end of the extension period. Northeast Bancorp must give the trustees
notice of its election of an extension period at least one business day prior to
the earlier of (1) the date the distributions on the preferred securities would
have been payable but for the election to begin the extension period and (2) the
date the property trustee is required to give notice to holders of the preferred
securities of the record date or the date such distributions are payable, but in
any event not less than one business day prior to the record date. The property
trustee will give notice to holders of the preferred securities of Northeast
Bancorp's election to begin a new extension period. Subject to the foregoing,
there is no limitation on the number of times that Northeast Bancorp may elect
to begin an extension period. See "Description of Junior Subordinated
Debentures -- Option To Extend Interest Payment Period" and "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
Northeast Bancorp currently does not intend to exercise its right to defer
payments of interest by extending the interest payment period on the junior
subordinated debentures.
SOURCE OF DISTRIBUTIONS. The Trust's funds available for distribution to
you will be limited to payments received under the junior subordinated
debentures in which the Trust will invest the proceeds from the issuance and
sale of its preferred securities and common securities. See "Description of
Junior Subordinated Debentures." The Trust pays distributions through the
property trustee. The property trustee holds amounts received from the junior
subordinated debentures in the payment account for the benefit of the holders of
the
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preferred securities and the common securities. If Northeast Bancorp does not
make payments on the junior subordinated debentures, the Trust will not have
funds available to pay distributions or other amounts payable on the preferred
securities. The payment of distributions and other amounts payable on the
preferred securities (if and to the extent the Trust has funds legally available
for and cash sufficient to make such payments) is guaranteed by Northeast
Bancorp. See "Description of Guarantee."
REDEMPTION
GENERAL. The junior subordinated debentures will mature on ,
2029. Northeast Bancorp will have the right, subject to receipt of prior
regulatory approval if then required, to redeem the junior subordinated
debentures (1) on or after , 2004, in whole at any time or in part
from time to time, or (2) in whole, but not in part, at any time within 90 days
following the occurrence and during the continuation of a Tax Event, Investment
Company Event, or Capital Treatment Event (each as defined below). See
"-- Liquidation Distribution Upon Dissolution." A redemption of the junior
subordinated debentures would cause a mandatory redemption of a proportionate
amount of the preferred securities and common securities at the redemption
price.
If Northeast Bancorp repays or redeems the junior subordinated debentures,
Northeast Bancorp must give the property trustee not less than 30 nor more than
60 days notice so that the property trustee can redeem a proportionate amount of
the preferred securities and the common securities. The redemption price for
each preferred security shall equal $10 plus accumulated but unpaid
distributions through the redemption date and the related amount of the premium,
if any, paid by Northeast Bancorp upon the concurrent redemption of such junior
subordinated debentures. See "Description of Junior Subordinated
Debentures -- Redemption." If less than all the junior subordinated debentures
are to be repaid or redeemed on a redemption date, then the proceeds from the
repayment or redemption shall be allocated to the redemption pro rata of the
preferred securities and the common securities.
If a Tax Event, an Investment Company Event, or a Capital Treatment Event
occurs and Northeast Bancorp does not elect to:
- redeem the junior subordinated debentures and thereby cause a mandatory
redemption of the preferred securities and the common securities, or
- liquidate the Trust and distribute the junior subordinated debentures to
holders of the preferred securities and the common securities as
described below under "-- Liquidation Distribution Upon Dissolution,"
such preferred securities will remain outstanding and Northeast Bancorp will pay
the additional amounts described below upon the occurrence of a Tax Event.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after the date of issuance of
the preferred securities, there is more than an insubstantial risk that:
- the Trust is, or will be within 90 days of the delivery of such opinion,
subject to United States federal income tax with respect to income
received or accrued on the junior subordinated debentures;
- interest payable by Northeast Bancorp on the junior subordinated
debentures is not, or within 90 days of the delivery of such opinion,
will not be, deductible by Northeast Bancorp, in whole or in part, for
United States federal income tax purposes; or
- the Trust is, or will be within 90 days of the delivery of such opinion,
subject to more than a de minimis amount of other taxes, duties, or other
governmental charges.
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See "Certain Federal Income Tax Consequences -- Pending Tax Litigation
Affecting the Preferred Securities" for a discussion of pending United States
Tax Court litigation that, if decided adversely to the taxpayer, could give rise
to a Tax Event, which may permit Northeast Bancorp to redeem the junior
subordinated debentures prior to , 2004.
If a Tax Event described in the first or third bullet points described
above has occurred and is continuing and the Trust is holding all of the junior
subordinated debentures, Northeast Bancorp will pay on the junior subordinated
debentures any additional amounts as may be necessary in order that the amount
of distributions then deemed payable by the Trust on the outstanding preferred
securities and common securities will not be reduced as a result of any
additional taxes, duties, or other governmental charges to which the Trust has
become subject as a result of a Tax Event.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a written change (including any
announced prospective change) in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that the Trust is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act, which change or prospective change becomes effective or
would become effective, as the case may be, on or after the date that the
preferred securities are originally issued.
"Capital Treatment Event" means the reasonable determination by Northeast
Bancorp that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
preferred securities, there is more than an insubstantial risk that Northeast
Bancorp will not be entitled to treat an amount equal to the liquidation amount
of the preferred securities as Tier 1 Capital (or the then equivalent thereof)
for the purposes of capital adequacy guidelines of the Office of Thrift
Supervision or any successor regulatory authority with jurisdiction over savings
and loan holding companies, or any capital adequacy guidelines as then in effect
and applicable to Northeast Bancorp. Currently no capital adequacy guidelines
apply to savings and loan holding companies such as Northeast Bancorp.
REDEMPTION PROCEDURES
Preferred securities redeemed on each redemption date shall be redeemed at
a price equal to $10 plus accumulated but unpaid distributions, with the
applicable proceeds from the contemporaneous redemption of the junior
subordinated debentures. Redemptions of the preferred securities shall be made
and the redemption price will be payable on each redemption date only to the
extent that the Trust has funds on hand available for the payment of such
redemption price. See also " -- Subordination of Common Securities."
The property trustee will mail to each holder of the preferred securities a
notice of redemption at least 30 days but not more than 60 days before the
redemption date. If the Trust gives a notice of redemption of the preferred
securities, then, by 12:00 noon, Eastern time, on the redemption date, to the
extent funds are available, in the case of preferred securities held in
book-entry form, the property trustee will deposit irrevocably with DTC funds
sufficient to pay the applicable redemption price and will give DTC irrevocable
instructions and authority to pay the redemption price to the beneficial owners
of the preferred securities. With respect to preferred securities not held in
book-entry form, the property trustee, to the extent funds are available, will
irrevocably deposit with the paying agent for the preferred securities funds
sufficient to pay the applicable redemption price and will give such paying
agent irrevocable instructions and authority to pay the redemption price to the
holders of the preferred securities upon surrender of their certificates
evidencing the preferred securities. Notwithstanding the foregoing,
distributions payable on or prior to the redemption date for any preferred
securities called for redemption shall be payable to the holders of the
preferred securities on the relevant record dates for the related distribution
dates.
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Once the notice of redemption is given and funds deposited as required,
then upon the date of such deposit all rights of the holders of such preferred
securities so called for redemption will cease, except the right of the holders
of such preferred securities to receive the redemption price, but without
interest on such redemption price. At that time, those preferred securities will
cease to be outstanding. If any date fixed for redemption is not a business day,
then payment of the redemption price will be made on the next succeeding day
which is a business day (without any interest or other payment in respect of any
such delay), except that, if such business day falls in the next calendar year,
such payment will be made on the immediately preceding business day. If payment
of the redemption price for the preferred securities called for redemption is
improperly withheld or refused and not paid either by the Trust or by Northeast
Bancorp under the guarantee as described under "Description of Guarantee," then
distributions on such preferred securities will continue to accumulate at the
then applicable rate, from the redemption date originally established by the
Trust to the date of actual payment. In this case, the actual payment date will
be considered the date fixed for redemption for purposes of calculating the
redemption price.
Subject to applicable law (including, without limitation, United States
federal securities laws), Northeast Bancorp or its affiliates may at any time
and from time to time purchase outstanding preferred securities by tender, in
the open market, or by private agreement, and may resell such securities.
If the Trust redeems less than all the preferred securities and common
securities, then the aggregate liquidation amount of such preferred securities
to be redeemed will be allocated pro rata to the preferred securities and the
common securities based upon the relative liquidation amounts of such classes.
The particular preferred securities to be redeemed shall be selected on a pro
rata basis not more than 60 days prior to the redemption date by the property
trustee from the outstanding preferred securities not previously called for
redemption, or in accordance with DTC's customary procedures, if the preferred
securities are then held in the form of a global preferred security. The
property trustee shall promptly notify the securities registrar for the
preferred securities in writing of the preferred securities selected for
redemption and, in the case of any preferred securities selected for partial
redemption, the liquidation amount of the preferred securities to be redeemed.
For all purposes of the trust agreement, unless the context otherwise requires,
all provisions relating to the redemption of preferred securities shall relate,
in the case of any preferred securities redeemed or to be redeemed only in part,
to the portion of the aggregate liquidation amount of preferred securities which
has been or is to be redeemed.
Unless Northeast Bancorp defaults in paying the redemption price on the
junior subordinated debentures, on and after the redemption date, interest will
cease to accrue on the junior subordinated debentures or portions thereof called
for redemption. Unless payment of the redemption price in respect to the
preferred securities is withheld or refused and not paid by the Trust or
Northeast Bancorp pursuant to the guarantee, distributions will cease to
accumulate on the preferred securities or portions of such securities called for
redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, and the
liquidation distribution in respect of, the preferred securities and common
securities, as applicable, shall be made on a proportionate basis, based on the
liquidation amount of such preferred securities and common securities. However,
if an event of default has occurred and is continuing on any distribution date
or redemption date due to the failure of Northeast Bancorp to pay any amounts in
respect of the junior subordinated debentures, then no payments may be made on
the common securities, unless all unpaid amounts due on the preferred securities
have been paid in full or provided for, as appropriate, including payment in
full in cash of all accumulated and unpaid distributions on all the outstanding
preferred securities and payment of the full amount of such redemption price on
all the outstanding preferred securities then called for redemption.
In the case of any event of default under the trust agreement with respect
to the preferred securities (as described below under "-- Events of Default;
Notice") resulting from an event of default under the indenture with respect to
the junior subordinated debentures (as described below under "Description of the
Junior Subordinated Debentures -- Debenture Events of Default"), Northeast
Bancorp, as the holder of the
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common securities, will have no right to act with respect to any such event of
default under the trust agreement until the effects of all such events of
default with respect to such preferred securities have been cured, waived, or
otherwise eliminated. See "-- Events of Default; Notice" and "Description of
Junior Subordinated Debentures -- Debenture Events of Default." Until all such
events of default under the trust agreement with respect to the preferred
securities have been so cured, waived, or otherwise eliminated, the property
trustee will act solely on behalf of the holders of the preferred securities and
not on behalf of the holders of the common securities, and only the holders of
the preferred securities will have the right to direct the property trustee to
act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amount payable on the preferred securities in the event of any
liquidation of the Trust is $10 per preferred security plus accumulated and
unpaid distributions, subject to certain exceptions, which may be in the form of
a distribution of such amount in junior subordinated debentures.
Northeast Bancorp, as holder of all the outstanding common securities, has
the right at any time to dissolve the Trust and, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, cause the
junior subordinated debentures to be distributed to the holders of the preferred
securities and common securities in liquidation of the Trust.
Pursuant to the trust agreement, the Trust will automatically dissolve upon
expiration of its term and will dissolve earlier on the first to occur of:
- certain events of bankruptcy, dissolution, or liquidation of Northeast
Bancorp or another holder of the common securities;
- the distribution of a proportionate amount of the junior subordinated
debentures to the holders of the preferred securities and the common
securities, if the holders of common securities have given written
direction to the property trustee to dissolve the Trust (which direction,
subject to the foregoing restrictions, is optional and wholly within the
discretion of the holders of common securities);
- the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction; and
- the redemption of all the preferred securities in connection with the
redemption of all the junior subordinated debentures as described under
"-- Redemption".
If an early dissolution of the Trust occurs as described in any of the
first three bullet points above, the Trust will be liquidated by the property
trustee as expeditiously as the property trustee determines to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to the holders of the preferred securities and the
common securities a proportionate amount of the junior subordinated debentures,
unless such distribution is not practical.
If distribution of the junior subordinated debentures is not practical, the
holders of the preferred securities and the common securities will be entitled
to receive out of the assets of the Trust available for distribution to holders,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, an amount equal to, in the case of holders of preferred
securities, the aggregate of the liquidation amount plus accumulated and unpaid
distributions thereon to the date of payment. If such liquidation distribution
can be paid only in part because the Trust has insufficient assets available to
pay in full the aggregate liquidation distribution, then the amounts payable
directly by the Trust on its preferred securities shall be paid on a pro rata
basis.
The holders of the common securities will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
preferred securities, except that if an event of default under the junior
subordinated debentures has occurred and is continuing the preferred securities
shall have a priority over the common securities. See "-- Subordination of
Common Securities."
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After the liquidation date fixed for any distribution of junior
subordinated debentures in exchange for preferred securities:
- the preferred securities will no longer be deemed to be outstanding;
- DTC or its nominee, as the registered holder of preferred securities,
will receive a registered global certificate or certificates representing
the junior subordinated debentures to be delivered upon such distribution
with respect to preferred securities held by DTC or its nominee; and
- any certificates representing the preferred securities not held by DTC or
its nominee will be deemed to represent the junior subordinated
debentures having a principal amount equal to the stated liquidation
amount of the preferred securities and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid distributions
on the preferred securities until such certificates are presented to the
security registrar for the preferred securities for transfer or
reissuance.
If Northeast Bancorp does not redeem the junior subordinated debentures
prior to maturity or liquidate the Trust and distribute the junior subordinated
debentures to holders of the preferred securities, then the preferred securities
will remain outstanding until the junior subordinated debentures are paid and
the liquidation distribution has been made to the holders of the preferred
securities.
There can be no assurance as to the market prices for the preferred
securities or the junior subordinated debentures that may be distributed in
exchange for preferred securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the preferred securities that an investor may
purchase, or the junior subordinated debentures that the investor may receive on
dissolution and liquidation of the Trust, may trade at a discount to the price
that was paid to purchase the preferred securities offered hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
trust agreement with respect to the preferred securities (whatever the reason
for such event of default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule, or regulation of any administrative or governmental
body):
- the occurrence of an event of default with respect to the junior
subordinated debentures (see "Description of Junior Subordinated
Debentures -- Debenture Events of Default");
- default by the Trust in paying any distribution when it becomes due and
payable, and continuation of such default for a period of 30 days;
- default by the Trust in paying any redemption price of any preferred
security or common security when it becomes due and payable;
- default in performing, or breach, in any material respect, of any
covenant or warranty of the trustees in the trust agreement (other than a
covenant or warranty a default in the performance of which or the breach
of which is dealt with the immediately preceding two bullet points), and
continuation of such default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the trustees
and Northeast Bancorp by the holders of at least 25% in aggregate
liquidation amount of the outstanding preferred securities, a written
notice specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" under the trust
agreement; or
- the occurrence of certain events of bankruptcy or insolvency with respect
to the property trustee if a successor property trustee has not been
appointed within 90 days of such event.
Within five business days after an event of default actually known to the
property trustee occurs, the property trustee will transmit notice of such event
of default to the holders of common and preferred securities and the
administrators, unless such event of default has been cured or waived. Northeast
Bancorp, as depositor, and the administrators are required to file annually with
the property trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the trust
agreement.
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If an event of default with respect to the junior subordinated debentures
has occurred and is continuing as a result of any failure by Northeast Bancorp
to pay any amounts in respect of the junior subordinated debentures when due,
the preferred securities will have a preference over the common securities with
respect to payments of any amounts as described above. See "-- Subordination of
Common Securities," "-- Liquidation Distribution Upon Dissolution" and
"Description of Junior Subordinated Debentures -- Debenture Events of Default."
REMOVAL OF TRUSTEES; APPOINTMENT OF SUCCESSORS
The holders of at least a majority in aggregate liquidation amount of the
outstanding preferred securities may remove any trustee for cause or, if an
event of default with respect to the junior subordinated debentures has occurred
and is continuing, with or without cause. If a trustee is removed by the holders
of the outstanding preferred securities, the successor may be appointed by the
holders of at least 25% in aggregate liquidation amount of preferred securities.
If a trustee resigns, such trustee will appoint its successor. If a trustee
fails to appoint a successor, the holders of at least 25% in aggregate
liquidation amount of the outstanding preferred securities may appoint a
successor. If a successor has not been appointed by such holders, then any
holder of preferred securities or the common securities or the other trustee may
petition a court in the State of Delaware to appoint a successor. Any Delaware
trustee must meet the applicable requirements of Delaware law. Any property
trustee must be a national or state-chartered bank, and at the time of
appointment have securities rated in one of the three highest rating categories
by a nationally recognized statistical rating organization and have capital and
surplus of at least $50,000,000. No resignation or removal of a trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
trust agreement.
The holders of the preferred securities will not in any event, however,
have the right to vote, appoint, remove, or replace the administrators of the
Trust. Such voting rights are vested exclusively in Northeast Bancorp as holder
of all of the common securities.
MERGER OR CONSOLIDATION OF TRUSTEES
Any entity into which the property trustee or the Delaware trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion, or consolidation to which such trustee is
a party, or any entity succeeding to all or substantially all the corporate
trust business of such trustee, will be the successor of such trustee under the
trust agreement, provided such entity is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS, OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, convert into,
amalgamate, or be replaced by, or convey, transfer, or lease its properties and
assets substantially as an entirety to, any entity, except as described below or
as otherwise set forth in the trust agreement. The Trust may, at the request of
the holders of the common securities and with the consent of the holders of at
least a majority in aggregate liquidation amount of the outstanding preferred
securities, merge with or into, consolidate, convert into, amalgamate, or be
replaced by or convey, transfer, or lease its properties and assets
substantially as an entirety to a trust organized as such under the laws of any
state, so long as:
- such successor entity either (1) expressly assumes all the obligations of
the Trust with respect to the preferred securities, or (2) substitutes
for the preferred securities other securities having substantially the
same terms as the preferred securities so long as the substitute
preferred securities have the same priority as the preferred securities
with respect to distributions and payments upon liquidation, redemption,
and otherwise;
- a trustee of such successor entity, possessing the same powers and duties
as the property trustee, is appointed to hold the junior subordinated
debentures;
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- such merger, consolidation, conversion, amalgamation, replacement,
conveyance, transfer, or lease does not cause the preferred securities
(including any substitute preferred securities) to be downgraded by any
nationally recognized statistical rating organization, if then rated;
- such merger, consolidation, conversion, amalgamation, replacement,
conveyance, transfer, or lease does not adversely affect the rights,
preferences, and privileges of the holders of the preferred securities
(including any substitute preferred securities) in any material respect;
- such successor entity has a purpose substantially identical to that of
the Trust;
- prior to such merger, consolidation, conversion, amalgamation,
replacement, conveyance, transfer, or lease, the Trust has received an
opinion from independent counsel experienced in such matters to the
effect that (1) such merger, consolidation, conversion, amalgamation,
replacement, conveyance, transfer, or lease does not adversely affect the
rights, preferences, and privileges of the holders of the preferred
securities (including any substitute preferred securities) in any
material respect, and (2) following such merger, consolidation,
conversion, amalgamation, replacement, conveyance, transfer, or lease,
neither the Trust nor such successor entity will be required to register
as an investment company under the Investment Company Act; and
- Northeast Bancorp or any permitted successor or assignee owns all the
common securities of such successor entity and guarantees the obligations
of such successor entity under the substitute preferred securities at
least to the extent provided by the guarantee.
Notwithstanding the foregoing, the Trust may not, except with the consent
of holders of 100% in aggregate liquidation amount of the preferred securities,
consolidate, convert into, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to, any other entity or permit any other entity to consolidate, amalgamate,
merge with or into, or replace it, if such consolidation, conversion,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Trust or the successor entity to be taxable as a corporation for United States
federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided above and under " -- Removal of Trustees; Appointment of
Successors" and "Description of Guarantee -- Amendments and Assignment" and as
otherwise required by law and the trust agreement, the holders of the preferred
securities will have no voting rights.
The trust agreement may be amended from time to time by the holders of a
majority of the common securities and the property trustee, without the consent
of the holders of the preferred securities, to:
- cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the trust agreement, provided that any such amendment does not adversely
affect in any material respect the interests of any holder of common and
preferred securities; or
- modify, eliminate, or add to any provisions of the trust agreement to
such extent as may be necessary to ensure that the Trust will not be
taxable as a corporation for United States federal income tax purposes at
any time that any preferred securities or common securities are
outstanding or to ensure that the Trust will not be required to register
as an "investment company" under the Investment Company Act.
Any such amendments of the trust agreement will become effective when notice of
such amendment is given to the holders of preferred securities and the common
securities.
The trust agreement may be amended by the holders of a majority of the
common securities and the property trustee with:
- the consent of holders representing not less than a majority in aggregate
liquidation amount of the outstanding preferred securities, and
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- receipt by the trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the trustees in
accordance with such amendment will not cause the Trust to be taxable as
a corporation for United States federal income tax purposes or affect the
Trust's exemption from status as an "investment company" under the
Investment Company Act.
However, without the consent of each holder of preferred securities or the
common securities affected thereby, the trust agreement may not be amended to:
- change the amount or timing of any distribution on the preferred
securities or the common securities or otherwise adversely affect the
amount of any distribution required to be made in respect of the
preferred securities or the common securities as of a specified date; or
- restrict the right of a holder of preferred securities or the common
securities to institute suit for the enforcement of any such payment on
or after such date.
As long as any junior subordinated debentures are held by the Trust, the
property trustee will not:
- direct the time, method, and place of conducting any proceeding for any
remedy available to the property trustee, or execute any trust or power
conferred on the debenture trustee with respect to the junior
subordinated debentures;
- waive any past default that is waivable under Section 5.13 of the
indenture;
- exercise any right to rescind or annul a declaration that the principal
of all of the junior subordinated debentures shall be due and payable; or
- consent to any amendment, modification, or termination of the indenture
or the junior subordinated debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the
holders of at least a majority in aggregate liquidation amount of the
outstanding preferred securities, except that, if a consent under the
indenture would require the consent of each holder of junior subordinated
debentures affected thereby, no such consent will be given by the
property trustee without the prior consent of each holder of the
preferred securities.
The property trustee may not revoke any action previously authorized or
approved by a vote of the holders of the preferred securities except by
subsequent vote of the holders of the preferred securities. The property trustee
will notify each holder of preferred securities of any notice of default with
respect to the junior subordinated debentures. In addition to obtaining the
approvals of the holders of the preferred securities described above, before
taking any of the actions listed above, the property trustee will obtain an
opinion of counsel experienced in such matters to the effect that the Trust will
not be taxable as a corporation for United States federal income tax purposes on
account of such action.
Any required approval of holders of preferred securities may be given at a
meeting of holders of preferred securities convened for such purpose or pursuant
to written consent. The property trustee will cause a notice of any meeting at
which holders of preferred securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each registered holder of preferred securities in the manner set forth in the
trust agreement.
No vote or consent of the holders of preferred securities will be required
to redeem and cancel preferred securities in accordance with the trust
agreement.
Notwithstanding that holders of preferred securities are entitled to vote
or consent under any of the circumstances described above, any of the preferred
securities that are owned by Northeast Bancorp, the trustees, or any affiliate
of Northeast Bancorp or any trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
EXPENSES AND TAXES
In the indenture, Northeast Bancorp, has agreed to pay all debts and other
obligations (other than with respect to the preferred securities) and all costs
and expenses of the Trust (including costs and expenses
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relating to the organization of the Trust, the fees and expenses of the
Trustees, and the costs and expenses relating to the operation of the Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than United States withholding taxes) to which the Trust might become subject.
These obligations of Northeast Bancorp under the indenture are for the benefit
of, and shall be enforceable by, any creditor to whom any such debts,
obligations, costs, expenses, and taxes are owed whether or not such creditor
has received notice thereof. Any such creditor may enforce such obligations of
Northeast Bancorp directly against Northeast Bancorp, and Northeast Bancorp has
irrevocably waived any right or remedy to require that any creditor take any
action against the Trust or any other person before proceeding against Northeast
Bancorp. Northeast Bancorp also has agreed in the indenture to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
BOOK ENTRY, DELIVERY, AND FORM
The preferred securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of a DTC nominee. Unless and until it is exchangeable
in whole or in part for the preferred securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of DTC or a nominee of such successor.
Ownership of beneficial interests in a global security will be limited to
participants that have accounts with DTC or its nominee or persons that may hold
interests through such participants. Northeast Bancorp expects that, upon the
issuance of a global security, DTC will credit, on its book-entry registration
and transfer system, the participants' accounts with their respective principal
amounts of the preferred securities represented by such global security.
Ownership of beneficial interests in such global security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of participants) and on the records
of participants (with respect to interests of the preferred securities held
through the participants). Beneficial owners of the preferred securities will
not receive written confirmation from DTC of their purchase, but are expected to
receive written confirmations from the participants through which the beneficial
owner entered into the transaction. Transfers of ownership interests will be
accomplished by entries on the books of participants acting on your behalf.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the preferred securities represented by such global security
for all purposes under the trust agreement. Except as provided below, owners of
beneficial interests in a global security will not be entitled to receive
physical delivery of the preferred securities in definitive form and will not be
considered the owners or holders of the preferred securities under the trust
agreement. Accordingly, persons owning a beneficial interest in such a global
security must rely on the procedures of DTC and, if such person is not a
participant, on the procedures of the participant through which such person owns
its interest, to exercise any rights of a holder of preferred securities under
the trust agreement. Northeast Bancorp understands that, under DTC's existing
practices, in the event that Northeast Bancorp requests any action of holders,
or an owner of a beneficial interest in such a global security desires to take
any action which a holder is entitled to take under the trust agreement, DTC
would authorize the participants holding the relevant beneficial interests to
take such action, and such participants would authorize beneficial owners owning
the preferred securities through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Redemption notices will also be sent to DTC. If less than all of the preferred
securities are being redeemed, Northeast Bancorp understands that it is DTC's
existing practice to determine by lot the amount of the interest of each
participant to be redeemed.
Distributions on the preferred securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such preferred securities.
Neither Northeast Bancorp, nor the trustees, the administrators, any paying
agent, or any other agent of Northeast Bancorp or the trustees will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such preferred securities or for maintaining, supervising, or
reviewing any records relating to such beneficial ownership interests.
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Disbursements of distributions to participants shall be the responsibility
of DTC. DTC's practice is to credit participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participant and not of DTC, Northeast Bancorp, the
trustees, the paying agent, or any other agent of Northeast Bancorp, subject to
any statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the preferred securities at any time by giving reasonable notice to
Northeast Bancorp or the trustees. If DTC notifies Northeast Bancorp that it is
unwilling to continue as such, or if it is unable to continue or ceases to be a
clearing agency registered under the Exchange Act and a successor depository is
not appointed by the Northeast Bancorp within ninety days after receiving such
notice or becoming aware that DTC is no longer so registered, Northeast Bancorp
will issue the preferred securities in definitive form upon registration of
transfer of, or in exchange for, such global security. In addition, Northeast
Bancorp may at any time and in its sole discretion determine not to have the
preferred securities represented by one or more global securities and, in such
event, will issue preferred securities in definitive form in exchange for all of
the global securities representing such preferred securities.
DTC has advised Northeast Bancorp and the Trust as follows:
- DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act;
- DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between
participants through electronic book entry changes to accounts of its
participants, thereby eliminating the need for physical movement of
certificates;
- participants include securities brokers and dealers (such as the
underwriter), banks, trust companies and clearing corporations and may
include certain other organizations;
- certain of such participants (or their representatives), together with
other entities, own DTC; and
- indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through, or maintain a
custodial relationship with a participant, either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the preferred securities will be made by the underwriter in
immediately available funds.
Secondary trading in preferred securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the preferred
securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the preferred securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the preferred securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the preferred securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable distribution dates
or, if the preferred securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto as such address
appears on the securities register for the preferred securities and common
securities. The paying agent will initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to the
administrators. The paying agent will be permitted to resign as paying agent
upon 30 days' written notice to
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the property trustee and the administrators. If the property trustee is no
longer the paying agent, the property trustee will appoint a successor (which
must be a bank or trust company reasonably acceptable to the administrators) to
act as paying agent.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as registrar and transfer agent for the
preferred securities.
Registration of transfers of preferred securities will be effected without
charge by or on behalf of the Trust, but only upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required to register or cause to be registered
the transfer of the preferred securities after the preferred securities have
been called for redemption.
OBLIGATIONS AND DUTIES OF THE PROPERTY TRUSTEE
The property trustee, other than during the occurrence and continuance of
an event of default under the trust agreement, undertakes to perform only such
duties as are specifically set forth in the trust agreement and, after such
event of default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the property trustee is under no obligation to exercise any
of the powers vested in it by the trust agreement at the request of any holder
of preferred securities unless it is offered reasonable indemnity against the
costs, expenses, and liabilities that might be incurred thereby.
For information concerning the relationships between Bankers Trust Company,
which will serve as the property trustee, and Northeast Bancorp, see
"Description of Junior Subordinated Debentures -- Information Concerning the
Debenture Trustee."
MISCELLANEOUS
The administrators and the property trustee are authorized and directed to
conduct the affairs of and to operate the Trust in such a way that: (1) the
Trust will not be deemed to be an "investment company" required to be registered
under the Investment Company Act or taxable as a corporation for United States
federal income tax purposes, and (2) the junior subordinated debentures will be
treated as indebtedness of Northeast Bancorp for United States federal income
tax purposes. In this connection, the property trustee and the holders of common
securities are authorized to take any action, not inconsistent with applicable
law, the certificate of trust of the Trust, or the trust agreement, that the
property trustee and the holders of common securities determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
preferred securities.
Holders of the preferred securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, or mortgage or pledge any of
its assets.
GOVERNING LAW
The trust agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures will be issued under the indenture
between Bankers Trust Company, acting as the debenture trustee, and Northeast
Bancorp. The indenture is qualified as an indenture under the Trust Indenture
Act of 1939. This summary of certain terms and provisions of the junior
subordinated debentures and the indenture is not complete. Investors should read
the form of indenture that is filed as an exhibit to the registration statement
of which this prospectus is a part. Whenever particular defined terms of the
indenture (as amended or supplemented from time to time) are referred to in this
prospectus, such defined terms are incorporated herein by reference. A copy of
the form of indenture is available from the debenture trustee upon request.
GENERAL
Concurrently with the issuance of the preferred securities, the Trust will
invest the proceeds thereof, together with the consideration paid by Northeast
Bancorp for the common securities, in the junior subordinated debentures issued
by Northeast Bancorp. The junior subordinated debentures are unsecured debt
obligations under the indenture and are limited in aggregate principal amount to
$ . The junior subordinated debentures will bear interest, accruing
from , 1999, at the annual rate of % of the principal amount
thereof. Northeast Bancorp will pay interest quarterly in arrears on March 31,
June 30, September 30, and December 31 of each year, to the person in whose name
each junior subordinated debenture is registered at the close of business on the
15th day of the month in which the relevant interest payment is payable (whether
or not a business day). The first interest payment date for the junior
subordinated debenture will be , 1999. It is anticipated that, until
the liquidation, if any, of the Trust, each junior subordinated debenture will
be registered in the name of the Trust and held by the property trustee in trust
for the benefit of you and holders of the common securities.
The amount of interest payable for any period less than a full interest
period will be computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. The amount of
interest payable for any full interest period will be computed by dividing the
rate per annum by four. If any date on which interest is payable on the junior
subordinated debentures is not a business day, then payment of the interest
payable on such date will be made on the next succeeding day that is a business
day (without any interest or other payment in respect of any such delay), or, if
such business day falls in the next calendar year, such payment will be made on
the immediately preceding business day.
Accrued interest that is not paid on the applicable interest payment date
will bear additional interest on the amount thereof (to the extent permitted by
law) at the rate per annum of %, compounded quarterly and computed on the
basis of a 360-day year of twelve 30-day months and the actual days elapsed in a
partial month in such period. The amount of additional interest payable for any
full interest period will be computed by dividing the rate per annum by four.
The term "interest" as used herein includes: (1) quarterly interest
payments, (2) interest on quarterly interest payments not paid on the applicable
interest payment date, and (3) any additional sums Northeast Bancorp pays on the
junior subordinated debentures following a Tax Event (as defined under
"Description of Preferred Securities -- Redemption") that may be required so
that distributions payable by the Trust will not be reduced by any additional
taxes, duties, or other governmental charges resulting from such Tax Event. The
interest payment provisions for the junior subordinated debenture correspond
with the distribution provisions with the preferred securities. See "Description
of Preferred Securities -- Distributions".
The junior subordinated debentures will mature on , 2029, subject
to the right of Northeast Bancorp to shorten the maturity date once at any time
to any date not earlier than , 2004, subject to receipt of any prior
regulatory approval if then required under applicable capital guidelines or
regulatory policies. In the event Northeast Bancorp elects to shorten the
maturity of the junior subordinated debentures, Northeast Bancorp will give
notice to the registered holders of the junior subordinated debentures, the
debenture trustee, and the Trust of such shortening no less than 90 days prior
to the effectiveness thereof. The property trustee must give notice to the
holders of the preferred securities and the common securities of the shortening
of the stated maturity at least 30 but not more than 60 days before such date.
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The junior subordinated debentures will be unsecured and will rank junior
and be subordinate in right of payment to all senior indebtedness of Northeast
Bancorp. The junior subordinated debentures will not be subject to a sinking
fund. The indenture does not limit the ability of Northeast Bancorp to incur or
issue other secured or unsecured debt, including senior indebtedness, whether
under the indenture or any existing or other indenture that Northeast Bancorp
may enter into in the future or otherwise. See "-- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as no event of default under the junior subordinated debenture has
occurred and is continuing, Northeast Bancorp has the right to defer interest
payments in the junior subordinated debentures at any time, or from time to
time, by extending the interest payment period for a period not exceeding 20
consecutive quarters, but not beyond the stated maturity of the junior
subordinated debentures. During any such extension period Northeast Bancorp
shall have the right to make partial payments of interest on any interest
payment date. At the end of such extension period, Northeast Bancorp must pay
all interest then accrued and unpaid (together with interest thereon at the
annual rate of %, compounded quarterly and computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period, to the extent permitted by applicable law). The amount of
additional interest payable for any full interest period will be computed by
dividing the rate per annum by four. During an extension period, interest will
continue to accrue and holders of junior subordinated debentures (or holders of
preferred securities while such securities are outstanding) will be required to
accrue and recognize interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
During any such extension period, Northeast Bancorp may not:
- make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Northeast Bancorp that
rank equally in all respects with or junior in interest to the junior
subordinated debentures; or
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of its capital
stock, except that we may:
(a) repurchase, redeem, or make other acquisitions of shares of capital
stock of Northeast Bancorp in connection with any employment contract,
benefit plan, or other similar arrangement with or for the benefit of any
one or more employees, officers, directors, or consultants, in connection
with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of Northeast Bancorp (or
securities convertible into or exercisable for such capital stock) as
consideration in an acquisition transaction entered into prior to the
applicable extension period;
(b) take any necessary actions in connection with any reclassification,
exchange, or conversion of any class or series of Northeast Bancorp's
capital stock (or any capital stock of a subsidiary of Northeast Bancorp)
for any class or series of Northeast Bancorp's capital stock or of any
class or series of Northeast Bancorp's indebtedness for any class or series
of Northeast Bancorp's capital stock;
(c) purchase fractional interests in shares of Northeast Bancorp's
capital stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged;
(d) declare a dividend in connection with any stockholder's rights plan,
or the issuance of rights, stock or other property under any stockholders
rights plan, or the redemption or repurchase of rights pursuant thereto; or
(e) declare a dividend in the form of stock, warrants, options or other
rights where the dividend stock or the stock issuable upon exercise of such
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks equally with or junior to such stock.
Before the end of any such extension period, Northeast Bancorp may further
defer the payment of interest, provided that no extension period may exceed 20
consecutive quarterly periods or extend beyond the
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maturity date of the junior subordinated debentures. Upon the termination of any
such extension period and the payment of all amounts then due, Northeast Bancorp
may elect to begin a new extension period subject to the above conditions. No
interest shall be due and payable during an extension period, except at the end
of the extension period. Northeast Bancorp must give the trustees notice of its
election of such extension period at least one business day prior to the earlier
of: (1) the date the distributions on the preferred securities would have been
payable but for the election to begin such extension period, and (2) the date
the property trustee is required to give notice to holders of the preferred
securities of the record date or the date such distribution is payable, but in
any event not less than one business day prior to such record date. The property
trustee will give notice to holders of the preferred securities of Northeast
Bancorp's election to begin a new extension period. There is no limitation on
the number of times that Northeast Bancorp may elect to begin an extension
period.
REDEMPTION
Northeast Bancorp may redeem the junior subordinated debentures prior to
maturity at its option (1) on or after , 2004, in whole at any time or
in part from time to time, or (2) in whole, but not in part, at any time within
90 days following the occurrence and during the continuation of a Tax Event,
Investment Company Event, or Capital Treatment Event (each as defined under
"Description of Preferred Securities -- Redemption"). In either case, the
redemption price will equal the outstanding principal amount on the junior
subordinated debentures to be redeemed, plus any accrued and unpaid interest,
including any additional interest on any additional sums paid by Northeast
Bancorp following a Tax Event as described under "-- Additional Sums". The
proceeds of any such redemption will be used by the Trust to redeem the
preferred securities.
Northeast Bancorp will mail a notice of redemption at least 30 days but not
less than 60 days before the redemption date to each holder of the junior
subordinated debentures to be redeemed at its registered address. Unless
Northeast Bancorp defaults in paying the redemption price for the junior
subordinated debentures, on and after the redemption date interest will cease to
accrue on such junior subordinated debentures or portions of the junior
subordinated debentures called for redemption.
ADDITIONAL SUMS
For so long as the Trust is the holder of all junior subordinated
debentures, if the Trust is required to pay any additional taxes, duties, or
other governmental charges as a result of the occurrence of a Tax Event,
Northeast Bancorp will pay as additional sums on the junior subordinated
debentures such amounts as may be required so that the net amounts received and
retained by the Trust after paying additional taxes, duties, or other
governmental charges will not be less than the amount the Trust would have
received had such additional taxes, duties, or governmental charges not been
imposed. See "Description of Preferred Securities -- Redemption."
REGISTRATION, DENOMINATION, AND TRANSFER
The junior subordinated debentures will initially be registered in the name
of the Trust. If the junior subordinated debentures are distributed to holders
of preferred securities, it is anticipated that the depositary arrangements for
the junior subordinated debentures will be substantially identical to those in
effect for the preferred securities. See "Description of Preferred
Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
Northeast Bancorp within 90 days of receipt of notice from DTC to such effect,
Northeast Bancorp will cause the junior subordinated debentures to be issued in
definitive form.
Payments on junior subordinated debentures represented by a global security
will be made to Cede & Co., the nominee for DTC, as the registered holder of the
junior subordinated debentures, as described under "Description of Preferred
Securities -- Book Entry, Delivery and Form." If junior subordinated debentures
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are issued in certified form, principal and interest will be payable, the
transfer of the junior subordinated debentures will be registrable, and junior
subordinated debentures will be exchangeable for junior subordinated debentures
of other authorized denominations of a like aggregate principal amount, at the
corporate trust office of the debenture trustee in New York, New York or at the
offices of any paying agent or transfer agent appointed by Northeast Bancorp,
provided that payment of interest may be made at the option of Northeast Bancorp
by check mailed to the address of the persons entitled thereto. However, a
holder of $1 million or more in aggregate principal amount of junior
subordinated debentures may receive payments of interest (other than interest
payable at the stated maturity) by wire transfer of immediately available funds
upon written request to the debenture trustee not later than 15 calendar days
prior to the date on which the interest is payable.
Junior subordinated debentures are issuable only in registered form without
coupons in integral multiples of $10. The junior subordinated debentures will be
exchangeable for other junior subordinated debentures of like tenor, of any
authorized denominations, and of a like aggregate principal amount.
Junior subordinated debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
indenture or at the office of any transfer agent designated by Northeast Bancorp
for such purpose without service charge and upon payment of any taxes and other
governmental charges as described in the indenture. Northeast Bancorp will
appoint the debenture trustee as securities registrar under the indenture.
Northeast Bancorp may at any time designate additional transfer agents with
respect to the junior subordinated debentures.
In the event of any redemption, neither Northeast Bancorp nor the debenture
trustee will be required to:
- issue, register the transfer of, or exchange junior subordinated
debentures during a period beginning at the opening of business 15 days
before the day of selection for redemption of the junior subordinated
debentures to be redeemed and ending at the close of business on the day
of mailing of the relevant notice of redemption, or
- register the transfer or exchange of any junior subordinated debentures
so selected for redemption, except, in the case of any junior
subordinated debentures being redeemed in part, any portion thereof not
to be redeemed.
Any monies deposited with the debenture trustee or any paying agent, or
then held by Northeast Bancorp in trust, for the payment of the principal of
(and premium, if any) or interest on any junior subordinated debenture and
remaining unclaimed for two years after the principal (and premium, if any) or
interest has become due and payable shall, at the request of Northeast Bancorp,
be repaid to Northeast Bancorp and the holder of such junior subordinated
debenture shall thereafter look, as a general unsecured creditor, only to
Northeast Bancorp for payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS; CERTAIN COVENANTS OF THE COMPANY
Northeast Bancorp has covenanted that at any time (1) there has occurred
any event (a) of which Northeast Bancorp has actual knowledge that with the
giving of notice or the lapse of time, or both, would constitute an event of
default under the junior subordinated debentures, and (b) that Northeast Bancorp
has not taken reasonable steps to cure, (2) if the junior subordinated
debentures are held by the Trust, Northeast Bancorp is in default with respect
to its payment of any obligations under the guarantee, or (3) Northeast Bancorp
has given notice of its election of an extension period as provided in the
junior subordinated indenture and has not rescinded such notice, or such
extension period, or any extension thereof, is continuing, then Northeast
Bancorp will not:
- make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Northeast Bancorp that
rank equally in all respects with or junior in interest to the junior
subordinated debentures; or
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- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of Northeast
Bancorp's capital stock of Northeast Bancorp, except that Northeast
Bancorp may:
(a) repurchase, redeem, or make other acquisitions of shares of capital
stock of Northeast Bancorp in connection with any employment contract,
benefit plan, or other similar arrangement with or for the benefit of any
one or more employees, officers, directors, or consultants, in connection
with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of Northeast Bancorp (or
securities convertible into or exercisable for such capital stock) as
consideration in an acquisition transaction entered into prior to the
applicable extension period or other event referred to below;
(b) take any necessary action in connection with any reclassification,
exchange, or conversion of any class or series of Northeast Bancorp's
capital stock (or any capital stock of any subsidiary of Northeast Bancorp)
for any class or series of Northeast Bancorp's capital stock or of any
class or series of Northeast Bancorp's indebtedness for any class or series
of Northeast Bancorp's capital stock;
(c) purchase fractional interests in shares of Northeast Bancorp's
capital stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged;
(d) declare a dividend in connection with any stockholder's rights plan,
or the issuance of rights, stock or other property under any stockholder's
rights plan, or redeem or repurchase rights pursuant thereto; or
(e) declare a dividend in the form of stock, warrants, options, or other
rights where the dividend stock or the stock issuable upon exercise of such
warrants, options, or other rights is the same stock as that on which the
dividend is being paid or ranks equally with or junior to such stock.
Northeast Bancorp has covenanted in the indenture:
- to continue to hold, directly or indirectly, 100% of the common
securities, provided that certain successors that are permitted pursuant
to the indenture may succeed to Northeast Bancorp's ownership of the
common securities;
- as holder of the common securities, not to voluntarily dissolve, wind-up,
or liquidate the Trust, other than:
(a) in connection with a distribution of junior subordinated debentures
to the holders of the preferred securities in liquidation of the Trust; or
(b) in connection with certain mergers, consolidations, conversions, or
amalgamations permitted by the trust agreement; and
- to use reasonable efforts, consistent with the terms and provisions of
the trust agreement, to cause the Trust to continue not to be taxable as
a corporation for United States federal income tax purposes.
MODIFICATION OF INDENTURE
Northeast Bancorp and the debenture trustee may, from time to time without
the consent of any of the holders of the outstanding junior subordinated
debentures, amend, waive, or supplement the provisions of the indenture to:
- evidence the succession of another corporation or association to
Northeast Bancorp and the assumption by such person of the obligations of
Northeast Bancorp under the junior subordinated debentures;
- add further covenants, restrictions, or conditions for the protection of
holders of the junior subordinated debentures;
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- cure ambiguities or correct the junior subordinated debentures in the
case of defects or inconsistencies in the provisions thereof, so long as
any such cure or correction does not adversely affect the interest of the
holders of the junior subordinated debentures in any material respect;
- facilitate the issuance of the junior subordinated debentures in
certified or other definitive form;
- evidence or provide for the appointment of a successor debenture trustee;
or
- qualify, or maintain the qualification of, the indenture under the Trust
Indenture Act.
The indenture contains provisions permitting Northeast Bancorp and the
debenture trustee, with the consent of the holders of not less than a majority
in principal amount of the junior subordinated debentures, to modify most of the
terms of the indenture. However, each holder of the outstanding junior
subordinated debentures affected by any proposed modification must agree to:
- change the stated maturity date of the junior subordinated debentures;
- reduce the principal amount of the junior subordinated debentures;
- reduce the rate of interest on the junior subordinated debentures or any
premium payable upon the redemption thereof, or change the place of
payment where, or the currency in which, any such amount is payable;
- impair the right to institute suit for the enforcement of any junior
subordinated debenture; or
- reduce the percentage of principal amount of junior subordinated
debentures, the holders of which are required to consent to any such
modification of the indenture.
Furthermore, so long as any of the preferred securities remain outstanding,
no such modification may be made that adversely affects the holders of such
preferred securities in any material respect, and no termination of the
indenture may occur, and no waiver of any event of default under the junior
subordinated debentures or compliance with any covenant under the indenture may
be effective, without the prior consent of the holders of at least a majority of
the aggregate liquidation amount of the outstanding preferred securities unless
and until the principal of (and premium, if any, on) the junior subordinated
debentures and all accrued and unpaid interest thereon have been paid in full
and certain other conditions are satisfied.
DEBENTURE EVENTS OF DEFAULT
The indenture provides that any of the following events with respect to the
junior subordinated debentures that has occurred and is continuing constitutes
an event of default with respect to the junior subordinated debentures:
- failure to pay any interest on the junior subordinated debentures when
due and continuance of such default for a period of 30 days (subject to
the deferral of any due date in the case when Northeast Bancorp extends
any interest payment);
- failure to pay any principal of, or premium, if any, on the junior
subordinated debentures when due whether at maturity, upon redemption, by
a declaration, or otherwise;
- failure to observe or perform in any material respect certain other
covenants contained in the indenture for 90 days after written notice to
Northeast Bancorp from the debenture trustee or the holders of at least
25% in aggregate outstanding principal amount of the outstanding junior
subordinated debentures; or
- Northeast Bancorp consents to the appointment of a receiver or other
similar official in any liquidation, insolvency, or similar proceeding
with respect to Northeast Bancorp or all or substantially all its
property; or a court or other governmental agency shall enter a decree or
order appointing a receiver or similar official and such decree or order
shall remain unstayed and undischarged for a period of 60 days.
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As described in "Description of Preferred Securities -- Events of Default;
Notice," the occurrence of an event of default in respect of the junior
subordinated debentures also will constitute an event of default in respect of
the preferred securities and the common securities.
The holders of at least a majority in aggregate principal amount of
outstanding junior subordinated debentures have the right to direct the time,
method, and place of conducting any proceeding for any remedy available to the
debenture trustee. The debenture trustee, or the holders of not less than 25% in
aggregate principal amount of outstanding junior subordinated debentures, may
declare the principal due and payable immediately upon an event of default under
the junior subordinated debentures, and, should the debenture trustee or such
holders of junior subordinated debentures fail to make such declaration, the
holders of at least 25% in aggregate liquidation amount of the outstanding
preferred securities shall have such right. The holders of a majority in
aggregate principal amount of outstanding junior subordinated debentures may
annul such declaration and waive the default:
- if all defaults (other than the non-payment of the principal of junior
subordinated debentures which has become due solely by such acceleration)
have been cured or waived, and
- a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration, together with the costs of
the debenture trustee, has been deposited with the debenture trustee.
Should the holders of junior subordinated debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
liquidation amount of the outstanding preferred securities shall have such
right.
The holders of at least a majority in aggregate principal amount of the
outstanding junior subordinated debentures affected thereby may, on behalf of
the holders of all the junior subordinated debentures, waive any past default,
except a default in the payment of principal or premium, if any, or interest
(unless this default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the debenture trustee) or a default in respect of a covenant
or provision which under the indenture cannot be modified or amended without the
consent of the holder of each outstanding junior subordinated debenture affected
by the default. See " -- Modification of Junior Subordinated Indenture."
Northeast Bancorp is required to file annually with the debenture trustee a
certificate as to whether or not Northeast Bancorp is in compliance with all the
conditions and covenants applicable to it under the indenture.
If an event of default in respect of the junior subordinated debentures
occurs and is continuing, the property trustee will have the right to declare
the principal of, and the interest on, the junior subordinated debentures, and
any other amounts payable under the indenture, to be due and payable and to
enforce its other rights as a creditor with respect to the junior subordinated
debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
Registered holders of preferred securities may sue Northeast Bancorp
directly for payment to such holders of amounts owed on the junior subordinated
debentures equal to the aggregate liquidation amount of the preferred securities
held by such holder if:
- An event of default under the junior subordinated debentures has occurred
and is continuing, and
- such event is attributable to the failure of Northeast Bancorp to pay
interest on or principal of the junior subordinated debentures when due.
In addition, if holders of at least 25% in liquidation amount of the
preferred securities direct the property trustee to enforce its rights under the
indenture but the property trustee does not enforce its rights as directed,
holders of 25% in liquidation amount of the preferred securities may sue
Northeast Bancorp directly to enforce the property trustee rights.
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In connection with such direct lawsuit, Northeast Bancorp will have a right
of set-off under the indenture to the extent of any payment made by Northeast
Bancorp to the holders of such preferred securities in any such lawsuit.
Northeast Bancorp may not amend the indenture to remove the right to bring a
direct action against Northeast Bancorp without the prior written consent of all
of the outstanding preferred securities.
You will not be able to exercise directly any remedies available to the
holders of the junior subordinated debentures except under the circumstances
described in the preceding paragraphs. See "Description of Preferred
Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS, AND OTHER TRANSACTIONS
The indenture provides that Northeast Bancorp may not consolidate with or
merge into any other entity, or convey, transfer, or lease its properties and
assets substantially as an entirety to any entity, and no entity may consolidate
with or merge into Northeast Bancorp, or convey, transfer or lease its
properties and assets substantially as an entirety to Northeast Bancorp, unless:
- in the event Northeast Bancorp consolidates with or merges into another
entity or conveys or transfers its properties and assets substantially as
an entirety to any entity, the successor entity is organized under the
laws of the United States or any state or the District of Columbia, and
such successor entity expressly assumes the obligations of Northeast
Bancorp in respect of the junior subordinated debentures;
- immediately after giving effect thereto, no event of default with respect
to the junior subordinated debentures, and no event which, after notice
or lapse of time or both, would constitute an event of default with
respect to the junior subordinated debentures, has occurred and is
continuing; and
- certain other conditions as prescribed in the indenture are satisfied.
The provisions of the indenture do not afford holders of the junior
subordinated debentures protection in the event of a highly leveraged or other
transaction involving Northeast Bancorp that may adversely affect holders of the
junior subordinated debentures.
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and Northeast Bancorp will
be deemed to have satisfied and discharged the indenture when:
- all junior subordinated debentures not previously delivered to the
debenture trustee for cancellation (1) have become due and payable, or
(2) will become due and payable at the stated maturity date within one
year;
- Northeast Bancorp deposits or causes to be deposited with the debenture
trustee funds, in trust, for the purpose and in an amount sufficient to
pay and discharge the entire indebtedness on the junior subordinated
debentures not previously delivered to the debenture trustee for
cancellation, for the principal, premium, if any, and interest to the
date of the deposit or to the stated maturity date or redemption date;
and
- Northeast Bancorp has paid all other sums payable by it under indenture
and Northeast Bancorp has delivered applicable certificates and opinions
that indicate that Northeast Bancorp has complied with all of its
obligations.
SUBORDINATION
The junior subordinated debentures will be subordinate and junior in right
of payment, to the extent set forth in the indenture, to all senior indebtedness
(as defined below) of Northeast Bancorp. If Northeast Bancorp defaults in the
payment of any principal, premium, if any, or interest, if any, or any other
amount payable on any senior indebtedness when the same becomes due and payable,
whether at maturity or at a date fixed for redemption or by declaration of
acceleration or otherwise, then, unless and until such default has
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been cured or waived, or has ceased to exist or all senior indebtedness has been
paid, no direct or indirect payment (in cash, property, securities, by set-off
or otherwise) may be made or agreed to be made on the junior subordinated
debentures, or in respect of any redemption, repayment, retirement, purchase, or
other acquisition of any of the junior subordinated debentures.
As used herein, "senior indebtedness" means, whether recourse is to all or
a portion of the assets of Northeast Bancorp and whether or not contingent:
- every obligation of Northeast Bancorp for money borrowed;
- every obligation of Northeast Bancorp evidenced by bonds, debentures,
notes, or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses;
- every reimbursement obligation of Northeast Bancorp with respect to
letters of credit, bankers' acceptances, or similar facilities issued for
the account of Northeast Bancorp;
- every obligation of Northeast Bancorp issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
- every capital lease obligation of Northeast Bancorp;
- every obligation of Northeast Bancorp for claims (as defined in Section
101(4) of the United States Bankruptcy Code of 1978) in respect of
derivative products such as interest and foreign exchange rate contracts,
commodity contracts, and similar arrangements; and
- every obligation of the type referred to above of another person and all
dividends of another person the payment of which, in either case,
Northeast Bancorp has guaranteed or is responsible or liable, directly or
indirectly, as obligor or otherwise.
However, senior indebtedness shall not include the following:
- any obligations which, by their terms, are expressly stated to rank
equally in right of payment with, or to not be superior in right of
payment to, the junior subordinated debentures;
- any senior indebtedness of Northeast Bancorp which when incurred and
without respect to any election under Section 1111(b) of the United
States Bankruptcy Code of 1978, was without recourse to Northeast
Bancorp;
- any indebtedness of Northeast Bancorp to any of its subsidiaries;
- indebtedness to any executive officer or director of Northeast Bancorp;
or
- any indebtedness in respect of debt securities issued to any trust, or a
trustee of such trust, partnership or other entity affiliated with
Northeast Bancorp that is a financing entity of Northeast Bancorp in
connection with the issuance of such financing entity of securities that
are similar to the preferred securities.
As of June 30, 1999, the senior indebtedness of Northeast Bancorp was
approximately $687,500. All senior indebtedness (including any interest thereon
accruing after the commencement of any proceeding described below) shall first
be paid in full before any payment or distribution, whether in cash, securities,
or other property, is made on the account of the junior subordinated debentures
in the event of:
- certain events of bankruptcy, dissolution, or liquidation of Northeast
Bancorp or another holder of the common securities:
- any proceeding for the liquidation, dissolution, or other winding-up of
Northeast Bancorp, voluntary or involuntary, whether or not involving
insolvency or bankruptcy proceedings;
- any assignment by Northeast Bancorp for the benefit of creditors; or
- any other marshaling of the assets of Northeast Bancorp.
In such event, any payment or distribution on account of the junior subordinated
debentures, whether in cash, securities, or other property, that would otherwise
(but for the subordination provisions) be payable or
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deliverable in respect of the junior subordinated debentures will be paid or
delivered directly to the holders of senior indebtedness in accordance with the
priorities then existing among such holders until all senior indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to senior indebtedness, the holders of junior subordinated
debentures, together with the holders of any obligations of Northeast Bancorp
ranking on a parity with the junior subordinated debentures, will be entitled to
be paid from the remaining assets of Northeast Bancorp the amounts at the time
due and owing on the junior subordinated debentures and such other obligations
before any payment or other distribution, whether in cash, property, or
otherwise, will be made on account of any capital stock or obligations of
Northeast Bancorp ranking junior to the junior subordinated debentures and such
other obligations. If any payment or distribution on account of the junior
subordinated debentures of any character or any security, whether in cash,
securities or other property is received by any holder of any junior
subordinated debentures in contravention of any of the terms hereof and before
all the senior indebtedness has been paid in full, such payment or distribution
or security will be received in trust for the benefit of, and must be paid over
or delivered and transferred to, the holders of the senior indebtedness at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all senior indebtedness remaining
unpaid to the extent necessary to pay all such senior indebtedness in full.
By reason of such subordination, in the event of the insolvency of
Northeast Bancorp, holders of senior indebtedness may receive more, ratably, and
holders of the junior subordinated debentures may receive less, ratably, than
the other creditors of Northeast Bancorp. Such subordination will not prevent
the occurrence of any event of default in respect of the junior subordinated
debentures.
Further, because Northeast Bancorp is a holding company, the creditors of
its subsidiaries also will have priority over Northeast Bancorp and you in any
distribution of its subsidiaries' assets in a bankruptcy, liquidation,
reorganization, or dissolution, except to the extent that Northeast Bancorp is
recognized as a creditor of its subsidiaries. The junior subordinated debentures
will be effectively subordinated to all existing and future liabilities of
Northeast Bancorp's subsidiaries, and you should look only to Northeast
Bancorp's assets for payments on the junior subordinated debentures.
The indenture places no limitation on the amount of additional senior
indebtedness that may be incurred by Northeast Bancorp. Northeast Bancorp
expects from time to time to incur additional senior indebtedness.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The debenture trustee has and is subject to all the duties and
responsibilities specified with respect to the debenture trustee under the Trust
Indenture Act. Subject to such provisions, the debenture trustee is under no
obligation to exercise any of the powers vested in it by the indenture at the
request of any holder of junior subordinated debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred by such request. The debenture trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the debenture trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
Bankers Trust Company, the debenture trustee, may serve from time to time
as trustee under other indentures or trust agreements with Northeast Bancorp or
its subsidiaries relating to other issues of their securities. In addition,
Northeast Bancorp and certain of its affiliates may have other banking
relationships with Bankers Trust Company and its affiliates.
GOVERNING LAW
The indenture and the junior subordinated debentures will be governed by
and construed in accordance with the laws of the State of New York.
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DESCRIPTION OF GUARANTEE
The guarantee will be executed and delivered by Northeast Bancorp
concurrently with the issuance of preferred securities by the Trust for your
benefit. Bankers Trust Company will act as guarantee trustee under the
guarantee. The guarantee trustee will hold the guarantee for the benefit of the
holders of the preferred securities. This summary of certain provisions of the
guarantee is not complete. Investors should read the form of guarantee that is
filed as an exhibit to the registration statement of which this prospectus is a
part. Whenever particular defined terms of the guarantee are referred to in this
prospectus, such defined terms are incorporated herein by reference. A copy of
the form of guarantee is available upon request from the guarantee trustee.
GENERAL
The guarantee will be an irrevocable guarantee of payment on a subordinated
basis of the Trust's obligations under the preferred securities, but will apply
only to the extent that the Trust has funds sufficient to make such payments,
and is not a guarantee of collection.
In accordance with the guarantee, Northeast Bancorp irrevocably and
unconditionally agrees to pay in full on a subordinated basis, to the extent set
forth in the guarantee and described herein, the Guarantee Payments (as defined
below) to the holders of the preferred securities, as and when due, regardless
of any defense, right of set-off, or counterclaim that the Trust may have or
assert, other than the defense of payment. The following payments on the
preferred securities (the "Guarantee Payments"), to the extent not paid by or on
behalf of the Trust, will be covered by the guarantee:
- any accrued and unpaid distributions required to be paid on such
preferred securities, to the extent that the Trust has funds on hand
available to make the payment;
- the redemption price with respect to any preferred securities called for
redemption, to the extent that the Trust has funds on hand available to
make the payment; and
- upon a voluntary or involuntary dissolution, winding-up, or liquidation
of the Trust (unless the junior subordinated debentures are distributed
to holders of the preferred securities), the lesser of:
(a) the aggregate of the liquidation amount and all accumulated and
unpaid distributions to the date of payment, to the extent that the
Trust has funds on hand available to make payment, and
(b) the amount of assets of the Trust remaining available for
distribution to holders of the preferred securities on liquidation
of the Trust.
The obligation of Northeast Bancorp to make a Guarantee Payment may be satisfied
by direct payment of the required amounts by Northeast Bancorp to you or by
causing the Trust to pay such amounts to you.
The guarantee does not apply to any payment of distributions due if the
Trust lacks funds legally available for payment. If Northeast Bancorp does not
make payments on the junior subordinated debentures held by the Trust, the Trust
will not be able to pay any distributions on the preferred securities and will
not have funds legally available for payment. In that event, holders of the
preferred securities will not be able to rely on the guarantee for payment. The
guarantee will rank subordinate and junior in right of payment to all senior
indebtedness of Northeast Bancorp. See " -- Status of the Guarantee." The
guarantee does not limit the incurrence or issuance of other secured or
unsecured debt of Northeast Bancorp, including senior indebtedness, whether
under the indenture, any other indenture that Northeast Bancorp may enter into
in the future or otherwise.
Northeast Bancorp has, through the guarantee, the trust agreement, the
junior subordinated debentures and the indenture, taken together, fully,
irrevocably and unconditionally guaranteed all the Trust's obligations under the
preferred securities on a subordinated basis. No single document standing alone
or operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable, and unconditional guarantee
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of the Trust's obligations in respect of the preferred securities. See
"Relationship Among the Preferred Securities, the Junior Subordinated
Debentures, and the Guarantee."
STATUS OF THE GUARANTEE
The guarantee will constitute an unsecured obligation of Northeast Bancorp
and will rank subordinate and junior in right of payment to all senior
indebtedness of Northeast Bancorp in the same manner as the junior subordinated
debentures.
The guarantee will constitute a guarantee of payment and not of collection.
This means that the guaranteed party may institute a legal proceeding directly
against Northeast Bancorp, as the guarantor, to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity. The guarantee will not be discharged except by payment of the
guarantee payments in full to the extent not paid by the Trust or distribution
to the holders of the preferred securities of the junior subordinated
debentures.
Since the right of Northeast Bancorp to participate in any distribution of
assets of a subsidiary, including the Bank, upon liquidation or reorganization
or otherwise is subject to prior claims of creditors of the subsidiary, the
obligations of Northeast Bancorp under the guarantee are therefore effectively
subordinated to all existing and future liabilities of Northeast Bancorp's
subsidiaries, including the Bank.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the preferred securities (in which case no consent will
be required), the guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate liquidation amount of the
outstanding preferred securities. The manner of obtaining any such approval will
be as set forth under "Description of Preferred Securities -- Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
guarantee shall bind the successors, assigns, receivers, trustees and
representatives of Northeast Bancorp and shall inure to the benefit of the
holders of the preferred securities then outstanding.
EVENTS OF DEFAULT
An event of default under the guarantee will occur upon the failure of
Northeast Bancorp to perform any of its payment or other obligations under the
guarantee, or to perform any non-payment obligation if such non-payment default
remains unremedied for 30 days. The holders of not less than a majority in
aggregate liquidation amount of the outstanding preferred securities have the
right to direct the time, method, and place of conducting any proceeding for any
remedy available to the guarantee trustee in respect of the guarantee or to
direct the exercise of any trust or power conferred upon the guarantee trustee
under the guarantee.
Any registered holder of preferred securities may institute a legal
proceeding directly against Northeast Bancorp to enforce its rights under the
guarantee without first instituting a legal proceeding against the Trust, the
guarantee trustee, or any other person or entity.
Northeast Bancorp, as guarantor, is required to file annually with the
guarantee trustee a certificate as to whether or not Northeast Bancorp is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance of
a default by Northeast Bancorp in performance of the guarantee, undertakes to
perform only such duties as are specifically set forth in the guarantee and,
after the occurrence of an event of default with respect to the guarantee, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
guarantee trustee is under no obligation to exercise any of the powers
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vested in it by the guarantee at the request of any holder of the preferred
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred by such request.
For information concerning the relationship between Bankers Trust Company,
as guarantee trustee, and Northeast Bancorp, see "Description of Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and effect upon:
- full payment of the redemption price of the preferred securities;
- full payment of the amounts payable with respect to the preferred
securities upon liquidation of the Trust; or
- distribution of junior subordinated debentures to the holders of the
preferred securities in exchange for all of the preferred securities.
The guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the preferred securities must restore
payment of any sums paid under the preferred securities or the guarantee.
GOVERNING LAW
The guarantee will be governed by and construed in accordance with the laws
of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES, AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Northeast Bancorp has irrevocably guaranteed, on a subordinated basis,
payments of distributions and other amounts due on the preferred securities if
the Trust has funds available for such payments, as and to the extent set forth
under "Description of Guarantee." Northeast Bancorp believes that, taken
together, its obligations under the junior subordinated debentures, the
indenture, the trust agreement, and the guarantee provide, in the aggregate, a
full, irrevocable, and unconditional guarantee of payment of distributions and
other amounts due on the preferred securities. No single document standing alone
or operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable, and unconditional guarantee of the
Trust's obligations in respect of the preferred securities.
If and to the extent that Northeast Bancorp does not make payments on the
junior subordinated debentures, the Trust will not have sufficient funds to pay
distributions or other amounts due on the preferred securities. The guarantee
does not cover payments of distributions when the Trust does not have sufficient
funds to pay such distributions. In such event, the remedy of a holder of the
preferred securities is to institute a legal proceeding directly against
Northeast Bancorp for enforcement of payment of Northeast Bancorp's obligations
under junior subordinated debentures having a principal amount equal to the
liquidation amount of the preferred securities held by such holder.
The obligations of Northeast Bancorp under the junior subordinated
debentures and the guarantee are subordinate and junior in right of payment to
all senior indebtedness.
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SUFFICIENCY OF PAYMENTS
As long as Northeast Bancorp makes payments on the junior subordinated
debentures when they are due, such payments will be sufficient to cover
distributions and other payments distributable on the preferred securities,
primarily because:
- the aggregate principal amount of the junior subordinated debentures will
be equal to the sum of the aggregate liquidation amount of the preferred
securities and common securities;
- the interest rate and the interest payment dates and other payment dates
on the junior subordinated debentures will match the distribution rate,
distribution dates and other payment dates for the preferred securities;
- Northeast Bancorp will pay for any and all costs, expenses, and
liabilities of the Trust except the Trust's obligations to holders of the
preferred securities and the common securities; and
- the trust agreement further provides that the Trust will not engage in
any activity that is not consistent with the limited purposes of the
Trust.
Notwithstanding anything to the contrary in the indenture, Northeast
Bancorp has the right to set-off any payment it is otherwise required to make
thereunder against and to the extent Northeast Bancorp has theretofore made, or
is concurrently on the date of such payment making, a payment under the
guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any preferred security may institute a legal proceeding
directly against Northeast Bancorp to enforce its rights under the guarantee
without first instituting a legal proceeding against the guarantee trustee, the
Trust, or any other person or entity. See "Description of Guarantee."
A default or event of default under any senior indebtedness of Northeast
Bancorp would not constitute a default or event of default in respect of the
preferred securities, the junior subordinated debentures, or the guarantee.
However, in the event of payment defaults under, or acceleration of, senior
indebtedness of Northeast Bancorp, the subordination provisions of the indenture
provide that no payments may be made in respect of the junior subordinated
debentures until such senior indebtedness has been paid in full or any payment
default thereunder has been cured or waived. See "Description of Junior
Subordinated Debentures -- Subordination." If Northeast Bancorp fails to make
required payments on the junior subordinated debentures, such failure would
constitute an event of default under the preferred securities.
LIMITED PURPOSE OF TRUST
The preferred securities represent preferred undivided beneficial interests
in the assets of the Trust. The Trust exists for the sole purpose of issuing the
preferred securities and common securities and investing the proceeds thereof in
the junior subordinated debentures. A principal difference between the rights of
a holder of a preferred security and a holder of a junior subordinated debenture
is that a holder of a junior subordinated debenture is entitled to receive from
Northeast Bancorp payments on junior subordinated debentures held, while a
holder of preferred securities is entitled to receive distributions or other
amounts distributable with respect to the preferred securities from the Trust
(or from Northeast Bancorp under the guarantee) only if and to the extent the
Trust has funds available for the payment of such distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Trust, other than any
such dissolution involving the distribution of the junior subordinated
debentures, after satisfaction of liabilities to creditors of the Trust as
required by applicable law, the holders of the preferred securities will be
entitled to receive, out of assets held by the Trust, the liquidation
distribution in cash. See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of Northeast Bancorp, the Trust, as registered holder of the junior
subordinated debentures, would be a subordinated creditor of Northeast Bancorp,
subordinated and junior in right of payment to all senior indebtedness as set
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forth in the indenture, but entitled to receive payment in full of all amounts
payable with respect to the junior subordinated debentures before any
stockholders of Northeast Bancorp receive payments or distributions. Since
Northeast Bancorp is the guarantor under the guarantee and has agreed under the
indenture to pay for all costs, expenses, and liabilities of the Trust (other
than the obligations of the Trust to the holders of the preferred securities and
common securities), the positions of a holder of the preferred securities and a
holder of such junior subordinated debentures relative to other creditors and to
stockholders of Northeast Bancorp in the event of liquidation or bankruptcy of
Northeast Bancorp are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The preferred securities and payments on the preferred securities generally
are subject to taxation. Therefore, you should consider the tax consequences of
owning and receiving payment on the preferred securities before purchasing them.
Northeast Bancorp has engaged Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A., Tampa, Florida, as special tax counsel ("Tax Counsel"), to review the
following discussion. They have given Northeast Bancorp their written opinion
that the following discussion correctly describes the United States federal
income tax treatment (a) regarding the characterization of the Trust, (b)
regarding the characterization of the junior subordinated debentures, and (c) of
the purchase, ownership, and disposition of the preferred securities.
The following discussion is general and may not apply to your particular
circumstances for any of the following (or other) reasons:
- This summary is based on federal tax laws in effect on the date of this
prospectus, including Treasury regulations under such laws, and
administrative and judicial interpretations thereof. Changes to any of
these laws, regulations, or interpretations may affect the tax
consequences discussed below.
- This summary discusses only preferred securities acquired at original
issuance at the original offering price and held as a capital asset
(within the meaning of federal tax law). It does not address all the tax
consequences that may be relevant to investors, nor does it address the
tax consequences to investors that may be subject to special tax
treatment, such as banks, thrift institutions, real estate investment
trusts, regulated investment companies, insurance companies, brokers and
dealers in securities or currencies, certain securities traders,
tax-exempt organizations, and certain other financial institutions. This
discussion also does not discuss tax consequences that may be relevant to
an investor in light of their particular circumstances, such as an
investor holding a preferred security as a position in a "straddle," or
as part of a "synthetic security," "hedging," as part of a "conversion"
or other integrated investment.
- This summary does not address:
(a) the income tax consequences to shareholders in, or partners or
beneficiaries of, a holder of the preferred securities,
(b) the United States federal alternative minimum tax consequences of
the purchase, ownership or disposition of the preferred securities, or
(c) any state, local or foreign tax consequences of the purchase,
ownership and disposition of preferred securities.
The authorities on which this summary is based are subject to various
interpretations, and the opinions of Tax Counsel are not binding on the Internal
Revenue Service (the "IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the IRS with
respect to the transactions described herein. Accordingly, there can be no
assurance that the IRS will not challenge the opinions expressed herein or that
a court would not sustain such a challenge.
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YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
US HOLDERS
IN GENERAL. For purposes of the following discussion, a "US Holder"
generally is a holder of the preferred securities who or which is
- a citizen or individual resident (or is treated as a citizen or
individual resident) of the United States for income tax purposes;
- a corporation or partnership created or organized (or treated as created
or organized for income tax purposes) in or under the laws of the United
States or any political subdivision thereof;
- an estate the income of which is includible in its gross income for
United States federal income tax purposes without regard to its source;
or
- a trust if (a) a court within the United States is able to exercise
primary supervision over the administration of the trust and (b) one or
more United States persons have the authority to control all substantial
decisions of the trust.
CHARACTERIZATION OF THE TRUST. Tax Counsel has rendered its opinion that,
(1) under then current law and based on the representations, facts, and
assumptions set forth in this prospectus, and (2) assuming full compliance with
the terms of the trust agreement (and other relevant documents), and (3) based
on certain assumptions and qualifications referred to in the opinion, upon the
issuance of the preferred securities the Trust will be characterized for United
States federal income tax purposes as a grantor trust and will not be
characterized as an association taxable as a corporation. Accordingly, for
United States federal income tax purposes, each US Holder purchasing the
preferred securities generally will be considered the owner of an undivided
interest in the junior subordinated debentures owned by the Trust, and each US
Holder will be required to include all income or gain recognized for United
States federal income tax purposes with respect to its allocable share of the
junior subordinated debentures on its own income tax return.
CHARACTERIZATION OF THE JUNIOR SUBORDINATED DEBENTURES. Under current law,
the junior subordinated debentures are debt of Northeast Bancorp for United
States federal income tax purposes. Northeast Bancorp, along with the Trust and
each investor (by acceptance of a beneficial interest in a preferred security)
agree to treat the junior subordinated debentures as Northeast Bancorp's debt
and the preferred securities as evidence of a beneficial ownership in the Trust.
We cannot assure you, however, that such position will not be challenged by the
IRS or, if challenged, that a challenge will not be successful. The remainder of
this discussion assumes that the junior subordinated debentures will be
classified as debt of Northeast Bancorp for federal income tax purposes.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT. Under the terms of the junior
subordinated debentures, Northeast Bancorp has the ability to defer payments of
interest from time to time by extending the interest payment period for a period
not exceeding 20 consecutive quarters, but not beyond the maturity of the junior
subordinated debentures. Treasury regulations provide that debt instruments like
the junior subordinated debentures will not be considered issued with original
issue discount ("OID") even if their issuer can defer payments of interest if
the likelihood of such deferral is "remote."
Northeast Bancorp has concluded, and this discussion assumes, that, as of
the date of this prospectus, the likelihood of deferring payments of interest
under the terms of the junior subordinated debentures is "remote" within the
meaning of the applicable Treasury regulations. This conclusion is based in part
on the fact that exercising that option would prevent Northeast Bancorp from
declaring dividends on its common stock and would prevent Northeast Bancorp from
making any payments with respect to debt securities that rank equally with or
junior to the junior subordinated debentures. Therefore, the junior subordinated
debentures should not be treated as issued with OID by reason of Northeast
Bancorp's deferral option. Rather, US Holders will
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be taxed on stated interest on the junior subordinated debentures when it is
paid or accrued in accordance with the holder's method of accounting for income
tax purposes. It should be noted, however, that no published rulings or any
other published authorities of the IRS have addressed this issue. Accordingly,
it is possible that the IRS could take a position contrary to the interpretation
described herein.
If Northeast Bancorp exercises its option to defer payments of interest,
the junior subordinated debentures would be treated as redeemed and reissued for
OID purposes. The sum of the remaining interest payments (and any de minimis
OID) on the junior subordinated debentures would thereafter be treated as OID.
The OID would accrue, and be includible in a US Holder's taxable income, on an
economic accrual basis (regardless of the US Holder's method of accounting for
income tax purposes) over the remaining term of the junior subordinated
debentures (including any period of interest deferral), without regard to the
timing of payments under the junior subordinated debentures. Subsequent
distributions of interest on the junior subordinated debentures generally would
not be taxable. The amount of OID that would accrue in any period would
generally equal the amount of interest that accrued on the junior subordinated
debentures in that period at the stated interest rate. Consequently, during any
period of interest deferral, US Holders will include OID in gross income in
advance of the receipt of cash, and if a US Holder disposes of a preferred
security prior to the record date for payment of distributions on the junior
subordinated debentures following that period, such US Holder will be subject to
income tax on OID accrued through the date of disposition (and not previously
included in income), but will not receive cash from the Trust with respect to
the OID.
If the possibility of Northeast Bancorp's exercise of its option to defer
payments of interest is not remote, the junior subordinated debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any de minimis OID) over the term of the junior subordinated
debentures. A US Holder will include that OID in its taxable income, over the
term of the junior subordinated debentures, on an economic accrual basis.
CHARACTERIZATION OF INCOME. Because the income underlying the preferred
securities will not be characterized as dividends for income tax purposes, if
the investor is a corporate holder of the preferred securities such investor
will not be entitled to a dividends-received deduction for any income that it
recognizes with respect to the preferred securities.
MARKET DISCOUNT AND BOND PREMIUM. Under certain circumstances holders of
the preferred securities may be considered to have acquired their undivided
interests in the junior subordinated debentures with market discount or
acquisition premium (as each phrase is defined for United States federal income
tax purposes).
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE
TRUST. Under certain circumstances described above (See "Description of the
Preferred Securities -- Liquidation Distribution Upon Dissolution"), the Trust
may distribute the junior subordinated debentures to investors in exchange for
the preferred securities and in liquidation of the Trust. Except as discussed
below, such a distribution would not be a taxable event for United States
federal income tax purposes, and each US Holder would have an aggregate adjusted
basis in its junior subordinated debentures for United States federal income tax
purposes equal to such holder's aggregate adjusted basis in its preferred
securities. For United States federal income tax purposes, a US Holder's holding
period in the junior subordinated debentures received in such a liquidation of
the Trust would include the period during which the preferred securities were
held by the US Holder. If, however, the relevant event is a Tax Event which
results in the Trust being treated as an association taxable as a corporation,
the distribution would likely constitute a taxable event to US Holders of the
preferred securities for United States federal income tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), Northeast Bancorp may redeem the junior subordinated
debentures for cash and the proceeds of such redemption distributed to investors
in redemption of their preferred securities. Such a redemption would be taxable
for United States federal income tax purposes, and a US Holder would recognize
gain or loss as if it had sold the preferred securities for cash. See " -- Sales
of Preferred Securities" below.
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SALES OF PREFERRED SECURITIES. A US Holder that sells preferred securities
will recognize gain or loss equal to the difference between its adjusted basis
in the preferred securities and the amount realized on the sale of such
preferred securities. A US Holder's adjusted basis in the preferred securities
generally will be its initial purchase price, increased by OID previously
included (or currently includible) in such holder's gross income to the date of
disposition, and decreased by payments received on the preferred securities
(other than any interest received with respect to the period prior to the
effective date of Northeast Bancorp's first exercise of its option to defer
payments of interest). Any such gain or loss generally will be capital gain or
loss, and generally will be a long-term capital gain or loss if the preferred
securities have been held for more than one year prior to the date of
disposition.
If a holder disposes of their preferred securities between record dates for
payments of distributions thereon, such holder will be required to include
accrued but unpaid interest (or OID) on the junior subordinated debentures
through the date of disposition in its taxable income for United States federal
income tax purposes (notwithstanding that the holder may receive a separate
payment from the purchaser with respect to accrued interest). Such holder may
deduct that amount from the sales proceeds received (including the separate
payment, if any, with respect to accrued interest) for the preferred securities
(or as to OID only, to add such amount to such holder's adjusted tax basis in
its preferred securities). To the extent the selling price is less than the
holder's adjusted tax basis (which will include accrued but unpaid OID, if any),
a holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
NON-US HOLDERS
The following discussion applies only to a Non-US Holder.
Payments to a Non-US Holder on a preferred security will generally not be
subject to withholding of income tax, provided that:
- the beneficial owner of the preferred security does not (directly or
indirectly, actually or constructively) own 10% or more of the total
combined voting power of all classes of stock of Northeast Bancorp
entitled to vote;
- the beneficial owner of the preferred security is not a controlled
foreign corporation that is related to Northeast Bancorp through stock
ownership; and
- either (a) the beneficial owner of the preferred securities certifies to
the Trust or its agent, under penalties of perjury, that it is a Non-US
Holder and provides its name and address, or (b) a securities clearing
organization, bank, or other financial institution that holds customers'
securities in the ordinary course of its trade or business, and holds the
preferred security in such capacity, certifies to the Trust or its agent,
under penalties of perjury, that such a statement has been received from
the beneficial owner by it or by another financial institution between it
and the beneficial owner in the chain of ownership, and furnishes the
Trust or its agent with a copy thereof.
As discussed above, it is possible that changes in the law affecting the
income taxes of junior subordinated debentures could adversely affect the
ability of Northeast Bancorp to deduct interest payable on the junior
subordinated debentures. Such changes also could cause the junior subordinated
debentures to be classified as equity, rather than debt of Northeast Bancorp for
United States federal income tax purposes. This might cause the income derived
from the junior subordinated debentures to be characterized as dividends,
generally subject to a 30% income tax (on a withholding basis) when paid to a
Non-US Holder, rather than as interest which, as discussed above, generally is
exempt from income tax in the hands of a person who is a Non-US Holder.
A Non-US Holder of a preferred security will generally not be subject to
withholding of income tax on any gain realized upon the sale or other
disposition of a preferred security.
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A Non-US Holder that holds the preferred securities in connection with the
active conduct of a United States trade or business will be subject to income
tax on all income and gains recognized with respect to its proportionate share
of the junior subordinated debentures.
INFORMATION REPORTING
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the preferred securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the preferred securities to or
through the United States office of a broker are subject to information
reporting unless the holder thereof certifies as to its Non-US Holder status or
otherwise establishes an exemption from information reporting and backup
withholding. See " -- Backup Withholding." Taxable income on the preferred
securities for a calendar year should be reported to US Holders on the
appropriate forms by the following January 31st.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the preferred securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against the holder's income tax liability, or
refunded, provided the required information is provided to the IRS.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY AND DOES NOT ADDRESS ALL THE
CONSEQUENCES TO A PARTICULAR PERSON OF THE PURCHASE, OWNERSHIP, AND DISPOSITION
OF THE PREFERRED SECURITIES. YOU ARE URGED TO CONTACT YOUR OWN TAX ADVISORS TO
DETERMINE YOUR PARTICULAR TAX CONSEQUENCES.
CERTAIN ERISA CONSIDERATIONS
Northeast Bancorp and certain of its affiliates may each be considered a
"party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974 or a "disqualified person" within the meaning of Section
4975 of the Internal Revenue Code with respect to many employee benefit plans
("Plans") that are subject to ERISA and individual retirement accounts ("IRAs").
The purchase of the preferred securities by an employee benefit plan or IRA that
is subject to the fiduciary responsibility provisions of ERISA or the prohibited
transaction provisions of Section 4975(e)(1) of the Internal Revenue Code and
with respect to which Northeast Bancorp, affiliate is a service provider (or
otherwise is a party in interest or a disqualified person) may constitute or
result in a prohibited transaction under ERISA or Section 4975 of the Internal
Revenue Code, unless the preferred securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan, fiduciary, or IRA holder, proposing to acquire any preferred securities
should consult with its legal counsel.
SUPERVISION AND REGULATION
GENERAL
Northeast Bancorp is a savings and loan holding company that is regulated
and subject to examination by the OTS. The Bank is a federally chartered savings
bank and is subject to the regulations, examinations, and reporting requirements
of the OTS. The Bank is a member of the Federal Home Loan Bank of Boston and the
Bank's deposits are insured by the FDIC through the savings association
insurance fund. As the administrator of the savings association insurance fund,
the FDIC has certain regulatory and full examination authority over OTS
regulated savings associations.
The Bank also is subject to regulation by the Board of Governors of the
Federal Reserve System governing reserves to be maintained against deposits and
certain other matters. The Bank's relationship with its depositors and borrowers
also is regulated to a great extent by both federal and state laws. Any change
in applicable laws or regulations, or a change in the ways these laws and
regulations are interpreted by regulatory agencies or courts, may have a
material adverse impact on the business of Northeast Bancorp and
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the Bank. In this regard, the Financial Services Modernization Act of 1999 is
expected to be passed by the U.S. House of Representatives and the U.S. Senate
and to be signed by the President. This legislation contains wide-sweeping
changes to the banking laws and regulatory structure which would, among other
things, repeal the Glass-Steagall Act and remove many of the prohibitions
relating to the ability of financial institutions to engage in the insurance
business and to underwrite securities.
The following information is a summary of some of the laws and regulations
applicable to Northeast Bancorp and the Bank. The applicable statutes and
regulations are summarized and do not purport to be complete, and are qualified
in their entirety by reference to the particular statutes and regulations.
FEDERAL REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
GENERAL LIMITATIONS. Northeast Bancorp is a unitary savings and loan
holding company within the meaning of the Home Owners' Loan Act of 1933 ("HOLA")
and is registered with the OTS. Northeast Bancorp is subject to OTS regulations,
examinations, supervision and reporting requirements. Further, the OTS has
enforcement authority over Northeast Bancorp and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.
As a unitary savings and loan holding company, Northeast Bancorp generally
is not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a qualified thrift
lender. See "Supervision and Regulation -- Federal Regulations of Savings
Associations -- Qualified Thrift Lender Test." Nevertheless, various activities
conducted by savings and loan holding companies require OTS authorization.
The HOLA prohibits a savings and loan holding company from directly or
indirectly acquiring control (including through an acquisition by merger,
consolidation or purchase of assets) of any savings association, or any other
savings and loan holding company, without prior OTS approval. In considering
whether to grant approval for any such transaction, the OTS will take into
consideration a number of factors, including:
- competitive effects of the transaction;
- financial and managerial resources;
- future prospects of the holding company and its bank or thrift
subsidiaries following the transaction;
- the effect of the acquisition on the risk to the insurance fund;
- the convenience and needs of the community to be served; and
- compliance history of such subsidiaries with the Community
Reinvestment Act.
Further, a savings and loan holding company may not acquire more than 5% of
the voting shares of any savings association unless by merger, consolidation or
purchase of assets, each of which requires prior OTS approval. In addition,
under other provisions of HOLA, a savings and loan holding company may acquire
up to 15% of the voting shares of certain undercapitalized savings associations.
MULTIPLE SAVINGS AND LOAN HOLDING COMPANIES. At the present time,
Northeast Bancorp is a unitary savings and loan holding company. Upon
acquisition by Northeast Bancorp of a separate subsidiary savings association,
Northeast Bancorp would become a multiple savings and loan holding company and
would be subject to extensive limitations on the types of business activities in
which it could engage. A holding company that acquires another institution and
maintains it as a separate subsidiary or whose sole subsidiary fails to meet the
qualified thrift lender test will become subject to the activities limitations
applicable to multiple savings bank holding companies. In general, a multiple
savings bank holding company (or subsidiary thereof that is not an insured
institution) may not commence, or continue for more than a limited period of
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time after becoming a multiple savings bank holding company (or a subsidiary
thereof), any business activity other than:
- furnishing or performing management services for a subsidiary insured
institution;
- conducting an insurance agency or an escrow business;
- holding, managing or liquidating assets owned by or acquired from a
subsidiary insured institution;
- holding or managing properties used or occupied by a subsidiary
insured institution;
- acting as trustee under deeds of trust;
- those activities previously directly authorized by the OTS by
regulation as of March 5, 1987 to be engaged in by multiple savings
bank holding companies; or
- subject to prior approval of the OTS, those activities authorized by
the Federal Reserve Board as permissible investments for bank holdings
companies.
These restrictions do not apply to a multiple savings bank holding company if
(a) all, or all but one, of its insured institution subsidiaries were acquired
in emergency thrift acquisitions or assisted acquisitions and (b) all of its
insured institution subsidiaries are qualified thrift lenders.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (a) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (b) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary with regard to the extent to which they permit interstate savings
and loan holding company acquisitions.
SAFETY AND SOUNDNESS. Under federal law, the Director of the OTS is
authorized to take action when it determines that there is reasonable cause to
believe that the continuation by a savings bank holding company of any
particular activity constitutes a serious risk to the financial safety,
soundness or stability of a savings bank holding company's subsidiary savings
institution. The Director of the OTS has oversight authority for all holding
company affiliates, not just the insured institution. Specifically, the Director
of the OTS may, as necessary:
- limit the payment of dividends by the savings institution to its
parent holding company;
- limit transactions between the savings institution, the holding
company and the subsidiaries or affiliates of either; or
- limit any activities of the savings institution that might create a
serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of savings institutions are governed
by the HOLA and, in certain respects, the Federal Deposit Insurance Act and the
rules and regulations issued by the OTS and the FDIC pursuant to these acts.
These laws and regulations delineate the nature and extent of the activities in
which savings associations may engage.
CAPITAL REQUIREMENTS. The OTS capital regulations have three components: a
leverage limit, a tangible capital requirement, and a risk-based capital
requirement. The OTS has broad discretion to impose capital requirements in
excess of minimum applicable ratios.
The leverage limit requires that a savings association maintain core
capital of at least 3% of its adjusted total assets. For purposes of this
requirement, total assets are adjusted to exclude intangible assets and
investments in certain subsidiaries, and to include the assets of certain other
subsidiaries, certain intangibles arising from prior period supervisory
transactions, and permissible mortgage servicing rights. Core capital includes
common shareholders' equity and retained earnings, noncumulative perpetual
preferred stock and
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related surplus and minority interests in consolidated subsidiaries, minus
intangibles, plus certain mortgage servicing rights, certain goodwill arising
from prior regulatory accounting practices, and certain investments in
subsidiaries.
Certain mortgage servicing rights are not deducted in computing core and
tangible capital. Prior to August 10, 1998, generally, the lower of 90% of the
fair market value of readily marketable mortgage servicing rights, or the
current unamortized book value as determined under GAAP could be included in
core and tangible capital up to a maximum of 50% of core capital computed before
the deduction of any disallowed servicing assets and disallowed purchased credit
card relationships. Effective August 10, 1998, the OTS increased the maximum
amount of mortgage servicing rights that are includable in regulatory capital
from 50% to 100% of core capital.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks, which are generally
more limited than activities permissible for savings associations and their
subsidiaries, must be deducted. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association.
The tangible capital requirement mandates that a savings association
maintain tangible capital of at least 1.5% of adjusted total assets. For
purposes of this requirement, adjusted total assets are calculated on the same
basis as the leverage limit. Tangible capital is defined in the same manner as
core capital, except that all intangible assets must be deducted.
The risk-based requirement promulgated by the OTS pursuant to the HOLA,
tracks the standard applicable to national banks, except that the OTS may
determine to reflect interest rate and other risks not specifically included in
the national bank standard. However, such deviations from the national bank
standard may not result in a materially lower risk-based requirement for savings
associations than for national banks. The risk-based standard adopted by the OTS
is similar to the Office of the Comptroller of the Currency standard for
national banks.
The risk-based standards of the OTS require maintenance of core capital
equal to at least 4% of risk-weighted assets and total capital equal to at least
8% of risk-weighted assets. Total capital includes core capital plus
supplementary capital (to the extent it does not exceed core capital).
Supplementary capital includes (a) cumulative perpetual preferred stock; (b)
mutual capital certificates, income capital certificates and net worth
certificates; (c) nonwithdrawable accounts and pledged deposits to the extent
not included in core capital; (d) perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements; (e) general loan and lease loss allowances, up to a maximum of
1.25% of risk-weighted assets; and (f) up to 45% of unrealized gains on certain
equity investments.
In determining the amount of risk-weighted assets, savings associations
must assign balance sheet assets to one of four risk-weight categories,
reflecting the relative credit risk inherent in the asset. Off-balance-sheet
items are assigned to one of the four risk-weight categories after a credit
conversion factor is applied.
OTS regulations add an interest rate risk component to the 8% risk-based
capital requirement discussed above. Only savings associations with more than a
normal level of interest rate risk are subject to these requirements.
Specifically, savings associations with interest rate risk exposure in excess of
2% (measured in accordance with an OTS Model and Guidelines) must deduct an
interest rate risk component from total capital prior to calculating their
risk-based capital ratios. The interest rate risk component is calculated as
one-half of the difference between the institution's measured interest rate risk
and 2%, multiplied by the estimated economic value of the institution's assets.
This deduction will have the effect of requiring savings associations with
interest rate risk exposure of more than 2% to hold more capital than those with
less than 2% exposure. On August 21, 1995, the OTS adopted and approved an
appeal process, but delayed the interest rate risk capital deduction
indefinitely.
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LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to a single or related group of
borrowers. Generally, a savings association may lend to a single borrower or
group of related borrowers, on an unsecured basis, in an amount not greater than
15% of its unimpaired capital and unimpaired surplus. An additional amount, not
greater than 10% of the savings association's unimpaired capital and unimpaired
surplus, may be loaned if the loan is secured by readily marketable collateral,
which is defined to include certain financial instruments and bullion, but
generally does not include real estate. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. The OTS also may impose more stringent limits on an association's
loans to one borrower, if it determines that such limits are necessary to
protect the safety and soundness of the institution.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments but also, in the alternative, by qualifying under the HOLA as
a domestic building and loan association.
Recent legislation also expands the qualified thrift lender test to provide
savings associations with greater authority to lend and diversify their
portfolios. In particular, credit card and education loans may now be made by
savings associations without regard to any percentage-of-assets limit, and
commercial loans may be made in an amount up to 10% of total assets, plus an
additional 10% for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At June 30, 1999, the Bank was in
compliance with current qualified thrift lender requirements.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, including:
- cash dividends;
- payments to repurchase or otherwise acquire its shares;
- payments to stockholders of another institution in a cash-out merger; and
- other distributions charged against capital.
OTS rules establish three tiers of institutions, which are based primarily
on an institution's capital level. An institution, such as the Bank, that
exceeds all fully phased-in capital requirements before and after a proposed
capital distribution and has not been advised by the OTS that it is in need of
more than normal supervision, could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of: (i) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75% of its net earnings for the previous four quarters;
provided that the institution would not be undercapitalized, as the term is
defined in the OTS Prompt Corrective Action regulations, following the capital
distribution. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its fully
phased-in requirement or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a quarterly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus borrowings payable in one year or less. Monetary penalties may be imposed
for failure to meet
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these liquidity requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. Savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings institution's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. Failure of a savings association to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice. The Bank received a satisfactory Community
Reinvestment Act rating under the current regulations in its most recent federal
examination by the OTS.
THE BANK SECRECY ACT AND MONEY LAUNDERING LAWS. The Bank Secrecy Act was
enacted by Congress in 1970. This act requires every financial institution
within the United States to file a Currency Transaction Report with the Internal
Revenue Service for each transaction in currency of more than $10,000 not
exempted by the United States Treasury Department.
The Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's checks,
traveler's checks, or money orders involving $3,000 or more in cash.
Institutions also must verify and record the identity of the originator and
beneficiary of certain funds transfers.
BRANCHING. Subject to certain statutory restrictions in the HOLA and the
Federal Deposit Insurance Act, the Bank is authorized to branch on a nationwide
basis. Branching by savings associations also is subject to other regulatory
requirements, including compliance with the Community Reinvestment Act and its
implementing regulations.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with the Bank, including Northeast Bancorp
and any non-savings institution subsidiaries) or to make loans to certain
insiders of the Bank or Northeast Bancorp, is limited by Sections 23A and 23B of
the Federal Reserve Act. Section 23A limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
LOANS TO OFFICERS, DIRECTORS, AND PRINCIPAL STOCKHOLDERS. Sections 22(g)
and 22(h) of the Federal Reserve Act and the rules and regulations issued under
that act are applicable to loans from a savings association to any of the
following persons:
- an executive officer of a savings association;
- a director of a savings association;
- a principal stockholder of a savings association (i.e., any person who
directly or indirectly, or acting through or in concert with one or more
persons, owns, controls, or has power to vote more than 10% of any class
of voting securities of a savings association);
- any company controlled by an executive officer, director or principal
stockholder of a savings association; and
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- any political or campaign committee which is controlled by, or which will
benefit any executive officer, director or principal stockholder.
Among other things, such loans must be made on terms substantially the same as
those prevailing on comparable transactions made to unaffiliated individuals,
and may not involve more than the normal risk of repayment or present other
unfavorable features. Certain extensions of credit to such persons must first be
approved in advance by a disinterested majority of a savings association's
entire board of directors. Section 22(h) of the Federal Reserve Act prohibits
loans to any such individuals where the aggregate amount exceeds an amount equal
to 15% of an insured institution's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus in the case of loans that are
fully secured by readily marketable collateral, or when the aggregate amount on
all such extensions of credit outstanding to all such persons would exceed the
Bank's unimpaired capital and unimpaired surplus. Section 22(g) establishes
additional limitations on loans to executive officers.
CHANGES IN DIRECTORS AND SENIOR EXECUTIVE OFFICERS. Section 32 of the
Federal Deposit Insurance Act, as amended by the 1996 Act, requires a depository
institution or holding company of a depository institution to give 30 days prior
written notice to its primary federal regulator of any proposed appointment of a
director or senior executive officer if the institution is not in compliance
with the minimum capital requirements or otherwise is in a troubled condition.
The regulator then has the opportunity to disapprove the proposed appointment.
PERMISSIBLE LOANS AND INVESTMENTS. Federally chartered savings banks, such
as the Bank, are authorized to originate, invest in, sell, purchase, service,
participate, and otherwise deal in: (1) loans made on the security of
residential and nonresidential real estate (up to 400% of the Bank's capital),
(2) commercial loans (up to 20% of assets, the last 10% of which must be small
business loans), (3) consumer loans (subject to certain percentage of asset
limitations), and (4) credit card loans. The lending authority of federally
chartered associations is subject to various OTS requirements, including, as
applicable, requirements governing loan-to-value ratio, percentage-of-assets
limits, and loans to one borrower limits. In September 1996, the OTS
substantially revised its investment and lending regulations eliminating many of
their specific requirements in favor of a more general standard of safety and
soundness.
Federally chartered savings associations may invest, without limitation, in
the following assets: (1) obligations of the United States government or certain
agencies thereof; (2) stock issued by or bonds of the FHLB or the FNMA; (3)
obligations issued or guaranteed by the FNMA, the Student Loan Marketing
Association, the GNMA, or any agency of the United States Government; (4)
certain mortgages, obligations, or other securities that have been sold by the
FHLMC; (5) stock issued by a national housing partnership corporation; (6)
demand, time, or savings deposits, shares, or accounts of any insured depository
institution; (7) certain "liquidity" investments approved by the OTS to meet
liquidity requirements; (8) shares of registered investment companies, the
portfolios of which are limited to investments that a federal association is
otherwise authorized to make; (9) certain mortgage-backed securities; (10)
general obligations of any state of the United States or any political
subdivision or municipality thereof, provided that not more than 10% of a
savings association's capital may be invested in the general obligations of any
one issuer; (11) loans secured by residential real property; (12) credit card
loans; and (13) educational loans. Federally chartered savings associations may
invest in secured or unsecured loans for commercial, corporate, business, or
agricultural purposes, up to 20% of assets, provided that the last 10% is
invested in small business loans. The HOLA also limits a federal savings
association's aggregate nonresidential real property loans to 400% of the
savings association's capital as determined pursuant to the OTS's capital
requirements. See "Supervision and Regulation -- Federal Regulation of Savings
Associations -- Capital Requirements." The OTS may allow a savings association
to exceed the aggregate limitation, if the OTS determines that exceeding the
limitation would pose no significant risk to the safe and sound operations of
the association and would be consistent with prudent operating practices.
Federally chartered savings associations also are authorized by the HOLA to make
investments in consumer loans, business development credit corporations, certain
commercial paper and corporate debt securities, service corporations, and small
business investment companies. All of these types of investments are subject to
percentage-of-assets and various other limitations.
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SERVICE CORPORATIONS. The HOLA authorizes federally chartered savings
associations, such as the Bank, to invest in the capital stock, obligations, or
other securities of service corporations. The HOLA authorizes a savings
association to invest up to a total of 3% of its assets in service corporations.
The last 1% of the 3% statutory investment limit applicable to service
corporations must be primarily invested in community development investments
drawn from a broad list of permissible investments that include, among other
things: (1) government guaranteed loans, (2) loans for investment in small
businesses, (3) investments in revitalization, and rehabilitation projects, and
(4) investments in low- and moderate-income housing developments.
Service corporations are authorized to engage in a variety of preapproved
activities, some of which (e.g., securities brokerage and real estate
development) are ineligible activities for the parent savings association. The
OTS regulations implementing the service corporation authority contained in the
HOLA also provide that activities reasonably related to the activities of a
federally chartered savings association may be approved on a case-by-case basis
by the Director of the OTS.
OPERATING SUBSIDIARIES. All federal savings associations are authorized to
establish or acquire one or more operating subsidiaries. Operating subsidiaries
are subject to examination and supervision by the OTS to the same extent as the
parent thrift. An operating subsidiary is a corporation that meets all of the
following requirements: (1) it engages only in activities that a federal savings
association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total assets,
OTS regulations do not limit the amount that a parent savings association may
invest in its operating subsidiaries. Operating subsidiaries may be incorporated
and operated in any geographical location where its parent may operate. An
operating subsidiary that is a depository institution may accept deposits in any
location, provided that the subsidiary has federal deposit insurance.
ENFORCEMENT. Under the Federal Deposit Insurance Act, the OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring enforcement action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such actions
under certain circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. The Federal Deposit Insurance Act
requires each federal banking agency to prescribe for all insured depository
institutions standards relating to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, and compensation fees and benefits
and such other operational and managerial standards as the agency deems
appropriate. The federal banking agencies adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the act. These
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. Further, the guidelines address (a) internal
controls and information systems; (b) internal audit system; (c) credit
underwriting; (d) loan documentation; (e) interest rate risk exposure; (f) asset
growth; and (g) compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by these guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the Federal Deposit Insurance Act. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.
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PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital ratio of less
than 8.0% or a leverage ratio of less than 4.0% (3.0% if the institution has a
composite rating of 1) or a Tier 1 risk-based capital ratio that is less than
4.0% is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized."
Subject to a narrow exception, the OTS is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notices that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS AND ASSESSMENTS
The Bank's deposits are insured by the FDIC through the bank insurance fund
("BIF") and the savings association insurance fund ("SAIF"), for up to $100,000
for each insured account holder, the maximum amount currently permitted by law.
The FDIC establishes premium assessment rates for BIF and SAIF deposit
insurance. There is no statutory limit on the maximum assessment and the percent
of increase in the assessment that the FDIC may impose in any one year,
provided, however, that the FDIC may not collect more than is necessary to reach
or maintain the BIF and SAIF designated reserve ratios and must rebate any
excess collected. Under the FDIC's risk-based insurance system, BIF and
SAIF-assessable deposits are now subject to premiums of between 0 to 27 cents
per $100 of deposits, depending upon the institution's capital position and
other supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC
places the institution in one of nine risk categories using a two-step process
based first on capital ratios and then on relevant supervisory information. Each
institution is assigned to one of three groups (well-capitalized, adequately
capitalized, or undercapitalized) based on its capital ratios. A
well-capitalized institution is one that has at least a 10% total risk-based
capital ratio (the ratio of total capital to risk-weighted assets), a 6% Tier 1
risk-based capital ratio (the ratio of tier 1 core capital to risk-weighted
assets), and a 5% Tier 1 leverage ratio (the ratio of core capital to adjusted
total assets). An adequately capitalized institution has at least an 8% total
risk-based capital ratio, a 4% tier 1 core risk-based capital ratio, and a 4%
Tier 1 leverage ratio. An undercapitalized institution is one that does not meet
either the definition of well-capitalized or adequately capitalized.
The FDIC also assigns each institution to one of three supervisory
subgroups based on an evaluation of the risk posed by the institution. These
supervisory evaluations modify premium rates within each of the three capital
groups. The nine risk categories and the corresponding BIF and SAIF assessment
rates are as follows:
<TABLE>
<CAPTION>
SUPERVISORY SUBGROUP
------------------------------
A B C
------------------------------
<S> <C> <C> <C>
Meets numerical standards for:
Well-capitalized.................................... 0 3 17
Adequately capitalized.............................. 3 10 24
Undercapitalized.................................... 10 24 27
</TABLE>
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For purposes of assessments of FDIC insurance premiums, Northeast Bancorp
believes that the Bank is a well-capitalized institution as of June 30, 1999.
FDIC regulations prohibit disclosure of the supervisory subgroup to which an
insured institution is assigned.
As an insurer, the FDIC issues regulations and conducts examinations of its
insured members. Insurance of deposits by the FDIC may be terminated by the
FDIC, after notice and hearing, upon a finding that an institution (a) has
engaged in unsafe and unsound practices, (b) is in an unsafe and unsound
condition to continue operations, or (c) has violated any applicable law,
regulation, rule, order or condition imposed by the OTS or the FDIC. When
conditions warrant, the FDIC may impose less severe sanctions as an alternative
to termination of insurance.
BROKERED DEPOSITS
Only a well-capitalized depository institution may accept brokered deposits
without prior regulatory approval. Under implementing regulations,
well-capitalized banks may accept brokered deposits without restriction,
adequately capitalized banks may not accept brokered deposits without a waiver
from the FDIC (subject to certain restrictions on payments of rates), while
undercapitalized banks may not accept brokered deposits.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional banks. FHLBs provide a central credit facility primarily for
member institutions. The Bank, as a member of the FHLB of Boston, is required to
acquire and hold shares of capital stock in that institution in an amount at
least equal to 1% of the aggregate principal amount of the Bank's unpaid
residential mortgage loans and similar obligations at the beginning of each year
(but not less than $500), or 5% of its advances from the FHLB of Boston,
whichever is greater.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). As of June 30, 1999, the Bank was
in compliance with these requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL SECURITIES LAWS
Northeast Bancorp's common stock is registered with the SEC under the
Securities Exchange Act of 1934. Accordingly, Northeast Bancorp is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act.
MAINE LAW
Northeast Bancorp and the Bank are headquartered in, and qualified to do
business in the State of Maine. Accordingly, the Maine Bureau of Banking has the
authority to impose certain regulations and the power to examine both the Bank
and Northeast Bancorp. In addition to approvals from federal regulatory
agencies, Northeast Bancorp may be required to seek approval of the Maine Bureau
of Banking prior to engaging in certain extraordinary transactions.
RECENT LEGISLATION
Federal legislation and regulation have significantly affected the
operations of federally insured savings associations, such as the Bank, and
other federally regulated financial institutions in the past several years and
have increased competition among savings associations, commercial banks, and
other financial institutions. Congress has been considering legislation in
various forms that would require federal thrifts, such as the
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Bank, to convert their charters to national or state bank charters. On October
22, 1999, representatives of the White House and Congress resolved disagreements
on several major provisions of the Financial Services Modernization Act of 1999.
This act is being redrafted to reflect those agreements, and is expected to be
passed by both the House and Senate. This legislation, which is expected to be
signed by the President, is the most wide-sweeping banking and financial
institutions legislation in the past 60 years. The Financial Services
Modernization Act, among other things, will:
- - permit banks to underwrite insurance and securities;
- - permit securities firms and insurers to buy banks;
- - prevent nonfinancial institutions from chartering or buying unitary thrift
holding companies, such as Northeast Bancorp;
- - authorize the Treasury Department's Office of the Comptroller of the Currency
to regulate bank subsidiaries that do securities underwriting; and
- - authorize the Federal Reserve to regulate bank holding company affiliates that
engage in risky activities such as insurance underwriting and real estate
development.
The operations of regulated depository institutions will continue to be
subject to changes in applicable statutes and regulations from time to time and
could adversely affect Northeast Bancorp, the Bank, and its affiliates. The
affect of the Financial Services Modernization Act on Northeast Bancorp is
uncertain at this time.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, dated
, 1999 among Northeast Bancorp, the Trust, and Advest, Inc., the
underwriter named therein, the Trust has agreed to sell to the underwriter, and
the underwriter has agreed to purchase from the Trust, $10,500,000 aggregate
liquidation amount of preferred securities at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus.
The underwriting agreement provides that the obligations of the underwriter
is subject to certain conditions precedent and that the underwriter will
purchase all of the preferred securities offered hereby if any of such preferred
securities are purchased.
The underwriter has advised Northeast Bancorp and the Trust that the
underwriter proposes to offer the preferred securities directly to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not to exceed $ per
preferred security. The underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per preferred security to certain other
dealers. After the public offering, the public offering price and the other
selling terms may be changed by the underwriter. No such change shall affect the
amount of proceeds to be received by the Trust as set forth on the cover page of
this prospectus.
Northeast Bancorp and the Trust have granted to the underwriter an option
exercisable during the 30 day period beginning from the date of the underwriting
agreement to purchase up to an additional $1,575,000 aggregate liquidation
amount of the preferred securities, solely to cover over-allotments, if any, at
the public offering price as set forth on the cover page. To the extent that the
underwriter exercises such option, the Trust will be obligated, pursuant to the
option, to sell such preferred securities to the underwriter. If purchased, the
underwriter will offer such additional preferred securities on the same terms as
those on which the $10,500,000 aggregate liquidation amount of the preferred
securities are being offered.
In view of the fact that all of the proceeds from the sale of the preferred
securities will be used to purchase the junior subordinated debentures issued by
Northeast Bancorp, the underwriting agreement provides that Northeast Bancorp
will pay as compensation for the underwriter's arranging the investment therein
of such proceeds an amount of $ per preferred security (or $
($ if the
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over-allotment option is exercised in full) in the aggregate). The expenses of
this offering (exclusive of the underwriting fees) are estimated at $
and are payable by Northeast Bancorp.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the preferred securities as interests in a direct participation
program, the offering of the preferred securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
Subject to certain limitations, Northeast Bancorp, the Trust, and the
underwriter have agreed to indemnify each other against certain liabilities
including liabilities under the Securities Act, or to contribute to payments
that Northeast Bancorp, the Trust, or the underwriter may be required to make in
respect thereof.
The foregoing is a summary of the principal terms of the underwriting
agreement and is not complete. Reference is made to a copy of the underwriting
agreement which is on file as an exhibit to the registration statement.
In connection with this offering, the underwriter and any selling group
members and their respective affiliates may engage in transactions effected in
accordance with Rule 104 of the Securities and Exchange Commission's Regulation
M that are intended to stabilize, maintain, or otherwise affect the market price
of the preferred securities. Such transactions may include over-allotment
transactions in which the underwriter creates a short position for its own
account by selling more preferred securities than it is committed to purchase
from the Trust. In such a case, to cover all or part of the short position, the
underwriter may exercise the over-allotment option described above or may
purchase preferred securities in the open market following completion of the
initial offering of the preferred securities. The underwriter also may engage in
stabilizing transactions in which it bids for, and purchases, shares of the
preferred securities at a level above that which might otherwise prevail in the
open market for the purpose of preventing or retarding a decline in the market
price of the preferred securities. The underwriter also may reclaim any selling
concessions allowed to a dealer if the underwriter repurchases shares
distributed by that dealer. Any of the foregoing transactions may result in the
maintenance of a price for the preferred securities at a level above that which
might otherwise prevail in the open market. Neither Northeast Bancorp nor the
underwriter makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the preferred securities. The underwriter is not required to engage in
any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
The preferred securities are a new issue of securities with no established
trading market. Northeast Bancorp and the Trust have been advised by the
underwriter that it intends to make a market in the preferred securities.
However, the underwriter is not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion of
the underwriter. We have applied to have the preferred securities listed on the
American Stock Exchange. Accordingly, no assurance can be given as to the
development or liquidity of any market for the preferred securities.
The underwriter has in the past, and may in the future, perform various
services for Northeast Bancorp, including investment banking services, for which
they have and may receive customary fees. The underwriter also served as
managing underwriter for a secondary offering of Northeast Bancorp's common
stock in 1998.
VALIDITY OF SECURITIES
The validity of the guarantee and the junior subordinated debentures and
certain tax matters will be passed upon for Northeast Bancorp by Carlton,
Fields, Ward, Emmanuel, Smith & Cutler, P.A., Tampa, Florida, and certain legal
matters will be passed upon for the Underwriter by Tyler Cooper & Alcorn, LLP.
Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A. will rely as to certain
matters of Maine law on the opinion of Lipman & Katz, P.A. Certain matters of
Delaware law relating to the validity of the preferred securities, the
enforceability of the trust agreement, and the creation of the Trust will be
passed upon by Richards, Layton & Finger, P.A., special Delaware counsel to
Northeast Bancorp and the Trust. Carlton, Fields, Ward, Emmanuel, Smith &
Cutler, P.A., and Tyler Cooper & Alcorn, LLP will rely as to certain matters of
Delaware law on the opinion of Richards, Layton & Finger, P.A.
101
<PAGE> 103
EXPERTS
Baker Newman & Noyes Limited Liability Company, independent auditors, have
audited our consolidated financial statements included in this Prospectus and
Registration Statement as of June 30, 1999 and 1998 and for each of the three
years in the period ended June 30, 1999, as set forth in their report, which is
included elsewhere in this Prospectus and Registration Statement. Our financial
statements are included in reliance on Baker Newman & Noyes Limited Liability
Company's report, given on their authority as experts in accounting and
auditing.
WHERE CAN YOU FIND MORE INFORMATION
Northeast Bancorp is subject to the reporting requirements of the
Securities Exchange Act of 1934 and, as a result, Northeast Bancorp files
reports, proxy statements, and other information with the Securities and
Exchange Commission. You may read, without charge, or copy, at prescribed rates,
any document that Northeast Bancorp files with the SEC at the public reference
facilities maintained by the SEC in Washington, D.C. and at its regional offices
in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-732-
0330 for further information on the public reference rooms and their copy
charges. Northeast Bancorp's electronic filings with the SEC also are available
to the public over the Internet at a World Wide Web Site maintained by the SEC
at http://www.sec.gov. Further, Northeast Bancorp's common stock trades on the
American Stock Exchange and, as a result, reports, proxy statements, and other
information concerning Northeast Bancorp also can be inspected at the offices of
The American Stock Exchange at 86 Trinity Place, New York, New York 10006.
In addition, Northeast Bancorp and the Trust have jointly filed with the
SEC a Registration Statement on Form S-2 under the Securities Act of 1933
covering the preferred securities, the junior subordinated debentures, and the
guarantee. This prospectus, which is part of the Registration Statement, does
not contain all the information included in the Registration Statement. For
further information with respect to Northeast Bancorp, the Trust, or the
securities offered in this prospectus, you should refer to the Registration
Statement and its exhibits. This prospectus summarizes material provisions of
contracts and other documents to which we refer you. Since the prospectus may
not contain all the information that you may find important, you should review
the full text of these documents. We have included copies of these documents as
exhibits to the Registration Statement. The full Registration Statement may be
obtained from the SEC as indicated above or from us.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus some
information in documents that are filed by Northeast Bancorp with the SEC. This
means we can disclose important information to you by referring to another
document filed separately with the SEC. Any information that we incorporate by
reference is considered part of this prospectus. We incorporate by reference in
this prospectus the following document of Northeast Bancorp listed below:
- Annual Report on Form 10-K for the fiscal year ended June 30, 1999, filed
with the SEC on September 28, 1999;
We also incorporate by reference any filings that Northeast Bancorp makes
with the SEC under Section 13(a) or 15(d) of the Securities Exchange Act of 1934
prior to the termination of this offering. Any information incorporated by
reference this way will automatically be deemed to update and supercede any
information previously disclosed in this prospectus or in an earlier filed
document also incorporated by reference in this prospectus.
You may request a copy of any or all documents which are incorporated by
reference to this prospectus and we will provide it to you at no cost. You
should make your request in writing or by telephone to Richard E. Wyman, Jr.,
Northeast Bancorp, 158 Court Street, Auburn, Maine 04210.
102
<PAGE> 104
This prospectus does not contain or incorporate by reference any separate
financial statements of the Trust. We do not consider that financial statements
of the Trust are material to holders of the preferred securities because the
Trust is a newly formed special purpose entity, has no operating history or
independent operations, and is not engaged in and does not propose to engage in
any activity other than holding the junior subordinated debentures of Northeast
Bancorp and issuing the preferred securities and the common securities. For more
information, see the information under the captions "Prospectus Summary -- NBN
Capital Trust," "Description of the Preferred Securities," "Description of
Junior Subordinated Debentures" and "Description of Guarantee." In addition, we
do not expect that the Trust will be filing reports under the Securities
Exchange Act of 1934 with the SEC.
103
<PAGE> 105
NORTHEAST BANCORP AND SUBSIDIARY
Audited Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
With Independent Auditors' Report
<PAGE> 106
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
----------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Statements of Financial Condition at June 30,
1999 and 1998............................................. F-3
Consolidated Statements of Income for the Years Ended June
30, 1999, 1998 and 1997................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 1999, 1998 and 1997.......... F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997.............................. F-6
Notes to Consolidated Financial Statements.................. F-7 - F-29
</TABLE>
F-1
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northeast Bancorp and Subsidiary
We have audited the consolidated statements of financial condition of
Northeast Bancorp and Subsidiary as of June 30, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of Northeast Bancorp's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Northeast
Bancorp and Subsidiary as of June 30, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Baker Newman & Noyes
Limited Liability Company
Portland, Maine
July 30, 1999
F-2
<PAGE> 108
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 4,963,985 $ 6,821,574
Interest bearing deposits................................... 345,585 421,392
Federal Home Loan Bank overnight deposits................... 6,784,000 4,909,000
------------ ------------
Total cash and cash equivalents..................... 12,093,570 12,151,966
Trading account securities, at market value................. -- 50,000
Available for sale securities, at market value (notes 2, 7
and 9).................................................... 18,054,317 13,608,823
Loans held for sale......................................... 311,600 369,500
Loans receivable (notes 3 and 7):
Mortgage loans:
Residential real estate................................. 182,244,336 171,903,751
Construction loans...................................... 3,187,642 3,521,427
Commercial real estate.................................. 55,437,983 47,052,134
------------ ------------
240,869,961 222,477,312
Undisbursed portion of construction loans............... (1,501,993) (1,421,847)
Net deferred loan origination costs..................... 220,337 7,270
------------ ------------
Total mortgage loans................................ 239,588,305 221,062,735
Commercial loans.......................................... 34,814,252 27,068,416
Consumer and other loans.................................. 44,583,690 33,899,799
------------ ------------
318,986,247 282,030,950
Less allowance for loan losses............................ (2,924,000) (2,978,000)
------------ ------------
Net loans........................................... 316,062,247 279,052,950
Premises and equipment -- net (note 4)...................... 5,037,026 4,473,885
Other real estate owned -- net (note 5)..................... 193,850 350,496
Accrued interest receivable -- loans........................ 1,803,379 1,710,704
Accrued interest receivable -- investments.................. 187,281 222,994
Federal Home Loan Bank stock, at cost (note 7).............. 5,680,500 5,680,500
Goodwill, net of accumulated amortization of $1,662,588 in
1999 and $1,532,807 in 1998 (note 13)..................... 1,462,346 1,923,915
Other assets (note 14)...................................... 3,496,789 2,936,861
------------ ------------
Total assets........................................ $364,382,905 $322,532,594
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6):
Demand.................................................. $ 17,891,552 $ 15,209,219
NOW..................................................... 31,203,347 23,429,512
Money market............................................ 7,156,424 11,993,110
Regular savings......................................... 21,999,615 20,305,953
Brokered time deposits.................................. 13,458,257 7,574,710
Certificates of deposit under $100,000.................. 103,302,505 86,156,463
Certificates of deposit $100,000 or more................ 24,352,335 19,355,130
------------ ------------
Total deposits...................................... 219,364,035 184,024,097
FHLB Borrowings (note 7).................................. 103,881,716 104,439,952
Note payable (note 8)..................................... 687,500 993,055
Securities sold under repurchase agreements (notes 2 and
9)...................................................... 11,867,839 5,205,594
Other liabilities......................................... 1,898,700 2,730,369
------------ ------------
Total liabilities................................... 337,699,790 297,393,067
Commitments and contingent liabilities (notes 8, 16 and 17)
Stockholders' equity (notes 10, 12 and 16):
Series A cumulative convertible preferred stock; $1 par
value, 1,000,000 shares authorized; 45,454 shares issued
and outstanding at June 30, 1998........................ -- 999,988
Common stock, $1 par value, 15,000,000 shares authorized;
2,768,624 and 2,614,285 shares issued and outstanding at
June 30, 1999 and 1998, respectively.................... 2,768,624 2,614,285
Additional paid-in capital................................ 10,208,299 9,258,107
Retained earnings......................................... 14,145,720 12,331,595
Accumulated other comprehensive income (loss) (note 2).... (439,528) (64,448)
------------ ------------
Total stockholders' equity.......................... 26,683,115 25,139,527
------------ ------------
Total liabilities and stockholders' equity.......... $364,382,905 $322,532,594
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 109
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans..................................... $25,178,587 $21,988,864 $18,973,560
Interest on Federal Home Loan Bank overnight
deposits........................................... 328,981 514,113 429,531
Interest and dividends on available for sale
securities......................................... 957,558 1,461,024 2,277,573
Dividends on Federal Home Loan Bank stock............. 364,245 300,664 227,360
Other interest and dividend income.................... 27,422 18,346 27,697
----------- ----------- -----------
Total interest and dividend income............ 26,856,793 24,283,011 21,935,721
Interest expense:
Deposits (note 6)..................................... 8,680,297 7,586,717 7,103,375
Repurchase agreements................................. 339,556 206,651 199,453
Borrowed funds........................................ 5,530,389 5,016,703 3,988,060
----------- ----------- -----------
Total interest expense........................ 14,550,242 12,810,071 11,290,888
----------- ----------- -----------
Net interest income before provision for loan
losses...................................... 12,306,551 11,472,940 10,644,833
Provision for loan losses (note 3)...................... 610,017 706,100 614,427
----------- ----------- -----------
Net interest income after provision for loan
losses...................................... 11,696,534 10,766,840 10,030,406
Noninterest income:
Fees and service charges on loans..................... 288,720 206,961 194,020
Fees for other services to customers.................. 660,045 596,110 657,705
Net securities gains (note 2)......................... 84,133 285,716 171,080
Gain on trading activities............................ 10,732 1,797 88,350
Gain on sales of loans................................ 817,084 726,599 201,418
Loan servicing fees................................... 160,811 227,409 275,496
Other income.......................................... 694,827 626,939 498,172
----------- ----------- -----------
Total noninterest income...................... 2,716,352 2,671,531 2,086,241
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Noninterest expense:
Salaries and employee benefits (notes 15 and 16)...... $ 4,889,172 $ 4,638,813 $ 4,614,802
Occupancy expense (note 4)............................ 975,086 903,978 783,434
Equipment expense (note 4)............................ 888,423 863,580 893,605
FDIC insurance expense (note 10)...................... 63,441 60,097 390,494
Other (notes 2, 13 and 15)............................ 3,753,721 3,265,249 3,036,002
----------- ----------- -----------
Total noninterest expense..................... 10,569,843 9,731,717 9,718,337
----------- ----------- -----------
Income before income taxes.............................. 3,843,043 3,706,654 2,398,310
Income tax expense (note 14)............................ 1,432,591 1,302,871 908,565
----------- ----------- -----------
Net income.................................... $ 2,410,452 $ 2,403,783 $ 1,489,745
=========== =========== ===========
Earnings per share (notes 11 and 16):
Basic................................................. $ .88 $ 1.00 $ .63
Diluted............................................... $ .86 $ .86 $ .56
</TABLE>
See accompanying notes.
F-4
<PAGE> 110
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK COMMON PAID-IN TREASURY RETAINED INCOME
SERIES A AND B STOCK CAPITAL STOCK EARNINGS (LOSS) TOTAL
--------------- ---------- ----------- -------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996...... $1,999,980 $1,421,950 $ 7,516,227 $(52,277) $10,315,041 $(837,354) $20,363,567
Net income................... -- -- -- -- 1,489,745 -- 1,489,745
Other comprehensive income
net of tax:
Net unrealized income
on investments
available for sale,
net of
reclassification
adjustment (note
19).................. -- -- -- -- -- 503,179 503,179
-----------
Total comprehensive
income............... -- -- -- -- -- -- 1,992,924
Issuance of common stock
through exercise of stock
options and purchase of
treasury stock............. -- 20,000 83,450 (28,420) -- -- 75,030
Exercise of stock warrants... -- 19,940 88,005 67,055 -- -- 175,000
Treasury stock issued --
employee stock bonus....... -- -- (268) 13,642 -- -- 13,374
Issuance of common stock..... -- 1,019 12,468 -- -- -- 13,487
Dividends on preferred
stock...................... -- -- -- -- (139,997) -- (139,997)
Dividends on common stock at
$0.21 per share............ -- -- -- -- (397,805) -- (397,805)
---------- ---------- ----------- -------- ----------- --------- -----------
Balance at June 30, 1997...... 1,999,980 1,462,909 7,699,882 -- 11,266,984 (334,175) 22,095,580
Net income................... -- -- -- -- 2,403,783 -- 2,403,783
Other comprehensive income
net of tax:
Net unrealized income
on investments
available for sale,
net of
reclassification
adjustment (note
19).................. -- -- -- -- -- 269,727 269,727
-----------
Total comprehensive
income............... -- -- -- -- -- -- 2,673,510
Issuance of common stock..... -- 939 15,730 -- -- -- 16,669
Conversion of preferred stock
Series B (note 12)......... (999,992) 214,284 785,708 -- -- -- --
Stock split in the form of a
dividend................... -- 740,807 -- -- (741,902) -- (1,095)
Stock options exercised and
treasury stock purchased... -- 32,200 158,500 (44,988) -- -- 145,712
Treasury stock sold.......... -- -- -- 44,988 -- -- 44,988
Exercise of stock warrants... -- 163,146 598,287 -- -- -- 761,433
Dividends on preferred
stock...................... -- -- -- -- (125,827) -- (125,827)
Dividends on common stock at
$0.21 per share............ -- -- -- -- (471,443) -- (471,443)
---------- ---------- ----------- -------- ----------- --------- -----------
Balance at June 30, 1998...... 999,988 2,614,285 9,258,107 -- 12,331,595 (64,448) 25,139,527
Net income................... -- -- -- -- 2,410,452 -- 2,410,452
Other comprehensive income
net of tax:
Net unrealized loss on
investments available for
sale, net of reclassification
adjustment (note 19)......... -- -- -- -- -- (375,080) (375,080)
-----------
Total comprehensive
income............... -- -- -- -- -- -- 2,035,372
Issuance of common stock..... -- 1,477 14,780 -- -- -- 16,257
Stock options exercised...... -- 16,500 71,786 -- -- -- 88,286
Dividends on preferred
stock...................... -- -- -- -- (25,667) -- (25,667)
Dividends on common stock at
$0.21 per share............ -- -- -- -- (570,660) -- (570,660)
Conversion of preferred stock
Series A (note 12)......... (999,988) 136,362 863,626 -- -- -- --
---------- ---------- ----------- -------- ----------- --------- -----------
Balance at June 30, 1999...... $ -- $2,768,624 $10,208,299 $ -- $14,145,720 $(439,528) $26,683,115
========== ========== =========== ======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 111
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,410,452 $ 2,403,783 $ 1,489,745
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 610,017 706,100 614,427
Provision for losses on other real estate owned......... 47,000 62,300 39,000
Deferred income tax expense (benefit)................... 86,398 (14,949) (72,290)
Depreciation of premises and equipment and other........ 755,956 617,628 665,193
Goodwill amortization and impairment provision.......... 461,569 296,374 296,374
Net gain on sale of available for sale securities....... (84,133) (285,716) (171,080)
Net gains on sales of loans............................. (817,084) (726,599) (201,418)
Originations of loans held for sale..................... (17,476,548) (7,251,700) (2,178,115)
Proceeds from sale of loans held for sale............... 17,908,553 7,287,744 2,430,823
Net change in trading account securities................ 50,000 (25,000) 172,621
Other................................................... (118,171) 41,035 (103,988)
Change in other assets and liabilities:
Interest receivable................................... (56,962) (293,605) (125,996)
Other assets and liabilities.......................... (1,241,063) 466,597 (17,869)
------------ ------------ ------------
Net cash provided by operating activities................. 2,535,984 3,283,992 2,837,427
Cash flows from investing activities:
Proceeds from the sale of available for sale securities... 6,930,743 27,974,991 12,377,154
Purchases of available for sale securities................ (15,992,030) (15,666,889) (12,129,135)
Proceeds from maturities and principal payments on
available for sale securities........................... 4,086,624 3,588,092 3,256,713
Proceeds from sale of loans............................... 11,278,496 17,479,139 --
Purchases of loans........................................ (27,913,995) (66,283,950) (25,425,642)
Net increase in loans..................................... (20,629,306) (10,509,720) (10,910,942)
Additions to premises and equipment....................... (1,424,307) (363,562) (1,043,176)
Proceeds from sale of other real estate owned............. 422,787 214,884 519,871
Purchase of Federal Home Loan Bank stock.................. -- (1,559,500) (1,362,700)
------------ ------------ ------------
Net cash used by investing activities............... (43,240,988) (45,126,515) (34,717,857)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits.................................. $ 35,339,938 $ 11,102,811 $ 8,066,043
Net (repayments) borrowings from the Federal Home Loan
Bank.................................................... (558,236) 23,945,481 27,856,994
Net increase in repurchase agreements..................... 6,662,245 106,972 1,335,656
Dividends paid............................................ (596,327) (597,270) (537,802)
Treasury stock purchased.................................. -- (44,988) (28,420)
Treasury stock sold....................................... -- 44,988 --
Stock options exercised................................... 88,286 190,700 103,450
Warrants exercised........................................ -- 761,433 175,000
Issuance of common stock.................................. 16,257 16,669 13,487
Stock split -- payment for fractional shares.............. -- (1,095) --
Principal payments on note payable........................ (305,555) (305,556) (203,581)
------------ ------------ ------------
Net cash provided by financing activities........... 40,646,608 35,220,145 36,780,827
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents........ (58,396) (6,622,378) 4,900,397
Cash and cash equivalents, beginning of year................ 12,151,966 18,774,344 13,873,947
------------ ------------ ------------
Cash and cash equivalents, end of year...................... $ 12,093,570 $ 12,151,966 $ 18,774,344
============ ============ ============
Supplemental schedule of cash flow information:
Interest paid............................................. $ 14,610,453 $ 12,727,917 $ 11,159,387
Income taxes paid......................................... 1,524,000 972,000 641,000
Supplemental schedule of noncash investing and financing
activities:
Transfer from loans to other real estate owned............ $ 301,537 $ 56,861 $ 538,019
Change in valuation allowance for unrealized losses on
available for sale securities, net of tax............... 375,080 269,727 503,179
Net change in deferred taxes for unrealized losses on
available for sale securities........................... 193,222 138,949 259,214
Transfer of nonmarketable investment security to other
assets.................................................. 45,000 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE> 112
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Northeast Bancorp and Subsidiary
(the Company) conform to generally accepted accounting principles and general
practice within the banking industry.
Business
Northeast Bancorp provides a full range of banking services to individual
and corporate customers throughout south central and western Maine through its
wholly owned subsidiary, Northeast Bank, F.S.B. The bank is subject to
competition from other financial institutions. The bank is subject to the
regulations of the Federal Deposit Insurance Corporation (FDIC) and the Office
of Thrift Supervision (OTS) and undergoes periodic examinations by these
agencies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Northeast Bancorp, a savings and loan holding company, and its wholly-owned
subsidiary, Northeast Bank, F.S.B. (including the Bank's wholly-owned
subsidiary, Northeast Financial Services, Inc.) All significant intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and income and
expenses for the period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the carrying value of real estate acquired through foreclosure, management
obtains independent appraisals for significant properties.
A substantial portion of the Company's loans are secured by real estate in
the State of Maine. In addition, all of the real estate acquired through
foreclosure is located in the same market. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio and the
recovery of the carrying amount of real estate acquired through foreclosure are
susceptible to changes in market conditions in Maine.
Merger
On October 24, 1997, the Company merged with Cushnoc Bank and Trust Company
in a transaction accounted for as a pooling of interests. All financial
information includes the accounts of Cushnoc Bank and Trust Company for all
periods presented prior to the date of the merger (See note 15). Cushnoc Bank
and Trust Company had a fiscal year based on the twelve months ending December
31. Upon consummation of the merger, Cushnoc Bank and Trust Company was merged
into the Company's banking subsidiary, Northeast Bank, F.S.B.
Cash and Cash Equivalents
For purposes of presentation in the cash flow statements, cash and cash
equivalents consist of cash and due from banks, Federal Home Loan Bank overnight
deposits and interest bearing deposits. The Company is
F-7
<PAGE> 113
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
required to maintain a certain reserve balance in the form of cash or deposits
with the Federal Reserve Bank. At June 30, 1999, the reserve balance was
approximately $1,211,000.
Available for Sale Securities
Marketable equity securities, and debt securities which may be sold prior
to maturity, are classified as available for sale and are carried at market
value. Market value is determined based on bid prices published in financial
newspapers or bid quotations received from securities dealers. Changes in market
value, net of applicable income taxes, are reported as a separate component of
stockholders' equity. When a decline in market value of a security is considered
other than temporary, the loss is charged to other expense in the consolidated
statements of income and is treated as a writedown of the security's "cost".
Gains and losses on the sale of securities are recognized on the trade date
using the specific identification method.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale and Mortgage Banking Activities
Loans originated for sale are specifically identified and carried at the
lower of aggregate cost or market value, estimated based on bid quotations from
loan dealers. The carrying value of loans held for sale approximates the market
value at June 30, 1999 and 1998. Gains and losses on sales of loans are
determined using the specific identification method and are reflected as gain on
sales of loans in the consolidated statements of income.
The Company recognizes as separate assets the rights to service mortgage
loans for others, and performs an assessment of capitalized mortgage servicing
rights for impairment based on the current fair value of those rights. The
Company capitalizes mortgage servicing rights at their allocated cost (based on
the relative fair values of the rights and the related loans) upon the sale of
the related loans.
The Company's mortgage servicing rights asset at June 30, 1999 and 1998 was
approximately $569,000 and $363,000, respectively, and is included in other
assets in the consolidated statements of financial position. Mortgage servicing
rights are amortized on an accelerated method over the estimated weighted
average life of the loans. The Company's assumptions with respect to
prepayments, which affect the estimated average life of the loans, are adjusted
periodically to reflect current circumstances. The Company evaluates the
estimated life of its servicing portfolio based on data which is disaggregated
to reflect note rate, type and term on the underlying loans.
Loans
Loans are carried at the principal amounts outstanding plus net premiums
paid and net deferred loan costs. Loan origination fees and certain direct loan
origination costs are deferred and recognized in interest income as an
adjustment to the loan yield over the life of the related loans. Loan premiums
paid to acquire loans are recognized as a reduction of interest income over the
estimated life of the loans. Loans are generally placed on 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
F-8
<PAGE> 114
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
terms of the loan agreement. Factors considered by management in determining
impairment include payment status and collateral value.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the allowance when
management believes that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses based on evaluations of collectibility and prior
loss experience. The evaluation takes into consideration such factors as changes
in the nature and volume of the portfolio, overall portfolio quality, specific
problem loans, and current and anticipated economic conditions that may affect
the borrowers' ability to repay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, changing
economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line and accelerated methods over the
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred and the cost of major renewals and betterments are
capitalized.
Long-lived assets are evaluated periodically for impairment. An assessment
of recoverability is performed prior to any writedown of the asset. If
circumstances suggest that their value may be impaired, then an expense would be
charged in the then current period.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
Other Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings, or acceptance of a deed or title in lieu of
foreclosure. Other real estate owned is carried at the lower of cost or fair
value of the collateral less estimated selling expenses. Losses arising from the
acquisition of such properties are charged against the allowance for loan
losses. Operating expenses and any subsequent provisions to reduce the carrying
value are charged against current period earnings. Gains and losses upon
disposition are reflected in earnings as realized.
F-9
<PAGE> 115
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
Goodwill
Goodwill arising from acquisitions is being amortized on a straight-line
basis over ten to fifteen year periods. Goodwill is reviewed for possible
impairment when events or changed circumstances may affect the underlying basis
of the asset (See note 13).
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs were
approximately $218,000, $172,000 and $187,000 for the years ended June 30, 1999,
1998 and 1997, respectively.
Stock-Based Compensation
Compensation expense for the Stock Option Plans is accounted for in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Stock Option Plans are noncompensatory plans and no
expense is recognized. Shares not yet awarded are not considered outstanding for
purposes of computing earnings per share.
Comprehensive Income
In 1999, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. No
adjustments to recorded amounts were required by adoption of this statement.
Accumulated other comprehensive income or loss consists solely of net unrealized
gains or losses on investment securities available for sale.
New Accounting Pronouncements Not Yet Implemented
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is scheduled to be effective in fiscal 2001. SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, is scheduled to be effective in
fiscal 2000. Management of the Company does not expect these statements to have
a significant effect on the Company's financial position or results of
operations based on the Company's current activities.
2. AVAILABLE FOR SALE SECURITIES
A summary of the cost and approximate fair values of available for sale
securities at June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
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......... $ 596,626 $ 598,445 $ 4,696,659 $ 4,698,266
Corporate bonds..................... 201,916 199,527 202,952 203,484
Mortgage-backed securities.......... 16,653,302 16,027,028 7,723,843 7,714,332
Equity securities................... 1,268,424 1,229,317 1,083,018 992,741
----------- ----------- ----------- -----------
$18,720,268 $18,054,317 $13,706,472 $13,608,823
=========== =========== =========== ===========
</TABLE>
F-10
<PAGE> 116
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
The gross unrealized gains and unrealized losses on available for sale
securities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
----------------------- -----------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S.
Treasury and other U.S.
Government corporations and agencies.......... $ 2,752 $ 933 $ 4,157 $ 2,550
Corporate bonds............................... 681 3,070 789 257
Mortgage-backed securities.................... 3,287 629,561 27,730 37,241
Equity securities............................. 15,631 54,738 16,676 106,953
------- -------- ------- --------
$22,351 $688,302 $49,352 $147,001
======= ======== ======= ========
</TABLE>
At June 30, 1999, investment securities with a market value of
approximately $14,938,000 were pledged as collateral to secure outstanding
repurchase agreements.
At June 30, 1999 and 1998, included in accumulated other comprehensive
income (loss) as a reduction to stockholders' equity are net unrealized losses
of $665,951 and $97,649, respectively, net of the deferred tax effect of
$226,423 and $33,201, respectively.
The cost and fair values of available for sale securities at June 30, 1999
by contractual maturity are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year............................................. $ 496,626 $ 497,820
Due after one year through five years....................... 301,916 300,152
----------- -----------
798,542 797,972
Mortgage-backed securities (including securities with
interest rates ranging from 5.15% to 9.0% maturing
September 2003 to March 2029)............................. 16,653,302 16,027,028
Equity securities........................................... 1,268,424 1,229,317
----------- -----------
$18,720,268 $18,054,317
=========== ===========
</TABLE>
Realized gains and losses on available for sale securities for the year
ended June 30, 1999 were $85,891 and $1,758, respectively, for the year ended
June 30, 1998 were $288,196 and $2,480, respectively, and for the year ended
June 30, 1997 were $171,205 and $125, respectively.
Based on management's assessment of available for sale securities, there
has been more than a temporary decline in fair value of certain securities. For
the years ended June 30, 1999, 1998 and 1997, write-downs of available for sale
securities were $95,728, $172,235 and $110,000, respectively, and are included
in other expense in the consolidated statements of income.
3. LOANS RECEIVABLE
The Company's lending activities are predominantly conducted in south
central and western Maine. However, the Company does purchase residential
mortgage loans in the open market out of this geographical area. The Company
grants single-family and multi-family residential loans, commercial real estate
loans, commercial loans and a variety of consumer loans. In addition, the
Company grants loans for the construction of residential homes, multi-family
properties, commercial real estate properties and for land development.
F-11
<PAGE> 117
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
Also, the Company participates in indirect lending arrangements for automobile,
equipment and mobile home loans. The Company's indirect lending activities are
conducted in south central and western Maine. Most loans granted by the Company
are collateralized by real estate. The ability and willingness of residential
and commercial real estate, commercial and construction loan borrowers to honor
their repayment commitments is generally dependent on the health of the real
estate sector in the borrowers' geographic area and/or the general economy.
In the ordinary course of business, the Company has loan transactions with
its officers, directors and their associates and affiliated companies ("related
parties") at substantially the same terms as those prevailing at the time for
comparable transactions with others. Such loans amounted to $3,500,973 and
$2,219,800 at June 30, 1999 and 1998, respectively. In 1999, new loans granted
to related parties totaled $2,008,528; payments and reductions amounted to
$727,355.
Included in the loan portfolio are unamortized premiums on purchased loans
of approximately $742,000 and $1,016,000 at June 30, 1999 and 1998,
respectively.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year....................... $2,978,000 $2,741,809 $2,760,872
Provision charged to operating expenses............ 610,017 706,100 614,427
Loans charged off.................................. (926,364) (785,111) (772,250)
Recoveries on loans charged off.................... 262,347 315,202 138,760
---------- ---------- ----------
Net loans charged off............................ (664,017) (469,909) (633,490)
---------- ---------- ----------
Balance at end of year............................. $2,924,000 $2,978,000 $2,741,809
========== ========== ==========
</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.
Loans that are returned to accrual status are no longer considered to be
impaired. Certain loans are exempt from individual impairment evaluation,
including large groups of smaller-balance homogenous loans that are collectively
evaluated for impairment, such as consumer and residential mortgage loans and
commercial loans with balances less than $25,000.
The allowance for loan losses includes impairment reserves related to loans
that are identified as impaired, which are based on discounted cash flows using
the loan's effective interest rate, the fair value of the collateral for
collateral-dependent loans, or the observable market price of the impaired loan.
When foreclosure is probable, impairment is measured based on the fair value of
the collateral. Loans that experience insignificant payment delays (less than 60
days) and insignificant shortfalls in payment amounts (less than 10%) generally
are not classified as impaired. Restructured loans are reported as impaired in
the year of restructuring. Thereafter, such loans may be removed from the
impaired loan disclosure if the loans were paying a market rate of interest at
the time of restructuring and are performing in accordance with their
renegotiated terms.
At June 30, 1999, total impaired loans were $612,867 of which $241,420 had
related allowances of $77,200. During the year ended June 30, 1999, the income
recognized related to impaired loans was $66,030 and the average balance of
outstanding impaired loans was $1,229,987. At June 30, 1998, total impaired
loans were $1,623,720 of which $927,355 had related allowances of $251,474.
During the year ended June 30, 1998, the income recognized related to impaired
loans was $19,693 and the average balance of outstanding impaired loans was
$1,956,488. At June 30, 1997, total impaired loans were $1,661,698 of which
$844,457 had related allowances of $369,474. During the year ended June 30,
1997, the income recognized related to
F-12
<PAGE> 118
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
impaired loans was $50,690 and the average balance of outstanding impaired loans
was $1,330,983. The Company recognizes interest on impaired loans on a cash
basis when the ability to collect the principal balance is not in doubt;
otherwise, cash received is applied to the principal balance of the loan.
Loans on nonaccrual status, including impaired loans described above, at
June 30, 1999 and 1998 totaled approximately $1,144,000 and $2,248,000,
respectively. Interest income that would have been recorded under the original
terms of such loans, net of interest income actually recognized for the years
ended June 30, 1999, 1998 and 1997, totaled approximately $71,000, $165,000 and
$203,000, respectively.
The Company has no material outstanding commitments to lend additional
funds to customers whose loans have been placed on nonaccrual status or the
terms of which have been modified.
The Company was servicing for others mortgage loans of approximately
$64,690,000, $55,581,000 and $42,509,000 at June 30, 1999, 1998 and 1997,
respectively.
4. PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land........................................................ $1,012,503 $1,037,503
Buildings................................................... 2,586,996 2,503,254
Leasehold and building improvements......................... 1,272,732 1,130,270
Furniture, fixtures and equipment........................... 3,818,358 4,480,402
---------- ----------
8,690,589 9,151,429
Less accumulated depreciation............................... 3,653,563 4,677,544
---------- ----------
Net premises and equipment........................ $5,037,026 $4,473,885
========== ==========
</TABLE>
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense, was $754,665, $615,591 and $660,871 for the
years ended June 30, 1999, 1998 and 1997, respectively.
5. OTHER REAL ESTATE OWNED
The following table summarizes the composition of other real estate owned
at June 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Real estate properties acquired in settlement of loans $221,575 $355,596
Less allowance for losses 27,725 5,100
-------- --------
$193,850 $350,496
======== ========
</TABLE>
Activity in the allowance for losses on other real estate owned was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 5,100 $ 50,839 $100,000
Provision for losses on other real estate owned 47,000 62,300 39,000
Other real estate owned write-downs (24,375) (108,039) (88,161)
-------- --------- --------
Balance at end of year $ 27,725 $ 5,100 $ 50,839
======== ========= ========
</TABLE>
F-13
<PAGE> 119
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
6. DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE 1999 1998
AT JUNE 30, ---------------------- ----------------------
1999 AMOUNT PERCENT AMOUNT PERCENT
------------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Demand.......................... 0.00% $ 17,891,552 8.2% $ 15,209,219 8.3%
NOW............................. 2.66 31,203,347 14.2 23,429,512 12.7
Money market.................... 2.16 7,156,424 3.3 11,993,110 6.5
Regular savings................. 2.15 21,999,615 10.0 20,305,953 11.0
Certificates of deposit:
1.00 - 3.75%.................. 2.35 1,093,801 .5 360,674 .2
3.76 - 5.75%.................. 5.12 103,086,863 47.0 55,603,422 30.2
5.76 - 7.75%.................. 6.10 36,924,752 16.8 57,105,075 31.0
7.76 - 9.75%.................. 8.00 7,681 .0 17,132 .1
---- ------------ ----- ------------ -----
4.47% $219,364,035 100.0% $184,024,097 100.0%
==== ============ ===== ============ =====
</TABLE>
At June 30, 1999, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1.00 - 3.75%......... $ 1,090,387 $ 3,414 $ -- $ -- $ -- $ --
3.76 - 5.75%......... 76,299,359 22,282,660 2,072,149 1,358,661 1,036,081 37,953
5.76 - 7.75%......... 21,051,009 8,118,697 7,117,931 637,115 -- --
7.76 - 9.75%......... 7,681 -- -- -- -- --
</TABLE>
Interest expense on deposits for the years ended June 30, 1999, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NOW................................................ $ 932,896 $ 269,412 $ 216,437
Money market 209,733 466,453 536,623
Regular savings.................................... 514,917 569,901 592,148
Certificates of deposit............................ 7,022,751 6,280,951 5,758,167
---------- ---------- ----------
$8,680,297 $7,586,717 $7,103,375
========== ========== ==========
</TABLE>
7. FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowings from the Federal Home Loan Bank are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
- ---------------------------------------------------
PRINCIPAL AMOUNTS INTEREST RATES MATURITY DATES
- ----------------- -------------- --------------
<S> <C> <C>
$ 42,000,000 4.64% - 6.27% 2000
3,148,288 4.98 - 6.40 2001
2,815,780 5.38 - 6.49 2002
9,515,546 5.69 - 6.64 2003
3,402,102 5.55 - 6.67 2004
9,000,000 5.25 - 6.65 2005
34,000,000 4.89 - 5.68 2008
------------
$103,881,716
============
</TABLE>
F-14
<PAGE> 120
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
JUNE 30, 1998
- ---------------------------------------------------
PRINCIPAL AMOUNTS INTEREST RATES MATURITY DATES
- ----------------- -------------- --------------
<S> <C> <C>
$ 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>
Residential mortgages on one to four family owner occupied homes, free of
liens, pledges and encumbrances, investment securities not otherwise pledged,
and the Company's Federal Home Loan Bank stock equal to at least 200% of the
borrowings from that bank have been pledged under a blanket agreement to secure
these borrowings. The Company is required to own stock of the Federal Home Loan
Bank of Boston in order to borrow from the Federal Home Loan Bank. Several of
the Federal Home Loan Bank borrowings held at June 30, 1999 are adjustable and,
therefore, the rates are subject to change.
At June 30, 1999, the Company had approximately $2,100,000 available under
a line of credit arrangement with the FHLB. Also, in addition to the FHLB
advances outstanding at June 30, 1999, the Company had approximately $24,000,000
available for long-term advances with the FHLB.
8. NOTE PAYABLE
The note payable at June 30, 1999 and 1998 consists of a loan from an
unrelated financial institution relating to the acquisition of a bank. The note
is payable in eighteen equal quarterly principal payments of $76,389. Interest
is payable monthly at 8%. The Company has pledged Northeast Bank F.S.B. common
stock and a $400,000 key man life insurance policy as collateral for the loan.
The loan agreement contains certain covenants which limit capital
expenditures of the Company and the amount of nonperforming loans, requires
minimum loan loss reserves, capital and return on assets, and the Company is
required to obtain approval from the lender before the Company can commit to a
merger or consolidation with another entity. At June 30, 1999, the Company was
in compliance with these covenants.
9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
During 1999 and 1998, the Company sold securities under agreements to
repurchase. The weighted average interest rate on repurchase agreements was
4.07% and 4.20% at June 30, 1999 and 1998, respectively. These borrowings, which
were scheduled to mature within 180 days, were collateralized by GNMA securities
with a market value of $14,938,000 and amortized cost of $15,525,000 at June 30,
1999, and a market value of $8,547,000 and amortized cost of $8,558,000 at June
30, 1998. The average balance of repurchase agreements was $8,202,000 and
$4,917,000 during the years ended June 30, 1999 and 1998, respectively. The
maximum amount outstanding at any month-end during 1999 and 1998 was $11,868,000
and $5,737,000, respectively. Securities sold under these agreements were under
the control of the Company during 1999 and 1998.
F-15
<PAGE> 121
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
10. CAPITAL AND REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
As of June 30, 1999 and 1998, the most recent notification from the Office
of Thrift Supervision (OTS) categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 capital as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
institution's category.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios established by the
Federal Deposit Insurance Corporation (FDIC) as set forth in the table below.
The Bank is also subject to certain capital requirements established by the OTS.
At June 30, 1999 and 1998, the Bank ratios exceeded the OTS regulatory
requirements. Management believes that the Bank meets all capital adequacy
requirements to which it is subject as of June 30, 1999 and 1998.
The Company is also subject to similar capital adequacy requirements and
the regulatory requirements of federal banking agencies.
The following tables illustrate the actual and required amounts and ratios
for the Company and the Bank as set forth by the FDIC at the dates indicated.
<TABLE>
<CAPTION>
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Tier 1 (Core) capital (to risk
weighted assets):
Northeast Bancorp........... $25,635 10.1% >=$10,160 >=4.0% >=$15,239 >= 6.0%
Northeast Bank.............. 25,615 10.1 >= 10,159 >=4.0 >= 15,239 >= 6.0
Tier 1 (Core) capital (to total
assets):
Northeast Bancorp........... $25,635 7.1% >=$14,533 >=4.0% >=$18,167 >= 5.0%
Northeast Bank.............. 25,615 7.1 >= 14,533 >=4.0 >= 18,166 >= 5.0
Total capital (to risk weighted
assets):
Northeast Bancorp........... $27,253 10.7% >=$20,319 >=8.0% >=$25,399 >=10.0%
Northeast Bank.............. 27,233 10.7 >= 20,318 >=8.0 >= 25,398 >=10.0
</TABLE>
F-16
<PAGE> 122
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Tier 1 (Core) capital (to risk
weighted assets):
Northeast Bancorp........... $22,211 10.2% >=$8,713 >=4.0% >=$13,070 >= 6.0%
Northeast Bank.............. 22,695 10.4 >= 8,711 >=4.0 >= 13,067 >= 6.0
Tier 1 (Core) capital (to total
assets):
Northeast Bancorp........... $22,211 6.9% >=$12,839 >=4.0% >=$16,049 >= 5.0%
Northeast Bank.............. 22,695 7.1 >= 12,837 >=4.0 >= 16,046 >= 5.0
Total capital (to risk weighted
assets):
Northeast Bancorp........... $23,891 11.0% >=$17,427 >=8.0% >=$21,784 >=10.0%
Northeast Bank.............. 24,374 11.2 >= 17,422 >=8.0 >= 21,778 >=10.0
</TABLE>
The Company may not declare or pay a cash dividend on, or repurchase, any
of its capital stock if the effect thereof would cause the capital of the
Company to be reduced below the capital requirements imposed by the regulatory
authorities. The amount of dividends paid per share on common stock in the
consolidated statements of changes in stockholders' equity for the years ended
June 30, 1998 and 1997 have been restated for the effects of the stock split
effected in the form of a dividend in December 1997.
In September of 1996, Congress enacted comprehensive legislation amending
the FDIC BIF-SAIF deposit insurance assessments on savings and loan institution
deposits. The legislation imposed a one-time assessment on institutions holding
SAIF deposits at March 31, 1995. As a result of this legislation, the Company
incurred a special assessment of approximately $297,000 during 1997. This
assessment is included in FDIC insurance expense in the 1997 consolidated
statement of income.
F-17
<PAGE> 123
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
11. EARNINGS PER SHARE
Basic earnings per share (EPS) are computed by dividing net income
available to common stockholders by the weighted average number of shares
outstanding. The following table shows the weighted average number of shares
outstanding for each of the last three years. The 1998 and 1997 amounts have
been restated to reflect the three-for-two stock split effected in the form of a
dividend in December 1997. EPS amounts for 1997 have also been restated to give
effect to Statement of Financial Accounting Standards No. 128, Earnings Per
Share, adopted by the Company in fiscal 1998. Shares issuable relative to stock
options granted and outstanding warrants have been reflected as an increase in
the shares outstanding used to calculate diluted EPS, after applying the
treasury stock method. The number of shares outstanding for Basic and Diluted
EPS are presented as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Average shares outstanding, used in computing Basic
EPS................................................... 2,710,117 2,277,165 2,152,564
Effect of Dilutive Securities:
Stock warrants and options outstanding.............. 26,188 41,797 122,937
Options and warrants exercised...................... 8,177 167,116 42,063
Convertible preferred stock......................... 50,062 309,165 350,646
--------- --------- ---------
Average equivalent shares outstanding, used in
computing Diluted EPS............................... 2,794,544 2,795,243 2,668,210
========= ========= =========
</TABLE>
There is a difference between net income and net income available to common
stockholders which is used in the calculation of Basic EPS. The following table
illustrates the difference:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income......................................... $2,410,452 $2,403,783 $1,489,745
Preferred stock dividends.......................... (25,667) (125,827) (139,997)
---------- ---------- ----------
Net income available to common stockholders........ $2,384,785 $2,277,956 $1,349,748
========== ========== ==========
</TABLE>
12. PREFERRED STOCK
In November of 1998, the preferred stock, Series A, was converted to common
stock at a three to one ratio. There were no warrants attached to the Series A
preferred stock. In April of 1998, the preferred stock, Series B, was converted
into common stock at a three to one ratio. The Series B preferred stock was
issued with warrants attached and during 1998, 163,146 warrants were exercised
for a total capital contribution of $761,443. At June 30, 1998, all Series B
preferred stock warrants had been exercised. No preferred stock is outstanding
at June 30, 1999.
F-18
<PAGE> 124
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
13. OTHER EXPENSES
Other expenses includes the following for the years ended June 30, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Merger expense(note 15).................................... $ -- $ 318,061 $ --
Professional fees.......................................... 471,083 310,390 398,704
General insurance.......................................... 81,830 104,391 125,670
Printing and office supplies............................... 300,888 265,954 263,648
Real estate owned expenses................................. 44,219 50,912 64,907
Provision for losses on OREO............................... 47,000 62,300 39,000
Goodwill amortization...................................... 461,569 296,374 296,374
Write-down of investment securities........................ 95,728 172,235 110,000
Other...................................................... 2,251,404 1,684,632 1,737,699
---------- ---------- ----------
$3,753,721 $3,265,249 $3,036,002
========== ========== ==========
</TABLE>
The goodwill amortization for 1999 included an impairment write-down of
approximately $165,000.
14. INCOME TAXES
The current and deferred components of income tax expense (benefit) were as
follows for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Federal:
Current................................................... $1,290,783 $1,265,879 $942,244
Deferred.................................................. 86,398 (14,949) (72,290)
---------- ---------- --------
1,377,181 1,250,930 869,954
State and local -- current................................ 55,410 51,941 38,611
---------- ---------- --------
$1,432,591 $1,302,871 $908,565
========== ========== ========
</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, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -----------------
% 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........ $1,306,635 34.0% $1,260,262 34.0% $815,425 34.0%
State tax, net of federal
tax benefit.............. 36,571 1.0 34,281 .9 25,483 1.1
Non-deductible goodwill.... 98,358 2.6 42,192 1.1 42,192 1.8
Dividend received
deduction................ (19,367) (.5) (7,848) (.2) (6,873) (.3)
Low income/rehabilitation
credit................... (20,000) (.5) (20,000) (.5) (20,000) (.8)
Other...................... 30,394 .8 (6,016) (.2) 52,338 2.1
---------- ---- ---------- ---- -------- ----
$1,432,591 37.4% $1,302,871 35.1% $908,565 37.9%
========== ==== ========== ==== ======== ====
</TABLE>
F-19
<PAGE> 125
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses....... $ 994,000 $1,013,000
Deferred gain on loan sales............................... 46,000 51,000
Interest on nonperforming loans........................... 24,000 56,000
Difference in tax and financial statement bases of
investments............................................ 331,000 154,000
Difference in tax and financial statement amortization of
deductible goodwill.................................... 107,000 100,000
Other..................................................... 99,000 57,000
---------- ----------
Total deferred tax assets......................... 1,601,000 1,431,000
Deferred tax liabilities:
Loan loss reserve -- tax basis............................ (74,000) (89,000)
Mortgage servicing rights................................. (193,000) (124,000)
Other..................................................... (41,000) (53,000)
---------- ----------
Total deferred tax liabilities.................... (308,000) (266,000)
---------- ----------
Net deferred tax assets, included in other
assets.......................................... $1,293,000 $1,165,000
========== ==========
</TABLE>
The Company has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset. Accordingly, no
valuation allowance has been recorded at June 30, 1999 and 1998.
Tax legislation requires that all thrift institutions recapture all or a
portion of their tax bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Company has previously recorded a
deferred tax liability equal to the tax bad debt recapture and as such, the
rules will have no effect on net income or federal income tax expense. The
unrecaptured base year reserves will not be subject to recapture as long as the
Company continues to carry on the business of banking. In addition, the balance
of the pre-1988 tax bad debt reserves continue to be subject to provisions of
present law that require recapture in the case of certain excess distributions
to stockholders. For federal income tax purposes, the Company has designated
approximately $2,400,000 of net worth as a reserve for tax bad debts on loans.
The use of this amount for purposes other than to absorb losses on loans would
result in taxable income and financial statement tax expense at the then current
tax rate, since no deferred taxes have been provided for base year reserve
recapture.
15. MERGER
In October 1997, the Company issued approximately 188,000 shares of its
common stock for all the outstanding common stock of Cushnoc Bank and Trust
Company, of Augusta, Maine (Cushnoc). Cushnoc shareholders received 2.089 shares
of the Company's common stock for each share of Cushnoc common stock. The merger
qualified as a tax-free reorganization and was accounted for as a pooling of
interests. Accordingly, the Company's consolidated financial statements were
restated for all periods prior to the business combination to include the
results of operations, financial position and cash flows of Cushnoc. No
adjustments were necessary to conform Cushnoc's methods of accounting to the
methods used by the Company. There were no significant intercompany transactions
prior to consummation of the merger. The costs associated with the merger
totaled approximately $435,000, with $117,000 included in salaries and employee
benefits and $318,000 included in other expense in the 1998 consolidated
statement of income.
F-20
<PAGE> 126
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
THROUGH YEAR ENDED
OCTOBER 24, 1997 JUNE 30, 1997
---------------- -------------
<S> <C> <C>
Interest Income:
Northeast Bancorp....................................... $7,280,300 $20,029,140
Cushnoc Bank............................................ 613,733 1,906,581
---------- -----------
Combined................................................ $7,894,033 $21,935,721
========== ===========
Net Income (Loss):
Northeast Bancorp....................................... $ 432,319 $ 1,507,103
Cushnoc Bank............................................ 29,435 (17,358)
---------- -----------
Combined................................................ $ 461,754 $ 1,489,745
========== ===========
</TABLE>
There were no other changes in stockholders' equity prior to consummation
of the merger in fiscal 1998 that were material to the financial position of the
Company.
16. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a profit sharing plan which covers substantially all
full-time employees. Contributions and costs are determined as a percent of each
covered employee's salary and are at the Board of Directors discretion. Expenses
related to the profit sharing plan for the years ended June 30, 1999, 1998 and
1997 were $53,590, $43,500 and $130,000, respectively.
401(k) Plan
The Company offers a contributory 401(k) plan which is available to all
full-time salaried and hourly-paid employees who are regularly scheduled to work
1,000 hours or more in a Plan year, have attained age 21, and have completed one
year of employment. Employees may contribute between 1% and 15% of their base
compensation to which the Company will match 50% up to the first 6% contributed.
For the years ended June 30, 1999, 1998 and 1997, the Company contributed
approximately $74,115, $60,700 and $38,300, respectively.
Stock Option Plans
The Company has adopted Stock Option Plans in 1987, 1989 and 1992. Both
"incentive stock options" and "nonqualified stock options" may be granted
pursuant to the Option Plans. Under the Option Plans, incentive stock options
may only be granted to employees of the Company and nonqualified stock options
may be granted to employees and nonemployee directors. All options granted under
the Option Plans will be required to have an exercise price per share equal to
at least the fair market value per share of common stock on the date the option
is granted. Options immediately vest upon being granted. The options are
exercisable for a maximum of ten years after the options are granted in the case
of all incentive stock options, three years for nonqualified stock options in
the 1987 plan and five years for nonqualified stock options in the 1989 and 1992
plans.
In accordance with the Stock Option Plans, a total of 354,000 shares of
unissued common stock were reserved for issuance pursuant to incentive stock
options with 6,250 shares at June 30, 1999 available to be granted and 90,000
shares of unissued common stock were reserved for issuance pursuant to
nonqualified stock options with 1,000 shares at June 30, 1999 available to be
granted.
F-21
<PAGE> 127
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
The number of shares and the exercise prices in the following table for
1998 and 1997 have been retroactively restated for the stock split effected in
the form of a dividend in December 1997. A summary of the qualified and
non-qualified option activity for the years ended June 30 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
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........................... 123,000 $10.44 130,500 $ 6.01 139,500 $5.11
Granted........................ 11,500 9.92 41,250 18.50 22,500 8.33
Exercised...................... (16,500) 5.35 (46,000) 5.11 (30,000) 3.45
Expired........................ (7,750) 18.50 (2,750) 10.18 (1,500) 8.33
------- ------ ------- ------ ------- -----
Outstanding at end of year..... 110,250 $10.59 123,000 $10.44 130,500 $6.01
======= ====== ======= ====== ======= =====
Options exercisable at year
end.......................... 110,250 $10.59 123,000 $10.44 130,500 $6.01
======= ====== ======= ====== ======= =====
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
NUMBER WEIGHTED-AVERAGE
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES JUNE 30, 1999 CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ -------------- ---------------- ----------------
<S> <C> <C> <C>
$3.58...................................... 15,000 .5 year $ 3.58
$7.50 to $10.50............................ 61,250 6.0 7.90
$15.31 to $18.50........................... 34,000 8.5 18.41
------- -------- ------
$3.58 to $18.50............................ 110,250 7.0 $10.59
======= ======== ======
</TABLE>
The per share weighted average fair value of stock options granted during
1999 and 1998 was $3.44 and $6.24, respectively, on the date of the grants using
the Black Scholes option-pricing model as a valuation technique with the
following average assumptions: expected dividend yield, 2.13% and 1.40%;
risk-free interest rate, 5.79% and 5.46%; expected life, 8 years and 8 years;
and expected volatility, 27.82% and 22.49%, respectively.
For financial statement purposes, the Company measures the compensation
costs of its stock option plans under Accounting Principles Board (APB) Opinion
No. 25, whereby no compensation cost is recorded if, at the grant date, the
exercise price of the options is equal to the fair market value of the Company's
common stock. Had the Company determined cost based on the fair value at the
grant date for its stock options under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share for the year ended
June 30, 1999 and June 30, 1998 would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
EARNINGS PER SHARE
NET --------------------
INCOME BASIC DILUTED
---------- -------- ---------
<S> <C> <C> <C>
JUNE 30, 1999:
As reported........................................... $2,410,452 $0.88 $0.86
Pro forma............................................. 2,376,947 0.87 0.85
JUNE 30, 1998:
As reported........................................... $2,403,783 $1.00 $0.86
Pro forma............................................. 2,225,811 0.92 0.80
</TABLE>
F-22
<PAGE> 128
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
The pro forma amounts reflect only stock options granted in 1997 and
subsequent years. Therefore, the full impact of calculating the cost for stock
options under Statement No. 123 is not reflected in the pro forma amounts
presented above because the cost for options granted prior to July 1, 1995 is
not considered under the requirements of Statement No. 123.
Stock Purchase Plan
The Company has a stock purchase plan which covers substantially all
full-time employees with one year of service. Offerings under the Plan are made
quarterly at the market value of the Company's common stock on the offering
termination date. The maximum number of shares which may be purchased under the
plan is 156,000 shares.
17. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE-SHEET RISKS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The contract amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments with contract amounts which represent credit risk:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commitments to originate loans:
Residential real estate mortgages......................... $ 9,392,000 $ 6,392,000
Commercial real estate mortgages, including multi-family
residential real estate................................ 10,314,000 1,510,000
Commercial business loans................................. 4,725,000 3,460,000
----------- -----------
24,431,000 11,362,000
Unused lines of credit...................................... 18,941,000 14,585,000
Standby letters of credit................................... 1,501,000 329,000
Unadvanced portions of construction loans................... 1,502,000 1,422,000
</TABLE>
At June 30, 1999, $925,000 of the stand-by letters of credit have been
granted to related parties.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are issued to support private borrowing
F-23
<PAGE> 129
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and they are used for trading purposes. The derivative financial
instruments used by the Company are covered call and put contracts on its equity
securities portfolio. Gains and losses from entering into these types of
contracts have been immaterial to the results of operations of the Company. The
total value of securities under call and put contracts at any one time is
immaterial to the Company's financial position, liquidity, or results of
operations.
Legal Proceedings
The Company and its subsidiary are parties to litigation and claims arising
in the normal course of business. Management believes that the liabilities, if
any, arising from such litigation and claims will not be material to the
Company's consolidated financial position.
Lease Obligations
The Company leases certain properties and equipment used in operations
under terms of operating leases which include renewal options. Rental expense
under these leases approximated $373,000, $380,000 and $246,000 for the years
ended June 30, 1999, 1998 and 1997, respectively.
Approximate future minimum lease payments over the remaining terms of the
leases at June 30, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 266,000
2001........................................................ 251,000
2002........................................................ 251,000
2003........................................................ 194,000
2004........................................................ 182,000
2005 and after.............................................. 828,000
----------
$1,972,000
==========
</TABLE>
F-24
<PAGE> 130
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
18. CONDENSED PARENT INFORMATION
Condensed financial statements for Northeast Bancorp at June 30, 1999 and
1998 and for each of the years in the three year period ended June 30, 1999 are
presented below.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash (deposited with subsidiary)............................ $ 80,758 $ 1,104,504
Investment in subsidiary.................................... 26,051,816 23,908,576
Goodwill, net............................................... 611,845 713,819
Other assets................................................ 632,094 413,620
----------- -----------
Total assets...................................... $27,376,513 $26,140,519
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable................................................ $ 687,500 $ 993,055
Other liabilities........................................... 5,898 7,937
----------- -----------
693,398 1,000,992
Stockholders' equity........................................ 26,683,115 25,139,527
----------- -----------
Total liabilities and stockholders' equity........ $27,376,513 $26,140,519
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Dividends from banking subsidiary........................ $ 98,314 $ -- $ --
Other income............................................. 758 76,556 16,232
---------- ---------- ----------
Total income..................................... 99,072 76,556 16,232
Expenses:
Amortization expense..................................... 101,974 101,974 101,973
Interest on note payable................................. 65,100 89,884 112,753
Occupancy expense........................................ -- 46,611 65,257
General and administrative expenses...................... 95,558 97,969 86,457
---------- ---------- ----------
Total expenses................................... 262,632 336,438 366,440
---------- ---------- ----------
Loss before income tax benefit and equity in
undistributed net income of subsidiary................ (163,560) (259,882) (350,208)
Income tax benefit......................................... 55,692 53,967 82,371
---------- ---------- ----------
Loss before equity in undistributed net income of
subsidiary............................................ (107,868) (205,915) (267,837)
Equity in undistributed net income of subsidiary........... 2,518,320 2,609,698 1,757,582
---------- ---------- ----------
Net income....................................... $2,410,452 $2,403,783 $1,489,745
========== ========== ==========
</TABLE>
F-25
<PAGE> 131
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 2,410,452 $ 2,403,783 $ 1,489,745
Adjustments to reconcile net income to net cash used
by operations:
Depreciation and amortization...................... 101,974 110,658 114,775
Treasury stock bonused............................. -- -- 13,374
Undistributed earnings of subsidiary............... (2,518,320) (2,609,698) (1,757,582)
(Increase) decrease in other assets................ (218,474) (46,502) 17,467
Decrease in other liabilities...................... (2,039) (4,911) (56,337)
----------- ----------- -----------
Net cash used by operating activities......... (226,407) (146,670) (178,558)
Cash flows from investing activities:
Proceeds from sale of premises and equipment to
subsidiary......................................... -- 367,696 245,167
Purchase of premises and equipment.................... -- (368) (7,086)
----------- ----------- -----------
Net cash provided by investing activities..... -- 367,328 238,081
Cash flows from financing activities:
Principal payments on note payable.................... (305,555) (305,556) (201,389)
Stock options exercised............................... 88,286 190,700 103,450
Proceeds from issuance of common stock................ 16,257 16,669 13,487
Treasury stock purchased.............................. -- (44,988) (28,420)
Treasury stock sold................................... -- 44,988 --
Dividends paid to stockholders........................ (596,327) (597,270) (537,802)
Warrants exercised.................................... -- 761,433 175,000
Stock split -- payment for fractional shares.......... $ -- $ (1,095) $ --
----------- ----------- -----------
Net cash (used) provided by financing
activities.................................. (797,339) 64,881 (475,674)
----------- ----------- -----------
Net (decrease) increase in cash............... (1,023,746) 285,539 (416,151)
Cash, beginning of year................................. 1,104,504 818,965 1,235,116
----------- ----------- -----------
Cash, end of year....................................... $ 80,758 $ 1,104,504 $ 818,965
=========== =========== ===========
Supplemental schedule of cash flow information:
Interest paid......................................... $ 67,100 $ 91,921 $ 111,490
</TABLE>
F-26
<PAGE> 132
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
19. OTHER COMPREHENSIVE INCOME
Beginning in 1999, SFAS No. 130, Reporting Comprehensive Income, requires
display in financial statements of amounts of total comprehensive income and
accumulated other comprehensive income. The components of other comprehensive
income for the years ended 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Unrealized gains (losses) arising during the period,
net of tax effect of $197,195 in 1999, $177,534 in
1998 and $279,981 in 1997............................. $(382,733) $344,624 $543,492
Less: reclassification adjustment for gains, net of
write-downs, included in net income, net of tax
effect of $3,942 in 1999, $38,584 in 1998 and
$20,767 in 1997..................................... 7,653 (74,897) (40,313)
--------- -------- --------
Other comprehensive income............................ $(375,080) $269,727 $503,179
========= ======== ========
</TABLE>
20. SEGMENT REPORTING
Northeast Bancorp through its subsidiary, Northeast Bank and it's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western and south central
Maine. These services include lending, demand, savings and time deposits, cash
management and trust services. While the Company's senior management team
monitors the operations of the subsidiaries, the subsidiaries are primarily
organized to operate in the banking industry. Substantially all income and
services are derived from banking products and services in Maine. Accordingly,
the Company's subsidiaries are considered by management to be aggregated in one
reportable operating segment.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's significant financial instruments.
Cash and Cash Equivalents
The fair value of cash, due from banks, interest bearing deposits and FHLB
overnight deposits approximates their relative book values, as these financial
instruments have short maturities.
Available for Sale Securities
The fair value of available for sale securities is estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. Fair values are calculated based on the value of one unit
without regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, or estimated
transaction costs. If these considerations had been incorporated into the fair
value estimates, the aggregate fair value amounts could have changed.
Federal Home Loan Bank Stock
This financial instrument does not have a market nor is it practical to
estimate the fair value without incurring excessive costs.
F-27
<PAGE> 133
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimates of maturity are based on the Company's historical experience
with repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic conditions, lending conditions and
the effects of estimated prepayments.
Fair value for significant non-performing loans is based on estimated cash
flows and is discounted using a rate commensurate with the risk associated with
the estimated cash flows. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available market information
and historical information.
The fair value of loans held for sale is estimated based on bid quotations
received from loan dealers.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the fair
value presented would be indicative of the value negotiated in an actual sale.
Accrued Interest Receivable
The fair value of this financial instrument approximates the book value as
this financial instrument has a short maturity. It is the Company's policy to
stop accruing interest on loans past due by more than ninety days. Therefore
this financial instrument has been adjusted for estimated credit loss.
Deposits
The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings, NOW accounts and money market
accounts, is equal to the amount payable on demand. The fair values of
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. If that value was considered, the fair value of
the Company's net assets could increase.
Borrowed Funds, Note Payable and Repurchase Agreements
The fair value of the Company's borrowings with the Federal Home Loan Bank
is estimated by discounting the cash flows through maturity or the next
repricing date based on current rates available to the Company for borrowings
with similar maturities. The fair value of the note payable approximates the
carrying value, as the interest rate approximates market rates. The fair value
of repurchase agreements approximates the carrying value, as these financial
instruments have a short maturity.
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.
F-28
<PAGE> 134
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These values do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial instruments include the deferred tax asset, premises and
equipment, other real estate owned and intangible assets, including the customer
base. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
The following table presents the estimated fair value of the Company's
significant financial instruments at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..... $ 12,094,000 $ 12,094,000 $ 12,152,000 $ 12,152,000
Available for sale
securities................. 18,054,000 18,054,000 13,609,000 13,609,000
Loans held for sale........... 312,000 315,000 370,000 372,000
Loans......................... 316,062,000 308,687,000 279,053,000 282,020,000
Interest receivable........... 1,991,000 1,991,000 1,934,000 1,934,000
Financial liabilities:
Deposits (with no stated
maturity).................. 78,251,000 78,251,000 70,938,000 70,938,000
Time deposits................. 141,113,000 141,352,000 113,086,000 113,488,000
Borrowed funds................ 103,882,000 99,986,000 104,440,000 102,052,000
Note payable.................. 688,000 688,000 993,000 993,000
Repurchase agreements......... 11,868,000 11,868,000 5,206,000 5,206,000
</TABLE>
F-29
<PAGE> 135
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT, AND THE UNDERWRITER HAS NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR IS IT
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF THE
DATE ON THE FRONT COVER PAGE, BUT THE INFORMATION MAY HAVE CHANGED SINCE THAT
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A Note About Forward-Looking
Statements............................ 3
Prospectus Summary.................... 5
Risk Factors.......................... 13
NBN Capital Trust..................... 21
Use of Proceeds....................... 21
Capitalization........................ 22
Accounting Treatment.................. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 50
Description of Preferred Securities... 59
Description of Junior Subordinated
Debentures.......................... 72
Description of Guarantee.............. 82
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures, and the Guarantee....... 84
Certain Federal Income Tax
Consequences........................ 86
Certain ERISA Considerations.......... 90
Supervision and Regulation............ 90
Underwriting.......................... 100
Validity of Securities................ 101
Experts............................... 102
Where Can You Find More Information... 102
Documents Incorporated by Reference... 102
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$10,500,000
NBN CAPITAL TRUST
% PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
NORTHEAST BANCORP
-------------------------
PROSPECTUS
------------------------
ADVEST, INC.
November , 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred in
connection with this offering, other than underwriting discounts and
commissions. All amounts, except the SEC registration fee, are estimated.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 3,357
NASD Filing Fees............................................ 1,708
AMEX Listing Fees........................................... 15,000
Accounting Fees and Expenses................................ 35,000*
Legal Fees and Expenses..................................... 100,000*
Printing and Expenses....................................... 20,000*
Blue Sky Fees and Expenses.................................. 5,000*
Trustee Fees and Expenses................................... 11,000*
Miscellaneous............................................... 10,435*
--------
Total............................................. $201,500*
========
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 719 of the Maine Business Corporation Act provides as follows:
1. A corporation shall have power to indemnify or, if so provided in
the bylaws, shall in all cases indemnify, any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, trustee, partner,
fiduciary, employee or agent of another corporation, partnership, joint
venture, trust, pension or other employee benefit plan or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by that person in
connection with such action, suit or proceeding; provided that no
indemnification may be provided for any person with respect to any matter
as to which that person shall have been finally adjudicated:
A. Not to have acted honestly or in the reasonable belief that
such person's action was not in or not opposed to the best interests
of the corporation or its shareholders or, in the case of a person
serving as a fiduciary of an employee benefit plan or trust, in or
not opposed to the best interest of that plan or trust, or its
participants or beneficiaries; or
B. With respect to any criminal action or proceeding, to have had
reasonable cause to believe that person's conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order or
conviction adverse to that person, or by settlement or plea of nolo
contendere or its equivalent, shall not of itself create a presumption that
a person did not act honestly or in the reasonable belief that such
person's action was in or not opposed to the best interest of the
corporation or its shareholders or, in the case of a person serving as a
fiduciary of an employee benefit plan or trust, in or not opposed to the
best interests of that plan or trust or its participants or beneficiaries
and, with respect to any criminal action or proceeding, had reasonable
cause to believe that person's conduct was unlawful.
1-A. Notwithstanding any provision of subsection 1, a corporation
shall not have the power to indemnify any person with respect to any claim,
issue or matter asserted by or in the right of the
II-1
<PAGE> 137
corporation as to which that person is finally adjudicated to be liable to
the corporation unless the court in which the action, suit or proceeding
was brought shall determine that, in view of all the circumstances of the
case, that person is fairly or reasonably entitled to indemnity for such
amounts as the court shall deem reasonable.
2. Any provision of subsection 1, 1-A or 3 to the contrary
notwithstanding, to the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in subsection 1 or 1-A, or in
defense of any claim, issue or matter therein, that director, officer,
employee or agent shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by that director,
officer, employee or agent in connection therewith. The right to
indemnification granted by this subsection may be enforced by a separate
action against the corporation, if an order for indemnification is not
entered by a court in the action, suit or proceeding wherein that director,
officer, employee or agent was successful on the merits or otherwise.
3. Any indemnification under subsection 1, unless ordered by a court
or required by the bylaws, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
and in the best interest of the corporation. That determination shall be
made by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to that action, suit or proceeding, or if
such a quorum is not obtainable, or even if obtainable, if a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or by the shareholders. Such a determination once made may
not be revoked and, upon the making of that determination, the director,
officer, employee or agent may enforce the indemnification against the
corporation by a separate action notwithstanding any attempted or actual
subsequent action by the board of directors.
4. Expenses incurred in defending a civil, criminal, administrative
or investigative action, suit or proceeding may be authorized and paid by
the corporation in advance of the final disposition of that action, suit or
proceeding made in accordance with the procedure established in subsection
3 that, based solely on the facts then known to those making the
determination and without further investigation, the person seeking
indemnification satisfied the standard of conduct prescribed by subsection
1, or if so provided by the bylaws, these expenses shall in all cases be
authorized and paid by the corporation in advance of the final disposition
of that action, suit or proceeding upon receipt by the corporation of:
A. A written undertaking by or on behalf of the officer,
director, employee or agent to repay that amount if that person is
finally adjudicated:
(1) Not to have acted honestly or in the reasonable belief
that such person's action was in or not opposed to the best
interests of the corporation or its shareholders or, in the case
of a person serving as a fiduciary of an employee benefit plan or
trust, in or not opposed to the best interests of such plan or
trust or its participants or beneficiaries;
(2) With respect to any criminal action or proceeding, to
have had reasonable cause to believe that the person's conduct
was unlawful; or
(3) With respect to any claim, issue or matter asserted in
any action, suit or proceeding brought by or in the right of the
corporation, to be liable to the corporation, unless the court in which
that action, suit or proceeding was brought permits indemnification in
accordance with subsection 2; and
B. A written affirmation by the officer, director, employee or
agent that the person has met the standard of conduct necessary for
indemnification by the corporation as authorized in this section.
The undertaking required under paragraph A shall be an unlimited general
obligation of the person seeking the advance, but need not be secured and
may be accepted without reference to financial ability to make the
repayment.
II-2
<PAGE> 138
5. The indemnification and entitlement to advances of expenses
provided by this section shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in that person's official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased
to be a director, officer, employee, agent, trustee, partner or fiduciary
and shall inure to the benefit of the heirs, executors and administrators
of such a person. A right to indemnification required by the bylaws may be
enforced by a separate action against the corporation, if an order for
indemnification has not been entered by a court in any action, suit or
proceeding in respect to which indemnification is sought.
6. A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, trustee, partner, fiduciary, employee
or agent of another corporation, partnership, joint venture, trust, pension
or other employee benefit plan or other enterprise against any liability
asserted against that person and incurred by that person in any such
capacity, or arising out of that person's status as such, whether or not
the corporation would have the power to indemnify that person against such
liability under this section.
7. For purposes of this section, references to the "corporation"
shall include, in addition to the surviving corporation or new corporation,
any participating corporation in a consolidation or merger.
Northeast Bancorp's Bylaws provide for the indemnification of directors and
officers. The general effect of the Bylaw provisions is to indemnify any
director or officer against any liability arising from any action or suit to the
full extent permitted by Maine law as referenced above. Advances against
expenses may be made under the Bylaws and any other indemnification agreement
that may be entered into by Northeast Bancorp and the indemnity coverage
provided thereunder may include liabilities under the federal securities laws as
well as in other contexts. Reference is made to Article X of Northeast Bancorp's
Bylaws filed as Exhibit 3.2 hereto.
Northeast Bancorp has purchased and maintains insurance on behalf of any
person who is or was a director or officer against any loss arising from any
claim asserted against any such person and incurred by such person in any such
capacity, subject to certain exclusions.
Under the Amended and Restated Trust Agreement of NBN Capital Trust (the
"Trust Agreement"), Northeast Bancorp will agree to indemnify each of the
trustees of the Trust or any predecessor trustee for the trust, and to hold each
trustee harmless against, any loss, damage, claim, liability, or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Agreement,
including costs and expenses of defending itself against any claim or liability
in connection with the exercise or performance of any of its powers or duties
under the Trust Agreement.
Pursuant to the Underwriting Agreement, Northeast Bancorp, the Trust, and
the underwriter have agreed to indemnify each other under certain circumstances
and conditions against and from certain liabilities, including liabilities under
the Securities Act of 1933, as amended. Reference is made to Section 11 of the
Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Articles of Incorporation of Northeast Bancorp, as amended
November 10, 1998, incorporated by reference to Exhibit 3.1
of Northeast Bancorp's Form 10-KSB for the fiscal quarter
ended December 31, 1998 previously filed with the
Commission.
</TABLE>
II-3
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
3.2 -- Bylaws of Northeast Bancorp, incorporated herein by
reference to Exhibit 3.2 to Amendment No. 1 to Northeast
Bancorp's Registration Statement on Form S-4 (Registration
No. 333-31797) previously filed with the Commission.
4.1 -- Form of Indenture with respect to Northeast Bancorp's %
Junior Subordinated Debentures.
4.2 -- Form of Junior Subordinated Debentures (included in Exhibit
4.1).
4.3 -- Trust Agreement of NBN Capital Trust (including Certificate
of Trust of NBN Capital Trust).
4.4 -- Form of Amended and Restated Trust Agreement of NBN Capital
Trust.
4.5 -- Form of % Preferred Securities of NBN Capital Trust
(included in Exhibit 4.4).
4.6 -- Form of Guarantee Agreement.
5.1 -- Opinion of Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A., Re: Validity of Securities.
5.2 -- Opinion of Richards, Layton & Finger, P.A.
8.1 -- Opinion of Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A., Re: Tax Opinion.
10.1 -- 1987 Stock Option Plan of Northeast Bancorp (formerly known
as Bethel Bancorp), incorporated herein by reference to
Exhibit 10.4 to the Bethel Bancorp's Registration Statement
on Form S-1 (Registration No. 33-12815) previously filed
with the Commission.
10.2 -- 1989 Stock Option Plan of Northeast Bancorp (formerly known
as Bethel Bancorp), incorporated by reference to Exhibit
10.6 to Bethel Bancorp's Form 10-Q for the quarter ended
September 30, 1994 previously filed with the Commission.
10.4 -- 1992 Stock Option Plan of Northeast Bancorp (formerly known
as Bethel Bancorp), incorporated by reference to Exhibit
10.7 to Bethel Bancorp's Form 10-K for the fiscal year ended
June 30, 1992 previously filed with the Commission.
10.5 -- 1994 Stock Purchase Plan incorporated by reference to the
definitive proxy statement of Northeast Bancorp previously
filed with the Commission on September 23, 1994.
11.1 -- Statement regarding computation of per share earnings,
incorporated herein by reference to Exhibit 11 to Northeast
Bancorp's Form 10-K for the fiscal year ended June 30, 1999
previously filed with the Commission.
12.1 -- Calculation of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Northeast Bancorp, incorporated herein by
reference to Exhibit 21 to Northeast Bancorp's Form 10-K for
the fiscal year ended June 30, 1998 previously filed with
the Commission.
23.1 -- Consent of Baker Newman & Noyes Limited Liability Company.*
23.2 -- Consent of Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A. (included in Exhibit 5.1).
23.3 -- Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.2).
24.1 -- Power of Attorney (contained in Signature section of this
Registration Statement).
25.1 -- Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939, as amended, of Bankers
Trust Company, as trustee under the Junior Subordinated
Indenture, the Amended and Restated Trust Agreement, and the
Guarantee Agreement relating to the NBN Capital Trust.
27.1 -- Financial Data Schedule (for SEC use only), incorporated
herein by reference to Exhibit 27 to Northeast Bancorp's
Form 10-K for the fiscal year ended June 30, 1999 previously
filed with the Commission.
</TABLE>
- ---------------------
* Exhibit filed herewith.
II-4
<PAGE> 140
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of the
registration statement in reliance on Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing a Form S-2 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Auburn, State of Maine, on the 27th
day of October, 1999.
NORTHEAST BANCORP
By: /s/ JAMES D. DELAMATER
------------------------------------
James D. Delamater
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director October 27, 1999
- -----------------------------------------------------
John B. Bouchard
* Director and Executive Vice October 27, 1999
- ----------------------------------------------------- President
A. William Cannan
/s/ JAMES D. DELAMATER Director, President and October 27, 1999
- ----------------------------------------------------- Chief Executive Officer
James D. Delamater (Principal Executive
Officer)
* Director October 27, 1999
- -----------------------------------------------------
Ronald J. Goguen
* Director October 27, 1999
- -----------------------------------------------------
Judith W. Hayes
* Director and Vice President October 27, 1999
- -----------------------------------------------------
Philip C. Jackson
* Director October 27, 1999
- -----------------------------------------------------
Ronald C. Kendall
* Director October 27, 1999
- -----------------------------------------------------
John Rosmarin
* Director October 27, 1999
- -----------------------------------------------------
John Schiavi
* Director and Chairman of the October 27, 1999
- ----------------------------------------------------- Board
John W. Trinward
* Director October 27, 1999
- -----------------------------------------------------
Stephen W. Wight
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director October 27, 1999
- -----------------------------------------------------
Dennis A. Wilson
* Chief Financial Officer October 27, 1999
- ----------------------------------------------------- (Principal Financial and
Richard E. Wyman, Jr. Accounting Officer)
</TABLE>
- ---------------
* Signed by James D. Delamater pursuant to power of attorney filed with this
Registration Statement on October 12, 1999.
Pursuant to the requirements of the Securities Act of 1933, the Trust
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-2 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Auburn, State of Maine, on the 27th
day of October, 1999.
NBN CAPITAL TRUST
BY: NORTHEAST BANCORP, as Depositor
By: /s/ JAMES D. DELAMATER
------------------------------------
James D. Delamater
President and Chief Executive
Officer
<PAGE> 143
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.
3.1 -- Articles of Incorporation of Northeast Bancorp, as amended
November 10, 1998, incorporated by reference to Exhibit 3.1
of Northeast Bancorp's Form 10-KSB for the fiscal quarter
ended December 31, 1998 previously filed with the
Commission.
3.2 -- Bylaws of Northeast Bancorp, incorporated herein by
reference to Exhibit 3.2 to Amendment No. 1 to Northeast
Bancorp's Registration Statement on Form S-4 (Registration
No. 333-31797) previously filed with the Commission.
4.1 -- Form of Indenture with respect to Northeast Bancorp's %
Junior Subordinated Debentures.
4.2 -- Form of Junior Subordinated Debentures (included in Exhibit
4.1).
4.3 -- Trust Agreement of NBN Capital Trust (including Certificate
of Trust of NBN Capital Trust).
4.4 -- Form of Amended and Restated Trust Agreement of NBN Capital
Trust.
4.5 -- Form of % Preferred Securities of NBN Capital Trust
(included in Exhibit 4.4).
4.6 -- Form of Guarantee Agreement.
5.1 -- Opinion of Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A., Re: Validity of Securities.
5.2 -- Opinion of Richards, Layton & Finger, P.A.
8.1 -- Opinion of Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A., Re: Tax Opinion.
10.1 -- 1987 Stock Option Plan of Northeast Bancorp (formerly known
as Bethel Bancorp), incorporated herein by reference to
Exhibit 10.4 to the Bethel Bancorp's Registration Statement
on Form S-1 (Registration No. 33-12815) previously filed
with the Commission.
10.2 -- 1989 Stock Option Plan of Northeast Bancorp (formerly known
as Bethel Bancorp), incorporated by reference to Exhibit
10.6 to Bethel Bancorp's Form 10-Q for the quarter ended
September 30, 1994 previously filed with the Commission.
10.4 -- 1992 Stock Option Plan of Northeast Bancorp (formerly known
as Bethel Bancorp), incorporated by reference to Exhibit
10.7 to Bethel Bancorp's Form 10-K for the fiscal year ended
June 30, 1992 previously filed with the Commission.
10.5 -- 1994 Stock Purchase Plan incorporated by reference to the
definitive proxy statement of Northeast Bancorp previously
filed with the Commission on September 23, 1994.
11.1 -- Statement regarding computation of per share earnings,
incorporated herein by reference to Exhibit 11 to Northeast
Bancorp's Form 10-K for the fiscal year ended June 30, 1999,
previously filed with the Commission.
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
12 -- Calculation of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Northeast Bancorp, incorporated herein by
reference to Exhibit 21 to Northeast Bancorp's Form 10-K for
the fiscal year ended June 30, 1998 previously filed with
the Commission.
23.1 -- Consent of Baker Newman & Noyes Limited Liability Company*
23.2 -- Consent of Carlton, Fields, Ward, Emmanuel, Smith & Cutler,
P.A. (included in Exhibit 5.1).
23.3 -- Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.2).
24.1 -- Power of Attorney (contained in Signature section of this
Registration Statement).
25.1 -- Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939, as amended, of Bankers
Trust Company, as trustee under the Junior Subordinated
Indenture, the Amended and Restated Trust Agreement, and the
Guarantee Agreement relating to the NBN Capital Trust.
27.1 -- Financial Data Schedule (for SEC use only), incorporated
herein by reference to Exhibit 27 to Northeast Bancorp's
Form 10-K for the fiscal year ended June 30, 1999 previously
filed with the Commission.
</TABLE>
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* Exhibit filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 30, 1999, in the Registration Statement (Form S-2
Amendment #1) and related Prospectus of Northeast Bancorp for the registration
of $12,075,000 of preferred securities.
/s/ Baker Newman & Noyes
-------------------------
Portland, Maine Baker Newman & Noyes
October 26, 1999 Limited Liability Company
