SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
_X_ Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 2000
__________________
or
___ Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File Number 1-14588
___________
Northeast Bancorp
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Maine 01-0425066
_________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
232 Center Street, Auburn, Maine 04210
_________________________________________________________________
(Address of Principal executive (Zip Code)
offices)
(207) 777-6411
_________________________________________________________________
Registrant's telephone number, including area code
Not Applicable
_________________________________________________________________
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subjected to such filing
requirements for the past 90 days. Yes_X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares outstanding as of October 31, 2000, 2,673,609 of common
stock, $1.00 par value per share.
_________________________________________________________________
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
September 30, 2000 and June 30, 2000
Consolidated Statements of Income
Three Months ended September 30, 2000 and 1999
Consolidated Statements of Changes in
Shareholders' Equity
Three Months ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows
Three Months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation
Item 3. Quantitative and Qualitative disclosure about
Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHEAST BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
_______________ _______________
<S> <C> <C>
Assets
Cash and due from banks $ 9,409,341 $ 7,996,321
Interest bearing deposits 494,980 488,622
Federal Home Loan Bank overnight deposits 4,634,000 4,293,000
Available for sale securities 23,094,629 23,159,039
Trading Securities 2,491 -
Federal Home Loan Bank stock 6,644,500 6,644,500
Loans held for sale 200,000 81,890
Loans 389,463,510 381,824,101
Less allowance for loan losses 3,573,000 3,498,000
_______________ _______________
Net loans 385,890,510 378,326,101
Bank premises and equipment, net 4,329,755 4,397,768
Assets acquired through foreclosure 311,288 278,010
Goodwill, net of accumulated amortization
of $2,005,411 at 9/30/00 and $1,936,846
at 6/30/00 1,119,523 1,188,088
Other assets 7,360,039 6,999,107
_______________ _______________
Total Assets $ 443,491,056 $ 433,852,446
=============== ===============
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 266,596,026 $ 259,981,812
Securities Sold Under Repurchase Agreements 14,600,414 13,110,165
Advances from the Federal Home Loan Bank 121,834,719 122,627,805
Other Liabilities 4,216,059 2,833,188
_______________ _______________
Total Liabilities 407,247,218 398,552,970
Guaranteed Preferred Beneficial Interest in
the Company's Junior Subordinated Debentures 7,172,998 7,172,998
Shareholders' Equity
Preferred stock, cumulative, $1 par value,
1,000,000 shares authorized and none issued
and outstanding - -
Common stock, $1.00 par value, 15,000,000
shares authorized; 2,786,095 and 2,786,095
shares issued and 2,678,579 and 2,682,527
shares outstanding at 9/30/00 and 6/30/00,
respectively 2,786,095 2,786,095
Additional paid in capital 10,266,013 10,265,909
Retained earnings 17,438,483 16,722,474
Accumulated other comprehensive income (loss) (515,611) (776,174)
_______________ _______________
29,974,980 28,998,304
_______________ _______________
Treasury Stock at cost, 107,516 and 103,568
shares at 09/30/00 and 6/30/00, respectively (904,140) (871,826)
_______________ _______________
Total Shareholders' Equity 29,070,840 28,126,478
_______________ _______________
Total Liabilities and Shareholders' Equity $ 443,491,056 $ 433,852,446
=============== ===============
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
_______________ _______________
<S> <C> <C>
Interest and Dividend Income
Interest on FHLB overnight deposits $ 76,622 $ 64,791
Interest on loans & Loans held for sale 8,515,449 7,010,975
Interest on available for sale securities 399,006 293,123
Dividends on Federal Home Loan Bank stock 133,616 94,269
Other Interest Income 6,605 5,612
_______________ _______________
Total Interest and Dividend Income 9,131,298 7,468,770
Interest Expense
Deposits 3,277,801 2,335,723
Repurchase agreements 128,602 126,207
Trust preferred securities 176,520 -
Other borrowings 1,972,441 1,516,348
_______________ _______________
Total Interest Expense 5,555,364 3,978,278
_______________ _______________
Net Interest Income 3,575,934 3,490,492
Provision for loan losses 195,511 295,229
_______________ _______________
Net interest income after Provision for
Loan Losses 3,380,423 3,195,263
Other Income
Service charges 298,759 265,183
Net securities gains 18,648 5,165
Net gain on trading securities 2,256 -
Other 325,399 356,976
_______________ _______________
Total Other Income 645,062 627,324
Other Expenses
Salaries and employee benefits 1,403,987 1,303,792
Net occupancy expense 208,592 227,449
Equipment expense 203,473 233,177
Goodwill amortization 68,565 68,565
Other 781,773 754,562
_______________ _______________
Total Other Expenses 2,666,390 2,587,545
_______________ _______________
Income Before Income Taxes 1,359,095 1,235,042
Income tax expense 475,822 433,320
_______________ _______________
$ 883,273 $ 801,722
=============== ===============
Earnings Per Common Share
Basic $ 0.33 $ 0.29
Diluted $ 0.33 $ 0.29
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Other
Common Additional Comprehensive
Preferred Stock at Paid in Retained Income Treasury
Stock $1.00 Par Capital Earnings (Loss) Stock Total
_____________ ____________ ____________ ____________ _____________ ____________ _____________
<C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ - $ 2,768,624 $10,208,299 $14,145,720 $ (439,528) $ - $ 26,683,115
Net income for three months
ended 09/30/99 - - - 801,722 - - 801,722
Other comprehensive income,
net of tax:
Adjustment of valuation
reserve for Securities
available for sale - - - - (133,270) - (133,270)
_____________
Total comprehensive income - - - - - - 668,452
Dividends on common stock
at $0.21 per share - - - (146,835) - - (146,835)
Common stock issued in
connection with employee
benefit and stock option
plans - 1,822 13,769 - - - 15,591
_____________ ____________ ____________ ____________ _____________ ____________ _____________
Balance at September 30,
1999 $ - $ 2,770,446 $10,222,068 $14,800,607 $ (572,798) $ - $ 27,220,323
============= ============ ============ ============ ============= ============ =============
Balance at June 30, 2000 $ - $ 2,786,095 $10,265,909 $16,722,474 $ (776,174) $ (871,826) $ 28,126,478
Net income for three months
ended 09/30/00 - - - 883,273 - - 883,273
Other comprehensive income,
net of tax:
Adjustment of valuation
reserve for Securities
available for sale - - - - 260,563 - 260,563
_____________
Total comprehensive income - - - - - - 1,143,836
Treasury stock purchased - - - - - (33,180) (33,180)
Dividends on common stock
at $0.25 per share - - - (167,264) - - (167,264)
Common stock issued in
connection with employee
benefit and stock option
plans - - 104 - - 866 970
_____________ ____________ ____________ ____________ _____________ ____________ _____________
Balance at September 30,
2000 $ - $ 2,786,095 $10,266,013 $17,438,483 $ (515,611) $ (904,140) $ 29,070,840
============= ============ ============ ============ ============= ============ =============
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
_______________ _______________
<S> <C> <C>
Cash provided by operating activities $ 1,849,370 $ 992,653
Cash flows from investing activities:
FHLB stock purchased - (338,900)
Available for sale securities purchased (512,793) (675,157)
Available for sale securities matured 860,770 758,002
Available for sale securities sold 73,480 48,461
New loans, net of repayments & charge offs (7,652,400) (22,452,960)
Net capital expenditures (84,406) (92,857)
Assets acquired through foreclosure sold 103,144 222,724
Real estate held for investment sold 11,414 14,997
_______________ _______________
Net cash used in investing activities (7,200,791) (22,515,690)
Cash flows from financing activities:
Net change in deposits 6,614,214 5,908,848
Net change in repurchase agreements 1,490,249 1,183,197
Dividends paid (167,264) (146,835)
Proceeds from stock issuance - 15,591
Treasury Stock purchased (32,314) -
Net increase (decrease) in advances from
Federal Home Loan Bank of Boston (793,086) 11,505,457
Net change in notes payable - (76,389)
_______________ _______________
Net cash provided by financing activities 7,111,799 18,389,869
_______________ _______________
Net (decrease) increase in cash and cash
equivalents 1,760,378 (3,133,168)
Cash and cash equivalents, beginning of period 12,777,943 12,093,570
_______________ _______________
Cash and cash equivalents, end of period $ 14,538,321 $ 8,960,402
=============== ===============
Cash and cash equivalents include cash on
hand, amounts due from banks and interest
bearing deposits.
Supplemental schedule of noncash activities:
Net change in valuation for unrealized market
value adjustments on available for sale
securities 260,563 (133,270)
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds - -
Interest paid 5,349,662 3,892,105
</TABLE>
NORTHEAST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
1. Basis of Presentation
_____________________
The accompanying unaudited condensed and consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2001. For further information, refer to the audited
consolidated financial statements and footnotes thereto for the fiscal year
ended June 30, 2000 included in the Company's Annual Report on Form 10-K.
2. Guaranteed Preferred Beneficial Interests in the Company' Junior
________________________________________________________________
Subordinated Debentures
_______________________
NBN Capital Trust ("NBNCT") a Delaware statutory trust, was created in
October of 1999. The NBNCT exists for the exclusive purpose of (i) issuing
and selling Common Securities and Preferred Securities to the public
(together the ("Trust Securities"), (ii) using the proceeds of the sale of
Trust Securities to acquire 9.60% Junior Subordinated Deferrable Interest
Debentures ("Junior Subordinated Debentures") issued by the Company, and
(iii) engaging only in those other activities necessary, convenient, or
incidental thereto (such as registering the transfer of the Trust Securities).
Accordingly the Junior Subordinated Debentures are the sole assets of the
NBNCT. The preferred securities accrue and pay distributions quarterly at an
annual rate of 9.60% of the stated liquidation amount of $7.00 per preferred
security. The Company has fully and unconditionally guaranteed all of the
obligations of NBNCT. The guaranty covers the quarterly distributions and
payments on liquidation or redemption of the preferred securities, but only to
the extent of funds held by NBNCT. In the second quarter of fiscal 2000, the
NBNCT sold $7,172,998 of its trust preferred securities to the public and
$221,851 of its common securities to the Company. The preferred securities are
mandatory redeemable upon the maturity of the Junior Subordinated Debentures on
December 31, 2029 or upon earlier redemption as provided in the Indenture. The
Company has the right to redeem the Junior Subordinated Debentures, in whole or
in part on or after December 31, 2004 at a redemption price specified in the
Indenture plus any accrued but unpaid interest to the redemption date. The
Company owns all of the Common Securities of NBNCT, the only voting security,
and as a result it is a subsidiary of the Company.
3. Loans
_____
The following is a summary of the composition of loans at:
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
____________________ ____________________
<S> <C> <C>
Residential Mortgages $ 197,864,147 $ 194,287,520
Commercial Real Estate 65,352,638 61,924,339
Construction 6,517,952 7,405,861
Commercial 41,432,975 41,518,623
Consumer & Other 75,456,193 74,027,771
____________________ ____________________
Total 386,623,905 379,164,114
Net Deferred Costs 2,839,605 2,659,987
____________________ ____________________
Net Loans $ 389,463,510 $ 381,824,101
==================== ====================
</TABLE>
4. Securities
__________
Securities available for sale at cost and approximate market values are
summarized below.
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
Debt securities issued
by the U.S. Treasury and
other U.S. Government
corporations and agencies $ 596,040 $ 595,665 $ 347,573 $ 345,792
Corporate bonds 200,615 195,215 200,876 193,587
Mortgage-backed securities 21,739,316 21,143,092 22,350,606 21,445,918
Equity securities 1,339,887 1,160,657 1,436,005 1,173,742
____________ ____________ ____________ ____________
$23,875,858 $23,094,629 $24,335,060 $23,159,039
============ ============ ============ ============
September 30, 2000 June 30, 2000
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Due in one year or less $ 546,807 $ 546,997 $ 298,613 $ 298,777
Due after one year
through five years 249,848 243,883 249,836 240,602
Mortgage-backed securities
(including securities
with interest rates
ranging from 5.15% to
9.0% maturing September
2003 to November 2029) 21,739,316 21,143,092 22,350,606 21,445,918
Equity securities 1,339,887 1,160,657 1,436,005 1,173,742
____________ ____________ ____________ ____________
$23,875,858 $23,094,629 $24,335,060 $23,159,039
============ ============ ============ ============
</TABLE>
5. Allowances for Loan Losses
__________________________
The following is an analysis of transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
____________ ____________
<S> <C> <C>
Balance at beginning of year $ 3,498,000 $ 2,924,000
Add provision charged to operations 195,511 295,229
Recoveries on loans previously charge off 50,741 58,355
____________ ____________
3,744,252 3,277,584
Less loans charged off 171,252 231,584
____________ ____________
Balance at end of period $ 3,573,000 $ 3,046,000
============ ============
</TABLE>
6. Advances from Federal Home Loan Bank
____________________________________
A summary of borrowings from the Federal Home Loan Bank is as follows:
<TABLE>
<CAPTION>
September 30, 2000
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
<C> <C> <C>
$ 75,944,098 4.98% - 7.05% 2001
7,958,884 5.97% - 6.79% 2002
1,414,398 6.36% - 6.67% 2003
1,517,339 5.55% 2004
27,000,000 6.65% - 6.79% 2006
8,000,000 5.59% - 5.68% 2008
______________
$ 121,834,719
==============
June 30, 2000
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 91,579,611 4.98% - 6.98% 2001
11,471,802 5.38% - 7.05% 2002
6,832,792 5.97% - 6.64% 2003
2,743,600 5.55% - 6.47% 2004
2,000,000 6.65% 2005
8,000,000 5.59% - 5.68% 2008
______________
$ 122,627,805
==============
</TABLE>
7. Adoption of Accounting Standard
_______________________________
On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS 138 ("Statement 133"). Statement 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Statements require
the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are
either offset against the change in fair value of assets, liabilities
or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of these Statements
did not result in a cumulative effect of an accounting change or
necessitate any transition adjustment. The adoption of these
Statements did not have a significant effect on the Company's
financial position, liquidity or results of operations for the
September 30, 2000 quarter.
Although the impact of adoption of Statement 133 was not material to
the Company's financial position, liquidity, or results of operations,
the Company does have financial instruments that qualify under
Statement 133 as derivatives and hedging activities. In the fourth
quarter of fiscal year 2000, the Company entered into two interest
rate exchange agreements to manage and hedge its interest rate
exposure with respect to the two structured brokered CD's issued at
$10 million each. The first CD is for a ten-year term with a one-year
call option at a fixed rate of 7.75%. The Company entered into an
interest rate exchange agreement with a third party to receive a fixed
rate of interest at 7.75% and pay a variable rate at the one-month
Libor rate. The second CD is for a five year, six month term with a
one-year call option at a fixed rate of 7.50%. The Company entered
into an interest rate exchange agreement with a third party to receive
a fixed rate of interest at 7.50% and pay a variable rate at the three-
month Libor rate. The two interest rate exchange agreements also contain one
year put agreements such that the terms mirror the terms of the CD's. The
Company entered into these interest rate exchange agreements to hedge
the potential fair value impact on the structured brokered CDs for
sudden changes in the interest rate environment and as a result these
qualify as fair value hedges under Statement 133. The Company believes
that the financial instruments will be highly effective against
changes in the fair value of the structured brokered CDs over their
terms. Management of the Company believes that the hedge is
structured as a near perfect hedge and that hedge ineffectiveness is
immaterial. The derivatives are recorded as other liabilities at fair
value of approximately $135,000 as of September 30, 2000 and were not
significant to the Company's financial position. Since these
derivatives qualify as fair value hedges there was no income statement
effect on the Company for the quarter ended September 30, 2000 as the
loss on recording the derivatives was offset by the change in fair value
of the structured brokered CDs.
In addition, the Company entered into an interest rate cap agreement
in September of 2000 to help mitigate the Company's asset/liability
position in a rising rate environment. The interest rate cap has a
$10,000,000 notional amount with a two year term and is based off the
three month Libor rate. If the three month Libor rate exceeds 7%
during the term of the agreement, the Company will receive the spread
above the 7% cap. This interest rate cap agreement qualifies as a
derivative under Statement 133. The Company entered into this interest
rate cap agreement to hedge the potential sudden increase in the cost
of short-term borrowings with the FHLB. The Company has a large
portfolio of short-term FHLB borrowings and with this interest rate
cap agreement is hedging interest rate risk for $10,000,000 of short-
term FHLB borrowings. The Company entered into this agreement as an
effective hedge to the exposure to the variability in cash flow. The
Company believes that the financial instrument will be effective
against changes in market interest rates over the term of the
agreement and there will be only an immaterial amount of hedge
ineffectiveness. This financial instrument qualifies as a cash flow
hedge under Statement 133. The fair value of the interest rate cap
agreement was immaterial to the Company's financial condition as of
September 30, 2000 and consequently did not impact other comprehensive
income.
The Company has a risk management policy for hedging activities. The policy
statement covers the following areas:
1) Hedging Instruments
___________________
The Company's hedging policy allows the use of interest rate swaps and
interest rate caps and floors in the support of its asset/liability
management process. The Bank may implement off-balance sheet hedging
with the intent of reducing interest rate risk.
2) Authority for Implementation
____________________________
The Asset/Liability Management Committee (ALCO) is responsible for
developing and implementing appropriate hedge programs and is also
responsible for ensuring that the Board of Directors is knowledgeable
about general hedging theory, usage and accounting, and based on that
understanding approves all hedging transactions.
3) Implementation
______________
Upon receiving authorization from the Board of Directors to employ a
given hedge activity, the Chief Financial Officer shall take appropriate
action to implement the hedge as well as monitor and adjust hedges to
maintain conformity to the hedge strategy authorized and to satisfy
requirements by Generally Accepted Accounting Principles.
4) Hedge Limits
____________
All hedges will be limited in size to a specific asset or liability, or
class of assets or liabilities. Interest rate swaps will not exceed a
size which might create liquidity problems from collateral requirements
or stream-of-payment settlements. The establishment of limits in
interest rate swaps, caps and floors can be somewhat misleading since
the notional amount by which these instruments are expressed never
exchanges hands and therefore is not at risk. Furthermore, since they
represent off balance sheet tools used by ALCO to hedge imbalances in
the Company's balance sheet in a prudent and cost effective manner, the
appropriate volume of swaps for the Company is not a static variable.
Limits change with elements such as the economic environment, the Company's
capital position, and the Company's ability to efficiently replicate
hedging actions in its local markets (lending and deposits) as well as
the capital markets (securities and borrowings). Notwithstanding, the
Company will limit outstanding net positions in these off balance sheet
contracts (swaps, caps, floors) executed for purposes of managing net
interest income to 15% of assets. Exceeding this limit will require the
approval of the Board of Directors.
5) Reporting
_________
At each scheduled ALCO meeting, the current status of any hedges will be
reported and discussed and will subsequently be reported to the Board of
Directors. Reports will include an analysis of variation from expected
results, a description of any corrective actions taken, and, if
appropriate, the cost to unwind or partially offset the hedge (i.e.
market value).
6) Overview of Risks
_________________
Market risk is the risk that a derivative instrument will lose value due
to a change in the price of an underlying instrument, an index of
financial instruments, or various interest rates. Since the Company's
derivatives are used to hedge net interest income, the replacement/market
value of a contract is secondary to the performance of the related
interest stream.
There is the risk of default by the counterparty unwilling or unable to
meet the terms of the contract, exposing the holder of the in-the-money
position to the cost of replacing the favorable contract under present
market conditions. The Bank will manage this exposure by limiting its
counterparts to highly credit worthy institutions.
Product liquidity risk exists to the degree that an instrument cannot be
obtained, closed out or disposed of rapidly at, or very close to,
economic value. Since the Bank's participation in derivatives will only
entail limited hedging activities, the need to rapidly unwind or close
out an off balance sheet transaction would be unlikely.
The Company monitors and attempts to control the inherent risks in hedging
instruments by adhering to the policy items stated above.
Item 2. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
Description of Operations
_________________________
Northeast Bancorp (the "Company") is a unitary savings and loan holding
company registered with the Office of Thrift Supervision ("OTS") its
primary regulator. The Company's principal asset is its wholly-owned
banking subsidiary, Northeast Bank, FSB (the "Bank"), which has branches
located in Auburn, Augusta, Bethel, Harrison, South Paris, Buckfield,
Mechanic Falls, Brunswick, Richmond, Lewiston, and Lisbon Falls, Maine. The
Bank also maintains a facility on Fundy Road in Falmouth, Maine, from which
loan applications are accepted and investment, insurance and financial
planning products and services are offered. The Bank's deposits are
primarily BIF-insured. Deposits at the Brunswick branch are SAIF-insured
and represent approximately 20% of the Bank's total deposits at September
30, 2000.
Northeast Bancorp through its subsidiary, Northeast Bank and the Bank's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western, midcoast and
south-central Maine. Although historically the Bank has been primarily a
residential mortgage lender, during the past few years the Bank has
expanded its commercial loan business, increased its line of financial
products and services, and expanded its market area. Management believes
that this strategy will increase core earnings in the long term by
providing stronger interest margins, additional non-interest income, and
increased loan volume. Substantially all of the Bank's current income and
services are derived from banking products and services in Maine.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations presents a review of the financial condition of the
Company from June 30, 2000 to September 30, 2000, and the results of
operations for the quarters ended September 30, 2000 and 1999. This
discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company and the Bank.
Accordingly, this section should be read in conjunction with the
consolidated financial statements and the related notes and other
statistical information contained herein.
Certain statements contained herein are not based on historical facts and
are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, such as statements relating to
financial condition and future prospects, loan loss reserve adequacy,
simulation of changes in interest rates, prospective results of operations,
capital spending and financing sources, and revenue sources. These
statements relate to expectations concerning matters that are not
historical facts. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology such as "believe", "expect", "estimate",
"anticipate", "continue", "plan", "approximately", "intend", or other
similar terms or variations on those terms, or the future or conditional
verbs such as "will", "may", "should", "could", and "would". Such forward-
looking statements reflect the current view of management and are based on
information currently available to them, and upon current expectations,
estimates, and projections regarding the Company and its industry,
management's belief with respect there to, and certain assumptions made by
management. These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties, and other factors.
Accordingly, actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and
pricing, fiscal and monetary policies of the U.S. Government, changes in
government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest
rates, acquisitions and the integration of acquired businesses, credit risk
management, asset/liability management, changes in technology, changes in
the securities markets, and the availability of and the costs associated
with sources of liquidity.
Financial Condition
___________________
Total consolidated assets were $443,491,056 on September 30, 2000, which
represents an increase of $9,638,610 from June 30, 2000. The increase in
assets is primarily due to loan growth and cash equivalents. Loan volume
during the quarter has been enhanced due to increased generation of
consumer loans through the Bank's participation in indirect automobile and
mobile home loans as well as increased volume of residential and commercial
real estate loans. The increase in loans has been funded with increased
deposits and repurchase agreements. Cash equivalents increased due to a
large cash letter clearing at the Federal Reserve on September 30, 2000. In
this regard, total net loans and cash equivalents increased by $7,639,410
and $1,760,378, respectively, from June 30, 2000 to September 30, 2000,
while securities decreased by $61,919 during the same period. Total
deposits and repurchase agreements increased by $8,104,463 from June 30,
2000 to September 30, 2000, while Federal Home Loan Bank (`FHLB')
borrowings decreased by $793,087 during the same period.
At September 30, 2000 and June 30, 2000, the Company's investment portfolio
totaled $23,097,120 and $23,159,039, respectively. The investment portfolio
consists of federal agency securities, mortgage-backed securities, bonds,
and equity securities. Funds retained by the Bank as a result of increases
in deposits or decreases in loans, which are not immediately used by the
Bank, are invested in securities held in its investment portfolio. The
investment portfolio is used as a source of liquidity for the Bank. 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.
The Company's investment portfolio is primarily classified as available for
sale at September 30, 2000 and June 30, 2000. Equity securities, and debt
securities, which may be sold prior to maturity, are classified as
available for sale and are carried at market value. Changes in market
value, net of applicable income taxes, are reported as a separate component
of shareholders' 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 September 30, 2000 was $23,875,858 and $23,094,629,
respectively. The difference between the carrying value and the cost of the
securities of $781,229 was primarily attributable to the decline in the
market value of mortgage-backed securities due to rising interest rates.
The net unrealized loss on mortgage-backed securities was $596,224 at
September 30, 2000. Substantially all of the mortgage-backed securities are
high-grade government backed securities. As in any long term earning asset
in which the earning rate is fixed, the market value of mortgage-backed
securities will fluctuate based on changes in market interest rates from
the time of purchase. Since the U.S. Government backs these mortgage-backed
securities, there is virtually no risk of loss of principal. Management
believes that the yields currently received on this portfolio are
satisfactory and intends to hold these securities for the foreseeable
future. Management attributes the reduction of $179,230 in the market value
of equity securities to the decline on the market value of the Company's
investments in preferred equity securities. 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 company's profitability. Based on
management's assessment of the securities portfolio during the September
30, 2000 quarter, there have been other than temporary declines in values
of individual equity securities in the amount of $54,480. Such securities
have been written down through an adjustment against earnings and are
included in other expenses in the statement of income for the quarter
ending September 30, 2000.
The Bank's loan portfolio had a balance of $389,463,510 as of September 30,
2000, which represents an increase of $7,639,410 compared to June 30, 2000.
From June 30, 2000 to September 30, 2000, the loan portfolio increased by
$6,232,607 in real estate mortgage loans and $1,507,627 in consumer and
other loans, while commercial loans decreased by $100,824. The loan
portfolio contains elements of credit and interest rate risk. The Bank
primarily lends within its local market areas, which management believes
helps them to better evaluate credit risk. The Bank continues to grow the
indirect loan portfolio and it is the Bank's intent to build relationships
with other institutions for potential sales of indirect loans. The Bank's
loan portfolio mix as of September 30, 2000 has remained significantly
unchanged when compared to June 30, 2000. The Bank's local market, as well
as the secondary market, continues to be very competitive for loan volume.
The local competitive environment and customer response to favorable
secondary market rates will have an adverse affect on the Bank'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. The Bank has experienced margin compression due to
decreased loan rates as well as increased rates on its cost of funds. The
Bank anticipates that the margin compression will continue for the
foreseeable future until loan volume increases in the current rising
interest rate environment.
At September 30, 2000, residential real estate mortgages consisting of
owner-occupied residential loans made up 52% of the total loan portfolio,
of which 36% of the residential loans are variable rate products. At
September 30, 1999, residential real estate mortgages consisting of owner-
occupied residential loans made up 55% of the total loan portfolio, of
which 39% of the residential loans are variable rate products. Variable
rate residential loans have decreased during the September 2000 quarter,
when compared to the September 1999 quarter, due to the increased market
demand for fixed rate loans. It has traditionally been management's intent
to increase the proportion of variable rate residential real estate loans
during a rising rate environment to reduce the interest rate risk in this
area. Management will continue to pursue its strategy of increasing the
percentage of variable rate loans as a percentage of the total loan
portfolio to help manage interest rate risk.
At September 30, 2000, 18% of the Bank's total loan portfolio consists of
commercial real estate mortgages. Commercial real estate loans have minimal
interest rate risk as 89% of the portfolio consists of variable rate
products. At September 30, 1999, commercial real estate mortgages made up
17% of the total loan portfolio, of which 87% of the commercial real estate
loans were variable rate products. The Bank tries to mitigate credit risk
by lending in its local market area as well as maintaining a well-
collateralized position in real estate.
Commercial loans made up 11% of the total loan portfolio, of which 45% are
variable rate instruments at September 30, 2000. At September 30, 1999
commercial loans made up 10% of the total loan portfolio, of which 44% were
variable rate instruments. The repayment ability of commercial loans is
highly dependent on the cash flow of the customer's business. The Bank
mitigates losses by strictly adhering to the Company's underwriting and
credit policies.
Consumer and other loans made up 19% of the loan portfolio as of September
30, 2000, which compares to 18% at September 30, 1999. Since these loans
are primarily fixed rate products, they have interest rate risk when market
rates increase. These loans also have credit risk. The increase in
consumer loans was primarily due to increased volume in indirect automobile
loans and mobile home loans, which together comprise approximately 87% of
the total consumer loans. The consumer loan department underwrites all the
indirect automobile loans and mobile home loans to mitigate credit risk.
The Bank typically pays a nominal one-time origination fee on the loans.
The fees are deferred and amortized over the life of the loans as a yield
adjustment. Management attempts to mitigate credit and interest rate risk
by keeping the products offered short-term, receiving a rate of return
commensurate with the risk, and lending to individuals in the Bank's known
market areas.
The Bank's allowance for loan losses was $3,573,000 as of September 30,
2000 as compared to $3,498,00 as of June 30, 2000, representing 0.93% and
0.92% of total loans, respectively. The Bank had non-performing loans
totaling $1,322,000 and $1,178,000 at September 30, 2000 and June 30, 2000,
respectively, which was 0.34% and 0.31% of total loans, respectively.
Consumer and other loans increased by $199,000 from June 30, 2000 to
September 30, 2000. The increase in non-performing consumer loans was due
to five additional mobile home loans and seven additional automobile loans.
The Bank's allowance for loan losses was equal to 270% and 297% of the
total non-performing loans at September 30, 2000 and June 30, 2000,
respectively. The following table represents the Bank's non-performing
loans as of September 30, 2000 and June 30, 2000, respectively:
<TABLE>
<CAPTION>
September 30, June 30,
Description 2000 2000
_________________________ _______________ _______________
<C> <C> <C>
1-4 Family Mortgages $ 246,000 $ 191,000
Commercial Mortgages 483,000 650,000
Commercial Loans 209,000 152,000
Consumer and Other 384,000 185,000
_______________ _______________
Total non-performing $ 1,322,000 $ 1,178,000
=============== ===============
</TABLE>
At September 30, 2000, the Bank had approximately $810,000 of loans
classified substandard, exclusive of the non-performing loans stated above,
that could potentially become non-performing due to delinquencies or
marginal cash flows. These substandard loans decreased by $1,616,000 when
compared to the $2,426,000 at June 30, 2000. The decrease was primarily due
to the sale and payoff of a downgraded commercial real estate loan with an
outstanding principal balance of approximately $1,500,000 at June 30, 2000.
The commercial real estate loan was well collaterallized and the Bank did not
incur any financial loss on this loan. The Bank's delinquent loans, as a
percentage of total loans, increased slightly during the September 30, 2000
quarter and in an effort to control the amount of such loans management
continues to allocate substantial resources to the collection area. Although
delinquencies and non-performing loans increased during the reported quarter,
management does not consider this to be a potential trend at this time.
The following table reflects the quarterly trend of total delinquencies 30
days or more past due, including non-performing loans, for the Bank as a
percentage of total loans:
<TABLE>
<CAPTION>
09-30-00 06-30-00 03-31-00 12-31-99
__________ __________ __________ __________
<C> <C> <C> <C>
0.95% 0.85% 1.08% 1.15%
</TABLE>
At September 30, 2000, loans classified as non-performing included
approximately $223,000 of loan balances that are current and paying as
agreed, but which the Bank maintains as non-performing until the borrower
has demonstrated a sustainable period of performance. Excluding these
loans, the Bank's total delinquencies 30 days or more past due, as a
percentage of total loans, would be 0.89% as of June 30, 2000.
The level of the allowance for loan losses, as a percentage of total loans,
remained essentially the same at September 30, 2000 compared to June 30,
2000, while the level of the allowance for loan losses as a percentage of
total non-performing loans decreased slightly as total non-performing loans
increased from June 30, 2000 to September 30, 2000. The Company has
experienced good growth in the consumer loan portfolio during the September
30, 2000 quarter, however these type of loans have additional credit risk
as compared to real estate mortgage loans. Although these types of loans
have increased, the allowance for loan losses as a percentage of total
loans was supported by management's ongoing analysis of the adequacy of the
allowance for loan losses. Classified loans are also considered in
management's analysis of the adequacy of the allowance for loan losses.
Based on reviewing the credit risk and collateral of classified loans,
management has considered the risks of the classified portfolio and
believes the allowance for loan losses is adequate.
On a regular and ongoing basis, management actively monitors the Bank'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, provide specific loss allowances when necessary, and change the
level of loan loss allowance. The process of evaluating the allowance
involves a high degree of management judgment. The methods employed to
evaluate the allowance for loan losses are quantitative in nature and
consider such factors as the loan mix, the level of non-performing loans,
delinquency trends, past charge-off history, loan reviews and
classifications, collateral, and the current economic climate.
Management believes that the allowance for loan losses is adequate
considering the level of risk in the loan portfolio. While management
believes that it uses the best information available to make its
determinations with respect to the allowance, there can be no assurance
that the Company will not have to increase its provision for loan losses in
the future as a result of changing economic conditions, adverse markets for
real estate or other factors. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance for loan losses based on their
judgments about information available to them at the time of their
examination. The Bank's most recent examination by the Office of Thrift
Supervision was on March 7, 2000. At the time of the exam the regulators
proposed no adjustments to the allowance for loan losses.
Other assets increased by $360,930 from June 30, 2000 to September 30,
2000. The increase was primarily due to the increase in deferred tax assets
and the purchase of non-marketable investments.
Other liabilities increased by $1,382,872 compared to June 30, 2000, due
primarily to increases in accrued interest and other operating expenses as
well as increased escrow account balances.
On July 1, 2000 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS 138 ("Statement 133"). Statement 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that Companies recognize all
derivatives as assets or liabilities in the statements of financial
position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the use of the
derivative and the resulting designation. Statement 133 did not have a
significant effect on the Company's financial position, liquidity, or
results of operations for the September 30, 2000 quarter.
Although the impact of Statement 133 was not material to the Company's
financial position, liquidity, or results of operations, the Company does
have financial instruments that qualify under Statement 133 as
derivatives and hedging activities. The Company entered into two interest rate
exchange agreements to manage and hedge its interest rate exposure with
respect to the two structured brokered CD's issued at $10 million each. The
first CD offering was for a ten-year term with a one-year call option at a
fixed rate of 7.75%. The Company then entered into an interest rate exchange
agreement with a third party to receive a fixed rate of interest at 7.75%
and pay a variable rate at the one-month Libor rate. The second CD offering
was for a five year six month term with a one-year call option at a fixed
rate of 7.50%. The Company then entered into an interest rate exchange
agreement with a third party to receive a fixed rate of interest at 7.50%
and pay a variable rate at the three-month Libor rate. There are one-year
call options on the structured CD's that allow the holders to call the
structured brokered CDs. The Company has one-year call options on the interest
rate exchange agreements as well. The Company entered into these interest rate
exchange agreements to hedge the potential fair value impact on the
structured brokered CDs for sudden changes in the interest rate environment
and as a result these qualify as fair value hedges under Statement 133. The
derivatives were recorded on the balance sheet as other liabilities at fair
value as of September 30, 2000 and were not significant to the Company's
financial position. Since these derivatives qualify as fair value hedges
there was no income statement effect on the Company for the quarter ended
September 30, 2000 as the loss on recording the derivatives was
offset by the change in fair value of the structured brokered CDs.
In addition, the Bank has entered into an interest rate cap agreement to
help mitigate the Bank's asset/liability position in a rising rate
environment. The interest rate cap has a $10,000,000 notional amount with a
two year term and is based off the three month Libor rate. If the three
month Libor rate exceeds 7% during the term of the agreement, the Bank will
receive the spread above the 7% cap. This interest rate cap agreement
qualifies as a derivative under Statement 133. The Bank entered into this
interest rate cap agreement to hedge the potential sudden increase in the
cost of short-term borrowings with the FHLB. This financial instrument
qualifies as a cash flow hedge under Statement 133. The fair value of the
interest rate cap agreement was not significant to the Company's statement
of financial condition as of September 30, 2000.
Capital Resources and Liquidity
_______________________________
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered certificate of deposits
("CDs") when national deposit interest rates are less than the interest
rates on local market deposits. Brokered CDs are also used to supplement
the growth in earning assets. Brokered CDs carry the same risk as local
deposit CDs, in that both are interest rate sensitive with respect to the
Bank's ability to retain the funds. The Bank also utilizes FHLB advances,
as alternative sources of funds, when the interest rates of the advances
are less than market deposit interest rates. FHLB advances are also used to
fund short-term liquidity demands.
Total deposits were $266,596,026 and securities sold under repurchase
agreements were $14,600,414 as of September 30, 2000. These amounts
represent an increase of $6,614,214 and $1,490,249, respectively, compared
to June 30, 2000. The increase in deposits was primarily due to the
increase in time and demand deposits. The increase in time deposits was
attributable to various special offerings as well as normal growth from the
branch market areas. The Bank has devoted additional staffing to increase
its balances in repurchase agreements. Repurchase agreements enhance the
Bank's ability to attain additional municipal and commercial deposits,
improving its overall liquidity position in a cost-effective manner.
Brokered CD's represented $34,497,656 of the total deposits at September
30, 2000, which decreased by $3,007,485 compared to the $37,505,141 balance
as of June 30, 2000. Cross selling strategies are employed by the Bank to
enhance deposit growth. Even though deposit interest rates have remained
competitive, the rates of return are potentially higher with other
financial instruments such as mutual funds and annuities. Like other
companies in the banking industry, the Bank will be challenged to maintain
or increase its core deposits.
Total advances from the FHLB were $121,834,719 as of September 30, 2000; a
decrease of $793,087 compared to June 30, 2000. The cash received from the
growth in deposits and repurchase agreements allowed the Bank to decrease
its advances in FHLB advances. The Bank has unused borrowing capacity from
the FHLB through its advances program. The Bank's current advance
availability, subject to the satisfaction of certain conditions, is
approximately $23,800,000 over and above the September 30, 2000 advances.
Mortgages, free of liens, pledges and encumbrances are required to be
pledged to secure FHLB advances. The Bank's ability to access principal
sources of funds is immediate and with the borrowing capacity at the
Federal Home Loan Bank, the normal growth in bank deposits and repurchase
agreements and the immediate availability of the Bank's cash equivalents as
well as securities available for sale, management believes that the
Company's available liquidity resources are sufficient to support the
Company's needs.
In December 1999, the Board of Directors of Northeast Bancorp approved a
plan to repurchase up to $2,000,000 of its common stock. Under the common
stock repurchase plan, Northeast Bancorp may purchase shares of its common
stock from time to time in the open market at prevailing prices.
Repurchased shares will be held in treasury and may be used in connection
with employee benefits and other general corporate purposes. The Company
does not believe that the current market price for its common stock
adequately reflects full value and believes that the purchase of its common
stock from time to time in the market is a good investment and use of its
funds. As of September 30, 2000, the Company has repurchased $904,140 of
its common stock and management believes that the purchase will not have a
significant effect on the Company's liquidity and earnings per share.
Total equity of the Company was $29,070,840 as of September 30, 2000 as
compared to $28,126,478 at June 30, 2000. Book value per common share was
$10.85 as of September 30, 2000 as compared to $10.49 at June 30, 2000. The
total equity to total assets ratio of the Company was 6.56% as of September
30, 2000 and 6.48% at June 30, 2000.
The Company's net cash provided by operating activities was $1,849,370
during September 30, 2000, which was a $856,717 increase when compared to
September 30, 1999. The increase was primarily attributable to the increase
in net income and other liabilities. Cash provided by financing activities
also increased the Company's net cash during September 30, 2000 due to the
growth in the Company's deposits and repurchase agreements. The increase in
net cash, provided by the Company's operating and finance activities, was
offset by the cash used by investing activities due to the increase in net
loans. Overall, the Company's cash position increased by $1,760,378 in the
September 30, 2000 quarter.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), contains various provisions intended to capitalize the Bank
Insurance Fund ("BIF") and also affects a number of regulatory reforms that
impact all insured depository institutions, regardless of the insurance
fund in which they participate. Among other things, FDICIA grants the OTS
broader regulatory authority to take prompt corrective action against
insured institutions that do not meet capital requirements, including
placing undercapitalized institutions into conservatorship or receivership.
FDICIA also grants the OTS broader regulatory authority to take corrective
action against insured institutions that are otherwise operating in an
unsafe and unsound manner.
FDICIA defines specific capital categories based on an institution's
capital ratios. Although no capital requirements are imposed on the
Company, the Bank is subject to such requirements established by the OTS.
The OTS has issued regulations requiring a savings institution 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 categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized". As of September 30, 2000, 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 September 30, 2000, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
To Be "Well
For Capital Capitalized" Under
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
________ _______ ________ ________ _________ ________
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
As of September 30,
2000:
Tier 1 (Core) capital
(to risk weighted
assets) $ 34,281 10.68% $ 12,835 4.00% $ 19,253 6.00%
Tier 1 (Core) capital
(to total assets) $ 34,281 7.75% $ 17,696 4.00% $ 22,120 5.00%
Total Capital (to risk
weighted assets) $ 36,464 11.36% $ 25,670 8.00% $ 32,088 10.00%
</TABLE>
Management believes that there are adequate funding sources to meet its
future liquidity needs for the foreseeable future. Primary among these
funding sources are the repayment of principal and interest on loans, the
renewal of time deposits, and the growth in the deposit base. Management
does not believe that the terms and conditions that will be present at the
renewal of these funding sources will significantly impact the Company's
operations, due to its management of the maturities of its assets and
liabilities.
Results of Operations
_____________________
Net income for the quarter ended September 30, 2000 was $883,273 or basic
and diluted earnings per share of $0.33, respectively. This compares to
earnings of $801,722 or basic and diluted earnings per share of $0.29 for
the quarter ended September 30, 1999. The Company's net interest income was
$3,575,934 for the three months ended September 30, 2000, as compared to
$3,490,492 for the three months ended September 30, 1999, an increase of
$85,442. Total interest income increased $1,662,528 during the three
months ended September 30, 2000 compared to the three months ended
September 30, 1999. The increase in interest income was due primarily from
increased volume and rates on loans. The increase in total interest expense
of $1,577,086 for the three months ended September 30, 2000 was due
primarily from increased volume and rates of deposits and borrowings.
The changes in net interest income are presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the three months ended
September 30, 2000 versus September 30, 1999
<TABLE>
<CAPTION>
Difference Due to
Volume Rate Total
_______________ _______________ _______________
<S> <C> <C> <C>
Investments $ 108,925 $ 36,305 $ 145,230
Loans, net 1,220,166 284,308 1,504,474
FHLB & Other Deposits (5,144) 17,968 12,824
_________________________________________________
Total Interest Earning Assets 1,323,947 338,581 1,662,528
Deposits 596,546 345,532 942,078
Repurchase Agreements 1,948 447 2,395
Borrowings 281,672 350,941 632,613
_________________________________________________
Total Interest-Bearing
Liabilities 880,166 696,920 1,577,086
_________________________________________________
Net Interest Income $ 443,781 $ (358,339) $ 85,442
=================================================
</TABLE>
Rate/Volume amounts spread proportionately between volume and rate.
The Company's business primarily consists of the savings and loan
activities of the Bank. Accordingly, the success of the Company is largely
dependent on its ability to manage interest rate risk. This is the risk
that represents the potential changes in interest rates and those 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. The
Bank has shifted to a slightly liability sensitive position based on its
own internal analysis which categorizes its core deposits as long term
liabilities which are then matched to long term assets. As a result, the
Bank will generally experience a contraction in its net interest margins
during a period of increasing rates. Management is currently addressing the
asset/liability mix to reposition the Bank to a slightly asset sensitive
position.
Approximately 20% of the Bank's loan portfolio are comprised of floating
rate loans based on a prime rate index. Interest income on these existing
loans will increase as the prime rate increases, as well as on
approximately 19% of other loans in the Bank's portfolio that are based on
short-term rate indices such as the one-year treasury bill. An increase in
short-term interest rates will also increase deposit and FHLB advance
rates, increasing the Company's interest expense. Although the Bank has
experienced some net interest margin compression, the impact on net
interest income will depend on, among other things, actual rates charged on
the Bank's loan portfolio, deposit and advance rates paid by the Bank and
loan volume.
The provision for loan losses for the three months ended September 30, 2000
was $195,511 as compared to $295,229 for the three months ended September
30, 1999, which was a decrease of $99,718. The Bank's loan volume during
the September 30, 2000 quarter was significantly less when compared to the
September 30, 1999 quarter. The reduction in loan volume in the September
30, 2000 quarter, when compared to September 30, 1999, was primarily in the
commercial and consumer loan portfolios. The Bank had experienced good loan
growth during the September 30, 1999 quarter particularly in the commercial
and consumer loan portfolios. However, these types of loans have additional
credit risk as compared to real estate mortgage loans. Due to the increase
in these types of loans, the Bank increased its provision for loan losses
during the September 30, 1999 quarter to maintain its allowance for loan
losses as a percentage of total loans and to consider the added risk of
these loans.
Total non-interest income was $645,062 for the three months ended September
30, 2000 as compared to $627,324 for the three months ended September 30,
1999. Service fee income was $298,759 for the three months ended September
30, 2000 as compared to $265,183 for the three months ended September 30,
1999. The $33,576 service fee increase for the three months ended
September 30, 2000 was primarily due to an increase in loan and deposit fee
income due to increased accounts. Net gains from securities and trading
increased by $13,483 and $2,256, respectively for the three months ended
September 30, 2000 as compared to the three ended September 30, 1999. The
Company sold a larger volume of its securities during the three-month
period ended September 30, 2000, taking advantage of the fluctuation in
market prices.
Other income was $325,399 for the three month period ended September 30,
2000, which was a decrease of $31,577 when compared to other income of
$356,976 for the three months ended September 30, 1999. The decrease in
other income was primarily due to the decrease in gains from sale of
residential loans to Freddie Mac.
Total non-interest expense, for the Company was $2,666,390 for the three
months ended September 30, 2000 as compared to $2,587,545 for the three
months ended September 30, 1999. The increase in non-interest expense of
$78,845 was due, in part, to the increase in compensation expense of
$100,195. The increase in compensation expense was primarily due to the
increased commission paid to brokers in the investment sales division due
to growth in sales revenue and increased costs associated with the
Company's general increases in compensation, health insurance and benefit
plans. This increase was offset, in part, by the decrease in occupancy
expense of $18,857 due to the closure of a branch at the end of the prior
fiscal year and by the decrease in equipment expense of $29,704 due to the
expenses associated with the closure of the branch.
Other expenses increased by $27,211 for the three months ended September
30, 2000 compared to the three months ended September 30, 1999. The
increase was primarily due to an increase in advertising expenses of
$32,000 to continue the Company's strategy in increasing market exposure
and an increase of $54,000 due to the write-down of certain equity
securities that management believes have experienced other than temporary
declines in market value. These increases were offset by the reduction of
the Company's other general expenses.
The Company's income tax expense increased by $42,502 for the three months
ended September 30, 2000, when compared to the three months ended September
30, 1999. The increase in income tax expense is due to increased earnings
before tax.
Recent Accounting Developments
______________________________
In September of 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", a replacement of FASB Statement No. 125
(Statement 140). Statement 140 provides accounting an reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. Statement 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. Statement 140 is effective for transfers and servicing assets and
extinguishments of liabilities occurring after March 31, 2001. This statement
is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Management of the Company does not expect
this statement to have a significant effect on the Company's financial position
or results of operations based on the Company's current activities.
Impact of Inflation
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, substantially all of the assets and virtually all of
the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance
than the general level of inflation. Over short periods of time, interest
rates may not necessarily move in the same direction or in the same
magnitude as inflation.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
_________________________________________________________
There have been no material changes in the Company's market risk from June
30, 2000. For information regarding the Company's market risk, refer to
the Company's Annual Report on Form 10-K dated as of June 30, 2000.
Part II - Other Information
Item 1. Legal Proceedings
_________________
None.
Item 2. Changes in Securities
_____________________
None.
Item 3. Defaults Upon Senior Securities
_______________________________
None.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
None.
Item 5. Other Information
_________________
None.
Item 6. Exhibits and Reports on Form 8-K
________________________________
(a) Exhibits
________
11 Statement regarding computation of per share earnings.
27 Financial data Schedule
(b) Reports on Form 8-K
___________________
No reports on Form 8-K have been filed during the quarter ended
September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 10, 2000 NORTHEAST BANCORP
By: /S/ James D. Delamater
_______________________________
James D. Delamater
President and CEO
By: /S/ Richard Wyman
_______________________________
Richard Wyman
Chief Financial Officer
NORTHEAST BANCORP
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION
11 Statement regarding computation of per share earnings
27 Financial data schedule
