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, 1998
__________________
or
___ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0 - 14588
_________
Northeast Bancorp
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Maine 01 - 0425066
_____________________________________ ______________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
232 Center Street, Auburn, Maine 04210
_____________________________________ ______________________________________
(Address of principal executive (Zip Code)
offices)
(207) 777 - 6411
_______________________________________________________________________________
Registrant's telephone number, including area code
Not Applicable
_______________________________________________________________________________
Former name, former address and former fiscal year,if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares outstanding as of November 06, 1998: 2,618,684 of common stock, $1.00
par value per share.
_______________________________________________________________________________
2
NORTHEAST BANCORP
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
September 30, 1998 and June 30, 1998
Consolidated Statements of Income
Three Months ended September 30, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity
Three Months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows
Three Months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Part II. Other Information
Item 1. Legal Proceddings
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 SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, June 30,
1998 1998
3
_______________ _______________
Assets
Cash and due from banks $ 4,916,299 $ 6,821,574
Interest bearing deposits in other banks 311,017 421,392
Federal Home Loan Bank overnight deposits 6,006,000 4,909,000
Trading account securities at market - 50,000
Available for sale securities 12,486,127 13,608,823
Federal Home Loan Bank stock 5,680,500 5,680,500
Loans held for sale 435,650 369,500
Loans 290,056,925 282,030,950
Less allowance for loan losses 2,870,000 2,978,000
_______________ _______________
Net loans 287,186,925 279,052,950
Bank premises and equipment, net 4,706,732 4,473,885
Assets acquired through foreclosure 135,622 381,288
Goodwill (net of accumulated amortization
of $1,606,902 at 9/30/98 and
$1,532,808 at 6/30/98) 1,849,821 1,923,915
Other assets 4,946,380 4,839,767
_______________ _______________
Total Assets 328,661,073 322,532,594
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 195,394,972 $ 184,024,097
Repurchase Agreements 5,532,249 5,205,594
Advances from Federal Home Loan Bank 99,003,912 104,439,952
Notes payable 916,667 993,055
Other Liabilities 2,104,371 2,730,369
_______________ _______________
Total Liabilities 302,952,171 297,393,067
Shareholders' Equity
Preferred stock, Series A, 45,454 shares
issued and outstanding 999,988 999,988
Common stock, par value $1, 2,618,384 and
2,614,285 shares issued and outstanding at
9/30/98 and 6/30/98, respectively 2,618,384 2,614,285
Additional paid in capital 9,290,192 9,258,107
Retained earnings 12,811,559 12,331,595
_______________ _______________
25,720,123 25,203,975
Accumulated other comprehensive income (loss) (11,221) (64,448)
_______________ _______________
Total Shareholders' Equity 25,708,902 25,139,527
_______________ _______________
Total Liabilities and Shareholders' Equity $ 328,661,073 $ 322,532,594
=============== ===============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
4
Three Months Ended
September 30,
1998 1997
_______________ _______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 116,234 $ 142,093
Interest on loans & loans held for sale 6,309,260 5,172,282
Interest on available for sale securities 194,387 488,483
Dividends on Federal Home Loan Bank stock 90,203 69,836
Other Interest Income 5,072 4,783
_______________ _______________
Total Interest Income 6,715,156 5,877,477
Interest Expense
Deposits 2,129,744 1,883,484
Repurchase agreements 52,744 48,438
Other borrowings 1,437,078 1,180,294
_______________ _______________
Total Interest Expense 3,619,566 3,112,216
_______________ _______________
Net Interest Income 3,095,590 2,765,261
Provision for loan losses 204,931 162,500
_______________ _______________
Net Interest Income after Provision for
Loan Losses 2,890,659 2,602,761
Other Income
Service charges 253,385 276,405
Net securities gains 10,791 107,996
Net gain on trading securities 5,612 1,797
Other 236,733 168,866
_______________ _______________
Total Other Income 506,521 555,064
Other Expenses
Salaries and employee benefits 1,196,731 1,163,615
Net occupancy expense 219,761 221,386
Equipment expense 182,003 219,686
Goodwill amortization 74,094 74,094
Other 730,068 598,440
_______________ _______________
Total Other Expenses 2,402,657 2,277,221
_______________ _______________
Income Before Income Taxes 994,523 880,604
Income tax expense 358,486 310,039
_______________ _______________
Net Income $ 636,037 $ 570,565
=============== ===============
Earnings Per Share
5
Primary $ 0.24 $ 0.24
Diluted $ 0.23 $ 0.21
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended September 30, 1998 and 1997
(Unaudited)
Accumulated
Other
Common Comprehensive
Preferred Stock at Common Retained Income Treasury
Stock $1.00 Par Surplus Earnings (Loss) Stock Total
____________ ___________ ___________ _____________ _____________ _____________ ____________
Balance at June 30, 1997 1,999,980 1,462,909 7,699,882 11,266,984 (334,175) -- 22,095,580
Net income for three months
ended September 30, 1997 -- -- -- 570,565 -- -- 570,565
Other comprehensive income,
net of tax:
Adjustment of valuation
reserve for securities
available for sale -- -- -- -- 61,827 -- 61,827
Comprehensive income -- -- -- -- -- -- 632,392
Cash dividends declared on
common stock -- -- -- (103,371) -- -- (103,371)
Cash dividends declared on
preferred stock -- -- -- (34,999) -- -- (34,999)
Common stock issued in
connection with employee
benefit and stock option
plans -- 18,673 69,077 -- -- (44,988) 42,762
Treasury Stock Purchased -- -- -- -- -- 44,988 44,988
____________ ___________ ___________ _____________ _____________ _____________ ____________
6
Balance September 30, 1997 $ 1,999,980 $1,481,582 $7,768,959 $ 11,699,179 $ (272,348) $ 0 $22,677,352
============ =========== =========== ============= ============= ============= ============
Balance at June 30, 1998 999,988 2,614,285 9,258,107 12,331,595 (64,448) -- 25,139,527
Net income for three months
ended September 30, 1998 -- -- -- 636,037 -- -- 636,037
Other comprehensive income,
net of tax:
Adjustment of valuation
reserve for securities
available for sale -- -- -- -- 53,227 -- 53,227
Comprehensive income -- -- -- -- -- -- 689,264
Cash dividends declared on
common stock -- -- -- (138,573) -- -- (138,573)
Cash dividends declared on
preferred stock -- -- -- (17,500) -- -- (17,500)
Common stock issued in
connection with employee
benefit and stock option
plans -- 4,099 32,085 -- -- -- 36,184
____________ ___________ ___________ _____________ _____________ _____________ ____________
Balance September 30, 1998 $ 999,988 $2,618,384 $9,290,192 $ 12,811,559 $ (11,221) $ 0 $25,708,902
============ =========== =========== ============= ============= ============= ============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Three Months Ended
September 30,
1998 1997
_______________ _______________
Cash provided by operating activities $ (210,989) $ 589,087
Cash flows from investing activities:
FHLB stock purchased -- (243,000)
Available for sale securities purchased (532,917) (4,293,677)
Available for sale securities principal
reductions 291,994 472,238
7
Available for sale securities matured 1,350,000 250,000
Available for sale securities sold 49,669 3,409,863
New loans, net of repayments & charge offs (7,867,188) (2,627,669)
Net capital expenditures (376,651) (58,377)
Assets acquired through foreclosure sold 262,219 87,038
Real estate held for investment sold 50,000 63,793
_______________ _______________
Net cash used in investing activities (6,772,874) (2,939,791)
Cash flows from financing activities:
Net change in deposits 11,370,876 363,286
Net change in repurchase agreements 326,655 (258,247)
Dividends paid (156,073) (138,370)
Proceeds from stock issuance 36,184 87,750
Net decrease (increase) in advances from
Federal Home Loan Bank of Boston (5,436,040) 513,413
Net change in notes payable (76,389) (76,389)
_______________ _______________
Net cash provided by financing activities 6,065,213 491,443
_______________ _______________
Net decrease in cash and cash equivalents (918,650) (1,859,261)
Cash and cash equivalents, beginning of period 12,151,966 18,774,345
_______________ _______________
Cash and cash equivalents, end of period $ 11,233,316 $ 16,915,084
=============== ===============
Cash and cash equivalents include cash on
hand, amounts due from banks, interest
bearing deposits and federal funds sold
Supplemental schedule of noncash investing
activities:
Net decrease in valuation for unrealized
market value adjustments on available for
sale securities 53,227 61,827
Net transfer (to) from Loans to Other Real
Estate Owned -- 56,325
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds 206,000 5,000
Interest paid 3,615,158 3,129,301
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998
1. Basis of Presentation
---------------------
The accompanying unaudited condensed and consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
8
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, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 1999. For further
information, refer to the audited consolidated financial statements and
footnotes thereto for the fiscal year ended June 30, 1998 included in the
Company's Annual Report on Form 10-K.
2. Reporting Comprehensive Income
------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. Such components of total comprehensive income for the
Company are net income and net unrealized gains (losses) on securities
available for sale, net of tax. The Company has adopted SFAS No. 130 effective
for the current quarter ended September 30, 1998.
3. Securities
----------
Securities available for sale at cost and approximate market values are
summarized below.
September 30, 1998 June 30, 1998
------------------------- -------------------------
Market Market
Cost Value Cost Value
------------ ------------ ------------ ------------
Debt securities issued by
the U.S. Treasury and
other U.S. Government
corporations and agencies $ 3,596,487 $ 3,602,648 $ 4,696,659 $ 4,698,266
Corporate bonds 202,691 209,042 202,952 203,484
Mortgage-backed securities 7,426,950 7,557,956 7,723,843 7,714,332
Equity securities 1,277,000 1,116,481 1,083,018 992,741
------------ ------------ ------------ ------------
$12,503,128 $12,486,127 $13,706,472 $13,608,823
============ ============ ============ ============
September 30, 1998 June 30, 1998
------------------------- -------------------------
Market Market
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ 247,070 $ 247,070 $ 347,253 $ 347,253
Due after one year
through five years 302,938 304,385 452,952 450,984
Due after five years
through ten years 1,249,753 1,259,610 1,100,000 1,103,200
Due after ten years 1,999,417 2,000,625 2,999,406 3,000,313
9
Mortgage-backed securities
(including securities with
interest rates ranging
from 5.15% to 9.0%
maturing September 2003
to February 2026) 7,426,950 7,557,956 7,723,843 7,714,332
Equity securities 1,277,000 1,116,481 1,083,018 992,741
------------ ------------ ------------ ------------
$12,503,128 $12,486,127 $13,706,472 $13,608,823
============ ============ ============ ============
4. Allowance for Loan Losses
-------------------------
The following is an analysis of transactions in the allowance for loan losses:
Three Months Ended
September 30,
1998 1997
------------ ------------
Balance at beginning of year $ 2,978,000 $ 2,741,809
Add provision charged to operations 204,931 162,500
Recoveries on loans previously charged off 25,523 72,872
------------ ------------
3,208,454 2,977,181
Less loans charged off 338,454 185,861
------------ ------------
Balance at end of period $ 2,870,000 $ 2,791,320
============ ============
5. Advances from Federal Home Loan Bank
------------------------------------
A summary of borrowings from the Federal Home Loan Bank is as follows:
September 30, 1998
---------------------------------------------
Principal Interest Maturity
Amounts Rates Dates
-------------- --------------- ------------
$ 36,500,000 5.55% - 5.96% 1999
4,000,000 5.88% - 6.27% 2000
4,256,961 5.38% - 6.40% 2001
11,246,951 5.69% - 6.67% 2003
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
--------------
$ 99,003,912
==============
June 30, 1998
10
---------------------------------------------
Principal Interest Maturity
Amounts Rates Dates
-------------- --------------- ------------
$ 43,745,440 5.55% - 6.00% 1999
4,000,000 5.88% - 6.27% 2000
1,212,676 5.56% - 6.40% 2001
1,138,627 6.21% - 6.49% 2002
9,631,854 5.69% - 6.64% 2003
1,711,355 6.36% - 6.67% 2004
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
--------------
$ 104,439,952
==============
Item 2. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operation
____________________
General
_______
This Management's Discussion and Analysis of Financial Condition and Results of
Operations presents a review of the material changes in the financial condition
of the Company from June 30, 1998 to September 30,1998, and the results of
operations for the quarters ended September 30, 1998 and 1997. This discussion
and analysis is intended to assist in understanding the financial condition and
results of operations of the Company. Accordingly, this section should be read
in conjunction with the condensed consolidated financial statements and the
related notes contained herein.
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, year 2000
readiness, simulation of changes in interest rates, prospective results of
operations, capital spending and financing sources, and revenue sources.
Forward-looking statements, which are based on various assumptions (some of
which are beyond the Company's control), may be identified by reference to a
future period or periods, or by the use of forward-looking terminology; such as
"may", "will", "believe", "expect", "estimate", "anticipate", "continue", or
similar terms or variations on those terms, or the negative of those terms.
Such forward-looking statements reflect the current view of management and are
based on information currently available to them, and upon current
expectations, estimates, and projections regarding the Company and its
industry, management's belief with respect there to, and certain assumptions
made by management. These forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties, and other factors.
Accordingly, actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
11
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and
the integration of acquired businesses, credit risk management, asset/liability
management, changes in technology, changes in the securities markets, and the
availability of and the costs associated with sources of liquidity.
Description of Operations
_________________________
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company and is primarily regulated by the Office of Thrift Supervision ("OTS").
The Company has one wholly-owned subsidiary, Northeast Bank, FSB (the "Bank"),
which has branches located in Auburn, Augusta, Bethel, Harrison, South Paris,
Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine.
Financial Condition
___________________
Total consolidated assets were $328,661,073 on September 30, 1998, which
represents an increase of $6,128,479 from June 30, 1998. Total net loans
increased by $8,133,975, from June 30, 1998 to September 30, 1998, while cash
equivalents and securities decreased by $918,650 and $1,172,696, respectively,
during the same period. Total deposits and repurchase agreements increased by
$11,697,530, while Federal Home Loan Bank ("FHLB") borrowings decreased by
$5,436,040 from June 30, 1998 to September 30, 1998.
The funds available from the decrease in cash equivalents, scheduled maturities
of securities available for sale and the increase in deposits were utilized to
support the increase in the loan portfolio and to repay FHLB borrowings from
June 30, 1998 to September 30, 1998.
At September 30, 1998, the carrying value of securities available for sale by
the Company was $12,486,127, which is $17,001 less than the cost of the
underlying securities. The difference between the carrying value and the cost
of the securities was primarily attributable to the decline in the market value
of equity securities from the prices at the time of purchase. Management
attributes the reduction in the market value of equity securities to the
decline of the stock market, which had a greater affect on the market value of
the Company's investments in high-tech stocks. Management reviews the
portfolio of investments on an ongoing basis to determine if there has been an
other-than-temporary decline in value. Some of the considerations management
makes in the determination are market valuations of particular securities and
economic analysis of the securities' sustainable market values based on the
underlying companies' profitability.
Total loans increased by $8,025,975 for the three months ended September 30,
1998. The loan portfolio growth was in 1-4 family mortgages, consumer
installment and commercial loans. In the September 1998 quarter, the Bank
purchased approximately $5,900,000 of 1-4 family mortgages. The purchase
consisted of 1-4 family fixed rate mortgages secured by property located
primarily in the State of New York. The continued expansion into new markets
diversifies the credit risk and the potential economic risks of the credits
held in the Bank's purchased loan portfolio, such that the portfolio is not
effected solely by the local State of Maine economy. The Bank's local market,
as well as the secondary market, continues to be very competitive for loan
origination volume. The local competitive environment and customer response
to favorable secondary market rates have affected the Bank's ability to
12
increase the loan portfolio. In an effort to increase loan volume, the Bank's
offering rates for its loan products have been reduced to compete in the
various markets. The Bank will experience some margin compression due to
decreased loan rates.
The loan portfolio contains elements of credit and interest rate risk. The
Bank primarily lends within its local market areas, which management believes
helps them to better evaluate credit risk. As the Bank expands its purchase of
loans in other states, management researches the strength of the economy in the
respective state and underwrites every loan before purchase. These steps are
taken to better evaluate and minimize the credit risk of out-of-state
purchases. The Bank also maintains a well collateralized position in real
estate mortgages.
At September 30, 1998, residential real estate mortgages made up 60% of the
total loan portfolio, in which 51% of the residential loans are variable rate
products, as compared to 65% and 53%, respectively, at September 30, 1997.
Although the Bank has purchased fixed rate loans, it is management's intent,
where market opportunities arise, to increase the volume in variable rate
residential loans to reduce the interest rate risk in this area.
At September 30, 1998, 17% of the Bank's total loan portfolio balance is
commercial real estate mortgages. Commercial real estate loans have minimal
interest rate risk as 88% of the portfolio consists of variable rate products.
At September 30, 1997, commercial real estate mortgages made up 18% of the
total loan portfolio, in which 88% of the commercial real estate loans were
variable rate products. The Bank tries to mitigate credit risk by lending in
its local market area as well as maintaining a well collateralized position in
real estate.
Commercial loans make up 10% of the total loan portfolio, of which 57% are
variable rate instruments at September 30, 1998. At September 30, 1997
commercial loans made up 8% of the total loan portfolio, of which 69% were
variable rate instruments. The credit loss exposure on commercial loans is
highly dependent on the cash flow of the customer's business. The Bank
mitigates losses by strictly adhering to the Company's underwriting and credit
policies.
Consumer and other loans make up 13% of the loan portfolio as of September 30,
1998 which compares to 8% at September 30, 1997. Since these loans are
primarily fixed rate products, they have interest rate risk when market rates
increase. These loans also have credit risk with minimal security. The
increase in consumer loans was primarily due to the volume generated from the
automobile dealer finance department. This department underwrites all the
automobile dealer finance loans to protect credit quality. The Bank primarily
pays a nominal one time origination fee on the loans. The fees are deferred
and amortized over the life of the loans as a yield adjustment. Management
attempts to mitigate credit and interest rate risk by keeping the products
offered short-term, receiving a rate of return commensurate with the risk, and
lending to individuals in the Bank's known market areas.
The Bank's allowance for loan losses was $2,870,000 as of September 30, 1998
versus $2,978,00 as of June 30, 1998, representing 0.99% and 1.06% of total
loans, respectively. The Bank had non-performing loans totaling $1,771,000 at
September 30, 1998 compared to $2,248,000 at June 30, 1998. Non-performing
loans represented 0.54% and 0.70% of total assets at September 30, 1998 and
June 30, 1998, respectively. The Bank's allowance for loan losses was equal to
13
162% and 132% of the total non-performing loans at September 30, 1998 and June
30, 1998, respectively. At September 30, 1998, the Bank had approximately
$983,000 of loans classified substandard, exclusive of the non-performing loans
stated above, that could potentially become non-performing due to delinquencies
or marginal cash flows. These substandard loans increased by $883,000 when
compared to the $100,000 at June 30, 1998. The increase was attributed to
management downgrading certain loans during its internal review process.
The following table represents the Bank's non-performing loans as of September
30, 1998 and June 30, 1998, respectively:
September 30, June 30,
Description 1998 1998
_________________________ _______________ _______________
1-4 Family Mortgages $ 710,000 $ 783,000
Commercial Mortgages 691,000 956,000
Commercial Loans 310,000 509,000
Consumer Installment 60,000 0
_______________ _______________
Total non-performing $ 1,771,000 $ 2,248,000
=============== ===============
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:
12-31-97 03-31-98 06-30-98 09-30-98
________ ________ ________ ________
1.72% 1.44% 1.09% 0.89%
At September 30, 1998, loans classified as non-performing included
approximately $378,000 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 0.76% as of September 30, 1998.
The level of the allowance forloan losses as a percentage of total loans has
decreased due to the increase of loan volume as well as a reduction in the
allowance for loan losses balance due to the charge-off of a commercial real
estate loan, while the level of allowance for loan losses as a percentage of
non-performing loans increased at September 30, 1998, when compared to June 30,
1998. Based on reviewing the credit risk and collateral of delinquent, non-
performing and classified loans, management considers the allowance for loan
losses to be adequate.
On a regular and ongoing basis, management evaluates the adequacy of the
allowance for loan losses. The process to evaluate the allowance involves a
high degree of management judgement. The methods employed to evaluate the
allowance for loan losses are quantitative in nature and consider such factors
14
as the loan mix, the level of non-performing loans, delinquency trends, past
charge-off history, loan reviews and classifications, collateral, and the
current economic climate.
While management uses its best judgement in recognizing loan losses in light of
available information, there can be no assurance that the Company will not have
to increase its provision for loan losses in the future as a result of changing
economic conditions, adverse markets for real estate or other factors. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance for loan
losses based on their judgements about information available to them at the
time of their examination. The Bank's most recent examination by the OTS was
on September 22, 1997. At the time of the exam the regulators proposed no
additions to the allowance for loan losses.
The bank's premises and equipment increased by $232,847 from June 30, 1998 to
September 30, 1998. The increase was due to the purchase and replacement of
the Bank's mainframe and software.
Capital Resources and Liquidity
_______________________________
Cash provided by operating activities in the consolidated statements of cash
flow decreased by $800,076 from September 30, 1997 to September 30, 1998 as a
result of reduction in other liabilities due to transaction timing differences.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered certificate of deposits
("C.D.s") when national deposit interest rates are less than the interest rates
on local market deposits. Brokered C.D.s are also used to supplement the
growth in earning assets. Brokered C.D.s carry the same risk as local deposit
C.D.s, in that both are interest rate sensitive with respect to the Bank's
ability to retain the funds. The Bank also utilizes FHLB advances, as
alternative sources of funds, when the interest rates of the advances are less
than market deposit interest rates. FHLB advances are also used to fund
short-term liquidity demands.
Total deposits were $195,394,972 and securities sold under repurchase
agreements were $5,532,249 as of September 30, 1998. These amounts represent
an increase of $11,370,875 and $326,655, respectively, compared to June 30,
1998. The increase in deposits was primarily due to the $6,000,000 increase in
NOW demand deposits. The increase in NOW deposits was attributable to the
development of a demand account where the interest rate increases as deposit
balances increase. Brokered deposits represented $10,340,009 of the total
deposits at September 30, 1998, which increased by $2,765,299 compared to the
$7,574,710 balance as of June 30, 1998. Cross selling strategies are employed
by the Bank to develop deposit growth. Even though deposit interest rates have
remained competitive, the rates of return are much higher at other financial
instruments such as mutual funds and annuities. Like other companies in the
banking industry, the Bank will be challenged to maintain and or increase its
core deposits.
Total advances from the FHLB were $99,003,912 as of September 30, 1998, a
decrease of $5,436,040 compared to June 30, 1998. The cash received from the
increase in the Bank's deposits was utilized to repay FHLB advances. The Bank
has unused borrowing capacity from the FHLB through its advances program. The
15
Bank's current advance availability, subject to the satisfaction of certain
conditions, is approximately $22,000,000 over and above the September 30, 1998
advances. Mortgages, free of liens, pledges and encumbrances are required to
be pledged to secure FHLB advances. The Bank's ability to access principal
sources of funds is immediate and with the borrowing capacity at the Federal
Home Loan Bank, the normal growth in bank deposits and repurchase agreements
and the immediate availability of the Bank's cash equivalents as well as
securities available for sale, management believes that the Company's available
liquidity resources are sufficient to support the Company's needs.
Total equity of the Company was $25,708,902 as of September 30, 1998 versus
$25,139,527 at June 30, 1998. Book value per common share was $9.44 as of
September 30, 1998 versus $9.23 at June 30, 1998. The total equity to total
assets ratio of the Company was 7.82% as of September 30, 1998 and 7.79% at
June 30, 1998.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
contains various provisions intended to capitalize the Bank Insurance Fund
("BIF") and also affects a number of regulatory reforms that impact all insured
depository institutions, regardless of the insurance fund in which they
participate. Among other things, FDICIA grants the OTS broader regulatory
authority to take prompt corrective action against insured institutions that do
not meet capital requirements, including placing undercapitalized institutions
into conservatorship or receivership. FDICIA also grants the OTS broader
regulatory authority to take corrective action against insured institutions
that are otherwise operating in an unsafe and unsound manner.
FDICIA defines specific capital categories based on an institution's capital
ratios. The OTS has issued regulations requiring a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, core capital of 3.0%, leverage
capital of 4.0% and a risk-based capital standard of 8.0%. The prompt
corrective action regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". As of
September 30, 1998, the most recent notification from the OTS categorized the
Bank as well capitalized. There are no conditions or events since that
notification that management believes has changed the institution's category.
At September 30, 1998, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
_________ ________ _________ ________ _________ ________
(Dollars in Thousands)
As of September 30,
1998:
Tier 1 (Core) capital
(to risk weighted
assets) $ 23,386 10.46% $ 8,946 4.00% $ 13,419 6.00%
16
Tier 1 (Core) capital
(to total assets) $ 23,386 7.16% $ 13,065 4.00% $ 16,332 5.00%
Total Capital (to
risk weighted assets) $ 24,796 11.09% $ 17,892 8.00% $ 22,365 10.00%
Results of Operations
_____________________
Net income for the quarter ended September 30, 1998 was $636,037 or basic
earnings per share of $0.24 and diluted earnings per share of $0.23. This
compares to earnings of $570,565 or basic earnings per share of $0.24 and
diluted earnings per share of $0.21 for the quarter ended September 30, 1997.
The Company anticipates earnings to steadily increase in the near future, but
the instability of the current economy could effect the predictability of the
Company's anticipated short term earnings.
On September 30, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Comparative financial information in the Statements of
Changes in Shareholders' Equity for earlier periods have been reclassified in
accordance with the requirement of Statement No. 130.
The Company's net interest income was $3,095,590 for the three months ended
September 30, 1998, versus $2,765,261 for the three months ended September 30,
1997, an increase of $330,329. Total interest income increased $837,679 during
the three months ended September 30, 1998 compared to the three months ended
September 30, 1997. The increase in net income was due primarily from an
increase in the volume of loans offset in part by a decrease in rates. The
increase in total interest expense of $507,350 for the three months ended
September 30, 1998 was due primarily from the increased volume of deposits and
borrowings.
The changes in net interest income are presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the three months ended
September 30, 1998 versus September 30, 1997
Difference Due to
Volume Rate Total
___________ ___________ ___________
Investments $ (245,503) $ (27,741) $ (273,244)
Loans 1,348,258 (211,279) 1,136,979
FHLB & Other Deposits (26,973) 917 (26,056)
_____________________________________
Total 1,075,782 (238,103) 837,679
Deposits 163,617 82,643 246,260
Repurchase Agreements 5,489 (1,183) 4,306
Borrowings 322,846 (66,062) 256,784
_____________________________________
Total 491,952 15,398 507,350
17
_____________________________________
Net Interest Income $ 583,830 $ (253,501) $ 330,329
=====================================
Rate/Volume amounts spread proportionately between volume and rate.
The majority of the Company's income is generated from the Bank. Management
believes that the Bank is slightly asset sensitive based on its own internal
analysis which categorizes its core deposits as long term liabilities which are
then matched to long term assets. As a result, the Bank will generally
experience a contraction in its net interest margins during a period of falling
rates. Management believes that the maintenance of a slight asset sensitive
position is appropriate since historically interest rates tend to rise faster
than they decline.
Approximately 21% of the Bank's loan portfolio is comprised of floating rate
loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as on approximately 31% of
other loans in the Bank's portfolio that are based on short-term rate indices
such as the one-year treasury bill. An increase in short-term interest rates
will also increase deposit and FHLB advance rates, increasing the Company's
interest expense. Although the Company has experienced some net interest
margin compression, the impact on net interest income will depend on, among
other things, actual rates charged on the Bank's loan portfolio, deposit and
advance rates paid by the Bank and loan volume.
Total non-interest income was $506,521 for the three months ended September 30,
1998 versus $555,064 for the three months ended September 30, 1997. Service
fee income was $253,385 for the three months ended September 30, 1998 versus
$276,405 for the three months ended September 30, 1997. The $23,020 service
fee decrease for the three months ended September 30, 1998 was primarily due to
a reduction in loan servicing and deposit fee income. Gains from available for
sale securities were $10,791 for the three months ended September 30, 1998
versus $107,996 for the three ended September 30, 1997. The Company sold some
of its available for sale securities during the three month period ended
September 30, 1997, taking advantage of the fluctuation in market prices in the
mortgage-backed security portfolio.
Other income was $236,733 for the three month period ended September 30, 1998,
which was an increase of $67,867 when compared to other income of $168,866 for
the three months ended September 30, 1997. The increase in other income in the
three months ended September 30,1998, was primarily due to gains from the sale
of 1-4 family mortgages, other real estate owned and real estate held for
investment.
Total non-interest expense, for the Company was $2,402,657 for the three months
ended September 30, 1998 versus $2,277,221 for the three months ended September
30, 1997. A portion of the increase in non-interest expense was due to an
increase in compensation expense of $33,116, for the three month period ended
September 30, 1998, attributable primarily to normal salary and benefit
increases. Other expenses increased by $131,627 for the three months ended
September 30, 1998, compared to September 30, 1997. The increase in other
expenses during the three month period was principally due to the following:
(i) an increase of $28,000 in processing fees due to the Bank outsourcing its
check processing to a third party, (ii) an increase of $17,000 in advertising
18
expense (which continues the Company's strategy to increase market exposure),
(iii) an increase of $39,000 in loan servicing fees due to the increase in
purchased loans, (iv) an increase of $17,000 in supplies expense due to timing
differences in purchasing, and (v) an increase of $21,000 in year 2000
expenses. The non-interest expense increase above was offset by the reduction
of $39,308 in occupancy and equipment expense due to reductions in maintenance
contracts.
Impact of Inflation
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, substantially all of the assets and virtually all of the
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Year 2000
_________
The Company is currently addressing the Year 2000 issue. Many existing
computer programs and hardware configurations use only two digits to identify a
year in the date field. Since these programs did not take into consideration
the upcoming change in the century, many computer applications could create
erroneous results by the year 2000 if not corrected. The Year 2000 issue will
affect this Company and it will affect virtually all companies and
organizations, including the Company's borrowers. The Company has organized a
Year 2000 committee to research, develop and implement a plan that will correct
this issue before the year 2000. The OTS, which primarily regulates thrifts,
savings and loan associations, and savings and loan holding companies, has
issued a formal regulation and comprehensive plan concerning the Year 2000
issue for such financial institutions. The Company has adopted the regulatory
comprehensive plan which has the following phases:
Awareness Phase
_______________
This phase consists of defining the Year 2000 problem; developing the resources
necessary to perform compliance work, establishing a Year 2000 program
committee and developing an overall strategy that encompasses in-house systems,
service bureaus for systems that are outsourced, vendors, auditors, customers,
and suppliers (including correspondents). This phase has been completed by the
Company's committee.
Assessment Phase
________________
This phase consists of assessing the size and complexity of the problem and
detailing the magnitude of the effort necessary to address the Year 2000 issue.
This phase must identify all hardware, software, networks, automated teller
machines, other various processing platforms, and customer and vendor
interdependencies affected by the Year 2000 date change. The assessment must
go beyond information systems and include environmental systems that are
dependent on embedded microchips, such as security systems, elevators and
19
vaults. During this phase management also must evaluate the Year 2000 effect
on other strategic business initiatives. The assessment should consider the
potential effect that mergers and acquisitions, major system development,
corporate alliances, and system interdependencies will have on existing systems
and/or the potential Year 2000 issues that may arise from acquired systems.
The financial institution or vendor should also identify resource needs,
establish time frames and sequencing of Year 2000 efforts. Resource needs
include appropriately skilled personnel, contractors, vendor support, budget
allocations, and hardware capacity. This phase should clearly identify
corporate accountability throughout the project, and policies should define
reporting, monitoring, and notification requirements. Finally, contingency
plans should be developed to cover unforeseen obstacles during the renovation
and validation phases and include plans to deal with lesser priority systems
that would be fixed later in the renovation phase.
The assessment phase has been materially completed, but is considered an
ongoing phase for the Company. The Company is in the process of developing its
contingency plan. The Company has instituted a comprehensive plan to
communicate with all its borrowers that the Company considers to be at risk
concerning the Year 2000 issue. The Company considers this plan necessary to
mitigate the risk associated with borrowers not having the ability to make loan
payments due to a Year 2000 issue. The company has currently estimated the
following costs associated with the Year 2000 issue, (i) computer hardware
replacement $130,000, (ii) software replacement $72,000, (iii) testing and
administrative costs $84,000, and (iv) potential contingency costs $60,000. As
of September 30, 1998, the Company has incurred approximately $59,200 of
cumulative Year 2000 expenses. These costs are under continuous review and
will be revised as needed. There can be no assurance that actual costs will
not exceed the Company's estimates. During the quarter ended September 30,
1998, the Company replaced its computer mainframe and software as planned to
accommodate the growth of the Company through merger and acquisitions. The
previous mainframe and software had been fully depreciated through the normal
course of its depreciable life and the costs associated with the replacement of
these items was in the Company's general business plan for fiscal 1999. The
anticipated Year 2000 hardware and software costs indicated above are in
addition to the Company's costs associated with the replacement of the
mainframe and software.
Renovation Phase
________________
This phase includes code enhancements, hardware and software upgrades, system
replacements, vendor certification, and other associated changes. Work should
be prioritized based on information gathered during the assessment phase. For
institutions relying on outside servicers or third-party software providers,
ongoing discussions and monitoring of vendor progress are necessary. The
Company has limited out-side servicers and vendors. Each servicer and vendor
has been contacted and has or will provide information to the Company
concerning their efforts to comply with the Year 2000 issue. The Company
anticipates completion of this phase by December 31, 1998. However, there can
be no assurance that these servicers or vendors will become Year 2000 compliant
in a timely manner or that their plan will be completed by December 31, 1998.
Validation Phase
________________
Testing is a multifaceted process that is critical to the Year 2000 project and
20
inherent in each phase of the project management plan. This process includes
the testing of incremental changes to hardware and software components. In
addition to testing upgraded components, connections with other systems must be
verified, and all changes should be accepted by internal and external users.
Management will establish controls to assure the effective and timely
completion of all hardware and software testing prior to final implementation.
As with the renovation phase, the Company will be in ongoing discussions with
their vendors on the success of their validation efforts. The Company
anticipates completion of this phase by December 31, 1998.
Implementation Phase
____________________
In this phase, systems should be certified as Year 2000 compliant and be
accepted by the business users. For any system failing certification, the
business effect must be assessed clearly and the organization's Year 2000
contingency plans should be implemented. Any potentially noncompliant mission-
critical system should be brought to the attention of executive management
immediately for resolution. In addition, this phase must ensure that any new
systems or subsequent changes to verified systems are compliant with Year 2000
requirements. The Company anticipates completion of this phase by March 31,
1999.
In summary, the Company recognizes the Year 2000 as a global issue with
potentially catastrophic results if not addressed. The Company has and will
continue to undertake all the necessary steps to protect itself and its
customers concerning the Year 2000 issue. Management is confident that all the
instituted phases will be completed and in place prior to the year 2000.
However, failure to meet the Year 2000 deadlines could have a material adverse
effect on the Company.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
_________________________________________________________
There have been no material changes in the Company's market risk from June 30,
1998. For information regarding the Company's market risk, refer to the
Company's Annual Report on Form 10-K dated as of June 30, 1998.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
_________________
None.
Item 2. Changes in Securities
_____________________
None.
Item 3. Defaults Upon Senior Securities
_______________________________
None.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
None.
Item 5. Other Information
21
_________________
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, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 06, 1998 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
NORTHEAST BANCORP
Exhibit 11. Statement Regarding Computation of Per Share Earnings
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
____________________ ____________________
EQUIVALENT SHARES:
Weighted Average Shares Outstanding 2,615,515 2,218,051
Total Diluted Shares 2,791,569 2,702,738
Net Income $ 636,037 $ 570,565
Less Preferred Stock Dividend 17,500 35,000
____________________ ____________________
Income Available to Common
Stockholders $ 618,537 $ 535,565
==================== ====================
Basic Earnings Per Share $ 0.24 $ 0.24
Diluted Earnings Per Share $ 0.23 $ 0.21
9
1
3-MOS
JUN-30-1999
SEP-30-1998
4,916,299
6,317,017
0
0
12,486,127
0
0
290,056,925
2,870,000
328,661,073
195,394,972
42,337,805
2,104,371
63,115,023
0
999,988
2,618,384
22,090,530
328,661,073
6,309,260
194,387
211,509
6,715,156
2,129,744
3,619,566
3,095,590
204,931
10,791
2,402,657
994,523
994,523
0
0
636,037
0.24
0.23
3.931
1,771,000
0
185,294
982,905
2,978,000
338,454
25,523
2,870,000
342,474
0
2,527,526
