FORM
10-K
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934
For
fiscal year ended June 30, 2007
[ ]
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
(State
or other jurisdiction of incorporation or
organization)
|
01-0425066
(I.R.S.
Employer Identification No.)
|
|
500
Canal Street, Lewiston, Maine
(Address
of principal executive offices)
|
04240
(Zip
Code)
|
|
Registrant's
telephone number, including area code:
|
(207)
786-3245
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class:
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Name
of each exchange on which registered:
|
|
Common
Stock, $1.00 par value
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NASDAQ
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined
in
Rule 405 of the Securities Act. Yes_ No X
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes_ No X
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes X No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. [x]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one): Large Accelerated Filer _ Accelerated filer _
Non-accelerated filer X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes_ No X
The
aggregate market value of the Registrant's common shares held by non-affiliates,
as of December 29, 2006, was approximately $46,845,271 based on the last
reported sales price of the Company's common shares on the American Stock
Exchange as of the close of business on such date. Although directors
and executive officers of the registrant and its subsidiaries were assumed
to be
"affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such
status. On September 11, 2007, the Company changed its listing from
AMEX to NASDAQ. There were 2,391,332 common shares of the registrant
outstanding as of September 20, 2007.
1
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of this Annual Report on Form 10-K:
|
Document
|
Form
10-K Reference Location
|
|
Proxy
Statement for the 2007 Annual Meeting of Shareholders
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III
|
This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Act of 1934 and is subject to risks,
uncertainties, and other factors which could cause actual results to differ
materially from those expressed or implied by such forward-looking
statements. See "Item 1. Business -Forward Looking Statements and
Risk Factors."
PART
I
Item
1. Business
Overview
and History
Northeast
Bancorp ("us", "our", "we", or the "Company"), a Maine corporation chartered
in
April 1987, is a bank holding company registered under the Bank Holding Company
Act of 1956 (the "BHCA"). Prior to 1996, the Company operated under
the name Bethel Bancorp. The Company's primary subsidiary and
principal asset is its wholly-owned banking subsidiary, Northeast Bank (the
"Bank" or "Northeast Bank"), which has eleven banking branches. The Bank
offers
property and casualty insurance products through the Bank's wholly owned
subsidiary, Northeast Bank Insurance Group, Inc. ("NBIG"). NBIG has
eleven insurance agency offices, four of which are located in our banking
branches. In addition, we also offer investment brokerage services, including
financial planning products and services, through our office in Falmouth,
Maine. The investment brokerage services are offered as a division of
the Bank.
Northeast
Bank, which was originally organized in 1872 as a Maine-chartered mutual
savings
bank and was formerly known as Bethel Savings Bank F.S.B. ("Bethel"), is
a Maine
state-chartered bank and a member of the Federal Reserve System. From
1987 to August 2004, Northeast Bank was a federal savings bank and the Company
was a unitary savings and loan holding company registered with the Office
of
Thrift Supervision ("OTS"). In August 2004, Northeast Bank's charter
was converted into a Maine state-chartered universal bank, and the Company
became a bank holding company under the BHCA. In connection with the
conversion of its charter, Northeast Bank applied for and was granted membership
in the Federal Reserve System. Accordingly, the Company and Northeast
Bank are currently subject to the regulatory oversight of the Federal Reserve
Board ("FRB") and the State of Maine Bureau of Financial
Institutions.
As
of
June 30, 2007, the Company, on a consolidated basis, had total assets of
approximately $557 million, total deposits of approximately $365 million,
and
stockholders' equity of approximately $41 million. Unless the context
otherwise requires, references herein to the Company include the Company
and its
subsidiaries on a consolidated basis.
Strategy
Northeast
Bancorp through its subsidiary, Northeast Bank, the Bank's subsidiary,
NBIG, and third party affiliations, provides a broad range of
financial services to individuals and companies in western and south-central
Maine. Although historically the Bank had been primarily a residential mortgage
lender, over the last decade the Bank has expanded its commercial loan business,
increased its line of financial products and services, and expanded its market
area. Management’s strategy is to continue modest, but profitable, growth by
increasing our loan and deposit market share in our existing markets in western
and south-central Maine, closely managing the yields on earning assets and
rates
on interest-bearing liabilities, introducing new financial products and
services, increasing the number of bank services per household, increasing
non-interest income from expanded investment and insurance brokerage and
trust
services, and controlling the growth of non-interest
expenses. 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. We believe that the local
character of the Bank's business and its "community bank" management philosophy
allows it to compete effectively in its market area.
Our
community banking strategy emphasizes the development of long-term full banking
relationships with customers at each branch location by providing consistent,
high quality service from:
|
·
|
employees
with local decision-making
authority;
|
|
·
|
employees
who are familiar with the customers' needs, their business environment
and
competitive demands; and
|
|
·
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employees
who are able to develop and customize personalized financial solutions
that are tailored to the customer's
needs.
|
2
With
the
goal of providing a full range of banking and other financial related services
to our customers and in an effort to develop strong, long-term primary banking
relationships with businesses and individuals, we have expanded our commercial
banking operations by selectively making commercial loans to small and medium
sized companies. In this regard, our business development efforts
have been directed towards full service credit packages and financial services,
as well as competitively priced mortgage packages. In our effort to
attract and maintain strong customer relationships, we also have continually
expanded the financial products and services that we make available to our
customers. In particular, we expanded our insurance division through
acquisitions in order to provide a broader array of insurance products to
our
customers, and we have continued to maintain an investment banking services
division to provide financial planning products and service to them as
well.
The
Bank
is subject to examination and comprehensive regulation by the Maine Bureau
of
Financial Institutions (the "Maine Bureau") and the FRB, and its deposits
are
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the
extent
permitted by law. The Bank also is a member of the Federal Home Loan
Bank ("FHLB") of Boston.
The
principal executive offices of Northeast Bancorp and the Bank are located
at 500
Canal Street, Lewiston, Maine, 04240, and their telephone number is (207)
786-3245.
Market
Area
The
Bank
is headquartered in Lewiston, Maine with full service branches in Auburn,
Augusta, Bethel, Brunswick, Buckfield, Harrison, Lewiston (2), Mechanic Falls,
Portland, and South Paris, Maine. The Bank's investment brokerage division
has
an office in Falmouth, Maine from which investment, insurance and financial
planning products and services are offered. NBIG has offices in
Auburn, Anson, Augusta, Bethel, Jackman, Livermore Falls, Mexico, Rangeley,
Scarborough, South Paris and Turner, Maine from where the Bank's insurance
division offers personal and commercial casualty and property insurance
products. The Company's market area, which covers western and south
central regions of the State of Maine, is characterized by a diverse economy
that has experienced moderate growth in recent years.
Market
for Services
Management
believes that the Bank's principal markets are: (i) the residential real
estate
market within its primary market area; (ii) small-to-medium sized
businesses within its primary market area; (iii) the growing consumer loan
market, including indirect automobile dealer and recreational vehicle loans;
and
(iv) the growing consumer demand for a wide range of other
consumer-oriented financial services and products such as financial planning
services, investments, life insurance, property and casualty insurance, trust
services, college loans and other similar products.
Businesses
are solicited through the personal efforts of the officers and directors
of both
Northeast Bancorp and the Bank. We believe that a locally-based,
independent bank is often perceived by the local business community as
possessing a clearer understanding of local commerce and its
needs. We also believe that we are able to make prudent lending
decisions more quickly than our competitors without compromising asset quality
or profitability.
Competition
We
encounter intense competition in our market area in making loans, attracting
deposits, and selling other customer products and
services. The deregulation of the banking industry, the ability to
create financial services holding companies to engage in a wide range of
financial services other than banking, and the widespread enactment
of state laws which permit multi-bank holding companies, as well as the
availability of nationwide interstate banking, has created a highly competitive
environment for financial services providers. In one or more aspects
of our business, we compete with other savings banks, commercial banks, credit
unions, mutual funds, insurance companies, brokerage and investment banking
companies, finance companies, and other financial intermediaries operating
in
Maine and elsewhere. Many of our primary competitors, some of which
are affiliated with large bank holding companies or other larger financial-based
institutions, have substantially greater resources, larger established customer
bases, higher lending limits, extensive branch networks, numerous ATMs and
greater advertising and marketing budgets. They may also offer
services that we do not currently provide.
The
principal factors in competing for deposits are convenient office locations,
flexible hours and interest rates and services, while those relating to loans
are interest rates, the range of lending services offered and lending fees.
Additionally, we believe that an emphasis on personalized financial planning
and
advice tailored to individual customer needs, together with the local character
of the Bank's business and its "community bank" management philosophy will
enhance our ability to compete successfully in our market
areas. Further, we also offer a wide range of financial services to
our customers, including not only basic loan and deposit services, but also
investment services, trust services, and insurance products. We believe that
our
ability to provide such services and advice, and to provide the financial
services and products required by our customers, will be an attractive
alternative to consumers in our market area.
3
Lending
Activities
General
The
primary source of income generated by the Bank is from the interest earned
from
our loan portfolio. The principal lending activities of the Bank are the
origination and purchase of conventional mortgages for the purpose of
constructing, financing, or re-financing one-to-four family residential
properties and commercial properties. The majority of the properties
securing the mortgage loan portfolio are located in the State of
Maine. However, in an effort to diversify the geographic scope of the
real estate collateral held by it, the Bank does purchase, in the secondary
market, residential mortgage loans collateralized by properties in other
states. Interest rates and origination fees charged on loans
originated by the Bank are generally competitive with other financial
institutions and other mortgage originators in its general market
area.
Although
residential and commercial real estate lending remains a strong component
of the
Bank's lending operations, consistent with our business strategy, we also
actively seek an increased volume of commercial and consumer
loans. Commercial loans are originated for commercial construction,
acquisition, remodeling and general business purposes. In this
regard, the Bank, among other things, also originates loans to small businesses
in association with the Small Business Administration. Consumer loans
include those for the purchase of automobiles, boats, home improvements and
personal investments. We also pursue quality indirect lending through
local automobile and recreational vehicle dealerships.
Residential
Lending
The
major
component of the Bank's lending activities consists of the origination of
single-family residential mortgage loans collateralized by owner-occupied
property, most of which is located in its primary service areas. The
Bank offers a variety of mortgage loan products. Its originations
generally consist of adjustable rate mortgages ("ARMs") or fixed rate mortgage
loans having terms of 15 years or 30 years amortized on a monthly basis,
with
principal and interest due each month. The Bank holds in portfolio
all adjustable rate mortgage loans. Fixed rate loans are sold into the
secondary market. Additionally, the Bank offers home equity loans and
home equity lines of credit.
The
Bank
offers adjustable rate mortgages with rate adjustments tied to the weekly
average rate of one, three and five year U.S. Treasury securities with specified
minimum and maximum interest rate adjustments. The interest rates on
a majority of these mortgages are adjusted yearly with limitations on upward
adjustments of 2% per adjustment period and 6% over the life of the loan.
The
Bank generally charges a higher interest rate if the property is not
owner-occupied. It has been the Bank's experience that the
proportions of fixed-rate and adjustable-rate loan originations depend in
large
part on the interest rate environment. As interest rates fall, there
is generally a reduced demand for variable rate mortgages and, as interest
rates
rise, there is generally an increased demand for variable rate
mortgages.
Fixed
rate and adjustable rate mortgage loans collateralized by single family
residential real estate generally have been originated in amounts of no more
than 80% of appraised value. The Bank may, however, lend up to 95% of the
value
of the property collateralizing the loan, but if made in excess of 80% of
the
value of the property, they must be insured by private or federally guaranteed
mortgage insurance. In the case of mortgage loans, the Bank will
procure mortgagee's title insurance to protect against defects in its lien
on
the property that may collateralize the loan. The Bank in most cases
requires title, fire, and extended casualty insurance to be obtained by the
borrower, and, where required by applicable regulations, flood
insurance. The Bank maintains its own errors and omissions insurance
policy to protect against loss in the event of failure of a mortgagor to
pay
premiums on fire and other hazard insurance policies.
Although
the contractual loan payment period for single-family residential real estate
loans is generally for a 15 to 30 year period, such loans often remain
outstanding for significantly shorter periods than their contractual
terms. The Bank generally does not charge a penalty for prepayment of
mortgage loans. Mortgage loans originated by the Bank customarily
include a "due on sale" clause giving the Bank the right to declare a loan
immediately due and payable in the event, among other matters, that the borrower
sells or otherwise disposes of the real property subject to a
mortgage. In general, the Bank enforces due on sale
clauses.
The
Bank
generally applies the same underwriting criteria to residential mortgage
loans
whether purchased or originated. In its loan purchases, the Bank
generally reserves the right to reject particular loans from a loan package
being purchased and does reject loans in a package that do not meet its
underwriting criteria. In connection with loan purchases, the Bank
receives various representations and warranties from the sellers of the loans
regarding the quality and characteristics of the loans. In
determining whether to purchase or originate a loan, the Bank assesses both
the
borrower's ability to repay the loan and the adequacy of the proposed
collateral. On originations, the Bank obtains appraisals of the
property securing the loan. On purchases, the Bank reviews the
appraisal obtained by the loan seller or originator. On purchases and
originations, the Bank reviews information concerning the income, financial
condition, employment and credit history of the applicant.
We
have
adopted written, non-discriminatory underwriting standards for use in the
underwriting and review of every loan considered for origination or
purchase. These underwriting standards are reviewed and approved
annually by our board of directors. Our underwriting standards for
fixed rate residential mortgage loans generally conform to standards established
by Fannie Mae ("FNMA") and the Federal Home Loan Mortgage Corporation (the
"FHLMC"). A loan application is obtained or reviewed by the Bank's
underwriters to determine the borrower's ability to repay, and confirmation
of
the more significant information is obtained through the use of credit reports,
financial statements, and employment and other verifications.
4
Commercial
Real Estate Lending
The
Bank
originates both multi-family and commercial real estate
loans. Multi-family and commercial property loans generally are made
in amounts up to 80% of the lesser of the appraised value or purchase price
of
the property. Although the largest multi-family or commercial loan in
our portfolio at June 30, 2007 was $2,597,020, most of these loans have balances
under $500,000.
The
Bank's permanent commercial real estate loans are secured by improved property
such as office buildings, medical facilities, retail centers, warehouses,
apartment buildings, condominiums and other types of buildings, which are
located in its primary market area. Multi-family and commercial real
estate loans generally have fixed or variable interest rates indexed to FHLB
and
prime interest rates with notes having terms of 3 - 5 years. Mortgage
loan maturities have terms up to 15 years.
Loans
secured by multi-family and commercial real estate generally are larger and
involve greater risks than one-to-four family residential mortgage
loans. Because payments on loans secured by multi-family and
commercial properties often are dependent on successful operation or management
of the properties, repayment of such loans may be subject to a greater extent
to
adverse conditions in the real estate market or the economy. We seek
to minimize these risks in a variety of ways, including limiting the size
of our
multi-family and commercial real estate loans and generally restricting such
loans to our primary market area. In determining whether to originate
multi-family or commercial real estate loans, we also consider such factors
as
the financial condition of the borrower and the debt service coverage of
the
property. The Company intends to continue to make multi-family and commercial
real estate loans as the market demands and economic conditions
permit.
Commercial
Lending
The
Bank
offers a variety of commercial loan services including term loans, lines
of
credit and equipment and receivables financing. A broad range of
short-to-medium term commercial loans, both collateralized and uncollateralized,
are made available to businesses for working capital (including the support
of
inventory and receivables), business expansion (including acquisitions of
real
estate and improvements), and the purchase of equipment and
machinery. Equipment loans are typically originated on both a one
year line of credit basis and on a fixed-term basis ranging from one to five
years. The purpose of a particular loan generally determines its
structure.
The
Bank's commercial loans primarily are underwritten in the Company's market
areas
on the basis of the borrower's ability to make repayment from the cash flow
of
their business and generally are collateralized by business assets, such
as
accounts receivable, equipment, and inventory. As a general practice,
the Bank takes as collateral a security interest in any available real estate,
equipment, or other business assets, although such loans may be made on an
uncollateralized basis. Collateralized working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
As
a
result, the availability of funds for the repayment of commercial loans may
be
substantially dependent on the success of the business
itself. Further, the collateral underlying the loans, which may
depreciate over time, usually cannot be appraised with as much precision
as
residential real estate, and may fluctuate in value based on the success
of the
business.
Consumer
Loans
Consumer
loans made by the Bank have included automobiles, recreational vehicles,
boats,
second mortgages, home improvements, mobile home loans, home equity lines
of
credit, personal (collateralized and uncollateralized) and deposit account
collateralized loans. The Bank's consumer loan portfolio consists primarily
of
loans to individuals for various consumer purposes, but includes some business
purpose loans, primarily small trucks and automobiles, which are payable
on an
installment basis. Most of these loans are for terms of up to 60
months and, although generally collateralized by liens on various personal
assets of the borrower, they may be originated without
collateral. Consumer loans are made at fixed and variable interest
rates and may be made based on up to a 7 year amortization
schedule.
Consumer
loans are attractive to us because they typically have a shorter term and
carry
higher interest rates than that charged on other types of
loans. Consumer loans, however, do pose additional risks of
collectability when compared to traditional types of loans granted by banks
such
as residential mortgage loans. In many instances, the Bank is
required to rely on the borrower's ability to repay since the collateral
may be
of reduced value at the time of collection. Accordingly, the initial
determination of the borrower's ability to repay is of primary importance
in the
underwriting of consumer loans.
Indirect
automobile lending consists of automobile loans made by the Bank through
the
purchase of contracts from automobile dealers. Generally, the Bank
will obtain fixed-rate automobile loans indirectly through various automobile
dealerships located in its market areas. These automobile dealers are
selected by us. Currently most of these loans were originated by 86
dealers located in our market area. Because the collateral is a
deteriorating asset, the initial determination of the borrower's ability
to pay
is of primary importance. The indirect origination of consumer loan
products generally requires funding of dealer reserves. These
reserves are maintained for the benefit of the dealer who originated such
loans,
but such funding is subject to performance of certain loan
conditions. The dealer is generally responsible to the Bank for the
amount of the reserve only if a loan giving rise to the reserve becomes
delinquent or the loan has been prepaid. The same process applies to
indirect recreational vehicle lending.
5
Construction
Loans
The
Bank
originates residential construction loans to finance the construction of
single-family dwellings. Most of the residential construction loans
are made to individuals who intend to erect owner-occupied housing on a
purchased parcel of real estate. The Bank's construction loans to individuals
typically range in size from $100,000 to $300,000. Construction loans
also are made to contractors to erect single-family dwellings for
resale. Construction loans are generally offered on the same basis as
other residential real estate loans, except that a larger percentage down
payment is typically required.
The
Bank
also may make residential construction loans to real estate developers for
the
acquisition, development and construction of residential
subdivisions. The Bank has limited reliance on this type of
loan. Such loans may involve additional risk attributable to the fact
that funds will be advanced to fund the project under construction, which
is of
uncertain value prior to completion, and because it is relatively difficult
to
evaluate accurately the total amount of funds required to complete a
project.
The
Bank
finances the construction of individual, owner-occupied houses on the basis
of
written underwriting and construction loan management
guidelines. Construction loans are structured either to be converted
to permanent loans with the Bank at the end of the construction phase or
to be
paid off upon receiving financing from another financial
institution. Construction loans on residential properties are
generally made in amounts up to 80% of appraised value. Construction
loans to developers generally have terms of up to 12 months. Loan
proceeds on builders' projects are disbursed in increments as construction
progresses and as inspections warrant. The maximum loan amount for
construction loans is based on the lesser of the current appraisal value
or the
purchase price for the property.
Loans
collateralized by subdivisions and multi-family residential real estate
generally are larger than loans collateralized by single-family, owner-occupied
housing and also generally involve a greater degree of risk. Payments
on these loans depend to a large degree on the results of operations and
management of the properties, and repayment of such loans may be more subject
to
adverse conditions in the real estate market or the economy.
Loan
Origination and Processing
Loan
originations are derived from a number of sources. Residential loan
originations can be attributed to real estate broker referrals, mortgage
loan
brokers, direct solicitation by the Bank's loan officers, present depositors
and
borrowers, builders, attorneys, walk-in customers and, in some instances,
other
lenders. Loan applications, whether originated through the Bank or
through mortgage brokers, are underwritten and closed based on the same
standards, which generally meet FNMA underwriting
guidelines. Consumer and commercial real estate loan originations
emanate from many of the same sources. The legal lending limit of the
Bank, as of June 30, 2007, was approximately $6.4 million.
The
loan
underwriting procedures followed by the Bank conform to regulatory
specifications and are designed to assess the borrower's ability to make
principal and interest payments and the value of any assets or property serving
as collateral for the loan. Generally, as part of the process, a bank loan
officer meets with each applicant to obtain the appropriate employment and
financial information as well as any other required loan
information. Upon receipt of the borrower's completed loan
application, the Bank then obtains reports with respect to the borrower's
credit
record, and orders and reviews an appraisal of any collateral for the loan
(prepared for the Bank through an independent appraiser). The loan information
supplied by the borrower is independently verified. Loan officers or other
loan
production personnel in a position to directly benefit monetarily through
loan
solicitation fees from individual loan transactions do not have approval
authority. Once a loan application has been completed and all information
has
been obtained and verified, the loan request is submitted to a final review
process. As part of the loan approval process, all uncollateralized
loans of more than $100,000 and all new collateralized loans of more than
$750,000 require pre-approval by the Bank's loan committee, which is currently
comprised of five directors of the Bank and meets on such basis as is deemed
necessary to promptly service loan demand. Loans to one
borrower are subject to limits depending on our internal risk
ratings.
Loan
applicants are notified promptly of the decision of the Bank by telephone
and a
letter. If the loan is approved, the commitment letter specifies the
terms and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required collateral
and required insurance coverage. Prior to closing any long-term loan,
the borrower must provide proof of fire and casualty insurance on the property
serving as collateral which insurance must be maintained during the full
term of
the loan. Title insurance is required on loans collateralized by real
property. Interest rates on committed loans are normally locked in at
the time of application for a 30 to 45 day period.
6
Other
Subsidiaries
The
Company acquired a wholly-owned subsidiary, ASI Data Services, Inc. (ASI),
through two stock purchases during 1993-1994. ASI initially provided data
processing services to the Company and its subsidiaries. The Company's board
transferred the assets and operations of ASI to the Bank in 1996, and ASI
now is
an inactive corporate subsidiary.
NBIG,
a
Maine corporation and a wholly-owned subsidiary of the Bank, was originally
formed in 1982 and was formerly known as Northeast Financial Services, Inc.
("NFS"). It transitioned from an entity for real estate development projects,
which terminated in fiscal 2005, to acquiring insurance agencies. Subsequent
to
the 2004 acquisition of Solon-Anson Insurance Agency, Inc. ("Solon Anson")
by
NFS, Solon-Anson was merged into NFS in April, 2005. NFS's name was
then changed to Northeast Bank Insurance Group, Inc. in May
2005. NBIG now supports the Bank's insurance agencies, which allows
the Bank to deliver insurance products to its customers. At June 30, 2007,
investment in and loans to this subsidiary constituted 0.80% of the Company's
total assets.
Employees
As
of
June 30, 2007, the Company, the Bank and its subsidiary together employed
200
full-time and 24 part-time employees. The Company's employees are not
represented by any collective bargaining unit. The Company believes
that its relations with its employees are good.
SUPERVISION
AND REGULATION
The
banking industry is extensively regulated under both federal and state law.
This
regulatory framework is intended primarily to protect depositors and the
federal
deposit insurance funds, and not for the protection of shareholders. The
following discussion summarizes certain aspects of the regulatory framework
applicable to the Company and Northeast Bank. To the extent that the following
information describes statutory and regulatory provisions, it is qualified
in
its entirety by reference to the particular statutory and regulatory
provisions.
Bank
Holding Company Regulation
General.
As a bank holding company registered under the Bank Holding Company Act of
1956
(the "BHCA"), the Company is subject to the regulation and supervision of,
and
inspection by, the Federal Reserve Board ("FRB"), its primary regulator.
The
Company also is registered as a Maine financial institution holding company
under Maine law and is subject to regulation and examination by the
Superintendent of Financial Institutions of the State of Maine
("Superintendent"). The Company is required to file reports with, and provide
other information regarding its business operations and those of its
subsidiaries to, the FRB and the Superintendent.
The
BHCA
prohibits a bank holding company, with certain limited exceptions, from
(i) acquiring or retaining direct or indirect ownership or control of more
than 5% of the outstanding voting stock of any company which is not a bank
or
bank holding company, or (ii) engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or performing
services for its subsidiaries; unless such non-banking business is determined
by
the FRB to be so closely related to banking or managing or controlling banks
as
to be properly incident thereto. Generally, permissible activities for bank
holding companies include, among other things, factoring accounts receivable,
acquiring and servicing loans, leasing personal property, performing certain
data processing services, acting as an agent or broker in selling credit
life
insurance and certain other types of insurance in connection with credit
transactions, and conducting certain insurance underwriting activities. The
BHCA
does not place territorial limits on permissible non-bank activities of bank
holding companies. In making determinations of what non-banking activities
are
permissible, the FRB is required to weigh the expected benefit to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Generally, bank holding companies, such as the Company, are required
to obtain prior approval of the FRB to engage in any new activity not previously
approved by the FRB. Further, despite prior approval, the FRB reserves the
power
to order any bank holding company or its subsidiaries to terminate any activity
when the FRB has reasonable grounds to believe that continuation of such
activity constitutes a serious risk to the financial soundness, safety, or
stability of the bank holding company or any of its bank
subsidiaries.
7
Financial
Modernization. The Gramm-Leach-Bliley Financial Modernization Act of
1999 (the "GLB Act"), which amended the BHCA, significantly relaxed previously
existing restrictions on the activities of bank holding companies and their
subsidiaries to:
|
·
|
allow
bank holding companies that qualify as "a financial holding company"
to
engage in a substantially broader range of activities that are
financial
in nature;
|
|
·
|
allow
insurers and other financial service companies to acquire
banks;
|
|
·
|
remove
various restrictions that apply to bank holding company ownership
of
securities firms and mutual fund advisory companies;
and
|
|
·
|
establish
the overall regulatory structure applicable to bank holding companies
that
also engage in insurance and securities
operations.
|
Under
the
GLB Act, an eligible bank holding company may elect to be a "financial holding
company" and thereafter engage in a range of activities that are financial
in
nature and that are not permissible for bank holding companies. These
activities, which can be conducted either directly or through a subsidiary,
include those that are "financial in nature", such as insurance underwriting,
securities underwriting and dealing and making merchant banking investments
in
commercial and financial companies. A financial holding company also may
engage
in any activity that the FRB determines by rule or order to be financial
in
nature, incidental to such financial activity, or complementary to a financial
activity and does not pose a substantial risk to the safety and soundness
of an
institution or the financial system generally. In addition to these activities,
a financial holding company may engage in those activities permissible for
a
bank holding company.
In
order
for a bank holding company to be eligible for financial holding company status,
all of the subsidiary insured depository institutions must be "well-capitalized"
and "well-managed" and have at least a satisfactory rating on its most recent
Community Reinvestment Act of 1977 ("CRA") review. A bank holding company
seeking to become a financial holding company must file a declaration with
the
FRB that it elects to become a financial holding company. If, after becoming
a
financial holding company, any of the insured depository institution
subsidiaries should fail to continue to meet these requirements, the financial
holding company would be prohibited from engaging in activities not permissible
for bank holding companies unless it was able to return to compliance within
a
specified period of time.
Although
Northeast Bank, our sole banking subsidiary, meets the capital, management,
and
CRA requirements, the Company has not made a declaration to elect to become
a
financial holding company and at this time has no plans to do so.
Banking
Acquisitions. The BHCA requires, among other things, the prior approval
of the FRB in any case where a bank holding company proposes to (i) acquire
direct or indirect ownership or control of more than 5% of the outstanding
voting stock of any bank or bank holding company (unless it already owns
a
majority of such voting shares), (ii) acquire all or substantially all of
the
assets of another bank or bank holding company, or (iii) merge or consolidate
with any other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would result in a monopoly, or which would
have a
substantially anti-competitive effect, unless the anti-competitive impact
of the
proposed transaction is clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The FRB
also is
required to consider the financial and managerial resources and future prospects
of the holding companies and banks, the projected capital adequacy on a
post-acquisition basis, and the acquiring institution's performance under
the
CRA.
In
addition, Maine law requires the prior approval of the Superintendent for
(i)
the acquisition of more than 5% of the voting shares of a Maine financial
institution or any financial institution holding company that controls a
Maine
financial institution, or (ii) the acquisition by a Maine financial institution
holding company of more than 5% of a financial institution or a financial
institution holding company domiciled outside the State of Maine.
Interstate
Banking and Branching. The Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act") provides
that bank holding companies which meet specified capital and management adequacy
standards, and any state-imposed age requirements, are eligible to acquire
banks
in states other than their home states unless, as a result of such acquisition,
the bank would control more than 10% of the total deposits of insured depository
institutions in the United States or more than 30% of such deposits in that
state (or other applicable state law limits).
Further,
the Interstate Banking and Branching Act authorizes adequately capitalized
and
managed banks to cross state lines to merge with other banks, subject to
certain
restrictions, thereby creating interstate branches. A bank also may open
new
branches in a state in which it does not directly have banking operations
if
that state has enacted a law permitting de novo branching.
Maine
law
expressly authorizes interstate banking combinations that are approved by
the
Superintendent and do not result in deposit concentrations exceeding 30%
of the
total deposits of the State of Maine (unless such limitation is waived by
the
Superintendent). Further, interstate branch acquisitions and the establishment
of de novo branches also are authorized under Maine law. However, if an
out-of-state financial institution seeks to establish or acquire branches
in
Maine, the laws of the jurisdiction of such financial institution must expressly
authorize, under conditions no more restrictive than the State of Maine,
the
Maine financial institution to engage in interstate branch acquisitions or
establishment of de novo branches in that state.
8
Source
of Strength; Safety and Soundness. Under FRB
policy, the Company is expected to act as a source of financial strength
to, and
commit resources to support, Northeast Bank. In addition, any capital loans
by a
bank holding company to its subsidiary banks are subordinate in right of
payment
to deposits and to certain other indebtedness of such subsidiary banks. In
the
event of a bank holding company's bankruptcy, any commitment by the bank
holding
company to a Federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to
a
priority of payment.
There
are
a number of obligations and restrictions imposed on bank holding companies
and
their depository institution subsidiaries by law and regulatory policy that
are
designed to minimize potential loss to the depositors of such depository
institutions and the FDIC insurance funds in the event of a depository
institution default. For example, under the Federal Deposit Insurance Company
Improvement Act of 1991 ("FDICIA"), to avoid receivership of an insured
depository institution subsidiary, a bank holding company is required to
guarantee the compliance of any insured depository institution subsidiary
that
may become "undercapitalized" with the terms of any capital restoration plan
filed by such subsidiary with its appropriate Federal bank regulatory agency
up
to the lesser of (i) an amount equal to 5% of the institution's total assets
at
the time the institution became undercapitalized or (ii) the amount that
is
necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with such capital restoration plan. See "-- Capital Adequacy
Guidelines - Classification of Banking Institutions" and "- Enforcement,
Policies and Actions".
In
addition, the "cross-guarantee" provisions of FDICIA require insured depository
institutions which are under common control to reimburse the FDIC for any
loss
incurred, or reasonably expected to be incurred, by the FDIC as a result
of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. Accordingly, the cross-guarantee provisions
enable the FDIC to access a bank holding company's healthy members of the
FDIC.
The FDIC may decline to enforce the cross-guarantee provisions if it determines
that a waiver is in the best interest of the insurance fund. The FDIC's claims
are superior to claims of stockholders of the insured depository institution
or
its holding company but are subordinate to claims of depositors, secured
creditors and holders of subordinated debt (other than affiliates) of the
commonly controlled insured depository institutions.
Under
FDICIA, as amended, Federal banking regulatory agencies have adopted guidelines
prescribing safety and soundness standards. These guidelines establish general
standards relating to internal controls and information systems, internal
audit
systems, loan documentation, credit underwriting, interest rate exposure,
asset
growth and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage
the
risk and exposures specified in the guidelines.
Bank
Regulation
General.
Northeast Bank is a Maine state-chartered banking corporation and a member
of
the Federal Reserve System and, as such, is subject to the supervision,
examination, and regulation by the Maine Bureau of Financial Institutions
and
the FRB.
As
a
state-chartered commercial bank, Northeast Bank is subject to the applicable
provisions of Maine law and the regulations adopted by the Maine Bureau of
Financial Institutions. The FRB and the Maine Bureau of Financial Institutions
will regularly examine the operations of Northeast Bank and are given authority
to approve or disapprove mergers, consolidations, the establishment of branches
and similar corporate actions. Maine law and the Superintendant regulate
(in
conjunction with applicable federal laws and regulations), among other things,
Northeast Bank's capital, permissible activities, reserves, investments,
lending
authority, the issuance of securities, payment of dividends, transactions
with
affiliated parties and borrowing. The federal and state banking regulators
also
have the power to prevent the continuance or development of unsafe or unsound
banking practices or other violations of law.
Transactions
with Affiliates. There are various legal restrictions on
the extent to which the Company and any non-bank subsidiaries affiliated
with
Northeast Bank can borrow or otherwise obtain credit from Northeast Bank.
Northeast Bank also is subject to certain restrictions on the purchase of,
or
investments in, the securities of, and purchase of assets from, the Company
and
of its non-bank subsidiaries, on loans or extensions of credit by a bank
to
third parties collateralized by the securities or obligations of the Company
and
any of its non-bank subsidiaries, on the issuance of guaranties, acceptances
and
letters of credit on behalf of the Company or any of its non-bank subsidiaries.
Northeast Bank is subjected to further restrictions on most types of
transactions with the Company and its non-bank subsidiaries which require
the
terms of such transactions to be substantially equivalent to the terms of
similar transactions with non-affiliated entities.
Further,
the Company and Northeast Bank are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services. For example, Northeast Bank may not
generally require a customer to obtain other services from Northeast Bank
or the
Company, and may not require the customer to promise not to obtain other
services from a competitor, as a condition to an extension of
credit.
Loans
to Insiders. Northeast Bank also is subject to certain restrictions
imposed by federal and state banking regulatory agencies on extensions of
credit
to executive officers, directors, principal shareholders or any related interest
of such persons. Sections 22(g) and 22(h) of the Federal Reserve Act, as
amended, and Regulation O promulgated by the FRB provide that extensions
of
credit to such insiders (a) must be made on substantially the same terms,
including interest rates and collateral as, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time
for,
comparable transactions with persons not covered above and who are not
employees, (b) must not involve more than the normal risk of repayment or
present other unfavorable features, and (c) may not exceed certain limitations
on the amount of credit extended to such persons, individually and in the
aggregate, which limits are based, in part, on the amount of Northeast Bank's
capital. The regulators do allow small discounts on fees on residential
mortgages for directors, officers, and employees. Northeast Bank also is
subject
to certain lending limits and restrictions on overdrafts to such persons
and
extensions of credit in excess of certain limits must be approved by the
board
of directors of Northeast Bank. A violation of these restrictions may result
in
the assessment of substantial civil monetary penalties on Northeast Bank
or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of Northeast Bank or the imposition of a cease and desist
order.
Bank
Subsidiaries' Activities. The powers of Maine-chartered banks
include provisions designed to provide these banks with competitive equity
to
the powers of national banks. In addition, the GLB Act permits state banks
to
engage in activities that are permissible for subsidiaries of financial holding
companies to the extent such activities are permitted under applicable state
law. The GLB Act also expressly preserves the ability of state banks, such
as
Northeast Bank, to retain all existing subsidiaries. In order to form a
financial subsidiary, a state bank must be "well capitalized." State banks
with
financial subsidiaries will be subject to certain capital deduction, risk
management, and affiliate transaction rules. In this regard, FRB rules provide
that state bank subsidiaries that engage only in activities that the bank
could
engage in directly will not be deemed to be a financial subsidiary.
9
Dividend
Restrictions
The
Company is a legal entity separate and distinct from Northeast Bank. The
primary
source of revenues and funds of the Company, including funds to pay dividends
to
our shareholders, have been and will likely continue to be from dividends,
if
any, paid to us by Northeast Bank. There are statutory and regulatory
limitations on the payment of dividends by Northeast Bank to the Company
as well
as by the Company to its shareholders. As to the payment of dividends, Northeast
Bank is subject to the laws and regulations of the State of Maine and to
the
regulations of the FRB.
If,
in
the opinion of the applicable federal bank regulatory authority, a depository
institution or holding company under its jurisdiction is engaged in or is
about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution or holding company, could include
the
payment of dividends), such authority may require, after notice and hearing
(except in the case of an emergency proceeding where there is no notice or
hearing), that such institution or holding company cease and desist from
such
practice. The Federal bank regulatory agencies have indicated that paying
dividends that deplete a depository institution's or holding company's capital
base to an inadequate level would be such an unsafe and unsound banking
practice. Moreover, under FDICIA, an insured institution may not pay a dividend
if payment would cause it to become undercapitalized or if it already is
undercapitalized. See "- Capital Adequacy Guidelines - Prompt Corrective
Regulatory Action". Moreover, the FRB and the FDIC have issued policy statements
which provide that bank holding companies and insured depository institutions
generally should only pay dividends out of current operating
earnings.
At
June
30, 2007, under dividend restrictions imposed under federal and state laws,
Northeast Bank could declare, without obtaining governmental approvals,
aggregate dividends to the Company of approximately $3,632,000.
Capital
Adequacy Guidelines
Minimum
Capital Requirements. The Company and
Northeast Bank are required to comply with capital adequacy standards
established by the FRB. There are two basic measures of capital adequacy
for
bank holding companies that have been promulgated by the FRB: a risk-based
measure and a leverage measure.
The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in credit and market risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure and to lessen disincentives for holding liquid assets. Under these
standards, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. In addition, the Federal bank regulatory agencies may from time
to
time require that a banking organization maintain capital above the minimum
limits, whether because of its financial condition or actual or anticipated
growth. FRB policy also provides that banking organizations generally, and
in
particular those that are experiencing internal growth or actively making
acquisitions, are expected to maintain capital positions that are substantially
in excess of the minimum supervisory levels, without significant reliance
on
intangible assets.
These
risk-based capital standards define a two-tier capital framework. Under these
regulations, the minimum ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance sheet activities, such
as
stand-by letters of credit) is 8%. At least one-half of the Total Capital
must
be "Tier 1 Capital," consisting of common equity, retained earnings or
undivided profits, qualifying non-cumulative perpetual preferred stock, and
a
limited amount of cumulative perpetual preferred stock and minority interests
in
the equity account of consolidated subsidiaries, less certain goodwill items
and
other intangible assets (i.e., at least 4% of the risk weighted assets).
The
remainder ("Tier 2 Capital") may consist of (a) the allowance for credit
losses of up to 1.25% of risk-weighted risk assets, (b) preferred stock that
does not qualify as Tier 1 Capital, (c) qualifying hybrid capital instruments,
(d) perpetual debt, (e) mandatory convertible securities, and (f) subordinated
debt and intermediate term-preferred stock up to 50% of Tier 1 Capital.
Assets and off-balance sheet items are assigned to one of four categories
of
risk weights, based primarily on relative credit risk. The minimum guideline
for
Tier 1 Capital is 4.0%. At June 30, 2007, the Company's consolidated Tier
1
Capital ratio was 9.07% and its Total Capital ratio was 13.97%.
In
addition, the FRB has established minimum leverage ratio guidelines for bank
holding companies. The guidelines provide for a minimum Tier 1 Capital to
average assets (less goodwill and certain other intangible assets) ("Leverage
Ratio") of at least 3% plus an additional cushion of 100 to 200 basis points.
The Company's Leverage Ratio at June 30, 2007, was 12.02%.
10
Federal
bank regulatory agencies also have adopted regulations which require regulators
to take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage
those
risks, when determining the adequacy of an institution's capital. Other factors
taken into consideration include: interest rate exposure, liquidity, funding
and
market risk; the quality and level of earnings; the quality of loans and
investments; the effectiveness of loan and investment policies; and management's
overall ability to monitor and control financial and operational risks,
including concentrations of credit and non-traditional activities. This
evaluation is made as part of the institution's regular safety and soundness
examination. Further, each Federal banking agency prescribes standards for
depository institution holding companies relating to internal controls,
information systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, maximum rates of classified assets
to
capital, minimum earnings sufficient to absorb losses and other standards
as
they deem appropriate. In addition, pursuant to the requirements of FDICIA,
Federal bank regulatory agencies all have adopted regulations requiring
regulators to consider interest rate risk (when interest rate sensitivity
of an
institution's assets does not match its liabilities or its off-balance sheet
position) in the evaluation of a bank's capital adequacy.
Northeast
Bank is subject to substantially similar risk-based and leverage capital
requirements as those applicable to the Company. As of June 30, 2007,
Northeast Bank was in compliance with applicable minimum capital
requirements.
Classification
of Banking Institutions. Among other things, FDICIA provides Federal
bank regulatory agencies with broad powers to take "prompt corrective action"
with respect to depository institutions that do not meet minimum capital
requirements. The extent of those powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." A depository institution's capital tier will depend upon
where its capital levels are in relation to various relevant capital measures,
which include a risk-based capital measure and a leverage ratio capital measure,
and certain other factors.
The
Federal bank regulatory agencies have adapted regulations establishing relevant
capital measures and relevant capital levels. Under these regulations, a
bank
will be considered:
|
Total
Risk Based Capital Ratio
|
Tier
1 Risk-Based Capital Ratio
|
Leverage
Ratio
|
Other
|
|
|
Well
Capitalized:
|
10%
or greater
|
6%
or greater
|
5%
or greater
|
Not
subject to any order or written directive to meet and maintain
a specific
capital level for any capital measure
|
|
Adequately
Capitalized
|
8%
or greater
|
4%
or greater
|
4%
or greater (3% in the case of a bank with a composite CAMEL rating
of
1)
|
|
|
Undercapitalized
|
less
than 8%
|
less
than 4%
|
less
than 4% ((3% in the case of a bank with a composite CAMEL rating
of
1)
|
|
|
Significantly
Undercapitalized
|
less
than 6%
|
less
than 3%
|
less
than 3%
|
|
|
Critically
Undercapitalized
|
Ratio
of tangible equity to total assets is less than or equal to
2%
|
Under
certain circumstances, a depository institution's primary Federal bank
regulatory agency may use its authority to reclassify a "well classified"
bank
as "adequately capitalized" or subject an "adequately capitalized" or
"undercapitalized" institution to supervisory actions applicable to the next
lower capital category if it determines that the bank is in an unsafe or
unsound
condition or deems the bank to be engaged in an unsafe or unsound practice
and
not have corrected the deficiency. The banking agencies are permitted to
establish individual minimum capital requirements exceeding the general
requirements described above. Generally, failing to maintain the status of
a
"well capitalized" or "adequately capitalized" depository institution subjects
the institution to restrictions and limitations on its business that become
progressively more severe as capital levels decrease. At June 30,
2007, Northeast Bank met the definition of a "well capitalized"
institution.
11
Prompt
Corrective Regulatory Action. Federal banking regulators
are required to take "prompt corrective action" if an insured depository
institution fails to satisfy certain minimum capital requirements and other
measures deemed appropriate by the federal banking regulators. See "- Capital
Adequacy Guidelines" and "- Enforcement Policies and Actions." Failure to
meet
the capital adequacy guidelines could subject a banking institution to capital
raising requirements. A bank is prohibited from making any capital distribution
(including the payment of a dividend) or paying a management fee to its holding
company if the bank would thereafter be
"undercapitalized". Limitations exist for "undercapitalized"
depository institutions regarding, among other things, asset growth,
acquisitions, branching, new lines of business, acceptance of brokered deposits
and borrowings from the Federal Reserve System. These institutions also are
required to submit a capital instruction plan that includes a guarantee from
the
institution's holding company. See "Bank Holding Company Regulation - Source
of
Strength; Safety and Soundness". A "significantly undercapitalized" depository
institution may be subject to a number of requirements and restrictions,
including orders to sell a sufficient quantity of voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation
of
receipt of deposits from correspondent banks. The appointment of a receiver
or
conservator may be required for "critically undercapitalized"
institutions.
Enforcement
Policies and Actions
The
enforcement powers available to Federal banking regulators and the Supervisor
over commercial banks and bank holding companies are extensive. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders, to initiate injunctive
actions against banking organizations and affiliated parties, and, in extreme
cases, to terminate deposit insurance. In general, these enforcement actions
may
be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the Federal bank
regulatory agencies. Current law generally requires public disclosure of
final
enforcement actions.
Community
Reinvestment Act
Bank
holding companies and their subsidiary banks are subject to the provisions
of
the CRA and the regulations promulgated thereunder by the appropriate Federal
bank regulatory agency. Under the terms of the CRA, Northeast Bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that
it
believes are best suited to its particular community, consistent with the
CRA.
The CRA requires each appropriate Federal bank regulatory agency, in connection
with its examination of a subsidiary depository institution, to assess such
institution's record of meeting the credit needs of its community and to
take
such record into account in its evaluation of certain applications by that
institution. The CRA also requires all institutions to make public disclosure
of
their CRA ratings. Further, such assessment also is part of the FRB's
consideration of applications to acquire, merge or consolidate with, or assume
the liabilities of, another banking institution or its holding company, or
to
open or relocate a branch office. In the case of a bank holding company applying
for approval to acquire a bank or a bank holding company, the FRB will assess
the record of each subsidiary bank of the applicant bank holding company
in
considering the application. Pursuant to current CRA regulations, an
institution's CRA rating is based on its actual performance in meeting community
needs. In particular, the rating system focuses on three tests: (a) a lending
test, which evaluates the institution's record of making loans in its service
areas; (b) an investment test, which evaluates the institution's record of
investing community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and (c) a service
test, which evaluates the institution's delivery of services through its
branches, ATMs, and other offices. The current CRA regulations also clarify
how
an institution's CRA performance will be considered in the application process.
Northeast Bank received a "satisfactory" CRA rating in its most recent
examination.
FDIC
Insurance Premiums
Northeast
Bank is required to pay semiannual FDIC deposit insurance assessments. Under
the
FDIC's risk-based insurance system, insured institutions are currently assessed
premiums based on the institution's capital position and other supervisory
factors. Each financial institution is assigned to one of three capital groups
-
well capitalized, adequately capitalized or undercapitalized - and further
assigned to one of three subgroups - within a capital group, on the basis
of
supervisory evaluations by the institution's primary federal and, if applicable,
state supervisors and other information relevant to the institution's financial
condition and the risk posed to the applicable FDIC deposit insurance fund.
The
actual assessment rate applicable to a particular institution (and any
applicable refund) will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC.
12
Gramm-Leach-Bliley
Act
The
GLB
Act, enacted in 1999, amended and repealed portions of the Glass-Steagall
Act
and other federal laws restricting the ability of bank holding companies,
securities firms, and insurance companies to affiliate with each other and
enter
into new lines of business. The GLB Act established a comprehensive framework
to
permit financial companies to expand their activities, including through
affiliations, and to modify the federal regulatory structure governing some
financial services activities. The increased authority of financial firms
to
broaden the type of financial services that they may offer to customers and
to
affiliates with other types of financial service companies may lead to further
consolidation in the financial services industry. However, it also may lead
to
additional competition in these markets in which we operate by allowing new
entrants into various segments of those markets that were not the traditional
competitors in the segments. Furthermore, the authority granted by the GLB
Act
may encourage the growth of larger competitors.
With
respect to bank securities activities, the GLB Act repeals the exemption
from
the definition of "broker" previously afforded to banks and replaces it with
a
set of limited exemptions that permits certain activities which have been
performed historically by banks to continue. Further, the GLB Act amends
the
securities laws to include banks with the general definition of
dealer. However, pending the passage of final regulations regarding
the definition of “broker” and “dealer”, banks retain their current exemption
from the definition.
In
addition, the GLB Act imposes regulations on financial institution with respect
to customer privacy. The GLB generally prohibits disclosure of customer
information to non-affiliated third parties unless the customer had been
given
the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to provide written disclosure of their
privacy
policies to customers at the time the banking relationship is formed and
annually thereafter. Financial institutions, however, are required to comply
with state law if it is more protective of customer privacy than the GLB
Act.
The privacy provisions became effective in July 2001.
The
GLB
Act contains a variety of other provisions including a prohibition against
ATM
surcharges unless the customer has first been provided notice of the imposition
and amount of the fee. The GLB Act reduces the frequency of CRA examinations
for
smaller institutions and imposes certain reporting requirements on depository
institutions that make payment to non-governmental entities in connection
with
the CRA.
Anti-Money
Laundering and Anti-Terrorism Legislation
Congress
enacted the Bank Secrecy Act of 1970 (the "BSA") to require financial
institutions, including the Company and Northeast Bank, to maintain certain
records and to report certain transactions to prevent such institutions from
being used to hide money derived from criminal activity and tax evasion.
The BSA
establishes, among other things: (a) record keeping requirements to assist
government enforcement agencies in tracing financial transactions and flow
of
funds; (b) reporting requirements for Suspicious Activity Reports and Currency
Transaction Reports to assist government enforcement agencies in detecting
patterns of criminal activity; (c) enforcement provisions authorizing criminal
and civil penalties for illegal activities and violations of the BSA and
its
implementing regulations; and (d) safe harbor provisions that protect financial
institutions from civil liability for the cooperative efforts.
The
USA
Patriot Act of 2001 (the "USA Patriot Act") is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities
to
work cohesively to combat terrorism on a variety of fronts. The USA Patriot
Act
amended the BSA and incorporates anti-terrorist financing provisions into
the
requirements of the BSA and its implementing regulations. Under the USA Patriot
Act, FDIC insured banks and commercial banks are required to increase their
due
diligence efforts for correspondent accounts and private banking customers.
The
USA Patriot Act requires banks to engage in additional record keeping or
reporting, requiring identification of owners of accounts, or of the customers
of foreign banks with accounts, and restricting or prohibiting certain
correspondent accounts. Among other things, the USA Patriot Act requires
all
financial institutions, including the Company and Northeast Bank to institute
and maintain a risk-based anti-money laundering compliance program that includes
a customer identification program, provides for information sharing with
law
enforcement and between certain financial institutions by means of an exemption
from the privacy provision of the GLB Act, prohibits U.S. banks and
broker-dealers from maintaining accounts with foreign "shell" banks, establishes
due diligence and enhanced due diligence requirements for certain foreign
correspondent banking and foreign private banking accounts and imposes
additional record keeping requirements for certain correspondent banking
arrangements. The USA Patriot Act also grants broad authority to the Secretary
of the Treasury to take actions to combat money laundering, and federal bank
regulators are required to evaluate the effectiveness of an applicant in
combating money laundering in determining whether to approve any application
submitted by a financial institution. The Company and Northeast Bank have
adopted policies, procedures, and controls to comply with the BSA and the
USA
Patriot Act, and they engage in very few transactions of any kind with foreign
financial institutions or foreign persons.
The
Department of the Treasury's Office of Foreign Asset Control ("OFAC")
administers and enforces economic and trade sanctions against targeted foreign
countries, entities and individuals based on U.S. foreign policy and national
security goals. As a result, financial institutions, including the Company
and
Northeast Bank, must scrutinize transactions to ensure that they do not
represent obligations of, or ownership interests in, entities owned or
controlled by sanctioned targets. In addition, the Company and Northeast
Bank
restrict transactions with certain targeted countries except as permitted
by
OFAC.
13
Sarbanes-Oxley
Act
The
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") implemented a broad range
of
corporate governance and accounting measures, executive compensation disclosure
requirements, and enhanced and timely disclosure obligations for corporate
information, all of which are designed to ensure that the stockholders of
corporate America are treated fairly and have full and accurate information
about the public companies in which they invest. All companies that file
periodic reports with the SEC are affected by the Sarbanes-Oxley
Act.
Specifically,
the Sarbanes-Oxley Act and various regulations promulgated thereunder,
established among other things:
|
·
|
the
creation of an independent accounting oversight board to oversee
the audit
of public companies and auditors who perform such
audits;
|
|
·
|
auditor
independence provisions which restrict non-audit services that
independent
accountants may provide to their audit clients
;
|
|
·
|
additional
responsibilities regarding financial statements for the chief executive
officer and chief financial officer of the reporting
entity;
|
|
·
|
a
prohibition on personal loans to directors and officers, except
certain
loans made by financial institutions on non-preferential terms
and in
compliance with other bank regulatory
requirements;
|
|
·
|
additional
corporate governance and responsibility measures which (a) require
the
chief executive officer and chief financial officer to certify
financial
statements and to forfeit salary and bonuses in certain situations,
and
(b) protect whistleblowers and
informants;
|
|
·
|
enhance
independence and expertise requirements of members of audit
committees;
|
|
·
|
expansion
of the audit committee's authority and responsibility by requiring
that
the audit committee (a) have direct control of the outside auditor,
(b) be
able to hire and fire the auditor, and (c) approve all non-audit
services;
|
|
·
|
mandatory
disclosure by analysts of potential conflicts of interest;
and
|
|
·
|
enhanced
penalties for fraud and other
violations.
|
On
September 11, 2007, the Company changed its listing from the American Stock
Exchange to the NASDAQ Stock Exchange. Both exchanges have adopted
corporate governance rules that have been approved by the SEC. Those rules
are intended to allow shareholders to more easily and efficiently monitor
the
performance of companies and directors.
The
Company has taken steps to comply with the provisions of the Sarbanes-Oxley
Act
and the regulations adopted thereunder. Based on our total assets, we are
first
required to provide management’s assessment of the company’s internal control
over financial reporting in our annual report on Form 10-K filed for our
first
fiscal year ending on or after December 15, 2007 (i.e., fiscal year 2008).
In
addition, we are required to obtain an attestation report by our auditors
for
the annual report on Form 10-K filed for our first fiscal year ending on
or
after December 15, 2008 (i.e., fiscal year 2009). Compliance with the
foregoing provisions is expected to increase our administrative
costs.
Monetary
Policy and Economic Control
The
commercial banking business is affected not only by legislation, regulatory
policies, and general economic conditions, but also by the monetary policy
of
the FRB. Changes in the discount rate on member bank borrowing, availability
of
borrowing at the "discount window," open market operations, the imposition
of
changes in reserve requirements against member banks' deposit and assets
of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies
are
used in varying combinations to influence overall growth and distributions
of
bank loans, investments and deposits, and these policies may affect interest
rates charged on loans or paid on deposits. The monetary policies of the
FRB
have had a significant effect on the operating results of commercial banks
and
are expected to do so in the future. The monetary policies of these agencies
are
influenced by various factors, including inflation, unemployment, short-term
and
long-term changes in the international trade balance and in the fiscal policies
of the United States Government. Future monetary policies and the effect
of such
policies on the future business and earnings of Northeast Bank cannot be
predicted.
14
Industry
Restructuring
For
well
over a decade, the banking industry has been undergoing a restructuring process
which is anticipated to continue. The restructuring has been caused by product
and technological innovations in the financial services industry, deregulation
of interest rates and increased competition from foreign and nontraditional
banking competitors, and has been characterized principally by the gradual
erosion of geographic barrier to intrastate and interstate banking and the
gradual expansion of investment and lending authorities for bank
institutions.
Members
of Congress and the administration may consider additional legislation designed
to institute reforms to promote the viability of the industry. Such legislation
could revise the federal regulatory structure for insured depository
institutions; others could affect the nature of products, services, and
activities that bank holding companies and their subsidiaries may offer or
engage in, and the types of entities that may control depository institutions.
There can be no assurance as to whether or in what form any such future
legislation might be enacted, or what impact such legislation might have
upon
the Company or Northeast Bank.
STATISTICAL
DISCLOSURE
The
additional statistical information contained in Item 8(b) of this Form 10-K,
"Financial Statements and Supplementary Data" as it relates to the disclosures
required by Industry Guide 3 under the Securities Exchange Act of 1934, as
amended, is incorporated herein by reference.
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
This
Annual Report on Form 10-K (including the Exhibits hereto) contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such
as
statements relating to our financial condition, prospective results of
operations, future performance or expectations, plans, objectives, prospects,
loan loss reserve adequacy, simulation of changes in interest rates, capital
spending and revenue sources. These statements relate to expectations concerning
matters that are not historical facts. Accordingly, statements that are based
on
management's projections, estimates, assumptions, and judgments constitute
forward-looking statements. These 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", "intend", "objective", "goal", "project",
or
other similar terms or variations on those terms, or the future or conditional
verbs such as "will", "may", "should", "could", and "would". In
addition, the Company may from time to time make such oral or written
"forward-looking statements" in future filings with the Securities and Exchange
Commission (including exhibits thereto), in its reports to shareholders,
and in
other communication made by or with the approval of the Company.
Such
forward-looking statements reflect our current views and expectations based
largely on information currently available to our management, and on our
current
expectations, assumptions, plans, estimates, judgments, and projections about
our business and our industry, and they involve inherent risks and
uncertainties. Although we believe that these forward-looking
statements are based on reasonable estimates and assumptions, they are not
guarantees of future performance and are subject to known and unknown risks,
uncertainties, contingencies, and other factors. Accordingly, we can not
give
you any assurance that our expectations will in fact occur or that our estimates
or assumptions will be correct. We caution you that actual results
could differ materially from those expressed or implied by such 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. Accordingly,
investors and others are cautioned not to place undue reliance on such
forward-looking statements.
15
Potential
risks, uncertainties, and other factors which could cause the Company's
financial performance or results of operations to differ materially from
current
expectations or such forward-looking statements include, but are not limited
to:
|
a)
|
general
economic conditions, either nationally or in the markets where
the Company
or its subsidiaries offer their financial products or services,
may be
less favorable than expected, resulting in, among other things,
a
deterioration of credit quality or in a decreased demand
for our products or services;
|
|
b)
|
A
significant increase in competitive pressures in the banking and
financial
services industry and, more particularly, a significant increase
in
competition in the Company's market areas as described under "Business
--
Market for Services and Competition";
|
|
c)
|
changes
in the interest rate environment which could reduce our margins
and
increase defaults in our loan portfolio, including those described
under
"Management's Discussion and Analysis of Results of Operations
and
Financial Condition --Risk Management", and also may have a negative
impact on the Company's interest rate exchange
agreement;
|
|
d)
|
the
adequacy of the allowance for loan losses and the Bank's asset
quality,
including those matters described in "Management's Discussion and
Analysis
of Results of Operations and Financial Condition -- Results of
Operations".
|
|
e)
|
changes
in political conditions or changes occurring in the legislative
or
regulatory environment that adversely affects the businesses in
which we
are engaged, including the impact of any changes in laws and regulations
relating to banking, securities, taxes, and insurance;
|
|
f)
|
changes
in technology;
|
|
g)
|
the
ability to increase market share and to control expenses, and changes
in
consumer spending, borrowing, and saving habits;
|
|
h)
|
changes
in trade, tax, monetary, or fiscal policies, including the interest
rate
policies of the FRB;
|
|
i)
|
money
market and monetary fluctuations, and changes in inflation or in
the
securities markets;
|
|
j)
|
Future
acquisitions and the integration of acquired businesses and
assets;
|
|
k)
|
changes
in the Company's organizational structure and in its compensation
and
benefit plans, including those necessitated by pressures in the
labor
market for attracting and retaining qualified
personnel;
|
|
l)
|
the
effect of changes in accounting policies and practices, as may
be adopted
by regulatory agencies as well as the Financial Accounting Standards
Board;
|
|
m)
|
unanticipated
litigation, regulatory, or other judicial proceedings;
|
|
n)
|
the
success of the Company at managing the risks involved in the
foregoing;
|
|
o)
|
other
one-time events, risks and uncertainties detailed from time to
time in the
filings of the Company with the Securities and Exchange
Commission.
|
All
written or oral forward-looking statements that are made or attributable
to us
are expressly qualified in their entirety by this cautionary
notice. Such forward-looking statements speak only to the date that
such statements are made, and the Company undertakes no obligation to update
any
forward-looking statement to reflect events or circumstances after the date
on
which such statement is made or to reflect the occurrence of unanticipated
events.
The
Company's results are strongly influenced by general economic conditions
in its
market areas in the western, central, and mid-coastal regions of the State
of
Maine. Deterioration in these conditions could have a material
adverse effect on the quality of the Bank's loan portfolio and the demand
for
its products and services. In particular, changes in the real estate
or service industries, or a slow-down in population growth, may adversely
impact
the Company's performance. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition."
All
forward-looking statements presume a continuation of the existing regulatory
environment and monetary policy. The banking industry is subject to
extensive state and federal regulation, and significant new laws or regulations,
or changes in or repeals of existing laws or regulations may cause results
of
the Company to differ materially. Further, federal monetary policy,
particularly as implemented by the FRB, significantly affect credit conditions
for the Bank and its customers. Such changes could adversely impact
the Company's financial results. In addition, the Sarbanes-Oxley Act
of 2002 and the numerous rulemaking initiatives adopted or proposed in
connection therewith or in reaction thereto have significantly increased
the
regulatory burdens of publicly held companies. Accordingly, the cost
of compliance with, and the personnel necessary to satisfy the obligations
imposed by, these regulatory initiatives may divert resources from our core
business operations and may adversely affect our
profitability. See "Item 1. Business Supervision and
Regulation."
A
significant source of risks arise from the possibility that losses will be
sustained because borrowers, guarantors, and related parties fail to perform
in
accordance with the terms of their loans. The Bank has adopted
underwriting and credit monitoring procedures and credit policies, including
the
establishment and review of the allowance for loan losses, that management
believe are appropriate to minimize the risks in assessing the likelihood
of
nonperformance, tracking loan performance, and diversifying the Bank's loan
portfolio. However, such policies may not prevent unexpected losses
that could adversely affect the Company's results and the allowance for loan
losses may not be adequate in all instances. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition - Results of Operations,"" - Financial Condition," and" - Risk
Management." Further, certain types of lending relationships carry
greater risks of nonperformance and collectability, such as commercial and
consumer loans. For a discussion of the risks associated with such
lending relationships, see "Item 1. Business -- Lending
Activities."
16
ITEM
1.a. Risk Factors
The
following discusses risks that management believes are specific to our business
and could have a negative impact on Northeast Bancorp’s financial performance.
When analyzing an investment in Northeast Bancorp (the "Company”), the risks and
uncertainties described below, together with all of the other information
included or incorporated by reference in this report, should be carefully
considered. This list should not be viewed as comprehensive and may not include
all risks that may affect the financial performance of the Company:
Changes
in interest rates may have adverse impact on the Company’s
profitability.
The
Company’s profitability is largely a function of the spread between the interest
rates earned on interest earning assets and the interest rates paid on deposits
and other interest-bearing liabilities. Like most financial institutions,
the
Company’s net interest income and margin will be affected by general economic
conditions and other factors, including fiscal and monetary policies of the
Federal government, that influence market interest rates and the Company’s
ability to respond to changes in such rates. At any given time, the Company’s
assets and liabilities may be such that they are affected differently by
a
change in interest rates. As a result, an increase or decrease in rates,
the
length of loan terms or the mix of adjustable- and fixed- rate loans or
investment securities could have a positive or negative effect on its net
income, capital and liquidity. Although management believes it has implemented
strategies and guidelines to reduce the potential effects of changes in interest
rates on results of operations, any substantial and prolonged change in market
interest rates, including the slope of the interest rate curve, could adversely
affect operating results.
Changes
in economic conditions and the composition of the Company’s loan portfolio could
lead to higher charge-offs or an increase in the Company’s provision for loan
losses and may reduce the Company’s net income.
As
a
lender, the Company is exposed to the risk that its borrowers may be unable
to
repay their loans and that any collateral securing the payment of their loans
may not be sufficient to assure repayment in full. Credit losses are inherent
in
the lending business and could have a material adverse effect on the operating
results of the Company. Adverse changes in the economy or business conditions,
either nationally or in the Company’s market areas, could increase
credit-related losses and expenses and/or limit growth. Substantially all
of the
Company’s loans are to businesses and individuals in its limited geographic area
and any economic decline in this market could impact the Company adversely.
We
make various assumptions and judgments about the collectibility of our loan
portfolio and provide for an allowance for loan losses based on a number
of
factors. If these assumptions are incorrect, the allowance for loan
losses may not be sufficient to cover losses, thereby having an adverse effect
on operating results, and may cause the Company to increase the allowance
in the
future by increasing the provision for loan losses. The Company has adopted
underwriting and credit monitoring procedures and credit policies that
management believes are appropriate to control these risks; however, such
policies and procedures may not prevent unexpected losses that could have
a
material adverse affect on the Company’s financial condition or results of
operations.
Impairment
Risk
The
Company regularly purchases U.S. Government-sponsored enterprise debt
securities, U.S. Government agency issued mortgage-backed securities, corporate
debt securities and equity securities. The Company is exposed to the risk
that
the issuers of these securities may experience significant deterioration
in
credit quality which could impact the market value of the issue. The Company
periodically evaluates its investments to determine if market value declines
are
other-than-temporary. Once a decline is determined to be other-than-temporary,
the value of the security is reduced and a corresponding charge to earnings
is
recognized.
Competition
The
financial services industry is highly competitive, with competition for
attracting and retaining deposits and making loans coming from other banks
and
savings institutions, credit unions, mutual fund companies, insurance companies
and other non-bank businesses. Many of the Company’s competitors are much larger
in terms of total assets and market capitalization, have a higher lending
limit,
greater access to capital and funding and offer a broader array of financial
products and services. In light of these factors, the Company’s ability to
continue to compete effectively is dependent upon its ability to maintain
and
build relationships through top quality service.
Government
Regulation and Supervision
The
banking industry is heavily regulated under both Federal and state law. Banking
regulations, designed primarily for the safety of depositors, may limit a
financial institution’s growth and the return to its investors, by restricting
such activities as the payment of dividends, mergers with or acquisitions
by
other institutions, expansion of branch offices and the offering of securities.
The Company is also subject to capitalization guidelines established by federal
law and could be subject to enforcement actions to the extent that its
subsidiary bank is found, by regulatory examiners, to be undercapitalized.
It is
difficult to predict what changes, if any, will be made to existing Federal
and
state legislation and regulations or the effect that such changes may have
on
the Company’s future business and earnings prospects. Any substantial changes to
applicable laws or regulations could also subject the Company to additional
costs, limit the types of financial services and products it may offer, and
inhibit its ability to compete with other financial service
providers.
17
Internal
Controls and Procedures
Management
diligently reviews and updates its internal controls, disclosure controls
and
procedures, and corporate governance policies and procedures. This system
is
designed to provide reasonable, not absolute, assurances that the internal
controls comply with appropriate regulatory guidance; any undetected
circumvention of these controls could have a material adverse impact on the
Company’s financial condition and results of operations.
Litigation
Although
there is currently no litigation to which the Company is a party, future
litigation that arises during the normal course of business could be material
and have a negative impact on the Company’s earnings. Future litigation could
also adversely impact the reputation of the Company in the communities that
it
serves.
Attracting
and Retaining Skilled Personnel
Attracting
and retaining key personnel is critical to the Company’s success, and difficulty
finding qualified personnel could have a significant impact on the Company’s
business due to the lack of required skill sets and years of industry
experience. Management is cognizant of these risks, and succession planning
is
built into the Company’s long-range strategic planning process.
Item
2. Properties
The
principal executive and administrative offices of the Company and the Bank
were
relocated to 500 Canal Street, Lewiston, Maine ("Headquarters Building")
from
158 Court Street, Auburn, Maine in August, 2005. The Bank entered
into a 15 year lease with respect to the Headquarters Building, and we moved
our
principal executive and administrative offices to this four story building
located in downtown Lewiston. We lease the entire building, a total
of 27,000 square feet. For the first ten years of the lease, the
annual rent expense is approximately $264,000. In addition to
executive and administrative offices, this building also houses our operations,
loan processing and underwriting, loan servicing, accounting, human resources
and commercial lending departments. We also opened a 500 square foot
branch office in this building and completed the relocation of the above
offices
and departments in August 2005.
In
addition to the branch office located in our Headquarters Building, we have
11
additional banking branches located in the State of Maine, as set forth
below.
|
Branch
Locations
|
Ownership
|
|
232
Center Street, Auburn
|
Lease
(1)
|
|
235
Western Avenue, Augusta
|
Fee
Simple
|
|
11
Main Street, Bethel
|
Fee
Simple
|
|
168
Maine Street, Brunswick
|
Fee
Simple
|
|
2
Depot Street, Buckfield
|
Fee
Simple
|
|
46
Main Street, Harrison
|
Fee
Simple
|
|
882
Lisbon Street, Lewiston
|
Lease
(2)
|
|
500
Canal Street, Lewiston
|
Lease (3)
|
|
26
Pleasant Street, Mechanic Falls
|
Fee
Simple
|
|
77
Middle Street, Portland
|
Lease
(4)
|
|
235
Main Street, South Paris
|
Fee
Simple
|
|
Insurance
Agency Locations
|
|
|
59
Main Street, Anson
|
Lease
(5)
|
|
350
Minot Avenue, Auburn*
|
Lease
(5)
|
|
235
Western Avenue, Augusta*
|
Fee
Simple
|
|
11
Main Street, Bethel*
|
Fee
Simple
|
|
346
Main Street, Jackman
|
Lease
(5)
|
|
28
Main Street, Livermore Falls
|
Lease
(7)
|
|
89
Main Street, Mexico
|
Lease
(5)
|
|
2568
Main Street, Rangeley
|
Lease
(5)
|
|
423
U. S. Route 1, Scarborough
|
Lease
(6)
|
|
235
Main Street, South Paris*
|
Fee
Simple
|
|
10
Snell Hill Road, Turner
|
Fee
Simple
|
|
*Each
of these insurance agency locations are situated in an existing
bank
branch location at the address indicated.
|
|
|
(1)
Lease term is ten years and expires May 1, 2016.
|
|
|
(2)
Lease term is 15 years and expires January 14, 2014.
|
|
|
(3)
Lease term is 15 years and expires July 15, 2020.
|
|
|
(4)
Lease term is five years and expires September 30,
2012.
|
|
|
(5)
Lease term is one year and automatically renews in September each
year.
|
|
|
(6)
Lease term is three years and expires July 31, 2010.
|
|
|
(7)
Lease term is eight months and expires December 31,
2007.
|
|
18
The
Bank's investment division leases space at 202 US Route One, Falmouth, Maine
which has a term of five years and expires August 31, 2012. In addition,
the
Bank has purchased land in Windham, Maine.
On
September 1, 2006, the Company purchased its South Paris, Maine branch,
previously leased from a member of our Board of Directors. The $400,000 purchase
price was based upon an independent appraisal. The consideration paid
was 5,000 shares of Company common stock and $297,000 in cash. The common
stock
issued was based on the market price on the day prior to the closing. This
acquisition was not material to the balance sheet or the results of operations
for the Company.
Item
3. Legal Proceedings
There
are
no pending legal proceedings to which the Company is a party or to which
any of
its property is subject. There are no material pending legal proceedings,
other
than ordinary routine litigation incidental to the business of banking, to
which
the Bank is a party or of which any of the Bank's property is the
subject. There are no material pending legal proceedings to which any
director, officer or affiliate of the Company, any owner of record beneficially
of more than five percent of the common stock of the Company, or any associate
of any such director, officer, affiliate of the Company or any security holder
is a party adverse to the Company or has a material interest adverse to the
Company or the Bank.
Item
4. Submission of Matters to a Vote of Security
Holders
There
were no matters submitted to a vote of the Company's securities-holders during
the fourth quarter of the fiscal year ended June 30, 2007.
Executive
Officers of the Registrant
Pursuant
to the Instructions of Form 10-K and Item 401(b) of Regulation S-K, the name,
age, and position of each executive officer of the Company and the Bank are
set
forth below along with such officer's business experience during the past
five
years. Officers are elected annually by the respective Boards of
Directors of the Company and the Bank to hold office until the earlier of
their
death, resignation, or removal.
|
Name
|
Age
|
Position
with Company and/or Bank
|
|
James
D. Delamater
|
56
|
President
and Chief Executive Officer (1)
|
|
Philip
C. Jackson
|
63
|
Senior
Vice President of Bank Trust Operations
|
|
Pender
J. Lazenby
|
57
|
Chief
Risk Officer
|
|
Marcel
Blais
|
48
|
Chief
Operating Officer
|
|
Robert
S. Johnson
|
55
|
Chief
Financial Officer (1)
|
|
Suzanne
Carney
|
40
|
Clerk
|
(1)
Each
of these individuals serves both the Company and the Bank in the same capacities
as indicated above.
James
D. Delamater has been President, Chief Executive Officer, and a
director of the Company and the Bank, since 1987.
Philip
C. Jackson has been a director of the Company and the Bank since
1987. Mr. Jackson also has served as the Senior Vice President of the
Bank's Trust Operations since 1997. From 1991 to 1994, Mr. Jackson
served as President of Bethel Savings Bank, the predecessor to the
Bank.
Marcel
Blais has been the Senior Vice President of the Bank - Retail Banking
since 1998. Mr. Blais joined the Company in 1997 as the Vice
President of the Bank - Branch Administration. Prior to joining the
Company he served as Vice President of Atlantic Bank from 1995 to 1997, and
as
Vice President - Branch Manager of Casco Bank from 1977 until 1995.
Robert
S. Johnson has been the Chief Financial Officer of the Bank since
December 2001. Prior to joining the company he served as Mortgage
Controller of Banknorth Group from 1998 to 1999 and as President and Chief
Financial Officer of Pepperell Bank & Trust from 1999 to 2001.
Pender
J. Lazenby has been a director of the Company and the Bank since
2003. Mr. Lazenby has also served as the Senior Vice President Chief
Risk Officer since February 2005 and prior to joining the Company served
in a
variety of positions with Fleet Boston and Bank Boston prior to its acquisition
in 1999.
Suzanne
Carney has been Clerk of the Bank since March 1999 and has been with
the Company since 1994 in the Accounting Division.
There
is
no family relationship between any of the directors or executive officers
of the
Company.
19
PART
II
Item
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchase of Equity Securities
On
September 11, 2007, the Company changed its listing from AMEX to
NASDAQ. The common stock of Northeast Bancorp currently trades on the
NASDAQ under the symbol "NBN". As of the close of business on September 20,
2007, there were approximately 2,391,332 shares of common stock outstanding
held
by approximately 446 stockholders of record.
The
following table sets forth the high and low closing sale prices of the Company's
Common Stock as reported on AMEX, and dividends paid during each quarter
for
periods indicated.
|
2006
- 2007
|
High
|
Low
|
Div
Pd
|
|
Jul
1- Sep 30
|
21.39
|
19.18
|
.090
|
|
Oct
1 - Dec 31
|
19.77
|
18.20
|
.090
|
|
Jan
1 - Mar 31
|
20.30
|
18.34
|
.090
|
|
Apr
1 - Jun 30
|
18.89
|
16.60
|
.090
|
|
2005
– 2006
|
High
|
Low
|
Div
Pd
|
|
Jul
1- Sep 30
|
22.50
|
19.85
|
.090
|
|
Oct
1 - Dec 31
|
24.00
|
21.66
|
.090
|
|
Jan
1 - Mar 31
|
24.50
|
20.80
|
.090
|
|
Apr
1 - Jun 30
|
22.10
|
20.76
|
.090
|
On
September 20, 2007, the last reported sale price of the Company's Common
stock
as quoted on NASDAQ was $17.75. Holders of the Company's Common stock are
entitled to receive dividends when and if declared by the Board of Directors
out
of funds legally available therefore, the amount and timing of future dividends
payable on the Company's Common Stock will depend on, among other things,
the
financial condition of the Company, regulatory considerations, and other
factors. The Company is a legal entity separate from the Bank, but its revenues
are derived primarily from the Bank. Accordingly, the ability of the
Company to pay cash dividends on its stock in the future generally will be
dependent upon the earnings of the Bank and the Bank's ability to pay dividends
to the Company. The payment of dividends by the Bank will depend on a number
of
factors, including capital requirements, regulatory limitations, the Bank's
results of operations and financial condition, tax considerations, and general
economic conditions. National banking laws regulate and restrict the ability
of
the Bank to pay dividends to the Company. See "Item 1.Business - Supervision
and
Regulation".
Stock
repurchases under the 2006 Stock Repurchase Plan for the year ended June
30,
2007 totaled 3,800 shares at an average price per share of $17.88.
20
|
Unregistered
Sales of Equity Securities and Use of Proceeds
The
following table provides the information on any purchase made by
or on
behalf of the Company of shares of Northeast Bancorp common stock
during
the indicated periods.
|
|||||
|
Period
(1)
|
Total
Number
Of
Shares
Purchased
(2)
|
Average
Price
Paid
per Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Program
|
Maximum
Number of
Shares
that May Yet be
Purchased
Under
The
Program (3)
|
|
|
Apr.
1 – Apr. 30
|
-
|
-
|
-
|
200,000
|
|
|
May
1 – May 31
|
-
|
-
|
-
|
200,000
|
|
|
Jun.
1 – Jun. 30
|
3,800
|
17.88
|
3,800
|
196,200
|
|
|
(1)
|
Based
on trade date, not settlement date.
|
||||
|
(2)
|
Represents
shares purchased in open-market transactions pursuant to the Company's
2006 Stock Repurchase Plan.
|
||||
|
(3)
|
On
December 15, 2006, the Company announced that its Board of Directors
of the Company approved the 2006 Stock Repurchase Plan pursuant
to which
the Company is authorized to repurchase in open-market transactions
up to
200,000 shares from time to time until the plan expires on December
31,
2007, unless extended.
|
||||
|
Item
6. Selected Financial Data
|
|||||||||||||||||||
|
At
or for the Year
|
|||||||||||||||||||
|
Ended
June 30,
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(Dollars
in thousands except for Per Share Data)
|
|||||||||||||||||||
|
Selected
operations data:
|
|||||||||||||||||||
|
Interest
income
|
$ |
35,682
|
$ |
35,456
|
$ |
32,674
|
$ |
28,124
|
$ |
29,026
|
|||||||||
|
Interest
expense
|
20,097
|
16,761
|
13,967
|
12,079
|
13,769
|
||||||||||||||
|
Net
interest income
|
15,585
|
18,695
|
18,707
|
16,045
|
15,257
|
||||||||||||||
|
Provision
for loan losses
|
989
|
1,226
|
1,302
|
962
|
1,091
|
||||||||||||||
|
Other
operating income (1)
|
7,903
|
6,578
|
5,083
|
4,670
|
4,174
|
||||||||||||||
|
Net
securities gains
|
42
|
17
|
68
|
201
|
922
|
||||||||||||||
|
Other
operating expenses (2)
|
20,075
|
18,209
|
16,684
|
14,799
|
13,530
|
||||||||||||||
|
Income
before income taxes
|
2,466
|
5,855
|
5,872
|
5,155
|
5,732
|
||||||||||||||
|
Income
tax expense
|
579
|
1,851
|
1,853
|
1,643
|
1,877
|
||||||||||||||
|
Net
income
|
$ |
1,887
|
$ |
4,004
|
$ |
4,019
|
$ |
3,512
|
$ |
3,855
|
|||||||||
|
Consolidated
per share data:
|
|||||||||||||||||||
|
Net
income:
|
|||||||||||||||||||
|
Basic
|
$ |
0.77
|
$ |
1.61
|
$ |
1.60
|
$ |
1.38
|
$ |
1.46
|
|||||||||
|
Diluted
|
$ |
0.76
|
$ |
1.59
|
$ |
1.57
|
$ |
1.35
|
$ |
1.44
|
|||||||||
|
Cash
dividends
|
$ |
0.36
|
$ |
0.36
|
$ |
0.36
|
$ |
0.35
|
$ |
0.32
|
|||||||||
|
Selected
balance sheet data:
|
|||||||||||||||||||
|
Total
assets
|
$ |
556,801
|
$ |
562,918
|
$ |
575,900
|
$ |
538,754
|
$ |
467,684
|
|||||||||
|
Loans
receivable
|
425,571
|
435,663
|
461,052
|
432,594
|
378,987
|
||||||||||||||
|
Deposits
|
364,554
|
395,293
|
396,219
|
377,820
|
318,743
|
||||||||||||||
|
Borrowings
|
147,564
|
124,860
|
136,293
|
121,443
|
109,871
|
||||||||||||||
|
Total
stockholders' equity
|
40,850
|
39,096
|
39,870
|
36,453
|
36,499
|
||||||||||||||
|
Other
ratios:
|
|||||||||||||||||||
|
Return
on average assets
|
0.34% | 0.70% | 0.71% | 0.71% | 0.86% | ||||||||||||||
|
Return
on average equity
|
4.59% | 9.95% | 10.39% | 9.50% | 10.58% | ||||||||||||||
|
Average
equity to average total assets
|
7.37% | 7.07% | 6.86% | 7.51% | 8.11% | ||||||||||||||
|
Common
dividend payout ratio
|
46.77% | 22.40% | 22.65% | 25.93% | 22.22% | ||||||||||||||
|
(1)
Includes primarily fees for deposit, investment brokerage and
trust
services to customers and gains on the sale of loans.
|
|||||||||||||||||||
|
(2)
Includes salaries, employee benefits, occupancy, equipment and
other
expenses.
|
|||||||||||||||||||
21
Item
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The
Management's Discussion and Analysis of Results of Operations and Financial
Condition which follows presents a review of the consolidated operating
results
of Northeast Bancorp, Inc. (the "Company") for the fiscal years ended June
30,
2007, 2006 and 2005. This discussion and analysis is intended to
assist you in understanding the results of our operations and financial
condition. You should read this discussion together with your review
of the Company's Consolidated Financial Statements and related notes and
other
statistical information included in this report. Certain amounts in the
years
prior to 2007 have been reclassified to conform to the 2007
presentation.
A
NOTE ABOUT FORWARD LOOKING STATEMENTS
This
report contains certain "forward-looking statements" within the meaning
of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, such as statements relating to our financial condition,
prospective results of operations, future performance or expectations,
plans,
objectives, prospects, loan loss reserve adequacy, simulation of the impact
of
changes in interest rates, capital spending, and revenue
sources. These statements relate to expectations concerning matters
that are not historical facts. Accordingly, statements that are based on
management's projections, estimates, assumptions, and judgments constitute
forward-looking statements. These 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", "intend", “objective”, “goal”, “project”, or
other similar terms or variations on those terms, or the future or conditional
verbs such as "will", "may", "should", "could", and "would". In
addition, the Company may from time to time make such oral or written
"forward-looking statements" in future filings with the Securities and
Exchange
Commission (including exhibits thereto), in its reports to shareholders,
and in
other communications made by or with the approval of the Company.
Such
forward-looking statements reflect our current views and expectations based
largely on information currently available to our management, and on our
current
expectations, assumptions, plans, estimates, judgments, and projections
about
our business and our industry, and they involve inherent risks and
uncertainties. Although we believe that these forward-looking
statements are based on reasonable estimates and assumptions, they are
not
guarantees of future performance and are subject to known and unknown risks,
uncertainties, contingencies, and other factors. Accordingly, we can
not give you any assurance that our expectations will in fact occur or
that our
estimates or assumptions will be correct. We caution you that
actual results could differ materially from those expressed or implied
by such
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. Accordingly, investors and others are cautioned not to
place undue reliance on such forward-looking statements. For a more
complete discussion of certain risks and uncertainties affecting the Company,
please see "Item 1. Business - Forward-Looking Statements and Risk
Factors" set forth in our Form 10-K. These forward-looking statements
speak only as of the date of this report and we do not undertake any obligation
to update or revise any of these forward-looking statements to reflect
events or
circumstances occurring after the date of this report or to reflect the
occurrence of unanticipated events.
CRITICAL
ACCOUNTING POLICIES
The
Notes
to the Consolidated Financial Statements contain a summary of Northeast
Bancorp's significant accounting policies. The level of the allowance
for loan losses is important to the presentation of the Company's results
of
operations and financial condition. The determination of what the
loan loss allowance should be requires management to make subjective and
difficult judgments, some of which may relate to matters that are inherently
uncertain. Actual results may differ materially from these estimates
and assumptions. See Note 1 to the Consolidated Financial
Statements.
22
Allowance
for Loan Losses
The
allowance for loan losses represents management's estimate of probable
losses
inherent in the loan portfolio. This evaluation process is subject to numerous
estimates and judgments. The frequency of default, risk ratings, and the
loss
recovery rates, among other things, are considered in making this evaluation,
as
are the size and diversity of individual large credits. Changes in these
estimates could have a direct impact on the provision and could result
in a
change in the allowance. The larger the provision for loan loss, the
greater the negative impact on our net income. Larger balance,
non-homogeneous loans representing significant individual credit exposures
are
evaluated based upon the borrower's overall financial condition, resources,
and
payment record, the prospects for support from any financially responsible
guarantors and, if appropriate, the realizable value of any collateral.
The
allowance for loan losses attributed to these loans is established through
a
process that includes estimates of historical and projected default rates
and
loss severities, internal risk ratings and geographic, industry, and other
environmental factors. Management also considers overall portfolio
indicators, including trends in internally risk-rated loans, classified
loans,
nonaccrual loans, and historical and forecasted write-offs; and a review
of
industry, geographic, and portfolio concentrations, including current
developments. In addition, management considers the current business strategy
and credit process, including credit limit setting and compliance, credit
approvals, loan underwriting criteria, and loan workout procedures. Each
portfolio of smaller balance, homogeneous loans, including residential
real
estate and consumer loans, is collectively evaluated for impairment. The
allowance for loan losses is established via a process that includes historical
delinquency and credit loss experience, together with analyses that reflect
current trends and conditions. Management also considers overall portfolio
indicators including historical credit losses, delinquent, non-performing
and
classified loans, trends in volumes, terms of loans, an evaluation of overall
credit quality and the credit process, including lending policies and procedures
and economic factors.
For
a
further description of our estimation process in determining the allowance
for
loan losses, see “Asset Quality” below.
GENERAL
Northeast
Bancorp (the "Company") is a Maine corporation and a bank holding company
registered with the Federal Reserve Bank of Boston ("FRB”) under the Bank
Holding Company Act of 1956. The Company also is a registered Maine
financial institution holding company. The FRB is the primary
regulator of the Company and the Company is also subject to regulation
and
examination by the Superintendent of the Maine Bureau of Financial
Institutions. We conduct business from our headquarters in Lewiston,
Maine and, as of June 30, 2007, from 12 banking offices and 11 insurance
agency
offices all located in western and south-central Maine. At June 30,
2007, we had consolidated assets of $556.8 million and consolidated
stockholders' equity of $40.8 million.
Northeast
Bancorp's principal asset is all the capital stock of Northeast Bank (the
"Bank"), a Maine state-chartered universal bank. Accordingly, the
Company's results of operations are primarily dependent on the results
of the
operations of the Bank. In addition to the Bank’s eleven branch
offices, its investment brokerage division has an office in Falmouth, Maine
from
which investment, insurance and financial planning products and services
are
offered. The Bank's wholly-owned subsidiary, Northeast Bank Insurance
Group, Inc. offers personal and commercial property and casualty insurance
products. Four of its eight insurance agency offices operate in our
Auburn, Augusta, Bethel, and South Paris, Maine branches.
Business
Strategy
The
principal business of the Bank consists of attracting deposits from the
general
public and applying those funds to originate or acquire residential mortgage
loans, commercial loans, commercial real estate loans, indirect consumer
loans
and consumer loans. The Bank sells residential mortgage and
commercial real estate loans into the secondary market. The Bank also
invests in mortgage-backed securities, securities issued by United States
Government-sponsored enterprises and municipal securities. The Bank
emphasizes the growth of noninterest sources of income from trust management,
financial planning, investment brokerage and insurance
commissions. We increased insurance commissions in fiscal 2007 by
expanding our insurance agency through acquisitions. The Bank's profitability
depends primarily on net interest income, which is the difference between
interest income earned from interest-earning assets (i.e. loans and investments)
and interest expense incurred on interest-bearing liabilities (i.e. customer
deposits and borrowed funds). Net interest income is affected by the
relative balances of interest-earning assets and interest-bearing liabilities,
and the rates received and paid on these balances.
Our
goal
is to continue modest, but profitable, growth by increasing our loan and
deposit
market share in our existing markets in western and south-central Maine,
closely
manage the yields on interest earning assets and rates on interest-bearing
liabilities, introduce new financial products and services, increase the
number
of bank services per household, increase noninterest income from expanded
trust,
investment and insurance brokerage services and control the growth of
noninterest expenses. It also is part of our business strategy to make
targeted
acquisitions in our current market areas from time to time when opportunities
present themselves. For the twelve months ended June 30, 2007, we
acquired four insurance agencies. On August 30, 2007, we acquired the
Hartford Agency in Lewiston, Maine, our fifth purchase, for $1,358,000
in cash
and debt.
23
The
Company's profitability is affected by the Bank's interest rate spread,
which is
the difference between the average yield earned on its interest-earning
assets
and the average rate paid on its interest-bearing liabilities, or
alternatively by interest margin, which is net interest income as a percentage
of average interest earning assets. It is also affected by the level
of the provision for loan losses, noninterest income and noninterest expense
of
Northeast Bancorp and the Bank, and the effective tax rate. Noninterest
income
consists primarily of loan and deposit service fees, trust, investment
brokerage
and insurance brokerage fees and gains on the sales of loans and
investments. Noninterest expenses consist of compensation and
benefits, occupancy related expenses, deposit insurance premiums paid to
the
FDIC, and other operating expenses which include advertising, computer
services,
supplies, telecommunication and postage expenses.
Economic
Conditions
We
believe that our market area has generally witnessed modest economic growth
and
a slowing of real estate appreciation from 2006 through 2007. The
economy and real estate markets in our market areas will continue to be
significant determinants of the quality of our assets in future periods
and our
results of operations, liquidity and financial condition. We believe
future economic activity will significantly depend on consumer confidence,
consumer spending and business expenditures for new capital equipment,
all of
which are tied to strong employment.
EXECUTIVE
SUMMARY
The
following were
significant factors comparing our results for fiscal 2007 to fiscal
2006:
|
·
|
Four
insurance agencies were acquired in twelve months ended June
30,
2007.
|
|
·
|
Revenues
from our investment brokerage, insurance, and trust and wealth
management
divisions increased by 28%.
|
|
·
|
Commercial
real estate loans were sold to the secondary market, increasing
gain on
sale income by $428,000.
|
|
·
|
Net
interest margins decreased to 299 basis points compared to 349
basis
points in fiscal 2006 and, combined with a decrease in total
interest
earning assets, resulted in a decrease in net interest
income.
|
|
·
|
Though
net income decreased in fiscal 2007, our financial condition
and liquidity
remain strong.
|
|
·
|
The
Company and the Bank are “well capitalized” under regulatory
definitions.
|
|
·
|
The
allowance for loan losses increased by $260,000 in fiscal 2007,
to
$5,756,000, and, as a percentage of total loans, increased in
fiscal 2007
to 1.35% compared to 1.26% in fiscal
2006.
|
|
·
|
Net
income decreased to $1,886,677 for fiscal 2007 compared to $4,004,199
for
fiscal 2006.
|
On
September 1, 2006, the Bank purchased the real estate located at 235 Main
Street, South Paris, Maine, (our South Paris branch) from a director for
a
purchase price of $400,000. The price was determined through an
independent, third party appraisal. We paid $297,000 in cash and
5,000 shares of Northeast Bancorp common stock (based on the $20.60 per
share
closing price on August 31, 2006). Management believes that the
transaction reflected arms-length, negotiated terms.
24
RESULTS
OF OPERATIONS
Comparison
of Fiscal Years Ended June 30, 2007 and 2006
Overview
For
the
fiscal year ended June 30, 2007 ("fiscal 2007"), we reported net income
of
$1,886,677, or $0.76 per diluted share, as compared to $4,004,199, or $1.59
per
diluted share, for the fiscal year ended June 30, 2006 ("fiscal 2006"),
a
decrease of $2,117,522, or 53%. This decrease was
attributable to a decrease in net interest income due to a decrease in
net
interest margin and increased noninterest expense which were partially
offset by
a decrease in the provision for loan losses and an increase in noninterest
income. The return on average assets was 0.34% in fiscal 2007
compared to 0.70% in fiscal 2006. The return on average equity was
4.59% in fiscal 2007 and 9.95% in fiscal 2006. The decrease in our
return on average assets and return on average equity was due to decreased
net
income for fiscal 2007.
Net
interest income decreased by 17% in fiscal 2007. This decrease was primarily
due
to a decrease in our net interest margin of 50 basis points compared to
fiscal
2006, combined with a decrease in average interest earning assets of
approximately $11.0 million as compared to the average interest earning
assets
in fiscal 2006. Of the decrease in average interest earning assets, average
loans decreased $15.0 million and average interest-bearing deposits and
regulatory stock decreased $0.6 million, partially offset by average investment
securities, which increased $4.6 million. Noninterest income
increased 20% during fiscal 2007 primarily from increased investment brokerage
and insurance commission revenue, gains on the sale of residential real
estate
and commercial real estate loans and net securities gains. These
increases were partially offset by lower fees and services charges on loans
and
deposits. The provision for loan losses decreased 19% primarily due
to a decrease in loans. Noninterest expense increased 10% during
fiscal 2007, which was primarily due to increases in salaries and employee
benefits expense, equipment expense, amortization of intangibles associated
with
the four insurance agency acquisitions and other expenses.
Net
Interest Income
Net
interest income decreased by $3,110,245, or 17%, during fiscal 2007, primarily
as a result of a decrease in net interest margin. Average
interest earning assets decreased $11.0 million during fiscal 2007 due
to a
$15.0 million decrease in average loans that was partially offset by a
$4.7
million increase in average investment securities. Regulatory stock
and interest-bearing deposits decreased $0.6 million. The decrease in average
residential real estate construction, commercial real estate and commercial
loans of $22.9 million was partially offset by a $7.9 million increase
in
consumer loans. The increase in average investment securities was due
to increases in mortgage-backed securities used to pledge as eligible collateral
for FHLB advances, and securities sold under agreements to repurchase and
municipal securities. Average interest-bearing deposits decreased by
$13.5 million, or 4%, during fiscal 2007 primarily due to a decrease in
average
brokered deposits, which decreased by $18.8 million and reduced our dependency
on wholesale funding. All other interest-bearing, non-maturing
deposits decreased, in the aggregate amount of $14.1 million, offset by
an
increase in certificates of deposit of $19.4, for a net increase of $5.3
million. Average repurchase agreements increased during fiscal
2007 by $4.7 million, or 15%. Average borrowings increased, primarily
due to debt incurred in the acquisition of insurance agencies. The yield
on
average interest earning assets increased 19 basis points, to 6.79%, in
fiscal
2007. The cost of funds increased 75 basis points, to 4.20%, due to
an increase in the cost of interest-bearing deposits. Table 1
provided in Item 8 of this Form 10-K shows the average balances, yields
and
rates of assets, liabilities, and stockholders’ equity of the Company for the
past three years. The table below shows the changes from 2006 to 2007
in net interest income by category due to changes in rate and
volume.
|
Rate/Volume
Analysis for the Year Ended
June
30, 2007 versus June 30, 2006
|
||||||||||||
|
Difference
Due to
|
||||||||||||
|
Volume
|
Rate
|
Total
|
||||||||||
|
Investments
|
$ |
131,490
|
$ |
375,714
|
$ |
507,204
|
||||||
|
Loans,
net
|
(1,075,851 | ) |
799,395
|
(276,456 | ) | |||||||
|
FHLB
deposits & other
|
33,336
|
42,035
|
75,371
|
|||||||||
|
Total
interest-earning assets
|
(911,025 | ) |
1,217,144
|
306,119
|
||||||||
|
Deposits
|
(437,192 | ) |
2,775,059
|
2,337,867
|
||||||||
|
Repurchase
agreements
|
154,571
|
422,677
|
577,248
|
|||||||||
|
Borrowings
|
42,110
|
379,167
|
421,277
|
|||||||||
|
Total
interest-bearing liabilities
|
(240,511 | ) |
3,576,903
|
3,336,392
|
||||||||
|
Net
interest income
|
$ | (670,514 | ) | $ | (2,359,759 | ) | $ | (3,030,273 | ) | |||
Rate/volume
amounts which are partly attributable to rate and volume are spread
proportionately between Volume and Rate based on the direct change attributable
to rate and volume. Borrowings in the table above include FHLB
advances, obligation under capital leases and junior subordinated
debentures. The adjustments to interest income and yield required to
make the presentation on a fully tax equivalent basis were $197,674 and
$117,702
for the twelve months ended June 30, 2007 and 2006, respectively.
25
Provision
for Loan Losses
The
provision for loan losses in fiscal 2007 was $989,158, a decrease of $237,255,
or 19%, compared to fiscal 2006. This decrease in the provision for
loan losses reflects the overall decrease in loans of approximately $10.0
million. The impact of this decrease in loans on the provision for
loan losses was partially offset by higher loan delinquency, higher classified
and criticized loans, higher net losses, and slightly lower nonperforming
loans
for fiscal 2007. Net charge-offs were $729,200 in fiscal 2007
compared to $630,300 in fiscal 2006. This $98,900 increase was
primarily in residential real estate and indirect consumer loans. Net
charge-offs to average loans outstanding was 0.17% in fiscal 2007 compared
to
0.14% in fiscal 2006.
The
allowance for loan losses at June 30, 2007 was $5,756,000 as compared to
$5,496,000 at June 30, 2006, an increase of $260,000, or 5%. The
ratio of the allowance to total loans was 1.35% at June 30, 2007 compared
to
1.26% at June 30, 2006. The ratio of the allowance for loan losses to
nonperforming loans was 113% at June 30, 2007 and 106% at June 30, 2006,
reflecting an increase of $260,000 in the allowance for loan losses and
a
$105,000 decrease in nonperforming loans, to $5,090,000, primarily due
to
nonperforming commercial real estate loans. Of total non-performing
loans at June 30, 2007, $2,038,000 million was current with principal and
interest payments. Nonperforming loans were 1.20% of total loans at
June 30, 2007 as compared to 1.19% at June 30, 2006, also due to a decrease
in
total loans. For additional information on the allowance for loan
losses, see “Critical Accounting Policies” above, and see “Asset Quality” below
for additional discussion on loans.
Noninterest
Income
Noninterest
income for the fiscal years ended June 30, 2007 and 2006 was $7,944,827
and
$6,594,881, respectively, an increase of $1,349,946, or 20%, in fiscal
2007. Most of this increase was due to the increase in investment
brokerage and insurance commission income and gain from sale of
loans.
Fees
for
other services to customers of $1,042,648 decreased $71,433, or 6%, during
fiscal 2007. This decrease was due to lower transaction service fees
and overdraft fee revenue as compared to fiscal 2006.
Net
securities gains of $42,349 increased $25,014, or 144%, during fiscal
2007. The volume of securities sold in fiscal 2007 increased from
fiscal 2006. Gains from the sale of equity and bond securities are
subject to market and economic conditions, and there can be no assurance
that
gains reported in prior periods will be achieved in the future.
Gains
on
the sales of loans of $869,255 increased $560,478, or 182%, during fiscal
2006. This increase was primarily due to gains on the sales of
commercial loans of $455,680. Gains on the sales of residential real estate
loans were $413,575, an increase of $104,798 over fiscal 2006. Sold
loan volume is subject to changing interest rates. Fixed rate
residential real estate loans are sold to reduce our exposure to interest
rate
risk.
Investment
commission revenue of $2,385,118 increased $615,818, or 35%, during fiscal
2007. This increase was primarily due to adding investment brokers
and increased production from existing investment brokers.
Insurance
commissions of $2,330,435 increased $413,613, or 21%, during the fiscal
year
2007 due to the partial year impact of the acquisition of the Palmer, Sturtevant
& Ham, and Southern Maine insurance agencies. The
Russell Agency was acquired on June 28, 2007, the last business day of
fiscal 2007.
Bank
owned life insurance (BOLI) income of $388,613 increased $21,674, or 6%,
during
fiscal 2007. This increase was due to an increase in the average interest
yield,
net of mortality cost, to 3.85% in fiscal 2007 from 3.81% in fiscal
2006. The additions to cash surrender value are based on this average
interest yield. These interest rates are determined by the life
insurance companies and are reset quarterly or annually. Each
policy is subject to minimum interest rates.
Other
noninterest income of $806,524 decreased $197,473, or 20%, during fiscal
2007. This decrease was primarily due to the fiscal 2006
deposit premium received of $500,845 from the sale of the deposits and
certain
loans of the Lisbon Falls branch, with no such corresponding
transaction occurring in fiscal 2007. This decrease was partially
offset by an increase in trust fee revenue of $83,384, a change in gain
on the
sales of fixed assets of $202,326 and an increase in gains from the trading
of
covered call options of $31,412. The gain on the sale of fixed assets
in fiscal 2007 of $73,963 was primarily from the sale of the former
Lisbon Falls branch building and land compared to a loss on the sale of
fixed assets in fiscal 2006 of $128,363.
Noninterest
Expense
Noninterest
expense for fiscal years ended June 30, 2007 and 2006 was $20,075,186 and
$18,208,504, respectively, an increase of $1,866,682, or 10%. The
increase in fiscal 2007 was primarily due to an increase in salaries and
employee benefits and other expenses. Our efficiency ratio, noninterest
expense
as a percentage of the total of net interest income and noninterest income,
increased to 85.3% during fiscal 2007 from 72.0% in fiscal 2006. The decrease
in
net interest income in fiscal 2007 compared to the prior year was a significant
factor contributing to the increase in the efficiency ratio.
26
Salaries
and employee benefits expense of $12,022,037 increased $1,384,279, or 13%,
during the fiscal year 2007. This increase includes the incentive
compensation paid based on the gains on the sales of commercial loans and
insurance agency acquisition totaling $431,000, and the salary and benefits
for
new positions in residential real estate lending, investment brokerage
and the
insurance agencies. Total full-time equivalent
employees were 214 compared to 201 at June 30, 2007 and 2006,
respectively.
Occupancy
expense of $1,722,381 increased $49,876, or 3%, during the fiscal year
2007. This increase was primarily due to mold remediation for our
Bethel branch, the full year impact of the headquarters capital lease,
increased
amortization expense, increased utilities and real estate
taxes. These increases were partially offset by a decrease in rent
expense resulting from the consolidation of leased space during fiscal
2006.
Equipment
expense of $1,531,276 increased $91,038, or 6%, during the fiscal year
2007. Software depreciation expense and software licensing
amortization expense for Internet banking software and conversion fees
for the
insurance agency core system increased compared to fiscal year
2006. These expenses were partially offset by lower moving expenses
compared to that incurred in fiscal year 2006 due to relocating staff and
equipment to the Gateway Building in Lewiston.
Other
expense of $4,484,908 increased $267,933, or 6%, during fiscal year
2007. This increase was due to increases in loan expense, primarily
collection expenses incurred as delinquencies and workout loans increased
during
fiscal 2007, supplies expense, due to reprinting of forms for image processing
of customer transactions, computer services expense, resulting from
converting to image processing and a higher volume of investment brokerage
transactions, and business insurance. Other noninterest expense
includes other-than-temporary write downs on equity and non-marketable
securities of $50,442 and $248,482, respectively, for fiscal 2007 compared
to
$38,394 and $42,257, respectively, in fiscal 2006, an aggregate increase
of
$218,273. These other-than-temporary write downs resulted from the periodic
analysis by management of impaired securities whereby management determined
that
recovery of cost was unlikely within a reasonable period of time for certain
equity and non-marketable securities. Partially offsetting these
increases was a decrease of $51,698 in advertising expense and a decrease
in
dues and assessments of $47,356.
The
Company's effective tax rate was 23.5% and 31.7% for the fiscal years ended
June
30, 2007 and 2006, respectively. See Note 12 in the
Consolidated Financial Statements for additional information.
Comprehensive
Income
The
Company's comprehensive income was $2,594,600 and $2,051,917 during 2007
and
2006, respectively. Comprehensive income differed from our net income
in 2007 and 2006 due to the change in the fair value of available-for-sale
securities, net of income tax. In fiscal 2007, there was a net increase
in fair
value of $707,923 due to a net unrealized loss on investments
available-for-sale, net of income tax. There was a net decrease in
fair value in fiscal 2006 of $1,952,282. See the Consolidated
Statements of Changes in Shareholders' Equity and Note 16 in the Consolidated
Financial Statements for additional information.
Comparison
of Fiscal Years Ended June 30, 2006 and 2005
For
fiscal 2006, we reported net income of $4,004,199, or $1.59 per diluted
share,
as compared to $4,018,634, or $1.57 per diluted share, for the fiscal year
ended
June 30, 2005 ("fiscal 2005"), a decrease of $14,435, or less than
1%. This decrease was attributable to increased noninterest expense
which slightly exceeded the increase in noninterest income. The
return on average assets was 0.70% in fiscal 2006 compared to 0.71 % in
fiscal
2005. The return on average assets changed due to total average
assets increasing by $5.8 million, or 1%, compared to fiscal
2005. The return on average equity was 9.95% in fiscal 2006 and
10.39% in fiscal 2005. The decrease in our return on average equity
was due to decreased net income for those periods and an increase in average
equity of 4%.
Net
interest income decreased by less than 1% during fiscal 2006. This decrease
was
primarily due to a decrease in our net interest margin of 1 basis
point. Average interest earning assets increased approximately $5.4
million as compared to the average interest earning assets in fiscal 2005.
Of
the increase in average interest earning assets, average investment securities
increased $10.6 million and average loans decreased $4.8
million. Net interest margin, the ratio of net interest income
to average interest earning assets, decreased to 3.49% in fiscal 2006 from
3.50%
in fiscal 2005. Net interest spread, the difference between the yield
on interest earning assets and the cost of funds, decreased by 8 basis
points to
3.15% in fiscal 2006 from 3.23% in fiscal 2005. The Bank balance
sheet moved during fiscal 2006 from an asset sensitive profile, where the
yields
on assets reprice faster that the cost of funds, to a slightly liability
sensitive profile, where cost of funds reprice faster than the yields on
assets. Noninterest income increased 28% during fiscal 2006 primarily
from increased investment brokerage and insurance commission revenue, loan
servicing fees, gains on the sale of residential real estate loans, and
the gain
on sale of deposits. This increase was partially offset by lower net
securities gains. The provision for loan losses decreased 6%,
primarily resulting from a decrease in loans. Noninterest expense
increased 9% during fiscal 2006, which was primarily due to increases in
salaries and employee benefits expense, occupancy and equipment expense
associated with the consolidation of the Bank’s operations and administration
functions into a new Gateway headquarters in Lewiston and the full year
impact
of the Solon-Anson Insurance Agency acquisition (September, 2004), partially
offset by a decrease in other expense. Other expense in fiscal 2005
included a loss from the write-off of deferred issuance costs related to
trust
preferred securities redeemed on December 31, 2004.
27
Net
Interest Income
Net
interest income decreased by $11,484, or less than 1%, during fiscal 2006
primarily resulting from a decrease in the net interest margin. Average
interest earning assets increased $5.4 million during fiscal 2006, comprised
of
a $10.6 million increase in average investment securities, partially offset
by a
$4.8 million decrease in average loans and a $0.5 million decrease in
interest-bearing deposits (primarily with the Federal Home Loan Bank).
The
increase in average investment securities was due to increases in
mortgage-backed securities, pledged as eligible collateral for FHLB advances
and
securities sold under agreements to repurchase and municipal
securities. The decrease in average loans resulted from a decrease in
construction loans, commercial loans and commercial real estate loans of
$18.8
million, partially offset by increases in residential real estate loans
and
consumer loans of $3.0 million and $11.0 million, respectively. Origination
of
commercial loans and commercial real estate loans decreased by $60 million
in
fiscal 2006 compared to fiscal 2005. Average interest-bearing
deposits increased by $0.6 million, or 0.1%, during fiscal 2006, with the
increase primarily consisting of time deposits. Average certificates
of deposit increased by $43.7 million. All other interest-bearing
deposits decreased including average brokered time deposits, which decreased
by
$31.7 million, or 36%, reflecting a reduction in our use of wholesale
funding. Average repurchase agreements increased during fiscal 2006
by $0.9 million, or 3%. Average borrowings increased primarily due to
a new obligation under a capital lease. The yield on average interest earning
assets increased 48 basis points to 6.60% in fiscal 2006. The cost of
funds increased 56 basis points, to 3.45%, due to an increase in the cost
of
interest-bearing deposits, partially (offset by) a decrease in the costs
of
advances from the FHLB and junior subordinated debentures (refinanced in
fiscal
2005). Table 1 provided in Item 8 of this Form 10-K shows the
average balances, yields and rates of assets, liabilities, and stockholders’
equity of the Company for the past three years. The table below shows
the changes from 2005 to 2006 in net interest income by category due to
changes
in rate and volume.
|
Rate/Volume
Analysis for the Year Ended
June
30, 2006 versus June 30, 2005
|
||||||||||||
|
Difference
Due to
|
||||||||||||
|
Volume
|
Rate
|
Total
|
||||||||||
|
Investments
|
$ |
437,837
|
$ |
378,420
|
$ |
816,257
|
||||||
|
Loans,
net
|
(314,444 | ) |
2,338,463
|
2,024,019
|
||||||||
|
FHLB
deposits & other
|
(8,398 | ) |
68,098
|
59,700
|
||||||||
|
Total
interest-earning assets
|
114,995
|
2,784,981
|
2,899,976
|
|||||||||
|
Deposits
|
14,332
|
2,513,176
|
2,527,508
|
|||||||||
|
Repurchase
agreements
|
11,589
|
512,560
|
524,149
|
|||||||||
|
Borrowings
|
42,541
|
(300,440 | ) | (257,899 | ) | |||||||
|
Total
interest-bearing liabilities
|
68,462
|
2,725,296
|
2,793,758
|
|||||||||
|
Net
interest income
|
$ |
46,533
|
$ |
59,685
|
$ |
106,218
|
||||||
Rate/volume
amounts which are partly attributable to rate and volume are spread
proportionately between Volume and Rate based on the direct change attributable
to rate and volume. Borrowings in the table above include FHLB
advances, obligation under capital lease, and junior subordinated
debentures. The adjustments to interest income and yield to a fully
tax equivalent basis were $117,702 and $0 for the twelve months ended June
30,
2006 and 2005, respectively.
Provision
for Loan Losses
The
provision for loan losses in fiscal 2006 was $1,226,413, a decrease of
$75,187,
or 6%, compared to fiscal 2005. This decrease in the provision for
loan losses reflects the significant overall decrease in loans of approximately
$25.4 million and a decrease in net loan charge-offs. Although we
experienced higher loan delinquency, higher nonperforming loans, and higher
classified and criticized loans for fiscal 2006, the level of expected
loan
defaults and the level of loss did not increase. Net charge-offs were
$630,300 in fiscal 2006 compared to $774,600 in fiscal 2005. This
$144,300 decrease was in residential real estate, commercial real estate
loans
and consumer loans. Net charge-offs to average loans outstanding was 0.14%
in
fiscal 2006 compared to 0.17% in fiscal 2005.
The
allowance for loan losses at June 30, 2006 was $5,496,000 as compared to
$5,104,000 at June 30, 2005, an increase of $392,000, or 8%. This
increase was net of $204,000 reclassified from the allowance for loan losses
to
a separate reserve account for off-balance credit risk (unadvanced lines
of
credit and loan commitments) included in other liabilities. This off-balance
credit risk had been included in the allowance for loan loss in prior years.
The
ratio of the allowance to total loans was 1.26% at June 30, 2006 compared
to
1.11% at June 30, 2005. The ratio of the allowance for loan losses to
nonperforming loans was 106% at June 30, 2006 and 301% at June 30, 2005,
reflecting an increase of $3.5 million in nonperforming loans, to $5.2
million,
primarily from nonperforming commercial real estate and commercial
loans. Of total non-performing loans at June 30, 2006, $1.9 million
was current with principal and interest payments. Nonperforming loans
were 1.19% of total loans at June 30, 2006 as compared to 0.37% at June
30,
2005, also due to the increase in nonperforming loans at June 30, 2006
and a
decrease in total loans. For additional information on the allowance
for loan losses, see “Critical Accounting Policies” above, and see “Asset
Quality” below for additional discussion on loans.
28
Noninterest
Income
Noninterest
income for the fiscal years ended June 30, 2006 and 2005 was $6,594,881
and
$5,151,179, respectively, an increase of $1,443,702, or 28%, in fiscal
2006. Most of this increase was due to the increase in investment
brokerage and insurance commission revenue and a gain from the sale of
the
deposits and certain loans of the Lisbon Falls branch.
Fees
for
other services to customers of $1,114,081 increased $46,965, or 4%, during
fiscal 2006. This increase was due to higher transaction service
fees, overdraft fees, and ATM and debit card fee revenue as compared to
fiscal
2005.
Net
securities gains of $17,335 decreased $50,605, or 74%, during fiscal
2006. The volume of securities sold in fiscal 2006 decreased from
fiscal 2005. Gains from the sale of equity and bond securities are
subject to market and economic conditions and there can be no assurance
that
gains reported in prior periods will be achieved in the
future. Other-than-temporary write-downs on equity securities of
$38,394 and $27,849 during fiscal 2006 and 2005, respectively, were included
in
noninterest expense.
Gains
on
the sales of loans of $308,777 increased $75,750, or 33%, during fiscal
2006. This increase was primarily due to a higher sales volume of
residential real estate loans, which increased by $4 million, to $15
million, in fiscal 2006 compared to $11 million in fiscal 2005. Sold
loan volume was impacted by 30 year fixed rate residential real estate
loan
origination volume, which is subject to changing interest rates, and a
shift in
the demand for loans with fixed or adjustable interest rates. The
Bank continues to hold in portfolio all new 15 year fixed rate loans and
all
adjustable rate loans. Residential real estate loans were sold to reduce
our
exposure to interest rate risk.
Investment
commission revenue of $1,769,300 increased $314,437, or 22%, during fiscal
2006. This increase was primarily due to adding investment brokers
and increased production from existing investment brokers.
Insurance
commissions of $1,916,822 increased $512,787, or 37%, during the fiscal
year
2006 due to the full year impact of the acquisition of the Solon Anson
Insurance
Agency (September 2004) and increased contingency payments from insurance
carriers based on loss experience.
BOLI
income of $366,939 increased $36,239, or 11%, during fiscal 2006. This
increase
was due to an increase in the average interest yield to 4.21% in fiscal
2006
from 4.15% in fiscal 2005. The additions to cash surrender value are
based on this average interest yield. These interest rates are
determined by the life insurance companies and are reset quarterly or
annually. Each policy is subject to minimum interest
rates.
Other
income of $1,003,997 increased $511,273, or 104%, during fiscal
2006. This increase was primarily due to the deposit premium received
of $500,845 from the sale of the deposits and certain loans of the
Lisbon Falls branch to Androscoggin Bank. Trust fee revenue also increased
by $109,266. The deposit premium and increased trust fees were
partially offset by change in loss on the disposal of fixed assets of
$188,082. The latter represents costs written off for a new branch
site which was abandoned in fiscal 2006. A $59,719 gain was realized in
fiscal
2005 from the sale of our former Richmond branch building.
Noninterest
Expense
Noninterest
expense for fiscal years ended June 30, 2006 and 2005 was $18,208,504 and
$16,684,174, respectively, an increase of $1,524,330, or 9%. The
increase in fiscal 2006 was primarily the result of an increase in salaries
and
employee benefits and occupancy and equipment expenses. Our
efficiency ratio increased to 72.0% during fiscal 2006 from 69.9% in fiscal
2005
due to increased noninterest expense.
Salaries
and employee benefits expense of $10,637,758 increased $1,083,441, or 11%,
during the fiscal year 2006. This increase includes the salary and
benefits for new positions in commercial lending, investment brokerage,
insurance agency, trust, and risk management divisions. Total
full-time equivalent employees were 201 compared to 193 at June 30, 2006
and
2005, respectively. Deferred compensation expense related to
the Solon-Anson Insurance acquisition was $399,845, an increase of $301,769
compared to fiscal 2005.
Occupancy
expense of $1,672,505 increased $253,809, or 18%, during the fiscal year
2006. This increase was primarily due to the relocation of our
commercial, administration and operations to the new Southern Gateway building
in Lewiston, completed in August 2005. Expenses contributing to this
increase were amortization of capital lease asset, depreciation of leasehold
improvements and real estate taxes. Repairs to the
Mechanic Falls branch for mold remediation increased building repairs by
$25,305. Higher heating fuel oil costs increased utilities expense by
$55,611.
29
Equipment
expense of $1,440,238 increased $330,130, or 30%, during the fiscal year
2006. As with occupancy expense, moving expense and increased
depreciation expense from new furniture and equipment for the new Southern
Gateway building accounted for most of this increase. Additional licensing
fees for our core operating system for new customer relationships also
contributed to this increase.
Other
expense of $4,216,975 decreased $134,377, or 3%, during fiscal year
2006. This decrease was due in part to the $396,425 loss recognized
in fiscal 2005 from the write-off of unamortized deferred issuance costs
related
to the redemption of the 9.60% trust preferred stock. Also
contributing to this decrease was other-than-temporary write downs on equity
and
non-marketable securities of $38,394 and $42,257, respectively, for fiscal
2006
compared to $27,849 and $96,931, respectively, in fiscal 2005, an aggregate
decrease of $44,129. These other-than-temporary write downs resulted from
the
periodic analysis by management of impaired securities whereby management
determined that recovery of cost was unlikely within a reasonable period
of time
for certain equity and non-marketable securities. Partially
offsetting this decrease was an increase of $155,719 in advertising expense
resulting from increased use of television advertising, and an increase
of
$108,841 in computer services expenses resulting from higher investment
brokerage transaction costs, increased processing fees from higher trust
activity, increased internet banking costs from higher customer enrollment
and
conversion costs and core system users in the insurance agency.
Taxes
The
Company's effective tax rate was 31.7% and 31.5% for the fiscal years ended
June
30, 2006 and 2005, respectively. See Note 12 in the
Consolidated Financial Statements for additional information.
Comprehensive
Income
The
Company's comprehensive income was $2,051,917 and $4,745,415 during 2006
and
2005, respectively. Comprehensive income differed from our net income
in 2006 and 2005 due to the change in the fair value of available-for-sale
securities, net of income tax. In fiscal 2006, there was a net decrease
in fair
value of $1,952,282 due to a net unrealized loss on investments
available-for-sale, net of income tax. There was a net increase in
fair value in fiscal 2005 of $726,781. See the Consolidated
Statements of Changes in Stockholders' Equity and Note 16 in the Consolidated
Financial Statements for additional information.
FINANCIAL
CONDITION
The
Company's total assets decreased $6,116,822, or 1%, to $556,800,980 at
June 30,
2007 compared to $562,917,802 at June 30, 2006. This decrease was
primarily due to a $10,091,111 decrease in total loans, primarily construction,
commercial real estate and commercial loans, partially offset by an $4,663,322
increase in goodwill and intangibles created from the acquisition of four
insurance agencies. The cash flow from the decrease in loans was
utilized to repay brokered time deposits at maturity. Also, advances
from the FHLB increased $17,128,100 to replace the funding of brokered
time
deposits. Stockholders' equity totaled $40,849,878 and $39,096,125 at
June 30, 2007 and 2006, respectively, an increase of
$1,753,753. Stockholders' equity was increased by net income of
$1,886,677, a decrease in net unrealized losses on available-for-sale securities
of $707,923, proceeds from the exercise of previously granted stock options
of
$6,550 and stock issued of $103,000 in connection with the purchase of
branch
real estate. These increases were offset by share repurchases and
retirements of $67,944 and payment of cash dividends of $882,453.
Cash
and
Cash Equivalents
Average
cash and cash equivalents (cash and due from bank and short-term investments)
decreased $1,258,962, to $11,174,060, in fiscal 2007 as compared to $12,433,022
in fiscal 2006. This decrease was due to the transfer of our clearing
activity to Banker’s Bank Northeast, reducing reserves balances maintained at
the Federal Reserve Bank of Boston.
Investments
Securities and Other Interest-earning Assets
The
average balance of the available-for-sale securities portfolio was $84,705,459
and $80,050,271 for fiscal 2007 and fiscal 2006, respectively. This
increase of $4,655,188, or 6%, provided additional collateral for FHLB
advances
and securities sold under agreements to repurchase. The portfolio is
comprised of U.S. Government-sponsored enterprises, mortgage-backed securities,
municipal securities, and equity and bank-issued trust preferred securities,
with most of our investment portfolio consisting of federal agency
mortgage-backed securities and short-term U.S. Government-sponsored enterprise
bonds. See Item 8, Tables 2 and 3, for a detail of
available-for-sale securities and investment maturities,
respectively.
All
of
the Company's securities are classified as available-for-sale and were
carried
at fair value of $86,348,070 and $86,137,707 as of June 30, 2007 and 2006,
respectively. These securities had net unrealized losses after taxes
of $1,914,546 at June 30, 2007 and $2,622,469 at June 30, 2006. See
Note 2 to the Consolidated Financial Statements. These unrealized
losses do not impact net income or regulatory capital, but are recorded
as an
adjustment to stockholders' equity, net of related deferred income taxes,
and
are a component of comprehensive income contained in the Consolidated Statements
of Changes in Stockholders' Equity.
30
Loans
The
average balance for loans, including loans held for sale, was $433,576,281
in
fiscal 2007, compared to $448,610,511 in fiscal 2006. This decrease of
$15,034,230, or 3%, in our average balance for loans at June 30, 2007,
was
attributable to decreases in average residential real estate, commercial
real
estate, commercial, and construction loans, partially offset by an increase
in
average consumer loans. See Item 8, Tables 4 and
5, for additional information on the composition of the loan
portfolio and loan maturities, respectively.
Residential
real estate loans averaged $147,432,431 in fiscal 2007, as compared to
$149,940,456 in fiscal 2006. This decrease of $2,508,025, or 2%, was
attributable to a decrease in residential real estate loans and home equity
lines of credit. We continued to sell most of the 15 year and 30 year
fixed rate residential real estate loans originated by us into the secondary
market. Residential real estate loans were 34% of the total loan
portfolio at both June 30, 2007 and 2006, respectively. Of
residential real estate loans at June 30, 2007, approximately 37% were
variable
rate products, compared to 43% at June 30, 2006. This decrease in the percentage
of variable rate products resulted from customers replacing variable rate
products with fixed rate products, which were subsequently sold into the
secondary market. We expect variable rate residential real estate
loans to decrease, causing the liability sensitivity of the consolidated
balance
sheet to increase.
Commercial
real estate and commercial loans both decreased during fiscal
2007. The decrease reflects the Bank’s tightening of credit
underwriting standards as delinquencies and classified and criticized commercial
loans increased and priced the origination of these loans to reflect
risk. Generally, competition for new and renewing commercial real
estate and commercial loans has been intense. Frequently, the
interest rates offered by competing banks appeared not to factor in credit
risk.
Commercial
real estate loans averaged $116,384,948 in fiscal 2007 and $121,279,403
in
fiscal 2006. This decrease of $4,894,455, or 4%, reflects the factors
noted above. Our focus was to lend primarily to small businesses
within our market areas. This portfolio consists of loans secured
primarily by income-producing commercial real estate and multifamily residential
real estate. Commercial real estate loans were 26% of the total loan
portfolio at both June 30, 2007 and 2006, respectively. Approximately
94% of the commercial real estate loans were variable rate product, with
this
portfolio reflecting our desire to minimize the interest rate risk, compared
to
approximately 96% of this portfolio at June 30, 2006.
Construction
loans averaged $7,009,832 in fiscal 2007 and $8,840,891 in fiscal
2006. This decrease of $1,831,059, or 21%, was primarily in
commercial construction loans. Construction loans were 1% of the
total loan portfolio at June 30, 2007 and 2006, respectively. Most
construction loans are subject to interest rates based on the prime rate,
have
contractual maturities less than 12 months, and disbursements are made
on
construction as completed and verified by inspection. Approximately
60% of the construction loans were variable rate product at June 30, 2007,
compared to approximately 30% at June 30, 2006.
Commercial
loans averaged $44,762,107 in fiscal 2007 and $58,416,018 in fiscal
2006. This decrease of $13,653,911, or 23%, reflects the above
factors and reduced warehouse lines of credit. Commercial loans were
10% and 12% of total loans at June 30, 2007 and 2006,
respectively. Variable rate products comprised 58% and 56% of this
loan portfolio at June 30, 2007 and 2006, respectively. The commercial
loan
credit risk exposure is highly dependent on the cash flow of the customer's
business. The Company mitigates credit risk by strictly adhering to
our underwriting and credit policies.
Consumer
and other loans averaged $115,314,393 in fiscal 2007 and $107,591,979 in
fiscal
2006. This increase of $7,722,414, or 7%, was attributable to new
recreational vehicle loans. Consumer and other loans comprised 29%
and 26% of total loans at June 30, 2007 and 2006,
respectively. Consumer, including indirect auto and recreational
vehicle, and other loans are mostly fixed rate products. At June 30,
2007 and 2006, we held $36,808,246 and $39,075,798 of indirect auto loans,
respectively. Indirect auto, indirect RV and indirect mobile home
loans together comprised approximately 95% of total consumer and other
loans, a
slight decrease from 96% in 2006. The detail of consumer loans at
June 30, 2007 and 2006 appears in the following table. The
Company underwrites all automobile dealer financed recreational vehicle
and
mobile home loans to protect credit quality. The Company pays a
nominal one-time origination fee on these loans. The fees are
deferred and amortized over the contractual life of the loan as a yield
adjustment. Management attempts to mitigate credit and interest rate
risk by keeping the products offered short-term, earning a rate of return
commensurate with the risk, and lending to individuals in the Company's
known
market areas. We did experience an increase in consumer loan
delinquency to 1.78% from 1.45%, and an increase in the net charge-off
of
consumer loans to $443,000 from $286,000 for the fiscal years ended June
30,
2007 and 2006, respectively.
|
Consumer Loans
|
||||||||||||||||
|
June
30, 2007
|
%
of Total
|
June
30, 2006
|
%
of Total
|
|||||||||||||
|
Indirect
Auto
|
$ |
36,808,246
|
31 | % | $ |
39,075,798
|
35 | % | ||||||||
|
Indirect
RV
|
51,611,223
|
43 | % |
41,111,060
|
36 | % | ||||||||||
|
Indirect
Mobile Home
|
24,961,562
|
21 | % |
28,212,411
|
25 | % | ||||||||||
|
Subtotal Indirect
|
113,381,031
|
95 | % |
108,399,269
|
96 | % | ||||||||||
|
Other
|
5,499,692
|
5 | % |
4,793,128
|
4 | % | ||||||||||
|
Total Consumer Loans
|
$ |
118,880,723
|
100 | % | $ |
113,192,397
|
100 | % | ||||||||
31
BOLI
averaged $9,082,562 in fiscal 2007 and $8,717,180 in fiscal 2006. One
new general account policy was purchased in fiscal 2007 for
$600,000. BOLI assets were invested in the general account of three
insurance companies and separate accounts in a third quality insurance
company. A general account policy’s cash surrender value is supported
by the general assets of the insurance company. A separate account
policy’s cash surrender value is supported by assets segregated from the general
assets of the insurance company. Standard and Poor's rated
these companies AA- or better at June 30, 2007. Interest earnings,
net of mortality costs, increase the cash surrender value. These
interest earnings are based on interest rates reset each year, subject
to
minimum interest rates. The increases in cash surrender value offset
all or a portion of the increase in employee benefit costs. The
increase in cash surrender value was recognized in other income and was
not
subject to income taxes. Borrowing on or surrendering the policy may
subject the Bank to income tax expense on the increase in cash surrender
value. For these reasons, management considers BOLI an illiquid
asset. BOLI represented 21.12% of capital plus the allowance
for loan losses at June 30, 2007.
Goodwill
and intangible average assets were $1,404,753 and $3,015,589, respectively,
for
fiscal 2007, and $407,897 and $2,048,461, respectively, for fiscal
2006. These increases resulted from the acquisition of four insurance
agencies during fiscal 2007. The allocation of the purchase price
paid for the four insurance agency acquisitions in excess of tangible assets
acquired added $2,472,906 to goodwill and $2,505,000 to intangibles in
the form
of customer lists and non-compete agreements. These intangibles are
being amortized over lives from 5 to 18 years, with an average of 12.55
years. Goodwill and intangibles are subject to impairment testing
annually. No impairment expense was recognized in fiscal
2007.
Deposits
Average
demand deposit accounts were $35,420,046 for the year ended June 30, 2007
as
compared to $39,161,547 in fiscal 2006. The increase of $3,741,501,
or 10%, was related to the loss of commercial real estate and commercial
loans
during fiscal 2007.
Average
interest-bearing deposits decreased by $13,513,511, or 4%, during fiscal
2007 to
$342,601,166. This decrease was primarily due to decreased brokered
time deposits and non-maturing, interest-bearing deposits. Average
certificates of deposit balances increased $19,445,872, to $218,915,654,
primarily from the promotion of time deposits as interest rates remained
high
during fiscal 2007. This increase allowed the Bank to decrease
brokered time deposits as they matured. Average brokered time deposit
balances decreased $18,777,144, or 33%, to $37,352,470 in fiscal 2007 from
$56,129,614 in fiscal 2006. All other non-maturing interest-bearing
deposits decreased during fiscal 2007. NOW, money market, and savings
balances declined as customers moved balances to higher yielding time
deposits. Average NOW accounts decreased $5,301,826, or 9%, during
fiscal 2007 to $54,666,850. The average interest rate paid on NOW
accounts increased from 1.93% in fiscal 2006 to 2.26% in fiscal
2007. Average money market accounts decreased $3,735,870, or 29%, to
$9,357,336 in fiscal 2007. The average interest rate paid on money
market accounts increased from 1.88% in fiscal 2006 to 2.36% in fiscal
2007. Average savings accounts decreased $5,144,543, or 19%, to
$22,308,856 during fiscal 2007. The average interest rate paid on
savings accounts increased from 0.83% in fiscal 2006 to 0.87% in fiscal
2007. The average interest rate paid on certificates of deposit
increased from 3.72% in fiscal 2006 to 4.62% in fiscal 2008. See Item
8, Table 10, for the scheduled maturities of certificates of deposit of
$100,000
or more.
We
use
brokered time deposits as part of our overall funding strategy and as an
alternative to retail certificates of deposits, FHLB advances, and junior
subordinated debentures, to fund the growth of our earning
assets. These deposits are limited by policy to 25% of total assets
and individual brokered time deposit maturities do not exceed $5 million
in any
one month. We use five national brokerage firms to source time
deposits, which are obtained through agents of the brokerage company soliciting
customers from throughout the United States. The terms of these
brokered time deposits allow for termination prior to maturity only in
the case
of the depositor’s death, have maturities generally beyond one yearand have
interest rates equal to or slightly above comparable FHLB
advances. At June 30, 2007, outstanding brokered time deposits of
$22,546,163 as a percentage of total assets was 4.05%, compared to 9.21%
at June
30, 2006. The average interest rate paid on brokered time deposits
increased from 3.58% in fiscal 2006 to 4.69% in fiscal 2007. Generally,
interest
rates paid on brokered time deposits exceed rates paid on FHLB advances
with
similar maturities, but the incremental interest expenses did not have
a
material impact on the results of operations for fiscal 2007.
32
Other
Funding Sources
Borrowings,
which consist of securities sold under repurchase agreements and other
sweep
accounts, Federal Home Loan Bank of Boston (FHLB) advances and junior
subordinated debentures are the Company's sources of funding other than
deposits.
Average
short-term borrowings during fiscal 2007 were $36,144,925, compared to
$31,427,133 during fiscal 2006. The increase of $4,717,792, or 15%,
was due to one existing customer. This liability was
collateralized by U.S. government-sponsored enterprise and federal agency
mortgage-backed securities. See Note 8 to the Consolidated Financial
Statements.
Average
FHLB advances for fiscal 2007 were $79,209,913, compared to $79,648,575
in
fiscal 2006. This decrease was $438,662, or 1%. These
advances had an average cost of 4.84% during fiscal 2007 compared to 4.40%
during fiscal 2006. At June 30, 2007 and 2006, FHLB advances were
$93,016,698 and $75,888,598, respectively. The Company had unused
advance capacity with the FHLB of $19,576,000 at June 30,
2007. Management intends to increase available FHLB advance
capacity by continuing to add qualifying securities. See Note 8 to
the Consolidated Financial Statements.
The
Bank
has a secured line of credit under the Borrower in Custody program through
the
Fed Discount Window. Under the terms of this credit line, the Bank
has pledged its indirect auto loans, and the line bears an interest rate
equal
to the then current federal funds rate plus 1.00%. At June 30, 2007,
the credit availability under the Borrower in Custody program was
$28,690,000. There were no borrowings outstanding under this credit
line at June 30, 2007.
The
following is a summary of the unused borrowing capacity of the Bank at
June 30,
2007 and available to meet our short-term funding needs:
|
Brokered
time deposits
|
$ 116,654,000
|
Subject
to policy limitation of 25% of total assets
|
|
Federal
Home Loan Bank of Boston
|
$
19,576,000
|
Unused
advance capacity subject to eligible and qualified
collateral
|
|
Fed
Discount Window Borrower-in-Custody
|
$
28,690,000
|
Unused
credit line subject to the pledge of indirect auto
loans
|
|
Total
Unused Borrowing Capacity
|
$ 164,920,000
|
We
had
outstanding $16,496,000 at June 30, 2007 and 2006, respectively, of junior
subordinated debentures issued by us to affiliated trusts. See “Capital” for
more information on junior subordinated debentures and affiliated
trusts.
ASSET
QUALITY
We
monitor our asset quality with lending and credit policies which require
the
regular independent review of our loan portfolio. We maintain an
internal rating system which provides a process to regularly monitor the
credit
quality of our loan portfolio.
At
June
30, 2007 and 2006, the allowance for loan losses was $5,756,000 and $5,496,000,
respectively. The increase in the allowance for loan losses was
attributed to the increasing mix of consumer indirect loans with a higher
risk
profile in the Bank's loan portfolio, the increase in loan delinquencies
and an
increase in internally classified and criticized loans.
The
allowance for loan losses as a percentage of total loans was 1.35% and
1.26% at
June 30, 2007 and 2006, respectively. This increase of 9 basis points
was attributable to a decline in loans in fiscal 2007 compared to fiscal
2006.
Classified
loans, exclusive of non-performing loans, that could potentially become
non-performing due to delinquencies or marginal cash flows were $2,542,000
and
$3,349,000 at June 30, 2007 and 2006, respectively. Significant
credit losses are not expected.
33
The
following table reflects the annual trend of total delinquencies 30 days
or more
past due, including loans on non-accrual status, which are not delinquent,
as a
percentage of total loans:
|
06/30/07
|
06/30/06
|
06/30/05
|
06/30/04
|
|
2.90%
|
2.09%
|
1.09%
|
1.13%
|
The
delinquency for the years prior to June 30, 2006 have been restated because
we
changed the method of measuring past due loans to the number of days lapsed
from
the date of last payment from the number of payments past due. For
the years ended June 30, 2005 and 2004, the previously reported delinquency
and
current non-accrual loans were 0.96% and 0.66%, respectively.
Non-performing
Assets
Total
non-performing loans were $5,090,000 and $5,195,000 at June 30, 2007 and
2006,
respectively. This decrease of $105,000, or 2%, was attributable
primarily to commercial real estate and commercial loans. Of
non-performing commercial real estate and commercial loans, $627,000 and
$1,411,000, respectively, were current and paying as
agreed. Many of these substandard loans were subject to a
name-by-name review determining the risk of loss based on the liquidation
of the
collateral. This risk of loss is incorporated in determining the
adequacy of the allowance for loan losses and represented approximately
13% of
the allowance at June 30, 2007. The following table represents the
non-performing loans as of June 30, 2007 and 2006.
|
Description
|
June
30, 2007
|
June
30, 2006
|
||||||
|
Residential
real estate
|
$ |
477,000
|
$ |
521,000
|
||||
|
Commercial
real estate
|
2,033,000
|
2,980,000
|
||||||
|
Commercial
loans
|
2,104,000
|
1,553,000
|
||||||
|
Consumer
and other
|
476,000
|
141,000
|
||||||
|
Total
non-performing
|
$ |
5,090,000
|
$ |
5,195,000
|
||||
Non-performing
loans as a percentage of total loans were 1.20% and 1.19% at June 30, 2007
and
2006, respectively. The allowance for loan losses was equal to 113%
and 106% of total non-performing loans at June 30, 2007 and 2006,
respectively. At June 30, 2007, non-performing loans included
$2,038,000 of loans 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 total delinquencies
30 days and more past due as a percentage of total assets would be 2.42%
and
1.66% for June 30, 2007 and 2006, respectively.
See
Item
8 Table 8 for a summary of non-performing assets for the last five
years.
We
continue to focus on asset quality issues and allocate significant resources
to
credit policy and loan review. The collection, workout and asset
management functions focus on the reduction of non-performing
assets. Despite this ongoing effort on asset quality, there can be no
assurance that adverse changes in the real estate markets and economic
conditions will not result in higher non-performing assets levels in the
future
and negatively impact our operations through higher provision for loan
losses,
net loan charge-offs, decreased accrual of income and increased noninterest
expenses.
Residential
real estate, commercial real estate, commercial, and consumer and other
loans
are generally placed on nonaccrual when reaching 90 days past
due. Secured consumer loans are written down to realizable value and
unsecured consumer loans are charged-off upon reaching 90 days past
due. Based on our judgment, we may place on nonaccrual
status loans which are currently less than 90 days past due or performing
in
accordance with their terms but are likely to present future principal
and/or
interest repayment problems and thus become classified as
non-performing.
Net
charge-offs were $729,000 during 2007, compared to $630,000 in
2006. Net charge-offs as a percentage of average loans outstanding
were 0.17% and 0.14% in 2007 and 2006, respectively. The increase of
$99,000 was due to higher gross charge-offs in indirect consumer loans
and
commercial loans. See Item 8 Table 6 for more information
concerning charge-offs and recoveries for the last five years.
Potential
Problem Loans
Commercial
real estate and commercial loans are periodically evaluated under an eight
point
risk rating system. These ratings are guidelines in assessing the
risk of a particular loan. We had classified commercial real estate
and commercial loans totaling $15,011,000 and $12,228,000 at June 30, 2007
and
2006, respectively, as substandard or lower under our risk rating
system. This increase was primarily due to commercial customer
relationships experiencing weaknesses in the underlying businesses and
also
reflects a tightening of our credit standards. These loans were
subject to our internal name-by-name review for the risk of loss based
on the
liquidation of collateral. This risk of loss was included in
determining the adequacy of the allowance for loan loss. At June 30,
2007, $3,935,000 of this amount was non-performing commercial real estate
and
commercial loans. The remaining $11,076,000 of commercial real estate
and commercial loans classified as substandard at June 30, 2007 evidence
one or
more weaknesses or potential weaknesses and may become non-performing loans
in
future periods.
34
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 and change
the level
of the 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. The liquidation value of
collateral for each classified commercial real estate or commercial loan
is
considered in the evaluation of the allowance for loan loss.
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 allowance for loan losses in the future as a result of changing economic
conditions, adverse markets for real estate or other
factors. Regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. These 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. No such
adjustments were proposed by the Federal Reserve Bank of Boston or the
Maine
Bureau of Financial Institutions based on their 2007 examination.
At
June
30, 2007, the Company had no acquired assets, compared to $10,384 at June
30,
2006. The decrease of $10,384 was due to a change in accounting for
repossessed vehicles and no in substance foreclosures at June 30,
2007. The collateral for indirect loans is written down
to its estimated realizable value once the loan reaches 90 days or more
delinquent. We continue to carry it as a loan, on non-accrual
status, until sold. Gains and losses on disposition are recognized as
recoveries and additional charge-offs, respectively. Total indirect
loans 90 days or more past due at June 30, 2007 and included in consumer
loans
were $199,000. See Note 5 of the Consolidated Financial Statements
for additional information. Management periodically receives
independent appraisals on acquired assets. As a result of this review
and the review of the acquired assets portfolio, the Company believes the
allowance for losses on acquired assets is adequate to state acquired assets
at
lower of cost or fair value less estimated selling costs.
A
reserve
for off-balance sheet credit risk was created in fiscal 2006. At June
30, 2006, this account balance was $204,086, compared to $178,818 at June
30,
2007. The adequacy of this balance is subject to the similar analysis
as the allowance for loan losses by taking into consideration the unadvanced
lines of credit for commercial and home equity loans, letters of credit
and
commitments to make loans.
RISK
MANAGEMENT
Asset-Liability
Management
The
Company's operating results are largely dependent upon its ability to
manage interest rate risk. Interest rate risk can be defined as the exposure
of
the Company's net interest income to adverse movements in interest rates.
Although the Company regularly manages other risks, such as credit and
liquidity
risk, in the normal course of its business, management considers interest
rate
risk to be its most significant market risk and it could potentially have
the
most material effect on the Company's financial condition and results of
operations. The Company does not believe that it is exposed to
significant market risk from trading activities because these activities
are not
material.
Asset-liability
management is governed by policies reviewed and approved annually by the
Board. The Board delegates responsibility for asset-liability
management to the Asset Liability Management Committee (ALCO) which is
comprised
of members of senior management who set the strategic directives that guide
the
day-to-day asset-liability management activities. ALCO reviews and
approves all major risk, liquidity and capital management programs, except
for
pricing, which is a subcommittee of ALCO members.
The
Company continues to attempt to minimize the volatility of its net interest
margin by managing the relationship of interest-rate sensitive assets to
interest-rate sensitive liabilities. To accomplish this, management undertakes
steps to increase the percentage of variable rate assets as a percentage
of its
total earning assets. The focus has been to originate variable rate commercial
and commercial real estate loans, which reprice or mature more quickly
than
similar fixed-rate loans. Variable rate residential real estate
loans are originated for the loan portfolio. Fixed
rate residential real estate loans are originated for sale to the secondary
market. Consumer loans, including indirect auto and recreational vehicle
loans,
are primarily originated with fixed rates. The Company's
adjustable-rate loans are primarily tied to published indices, such as
the Wall
Street Journal prime rate and one-year U.S. Treasury Bills. Management
considers
the Bank's assets and liabilities well matched. The balance sheet is
slightly liability sensitive.
The
overall objective of interest rate risk management is to deliver consistent
net
interest income growth over a range of possible interest rate
environments. We focus on interest rates, careful review of the cash
flows of loans and deposits and other modeling assumptions and asset liability
strategies to help attain our goals and objectives.
Another
objective of interest rate risk management is to control our estimated
exposure
to interest rate risk within limits established by the asset/liability
committee
and approved by our Board. These limits reflect our tolerance for
interest rate risk over a wide range of both short-term and long-term
measurements. We also evaluate risk through liquidation or
run-off measures of assets and liabilities on our balance sheet and stress
test
measures. Stress testing demonstrates the impact of very extreme but
lower probability events. The combination of these measures gives
management a comprehensive view of the possible risk to future
earnings. We attempt to control interest rate risk by identifying and
quantifying these risks.
35
Net
interest income is our largest source of revenue. Net interest income
sensitivity is our primary short-term measurement used to assess the interest
rate risk of our on-going business. We believe that net interest
income sensitivity gives us the best perspective on how day-to-day decisions
affect our interest rate risk profile. We subject estimated net
interest income over a 12 month period to various rate movements using
a
simulation model for various specified interest rate
scenarios. Simulations are run quarterly and include scenarios where
market rates are shocked up and down. Our base simulation assumes
that rates do not change for the next 12 months. The sensitivity
measurement is calculated as a percentage variance of the net interest
income
simulations to the base simulation results. The results are compared to
policy
guidelines and are disclosed in the following table.
Assuming
a 200 basis point increase and decrease in interest rates starting on June
30,
2007, we estimate that our net interest income in the following 12 months
would
decrease by 1.80% if rates went up 200 basis points and increase by 4.60%
if
rates went down 200 basis points. This demonstrates the liability
sensitivity of our balance sheet where the simulated increase in interest
expense would be greater than the increase in interest income because our
interest-bearing liabilities reprice more quickly than the repricing of
our
interest-bearing assets. In a falling rate environment, the
interest-bearing liabilities reprice downward more quickly than the repricing
of
our interest-bearing assets. Also shown in the table are the results
assuming a 200 basis increase and decrease in interest rates starting June
30,
2006.
|
Up
200 Basis Points
|
Down
200 Basis Points
|
||
|
June
30, 2007
|
-1.80%
|
4.60%
|
|
|
Up
200 Basis Points
|
Down
200 Basis Points
|
||
|
June
30, 2006
|
-0.17%
|
2.33%
|
LIQUIDITY
On
a
parent Company only basis, our commitments and debt service requirements
at June
30, 2007 consisted of junior subordinated notes issued to NBN Capital Trust
II
and NBN Capital Trust III totaling $6,186,000 due March 30, 2034 and junior
subordinated debentures issued to NBN Capital Trust IV totaling $10,310,000
due
February 23, 2035. NBN Capital Trust II issued $3,093,000 of junior
subordinated notes with a variable interest rate based on three month LIBOR
plus
2.80% and which reprice quarterly. The interest rate was 8.16% at
June 30, 2007. NBN Capital Trust III also issued $3,093,000 of junior
subordinated notes with a fixed interest rate of 6.50% until March 30,
2009,
when the interest rate will become variable based on three month LIBOR
plus
2.80%. NBN Capital Trust IV issued $10,310,000 of junior subordinated
debentures with a fixed interest rate of 5.88% until February 23, 2010,
when the
interest rate will become variable based on three month LIBOR plus
1.89%. NBN Capital Trust II and III have a call option on March 30,
2009 and NBN Capital Trust IV has a call option on February 23,
2010. See Note 18 to the Consolidated Financial
Statements. Based on the interest rates at June 30, 2006, the annual
aggregate payments to meet the debt service of the junior subordinated
debentures is approximately $1,060,000.
|
Affiliated
Trusts
|
Trust
Preferred Securities
|
Common
Securities
|
Junior
Subordinated Debentures
|
Interest
Rate
|
Maturity
Date
|
|||||
|
NBN
Capital Trust II
|
$
3,000,000
|
$
93,000
|
$
3,093,000
|
8.16%
|
March
30, 2034
|
|||||
|
NBN
Capital Trust III
|
3,000,000
|
93,000
|
3,093,000
|
6.50%
|
March
30, 2034
|
|||||
|
NBN
Capital Trust IV
|
10,000,000
|
310,000
|
10,310,000
|
5.88%
|
February
23, 2035
|
|||||
|
Total
|
$ 16,000,000
|
$ 496,000
|
$ 16,496,000
|
6.42%
|
The
principal sources of funds for us to meet parent-only obligations are dividends
from our banking subsidiary, which are subject to regulatory limitations,
and
borrowings from public and private sources. For information on the
restrictions on the payment of dividends by our banking subsidiary, see
Note 9
to the Consolidated Financial Statements.
For
our
banking subsidiary, liquidity represents the ability to fund asset growth,
accommodate deposit withdrawals and meet other contractual obligations
and
commitments. Liquidity risk is the danger that a bank cannot meet
anticipated or unexpected funding requirements or can meet them only at
excessive cost. Liquidity is measured by the ability to raise cash
when needed at a reasonable cost. Many factors affect a bank's
ability to meet liquidity needs, including variation in the markets served,
its
asset-liability mix, its reputation and credit standing in the market and
general economic conditions.
In
addition to traditional deposits, the Bank has other liquidity sources,
including the proceeds from maturing securities and loans, the sale of
securities, asset securitizations and borrowed funds such as FHLB advances
and
brokered time deposits. We monitor and forecast our liquidity
position. There are several interdependent methods used by us for
this purpose, including daily review of federal funds positions, monthly
review
of balance sheet changes, monthly review of liquidity ratios, quarterly
review
of liquidity forecasts and periodic review of contingent funding
plans.
At
June
30, 2007, our banking subsidiary had $165 million of immediately accessible
liquidity, defined as cash that could be raised within 7 days through
collateralized borrowings, brokered deposits or security sales. This
position represented 30% of total assets, compared to a policy minimum
of
10%.
36
OFF-BALANCE
SHEET ARRANGEMENTS & AGGREGATE CONTRACTUAL OBLIGATIONS
The
Company is a party to financial instruments with off-balance sheet risk
in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, unused lines of credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amounts recognized in the condensed consolidated
balance
sheet. The contract or notional amounts of these instruments reflect
the extent of the Company's involvement in particular classes of financial
instruments.
The
Company's exposure to credit loss in the event of nonperformance by the
other
party to the financial instrument for commitments to extend credit, unused
lines
of credit and standby letters of credit is represented by the contractual
amount
of those instruments. To control the credit risk associated with
entering into commitments and issuing letters of credit, the Company uses
the
same credit quality, collateral policies, and monitoring controls in making
commitments and letters of credit as it does with its lending
activities. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation.
Commitments
to extend credit are agreements to lend to a customer as long as there
is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment
of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total committed amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon extension
of
credit, is based on management's credit evaluation of the counter
party.
Standby
letters of credit are conditional commitments issued by the Company to
guarantee
the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
Unused
lines of credit and commitments to extend credit typically result in loans
with
a market interest rate.
A
summary
of the amounts of the Company's (a) contractual obligations, and (b) other
commitments with off-balance sheet risk, both at June 30, 2007
follows:
|
Payments
Due by Period
|
|||||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
||||||||||||||||||
|
FHLB
advances
|
$ |
93,016,698
|
$ |
50,016,698
|
$ |
33,000,000
|
$ |
10,000,000
|
$ | - | |||||||||||||
|
Junior
subordinated debentures
|
16,496,000
|
-
|
16,496,000
|
-
|
-
|
||||||||||||||||||
|
Capital
lease obligation
|
2,653,511
|
134,087
|
289,193
|
319,668
|
1,910,563
|
||||||||||||||||||
|
Other
borrowings
|
2,292,163
|
534,522
|
997,665
|
405,777
|
354,199
|
||||||||||||||||||
|
Total
long-term debt
|
114,458,372
|
50,685,307
|
50,782,858
|
10,725,445
|
2,264,762
|
||||||||||||||||||
|
Operating
lease obligations
|
1,926,575
|
379,059
|
622,833
|
466,344
|
458,339
|
||||||||||||||||||
|
Total
contractual obligations
|
$ |
116,384,947
|
$ |
51,064,366
|
$ |
51,405,691
|
$ |
11,191,789
|
$ |
2,723,101
|
|||||||||||||
|
Amount
of Commitment Expiration - Per Period
|
|||||||||||||||||||||||
|
Commitments
with off-balance sheet risk
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
||||||||||||||||||
|
Commitments
to extend credit (1)(3)
|
$ |
10,003,000
|
$ |
10,003,000
|
$ | - | $ | - | $ | - | |||||||||||||
|
Commitments
related to loans held for sale(2)
|
2,557,000
|
2,557,000
|
-
|
-
|
-
|
||||||||||||||||||
|
Unused
lines of credit (3)(4)
|
45,002,000
|
21,189,000
|
3,099,000
|
2,288,000
|
18,426,000
|
||||||||||||||||||
|
Standby
letters of credit (5)
|
696,000
|
696,000
|
-
|
-
|
-
|
||||||||||||||||||
| $ |
58,258,000
|
$ |
34,445,000
|
$ |
3,099,000
|
$ |
2,288,000
|
$ |
18,426,000
|
||||||||||||||
| (1) |
Represents
commitments outstanding for residential real estate, commercial
real
estate, and commercial loans.
|
||||||||||||||||||||||
| (2) |
Commitments
of residential real estate loans that will be held for
sale.
|
||||||||||||||||||||||
|
(3)
|
|
Loan
commitments and unused lines of credit for commercial and construction
loans that expire or are subject to renewal in twelve months
or
less.
|
|||||||||||||||||||||
| (4) |
Represents
unused lines of credit from commercial, construction, and home
equity
loans.
|
||||||||||||||||||||||
| (5) |
Standby
letters of credit generally expiring in twelve months.
|
||||||||||||||||||||||
The
Bank
has written options limited to those residential real estate loans designated
for sale in the secondary market and subject to a rate lock. These
rate-locked loan commitments are used for trading activities, not as a
hedge. The fair value of the outstanding written options at June 30,
2007 was a loss of $10,248.
37
CAPITAL
At
June
30, 2007 and 2006, stockholders' equity totaled $40,849,878 and $39,096,125,
respectively, or 7.34% and 6.95% of total assets, respectively. In
addition, we had on both June 30, 2007 and 2006, $16,496,000 of junior
subordinated debentures which mature in 2034 and 2035 and qualify as Tier
1
Capital. See Note 18 to the Consolidated Financial
Statements. The changes in stockholders' equity include net income
for the year ended June 30, 2007 of $1,886,677, stock issued for $6,550
from the
exercise of stock options and $103,000 in connection with the purchase
of branch
real estate and a decrease of $707,923 in the net unrealized losses on
available-for-sale securities offset by dividend payments of $882,453,
and stock
repurchases of $67,944, representing 3,800 shares repurchased at an average
cost
of $17.88 per share. See Note 9 to the Consolidated Financial
Statements for additional information on capital ratios.
The
2006
Stock Repurchase Plan was approved by the Board of Directors on December
15,
2006, replacing the 2004 Stock Repurchase Plan which was terminated on
the same
date. Although the Company may discontinue the repurchase program at any
time,
it is scheduled to terminate on December 31, 2007. Under the 2006
Stock Repurchase Plan, the Company may purchase up to 200,000 shares of
its
common stock from time to time in the open market at prevailing
prices. Common stock repurchased pursuant to the plan is classified
as authorized but unissued shares of common stock available for future
issuance
as determined by the Board of Directors. Total stock repurchases
under the 2006 Plan in fiscal 2007 were 3,800 shares, for $67,944, at an
average
price of $17.88 per share. For fiscal 2006, the total stock
repurchased was 90,200 shares, for $2,142,250, at an average price of $23.75
per
share. The remaining repurchase capacity of the 2006 Plan is 196,200
shares. Since inception, total stock repurchases under the 2004 plan
were 145,500 shares, for $3,204,902, through December 15,
2006. Management believes that these and future purchases have not
and will not have a significant impact on the Company's liquidity.
Regulatory
capital guidelines require the Bank to maintain certain capital
ratios. The Bank's Tier 1 Capital was $46,780,000, or 8.60% of total
average assets at June 30, 2007 compared to $50,864,000, or 9.07% of total
average assets, at June 30, 2006. We are also required to maintain risk-based
capital ratios based on the level of certain assets, as adjusted to reflect
their perceived level of risk. Our regulatory capital ratios
currently exceed all applicable requirements. See Note 9 to the
Consolidated Financial Statements.
IMPACT
OF INFLATION
The
consolidated financial statements and related notes 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.
IMPACT
OF NEW ACCOUNTING STANDARDS
Note
1 of
the Consolidated Financial Statement includes the Financial Accounting
Standards
Board (FASB) and the SEC issued statements and interpretations affecting
the
Company.
38
|
Item
7 A.
|
Quantitative
and Qualitative Disclosure about Market
Risk
|
|
See
Item 7 of our Form 10-K, "Management's Discussion and Analysis
of
Financial Condition and Results of Operations - Risk
Management" and accompanying table set forth therein for quantitative
and
qualitative disclosures about market risk.
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
|
a.
|
Financial
Statements Required by Regulation
S-X
|
To
the
Board of Directors
Northeast
Bancorp and Subsidiary
Lewiston,
Maine
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
audited the accompanying consolidated balance sheet of Northeast Bancorp and
Subsidiary as of June 30, 2007 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the year ended June
30, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Northeast Bancorp and
Subsidiary as of June 30, 2006 were audited by other auditors whose report
dated
August 11, 2006 expressed an unqualified opinion on those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the 2007 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Northeast Bancorp and Subsidiary as of June 30, 2007, and the results of their
operations and their cash flows for the year ended June 30, 2007, in conformity
with U.S. generally accepted accounting principles.
|
/s/
Shatswell, MacLeod & Company, P.C.
|
|
|
West
Peabody, Massachusetts
|
Shatswell,
MacLeod & Company, P.C.
|
|
September
6, 2007
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Northeast
Bancorp and Subsidiaries
We
have
audited the consolidated statement of financial condition of Northeast Bancorp
and Subsidiaries (the Company) as of June 30, 2006, and the related
consolidated statements of income, changes in stockholders’ equity and cash
flows for each of the two years in the period ended June 30,
2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Northeast Bancorp and
Subsidiaries as of June 30, 2006, and the results of their operations and
their cash flows for each of the two years in the period ended June 30,
2006, in conformity with U.S. generally accepted accounting
principles.
|
|
/s/
Baker Newman & Noyes
|
|
Portland,
Maine
|
Baker
Newman & Noyes
|
| August 11, 2006 |
Limited
Liability Company
|
39
NORTHEAST
BANCORP AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
June
30,
2007 and 2006
|
ASSETS
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
and due from banks
|
$ |
9,065,330
|
$ |
9,573,908
|
||||
|
Interest-bearing
deposits
|
1,676,391
|
1,099,813
|
||||||
|
Federal
Home Loan Bank overnight deposits
|
-
|
1,430,000
|
||||||
|
Total
cash and cash equivalents
|
10,741,721
|
12,103,721
|
||||||
|
Available-for-sale
securities, at fair value
|
86,348,070
|
86,137,707
|
||||||
|
Loans
held-for-sale
|
1,636,485
|
681,143
|
||||||
|
Loans
receivable
|
425,571,418
|
435,662,529
|
||||||
|
Less
allowance for loan losses
|
5,756,000
|
5,496,000
|
||||||
|
Net
loans
|
419,815,418
|
430,166,529
|
||||||
|
Premises
and equipment - net
|
7,545,430
|
7,315,881
|
||||||
|
Acquired
assets - net
|
-
|
10,384
|
||||||
|
Accrued
interest receivable
|
2,586,720
|
2,678,558
|
||||||
|
Federal
Home Loan Bank stock, at cost
|
4,825,700
|
5,498,300
|
||||||
|
Federal
Reserve Bank stock, at cost
|
471,500
|
459,500
|
||||||
|
Goodwill
|
2,880,803
|
407,897
|
||||||
|
Intangible
assets, net of accumulated amortization of $2,681,148 in 2007
and $2,366,564 in 2006
|
4,110,081
|
1,919,665
|
||||||
|
Bank
owned life insurance (BOLI)
|
9,844,584
|
8,895,326
|
||||||
|
Other
assets
|
5,994,468
|
6,643,191
|
||||||
|
Total
assets
|
$ |
556,800,980
|
$ |
562,917,802
|
||||
40
|
NORTHEAST
BANCORP AND SUBSIDIARY
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
June
30, 2007 and 2006
|
||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
2007
|
2006
|
|||||||
|
Liabilities:
|
||||||||
|
Deposits
|
||||||||
|
Demand
|
$ |
36,332,604
|
$ |
38,137,357
|
||||
|
NOW
|
53,405,241
|
54,432,157
|
||||||
|
Money
market
|
8,053,552
|
9,430,378
|
||||||
|
Regular
savings
|
21,145,567
|
24,247,324
|
||||||
|
Brokered
time deposits
|
22,546,163
|
51,859,091
|
||||||
|
Certificates
of deposit under $100,000
|
154,972,970
|
152,681,352
|
||||||
|
Certificates
of deposit $100,000 or more
|
68,097,680
|
64,505,718
|
||||||
|
Total
deposits
|
364,553,777
|
395,293,377
|
||||||
|
Federal
Home Loan Bank advances
|
93,016,698
|
75,888,598
|
||||||
|
Short-term
borrowings
|
33,105,377
|
29,637,426
|
||||||
|
Junior
subordinated debentures issued to affiliated trusts
|
16,496,000
|
16,496,000
|
||||||
|
Capital
lease obligation
|
2,653,511
|
2,781,046
|
||||||
|
Other
borrowings
|
2,292,163
|
57,129
|
||||||
|
Other
liabilities
|
3,833,576
|
3,668,101
|
||||||
|
Total
liabilities
|
515,951,102
|
523,821,677
|
||||||
|
Commitments
and contingent liabilities
|
||||||||
|
Stockholders'
equity
|
||||||||
|
Preferred
stock, $1.00 par value, 1,000,000 shares authorized; none
issued
|
-
|
-
|
||||||
| Common stock, at stated value, 15,000,000 shares authorized; 2,448,832 and 2,447,132 shares outstanding | ||||||||
|
at June 30, 2007 and
2006, respectively
|
2,448,832
|
2,447,132
|
||||||
|
Additional
paid-in capital
|
4,715,164
|
4,675,258
|
||||||
|
Retained
earnings
|
35,600,428
|
34,596,204
|
||||||
|
Accumulated
other comprehensive loss
|
(1,914,546 | ) | (2,622,469 | ) | ||||
|
Total
stockholders' equity
|
40,849,878
|
39,096,125
|
||||||
|
Total
liabilities and stockholders' equity
|
$ |
556,800,980
|
$ |
562,917,802
|
||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||
41
NORTHEAST
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
Years
Ended June 30, 2007, 2006 and 2005
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
and dividend income:
|
||||||||||||
|
Interest
and fees on loans
|
$ |
31,366,547
|
$ |
31,643,003
|
$ |
29,618,984
|
||||||
|
Interest
on Federal Home Loan Bank overnight deposits
|
152,805
|
93,017
|
52,912
|
|||||||||
|
Taxable
interest on available-for-sale securities
|
3,154,072
|
2,947,224
|
2,568,558
|
|||||||||
|
Tax-exempt
interest on available-for-sale securities
|
442,311
|
264,839
|
-
|
|||||||||
|
Dividends
on available-for-sale securities
|
140,954
|
130,605
|
146,678
|
|||||||||
|
Dividends
on Federal Home Loan Bank and Federal Reserve Bank
stock
|
368,463
|
335,900
|
264,777
|
|||||||||
|
Other
interest and dividend income
|
57,203
|
41,620
|
22,025
|
|||||||||
|
Total
interest and dividend income
|
35,682,355
|
35,456,208
|
32,673,934
|
|||||||||
|
Interest
expense:
|
||||||||||||
|
Deposits
|
13,490,173
|
11,152,306
|
8,624,798
|
|||||||||
|
Federal
Home Loan Bank advances
|
3,819,550
|
3,482,655
|
3,850,815
|
|||||||||
|
Short-term
borrowings
|
1,504,936
|
927,688
|
403,539
|
|||||||||
|
Junior
subordinated debentures issued to affiliated trusts
|
1,080,538
|
1,063,681
|
1,087,696
|
|||||||||
|
Obligation
under capital lease agreements
|
136,726
|
130,583
|
-
|
|||||||||
|
Other
borrowings
|
65,075
|
3,693
|
-
|
|||||||||
|
Total
interest expense
|
20,096,998
|
16,760,606
|
13,966,848
|
|||||||||
|
Net
interest and dividend income before provision for loan
losses
|
15,585,357
|
18,695,602
|
18,707,086
|
|||||||||
|
Provision
for loan losses
|
989,158
|
1,226,413
|
1,301,600
|
|||||||||
|
Net
interest and dividend income after provision for loan
losses
|
14,596,199
|
17,469,189
|
17,405,486
|
|||||||||
|
Noninterest
income:
|
||||||||||||
|
Fees
and service charges on loans
|
79,885
|
97,630
|
100,858
|
|||||||||
|
Fees
for other services to customers
|
1,042,648
|
1,114,081
|
1,067,116
|
|||||||||
|
Net
securities gains
|
42,349
|
17,335
|
67,940
|
|||||||||
|
Loss
on trading activities
|
-
|
-
|
(83 | ) | ||||||||
|
Gain
on sales of loans
|
869,255
|
308,777
|
233,027
|
|||||||||
|
Investment
and insurance commissions
|
4,715,553
|
3,686,122
|
2,858,897
|
|||||||||
|
BOLI
income
|
388,613
|
366,939
|
330,700
|
|||||||||
|
Other
|
806,524
|
1,003,997
|
492,724
|
|||||||||
|
Total
noninterest income
|
7,944,827
|
6,594,881
|
5,151,179
|
|||||||||
|
Noninterest
expense:
|
||||||||||||
|
Salaries
and employee benefits
|
12,022,037
|
10,637,758
|
9,554,317
|
|||||||||
|
Occupancy
expense
|
1,722,381
|
1,672,505
|
1,418,696
|
|||||||||
|
Equipment
expense
|
1,531,276
|
1,440,238
|
1,110,108
|
|||||||||
|
Intangible
assets amortization
|
314,584
|
241,028
|
249,701
|
|||||||||
|
Other
|
4,484,908
|
4,216,975
|
4,351,352
|
|||||||||
|
Total
noninterest expense
|
20,075,186
|
18,208,504
|
16,684,174
|
|||||||||
|
Income
before income taxes
|
2,465,840
|
5,855,566
|
5,872,491
|
|||||||||
|
Income
tax expense
|
579,163
|
1,851,367
|
1,853,857
|
|||||||||
|
Net
income
|
$ |
1,886,677
|
$ |
4,004,199
|
$ |
4,018,634
|
||||||
|
Earnings
per common share:
|
||||||||||||
|
Basic
|
$ |
0.77
|
$ |
1.61
|
$ |
1.60
|
||||||
|
Diluted
|
$ |
0.76
|
$ |
1.59
|
$ |
1.57
|
||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
42
NORTHEAST
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years
Ended June 30, 2007, 2006 and 2005
|
Preferred
Stock
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
||||||||||||||||||||
|
Balance
at June 30, 2004
|
$ |
-
|
$ |
2,525,416
|
$ |
6,943,894
|
$ |
28,380,678
|
$ | (1,396,968 | ) | $ |
36,453,020
|
||||||||||||
|
Net
income
|
-
|
-
|
-
|
4,018,634
|
-
|
4,018,634
|
|||||||||||||||||||
| Other comprehensive income net of tax: | |||||||||||||||||||||||||
| Net unrealized losses on investments | |||||||||||||||||||||||||
| available-for-sale, net of reclassification | |||||||||||||||||||||||||
|
adjustment
|
-
|
-
|
-
|
-
|
726,781
|
726,781
|
|||||||||||||||||||
|
Total comprehensive income
|
-
|
-
|
-
|
4,745,415
|
|||||||||||||||||||||
|
Purchase
of 43,609 shares of Company
stock
|
-
|
(43,609 | ) | (799,893 | ) |
-
|
-
|
(843,502 | ) | ||||||||||||||||
|
Stock
options exercised
|
-
|
37,875
|
385,410
|
-
|
-
|
423,285
|
|||||||||||||||||||
|
Stock
grant
|
-
|
150
|
1,425
|
-
|
-
|
1,575
|
|||||||||||||||||||
|
Dividends
on common stock at $0.36
per
share
|
-
|
-
|
-
|
(910,220 | ) |
-
|
(910,220 | ) | |||||||||||||||||
|
Balance
at June 30, 2005
|
-
|
2,519,832
|
6,530,836
|
31,489,092
|
(670,187 | ) |
39,869,573
|
||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
4,004,199
|
-
|
4,004,199
|
|||||||||||||||||||
| Other comprehensive income net of tax: | |||||||||||||||||||||||||
| Net unrealized losses on investments | |||||||||||||||||||||||||
| available-for-sale, net of reclassification | |||||||||||||||||||||||||
|
adjustment
|
-
|
-
|
-
|
-
|
(1,952,282 | ) | (1,952,282 | ) | |||||||||||||||||
|
Total comprehensive income
|
-
|
-
|
-
|
-
|
-
|
2,051,917
|
|||||||||||||||||||
|
Purchase
of 90,200 shares of Company stock
|
-
|
(90,200 | ) | (2,052,050 | ) |
-
|
-
|
(2,142,250 | ) | ||||||||||||||||
|
Stock
options exercised
|
-
|
17,500
|
196,472
|
-
|
-
|
213,972
|
|||||||||||||||||||
|
Dividends
on common stock at $0.36 per
share
|
-
|
-
|
-
|
(897,087 | ) |
-
|
(897,087 | ) | |||||||||||||||||
|
Balance
at June 30, 2006
|
-
|
2,447,132
|
4,675,258
|
34,596,204
|
(2,622,469 | ) |
39,096,125
|
||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
1,886,677
|
-
|
1,886,677
|
|||||||||||||||||||
| Other comprehensive income net of tax: | |||||||||||||||||||||||||
| Net unrealized losses on investments | |||||||||||||||||||||||||
| available-for-sale, net of reclassification | |||||||||||||||||||||||||
|
adjustment
|
-
|
-
|
-
|
-
|
707,923
|
707,923
|
|||||||||||||||||||
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
2,594,600
|
|||||||||||||||||||
|
Purchase
of 3,800 shares of Company stock
|
-
|
(3,800 | ) | (64,144 | ) |
-
|
-
|
(67,944 | ) | ||||||||||||||||
|
Stock
options exercised
|
-
|
500
|
6,050
|
-
|
-
|
6,550
|
|||||||||||||||||||
| Common stock issued in connection with the | |||||||||||||||||||||||||
|
purchase
of branch real estate
|
-
|
5,000
|
98,000
|
-
|
-
|
103,000
|
|||||||||||||||||||
|
Dividends
on common stock at $0.36 per share
|
-
|
-
|
-
|
(882,453 | ) |
-
|
(882,453 | ) | |||||||||||||||||
|
Balance
at June 30, 2007
|
$ |
-
|
$ |
2,448,832
|
$ |
4,715,164
|
$ |
35,600,428
|
$ | (1,914,546 | ) | $ |
40,849,878
|
||||||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|||||||||||||||||||||||||
43
NORTHEAST
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended June 30, 2007, 2006 and 2005
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ |
1,886,677
|
$ |
4,004,199
|
$ |
4,018,634
|
||||||
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
||||||||||||
|
Provision
for loan losses
|
989,158
|
1,226,413
|
1,301,600
|
|||||||||
|
Provision
for losses on acquired assets
|
6,384
|
2,500
|
20,000
|
|||||||||
|
Provision
made for deferred compensation
|
276,539
|
399,845
|
98,000
|
|||||||||
|
Write-down
of available-for-sale securities
|
50,442
|
38,394
|
27,849
|
|||||||||
|
Write-down
of non-marketable securities
|
248,482
|
42,257
|
96,931
|
|||||||||
|
Deferred
income tax benefit
|
(329,268 | ) | (323,220 | ) | (197,522 | ) | ||||||
|
BOLI
income, net
|
(349,258 | ) | (366,939 | ) | (274,347 | ) | ||||||
|
Depreciation
of premises and equipment
|
1,088,373
|
1,048,529
|
711,339
|
|||||||||
|
Amortization
of intangible assets
|
314,584
|
241,028
|
249,701
|
|||||||||
|
Net
gain on sale of available-for-sale securities
|
(42,349 | ) | (17,335 | ) | (67,940 | ) | ||||||
|
Net
(gain) loss on disposals, writedowns and sale of
fixed assets
|
(73,962 | ) |
128,363
|
(59,719 | ) | |||||||
|
Gain
on sale of deposits
|
-
|
(500,845 | ) |
-
|
||||||||
|
Net
change of loans held-for-sale
|
(955,342 | ) | (362,293 | ) |
226,872
|
|||||||
|
Other
|
27,839
|
21,962
|
(350,028 | ) | ||||||||
|
Change
in other assets and liabilities:
|
||||||||||||
|
Interest
receivable
|
91,838
|
(123,669 | ) | (361,720 | ) | |||||||
|
Other
assets and liabilities
|
28,754
|
106,976
|
631,272
|
|||||||||
|
Net
cash provided by operating activities
|
3,258,891
|
5,566,165
|
6,070,922
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Federal
Reserve Bank stock purchased
|
(12,000 | ) | (54,000 | ) | (405,500 | ) | ||||||
|
Proceeds
from redemption of Federal Home Loan Bank stock
|
672,600
|
1,146,200
|
-
|
|||||||||
|
Proceeds
from the sales of available-for-sale securities
|
2,290,571
|
1,354,098
|
1,126,131
|
|||||||||
|
Purchases
of available-for-sale securities
|
(14,720,181 | ) | (25,311,089 | ) | (22,862,781 | ) | ||||||
|
Proceeds
from maturities and principal payments
on
available-for-sale securities
|
13,255,927
|
9,078,452
|
15,859,638
|
|||||||||
|
Net
decrease (increase) in loans
|
9,361,953
|
24,729,918
|
(29,502,226 | ) | ||||||||
|
Purchases
of premises and equipment
|
(1,373,474 | ) | (1,111,469 | ) | (1,241,683 | ) | ||||||
|
Proceeds
from sales of premises and equipment
|
246,610
|
-
|
481,794
|
|||||||||
|
Proceeds
from sales of acquired assets
|
4,000
|
244,722
|
497,507
|
|||||||||
|
Other
|
-
|
-
|
(75,492 | ) | ||||||||
|
Purchase
of retirement annuity
|
-
|
-
|
(900,000 | ) | ||||||||
|
Purchase
of BOLI
|
(600,000 | ) |
-
|
(529,184 | ) | |||||||
|
Cash
paid in connection with acquisition of
insurance
agencies
|
(2,450,000 | ) |
-
|
(993,469 | ) | |||||||
|
Net
cash provided (used) by investing activities
|
6,676,006
|
10,076,832
|
(38,545,265 | ) | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
(decrease) increase in deposits
|
(30,739,600 | ) |
7,267,169
|
18,398,993
|
||||||||
|
Cash
paid on sale of deposits
|
-
|
(7,691,669 | ) |
-
|
||||||||
|
Advances
from the Federal Home Loan Bank
|
43,000,000
|
105,000,000
|
33,000,000
|
|||||||||
|
Repayment
of advances from the Federal Home Loan Bank
|
(36,831,900 | ) | (115,309,004 | ) | (24,403,032 | ) | ||||||
|
Net
advances (repayments) on Federal Home Loan
Bank
overnight advances
|
10,960,000
|
-
|
(5,377,000 | ) | ||||||||
|
Net
increase (decrease) in short-term borrowings
|
3,467,951
|
(3,741,986 | ) |
8,494,543
|
||||||||
|
Dividends
paid
|
(882,453 | ) | (897,087 | ) | (910,220 | ) | ||||||
|
Company
stock purchased
|
(67,944 | ) | (2,142,250 | ) | (698,812 | ) | ||||||
|
Issuance
of common stock
|
6,550
|
213,972
|
280,170
|
|||||||||
|
Proceeds
from issuance of junior subordinated debentures
|
-
|
-
|
10,310,000
|
|||||||||
|
Repayment
of junior subordinated debentures
|
-
|
-
|
(7,394,849 | ) | ||||||||
|
Repayment
on debt from insurance agencies acquisitions
|
(81,966 | ) |
-
|
-
|
||||||||
|
Repayment
on capital lease obligation
|
(127,535 | ) | (111,656 | ) |
-
|
|||||||
|
Net
cash (used) provided by financing activities
|
(11,296,897 | ) | (17,412,511 | ) |
31,699,793
|
|||||||
|
Net
decrease in cash and cash equivalents
|
(1,362,000 | ) | (1,769,514 | ) | (774,550 | ) | ||||||
|
Cash
and cash equivalents, beginning of year
|
12,103,721
|
13,873,235
|
14,647,785
|
|||||||||
|
Cash
and cash equivalents, end of year
|
$ |
10,741,721
|
$ |
12,103,721
|
$ |
13,873,235
|
||||||
|
Supplemental
schedule of cash flow information:
|
||||||||||||
|
Interest
paid
|
$ |
20,120,234
|
$ |
16,872,352
|
$ |
13,214,688
|
||||||
|
Income
taxes paid
|
819,500
|
2,220,561
|
2,017,222
|
|||||||||
|
Supplemental
schedule of noncash investing and financing
activities:
|
||||||||||||
|
Transfer
from loans to acquired assets
|
$ |
-
|
$ |
173,800
|
$ |
570,339
|
||||||
|
Stock
tendered in cashless stock option exercise
|
-
|
-
|
144,690
|
|||||||||
| Change in valuation allowance for unrealized losses (gains) on available-for-sale | ||||||||||||
|
securities,
net of tax
|
707,923
|
1,952,282
|
(726,781 | ) | ||||||||
|
Net
change in deferred taxes for unrealized losses (gains)
on available-for-sale securities
|
364,689
|
1,005,701
|
(374,404 | ) | ||||||||
|
Transfer
from loan loss allowance to other liabilities for
off balance sheet credit risk
|
-
|
204,086
|
-
|
|||||||||
|
Capital
lease asset and related obligation
|
-
|
2,892,702
|
-
|
|||||||||
|
Stock
issued in branch purchase
|
103,000
|
-
|
-
|
|||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
44
NORTHEAST
BANCORP AND SUBSIDIARY
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended June 30, 2007, 2006 and 2005
1. Summary of Significant Accounting
Policies
The
accounting and reporting policies of Northeast Bancorp and Subsidiary (the
Company) conform to accounting principles generally accepted in the United
States of America and general practice within the banking industry.
Business
Northeast
Bancorp (the Company) is a Maine corporation and a bank holding company
registered with the Federal Reserve Bank of Boston (FRB) under the Bank Holding
Company Act of 1956. The Company provides a full range of banking
services to individual and corporate customers throughout south-central and
western Maine through its wholly-owned subsidiary, Northeast Bank (the Bank),
a
Maine state-chartered universal bank. Effective August, 2004, the
Bank converted its charter to a state bank from a charter as a federal savings
and loan association and became a member of the Federal Reserve Bank of
Boston. As a result, the Bank is subject to the joint regulatory
oversight by the FRB and the State of Maine Bureau of Financial
Institutions. The Bank is also subject to the regulations of the
Federal Deposit Insurance Corporation (FDIC). The Bank faces vigorous
competition from banks and other financial institutions.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Northeast
Bancorp, and its wholly-owned subsidiary, Northeast Bank (including the Bank's
wholly-owned subsidiary, Northeast Bank Insurance Group, Inc.). All
significant intercompany transactions and balances have been eliminated in
consolidation.
In
December 2003, the Financial Accounting Standards Board (FASB) issued a revised
FASB Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46R") which, in part, specifically addresses limited purpose trusts formed
to issue trust preferred securities. FIN 46R establishes the criteria
used to identify variable interest entities and to determine whether or not
to
consolidate a variable interest entity. In fiscal 2004, pursuant to
the criteria established by FIN 46R, the Company deconsolidated three trusts
which the Company had formed for the purposes of issuing trust preferred
securities to unaffiliated parties and investing the proceeds from the sale
thereof and the common securities of the trusts in junior subordinated
debentures issued by the Company. The affiliated trusts are NBN
Capital Trust, NBN Capital Trust II and NBN Capital Trust III. The
result of the deconsolidation and the accounting for these entities was to
recognize investments in these entities of approximately $408,000 in the
aggregate in other assets and to report the amount of junior subordinated
debentures issued by the Company to such entities, rather than the related
trust
preferred securities, in the consolidated statement of financial condition
which
resulted in a $408,000 increase in this liability. The adoption of
FIN 46R did not have any additional impact on the Company's financial condition,
results of operations, earnings per share or cash flows.
NBN
Capital Trust, NBN Capital Trust II and NBN Capital Trust III are considered
affiliates. (See note 18).
Use
of Estimates
The
financial statements have been prepared in conformity with accounting principles
generally accepted in the Unites States of America. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of
contingent assets and liabilities as of the date of the statement of financial
condition and income and expenses for the period. Actual results
could differ significantly from those estimates.
Material
estimates that are particularly susceptible to significant change relate to
the
determination of the allowance for loan losses and a determination as to whether
declines in the fair values below cost of investments is
other-than-temporary.
In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties. A
substantial portion of the Company's loans are secured by real estate in the
State of Maine. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio is susceptible to changes
in
market conditions in Maine.
In
connection with the determination of whether fair value declines of investments
are other-than-temporary, management investigates the underlying cause for
the
declines, the near term prospects for recovery and the Company's intent and
ability to hold the investments.
Cash
and Cash Equivalents
For
purposes of presentation in the consolidated statements of cash flow, cash
and
cash equivalents consist of cash and due from banks, interest-bearing deposits
and Federal Home Loan Bank overnight deposits. The Company is
required to maintain a certain reserve balance in the form of cash or deposits
with the Federal Reserve Bank. At June 30, 2007 and 2006, the reserve
balance was approximately $250,000 and $230,000, respectively.
Available-for-sale
Securities
Marketable
equity securities and debt securities, which may be sold prior to maturity,
are
classified as available-for-sale and are carried at fair value. Fair
value is determined based on bid prices published in financial newspapers or
bid
quotations received from securities dealers. Changes in fair value,
net of applicable income taxes, are reported as a separate component of
stockholders' equity. When a decline in fair value of a security is
considered other-than-temporary, the loss is charged to other expense in the
consolidated statements of income and is treated as a write-down of the
security's cost. Realized gains and losses on the sale of securities
are recognized on the trade date using the specific identification
method. The Company has no marketable securities classified as
held-to-maturity or trading.
Federal
Home Loan Bank and Federal Reserve Bank Stock
Federal
Home Loan Bank stock and Federal Reserve Bank stock are carried at
cost. Each is a restricted investment.
Loans
held-for-sale and Mortgage Banking Activities
Loans
originated for sale are specifically identified and carried at the lower of
aggregate cost or fair value, estimated based on bid quotations from loan
dealers. The carrying value of loans held-for-sale approximates the
fair value at June 30, 2007 and 2006. Realized gains and losses on
sales of loans are determined using the specific identification method and
are
reflected as gains on sale of loans in the consolidated statements of
income.
The
Company sells loans both on a servicing released and servicing retained
basis. The Company recognizes as separate assets the rights to
service mortgage loans for others, and performs an assessment of capitalized
mortgage servicing rights for impairment based on the current fair value of
those rights. The Company capitalizes mortgage servicing rights at
their allocated cost (based on the relative fair values of the rights and the
related loans) upon the sale of the related loans.
The
Company's mortgage servicing rights asset at June 30, 2007 and 2006 was
approximately $202,000 and $303,000, respectively, and is included in other
assets in the consolidated statements of financial condition. The
fair value of mortgage servicing rights exceeds their carrying
value. Mortgage servicing rights are amortized over the estimated
weighted average life of the loans. The Company's assumptions with
respect to prepayments, which affect the estimated average life of the loans,
are adjusted periodically to reflect current circumstances. The
Company evaluates the estimated life and fair value of its servicing portfolio
based on data which is disaggregated to reflect note rate, type and term on
the
underlying loans.
Loans
Loans
are
carried at the principal amounts outstanding plus net premiums paid and net
deferred loan origination fees and costs. Loan origination fees and
certain direct loan origination costs are deferred and recognized in interest
income as an adjustment to the loan yield over the life of the related
loans. Loan premiums paid to acquire loans are recognized as a
reduction of interest income over the estimated life of the
loans. Loans are generally placed on nonaccrual status when they are
past due 90 days as to either principal or interest, or when in management's
judgment the collectibility of interest or principal of the loan has been
significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against interest
on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has performed
for
a period of time, generally six months. Loans are classified as
impaired when it is probable that the Company will not be able to collect all
amounts due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment
include payment status and collateral value.
45
Allowance
for Loan Losses
The
allowance for loan losses is established through a provision for loan losses
charged to operations. Loan losses are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to
the allowance.
The
allowance for loan losses represents management's estimate of probable losses
inherent in the loan portfolio. This evaluation process is subject to
numerous estimates and judgments. The frequency of default, risk
ratings and the loss recovery rates, among other things, are considered in
making this evaluation, as are the size and diversity of individual large
credits. Larger balance, non-homogeneous loans representing
significant individual credit exposures are evaluated based upon the borrower's
overall financial condition, resources and payment record; the prospects for
support from any financially responsible guarantors; and, if appropriate, the
realizable value of any collateral. The allowance for loan losses
attributed to these loans is established through a process that includes
estimates of historical and projected default rates and loss severities;
internal risk ratings; and geographic, industry, and other environmental
factors. Management also considers overall portfolio indicators,
including trends in internally risk-rated loans, classified loans, nonaccrual
loans and historical and forecasted write-offs; and a review of industry,
geographic, and portfolio concentrations, including current
developments. In addition, management considers the current business
strategy and credit process, including credit limit setting and compliance,
credit approvals, loan underwriting criteria, and loan workout
procedures. Each portfolio of smaller balance, homogeneous loans,
including residential real estate and consumer loans, is collectively evaluated
for impairment. The allowance for loan losses for these loans is
established via a process that includes historical delinquency and credit loss
experience, together with analyses that reflect current trends and
conditions. Management also considers overall portfolio indicators
including historical credit losses; delinquent, non-performing and classified
loans; trends in volumes; terms of loans; an evaluation of overall credit
quality and the credit process, including lending policies and procedures;
and
economic factors. Changes in these estimates could have a direct
impact on the provision and could result in a change in the
allowance.
Management
believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, changing
economic conditions and the economic prospects of the borrowers might
necessitate future additions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated
depreciation. Depreciation is computed by the straight-line and
accelerated methods over the estimated useful lives of the
assets. Premises and equipment under capital leases are amortized
over the estimated useful lives of the assets or the respective lease terms,
whichever is shorter. Maintenance and repairs are charged to expense
as incurred and the cost of major renewals and betterments are
capitalized. Premises and equipment are evaluated periodically for
impairment. An assessment of recoverability is performed prior to any
write-down of the asset. If circumstances suggest that their value
may be impaired, then an expense would be charged in the then current
period.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
Acquired
Assets
Acquired
assets are carried at the lower of cost or fair value of the collateral less
estimated selling expenses.
Goodwill
and Intangible Assets
Goodwill
of $407,897 arising from the acquisition of a bank in prior years is deemed
to
have an indefinite useful life. The Company ceased amortization of
goodwill on July 1, 2001, with the adoption of Statement of Financial Accounting
Standard
No.
142,
Goodwill and Other Intangible Assets. Intangible assets
include noncompete agreements and customer lists which are being amortized
on a
straight-line basis over the estimated lives of the asset ranging from five
to
eighteen years. The weighted average amortization period for
intangibles subject to amortization is 12.55 years. Goodwill and
intangible assets are reviewed annually for possible impairment, and if the
assets are deemed impaired, an expense would be charged in the then current
period. The estimated aggregate amortization expense for each of the
five succeeding fiscal years is as follows: 2008 - $389,287; 2009 -
$352,943; 2010 - $345,703; 2011 - $345,703 and 2012 - $345,703.
46
Advertising
Expense
Advertising
costs are expensed as incurred. Advertising costs were approximately
$440,000, $492,000 and $336,000 for the years ended June 30, 2007, 2006 and
2005, respectively.
Stock-Based
Compensation
The
Company has stock-based employee compensation plans, which are described more
fully in note 14. The Company adopted Statement of Financial
Accounting Standard No. 123 (revised 2004), Shared-Based Payment ("SFAS
123-R"), effective for the fiscal year beginning July 1, 2005, superseding
APB
Opinion 25 and replacing FASB Statement No. 123. Prior to July 1,
2005, the Company utilized the intrinsic value methodology allowed by APB
Opinion 25. SFAS 123-R requires companies to measure and record
compensation expense for stock options and other share-based payments based
on
the instruments' fair value reduced by expected forfeitures. Under
the modified prospective approach adopted by the Company, the Company recognizes
expense for new options awarded and to awards modified, repurchased or canceled
after the effective date. Since there were no new options granted (or
modifications of existing options) during fiscal 2007 and 2006 and since all
previously granted options were fully vested at the grant date, adoption of
SFAS
123-R had no impact on the 2007 and 2006 financial statements.
The
following table illustrates the effect on net income and earnings per share
as
if the Company had applied the fair value recognition provisions of SFAS 123-R
to stock-based employee compensation.
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income, as reported
|
$ |
1,886,677
|
$ |
4,004,199
|
$ |
4,018,634
|
||||||
|
Deduct: total
stock-based employee compensation
expense determined under fair
value
based method for all awards, net of related tax
effects
|
-
|
-
|
1,513
|
|||||||||
|
Pro
forma net income
|
$ |
1,886,677
|
$ |
4,004,199
|
$ |
4,017,121
|
||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
- as reported
|
$ |
.77
|
$ |
1.61
|
$ |
1.60
|
||||||
|
Basic
- pro forma
|
$ |
.77
|
$ |
1.61
|
$ |
1.59
|
||||||
|
Diluted
- as reported
|
$ |
.76
|
$ |
1.59
|
$ |
1.57
|
||||||
|
Diluted
- pro forma
|
$ |
.76
|
$ |
1.59
|
$ |
1.57
|
||||||
The
following table presents the weighted average fair value and related assumptions
using the Black-Scholes option-pricing model for all stock options granted
during the periods indicated. There were no stock options granted in
fiscal 2007 and 2006.
|
2007
|
2006
|
2005
|
||||||||||
|
Weighted
average fair value
|
$ |
-
|
$ |
-
|
$ |
1,513
|
||||||
|
Dividend
yield
|
-
|
-
|
2.8 | % | ||||||||
|
Expected
volatility
|
-
|
-
|
24.3 | % | ||||||||
|
Risk-free
interest rates
|
-
|
-
|
4.5 | % | ||||||||
|
Expected
lives
|
-
|
-
|
8
years
|
|||||||||
Bank-Owned
Life Insurance
Bank-owned
life insurance ("BOLI") represents life insurance on the lives of certain
employees. Increases in the cash value of the policies, as well as
insurance proceeds received, are recorded in other noninterest income, and
are
not subject to income taxes. The cash surrender value is included in
assets. The Company reviews the financial strength of the insurance
carriers prior to the purchase of BOLI and annually thereafter.
47
Comprehensive
Income
Accumulated
other comprehensive income or loss consists solely of unrealized gains or losses
on investment securities available-for-sale, net of related income
taxes.
Derivatives
The
Company accounts for derivatives in accordance with Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, which requires the Company to recognize
all derivatives on the statement of financial condition at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. 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
Company has only limited involvement with derivative financial instruments
and
they are used for trading and hedging purposes. The derivative
financial instruments used by the Company are covered call and put contracts
on
its equity securities portfolio and certain residential mortgage loan
commitments for resale into the secondary market. The total value of
securities under call and put contracts and commitments to originate residential
mortgage loans for resale at June 30, 2007, 2006 and 2005, which are not used
as
a hedge but are classified as trading, is immaterial to the Company's financial
position, liquidity, and results of operations.
Trust
Assets
Assets
of
the Company's trust department are not included in these consolidated financial
statements because they are not assets of the Company. As of June 30,
2007, total assets held in trust for customers, for which the Company has
fiduciary responsibility, amounted to approximately $97,329,000.
Treasury
Stock
On
July
1, 2003, the Maine Business Corporation Act became effective. This
Act eliminated the concept of treasury stock, instead providing that shares
of
its stock acquired by the Company simply constitute authorized but unissued
shares. Accordingly, all stock held by the Company as treasury stock
has been reclassified as authorized but unissued stock in accordance with the
Act.
Reclassifications
Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation.
New
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Instruments (SFAS 155), which permits, but does not require, fair value
accounting for any hybrid financial instrument that contains an embedded
derivative that would otherwise require bifurcation in accordance with SFAS
133. The statement also subjects beneficial interests issued by
securitization vehicles to the requirements of SFAS No. 133. The
statement is effective as of July 1, 2007. The adoption of SFAS 155
is not expected to have a material impact on the Company’s financial condition
and results of operations.
In
March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140 (SFAS 156). SFAS
156 requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in specific situations. Additionally, the
servicing asset or servicing liability shall be initially measured at fair
value; however, an entity may elect the “amortization method” or “fair value
method” for subsequent balance sheet reporting periods. SFAS 156 is
effective as of an entity’s first fiscal year beginning after September 15,
2006. Early adoption is permitted as of the beginning of an entity’s
fiscal year, provided the entity has not yet issued financial statements,
including interim financial statements, for any period of that fiscal
year. The Company does not expect the adoption of this statement to
have a material impact on its financial condition, results of operations or
cash
flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles (GAAP)
and
enhances disclosures about fair value measurements. SFAS 157 retains
the exchange price notion and clarifies that the exchange price is the price
that would be received for an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants on the measurement
date. SFAS 157 is effective for the Company’s consolidated financial
statements for the year beginning on July 1, 2008, with earlier adoption
permitted. The Company does not expect the adoption of SFAS 157 to
have a material impact on its financial condition, results of operations or
cash
flows.
48
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. The new standard is effective at the
beginning of the Company’s fiscal year beginning July 1, 2008, and early
application may be elected in certain circumstances. The Company is
currently evaluating and has not yet determined the impact the new standard
is
expected to have on its financial position, results of operations or cash
flows.
2. Available-for-sale
securities
A
summary
of the cost and approximate fair values of available-for-sale securities at
June
30, 2007 and 2006 follows:
|
2007
|
2006
|
|||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
|
Debt
securities issued by U.S. Government-sponsored
enterprises
|
$ |
21,765,732
|
$ |
21,158,409
|
$ |
25,766,682
|
$ |
24,694,409
|
||||||||
|
Mortgage-backed
securities
|
53,987,824
|
52,138,732
|
50,618,118
|
48,126,031
|
||||||||||||
|
Municipal
bonds
|
11,067,197
|
10,709,069
|
11,075,274
|
10,770,167
|
||||||||||||
|
Corporate
bonds
|
500,000
|
484,625
|
500,000
|
477,520
|
||||||||||||
|
Equity
securities
|
1,928,144
|
1,857,235
|
2,151,072
|
2,069,580
|
||||||||||||
| $ |
89,248,897
|
$ |
86,348,070
|
$ |
90,111,146
|
$ |
86,137,707
|
|||||||||
|
The
gross unrealized gains and unrealized losses on available-for-sale
securities are as follows:
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
|||||||||||||
|
Debt
securities issued by U. S. Government-sponsored
enterprises
|
$ |
-
|
$ |
607,323
|
$ |
-
|
$ |
1,072,273
|
||||||||
|
Mortgage-backed
securities
|
2,818
|
1,851,910
|
2,289
|
2,494,376
|
||||||||||||
|
Municipal
bonds
|
-
|
358,128
|
-
|
305,107
|
||||||||||||
|
Corporate
bonds
|
-
|
15,375
|
-
|
22,480
|
||||||||||||
|
Equity
securities
|
18,661
|
89,570
|
22,809
|
104,301
|
||||||||||||
| $ |
21,479
|
$ |
2,922,306
|
$ |
25,098
|
$ |
3,998,537
|
|||||||||
At
June
30, 2007, mortgage-backed and U.S. Government-sponsored enterprise securities
with a fair value of approximately $70,934,000 were pledged as collateral to
secure outstanding repurchase agreements, FHLB advances and other
purposes.
The
following summarizes the Company's gross unrealized losses and fair values
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at June 30,
2007.
|
Less
than 12 Months
|
More
than 12 Months
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
|
U.S.
Government-sponsored enterprises
|
$ |
391,296
|
$ |
9,828
|
$ |
20,767,113
|
$ |
597,495
|
$ |
21,158,409
|
$ |
607,323
|
||||||||||||
|
Mortgage-backed securities
|
22,180,625
|
463,353
|
27,327,140
|
1,388,557
|
49,507,765
|
1,851,910
|
||||||||||||||||||
|
Municipal
bonds
|
7,945,475
|
262,497
|
2,763,594
|
95,631
|
10,709,069
|
358,128
|
||||||||||||||||||
|
Corporate
bonds
|
-
|
-
|
484,625
|
15,375
|
484,625
|
15,375
|
||||||||||||||||||
|
Equity
securities
|
839,368
|
49,720
|
630,039
|
39,850
|
1,469,407
|
89,570
|
||||||||||||||||||
| $ |
31,356,764
|
$ |
785,398
|
$ |
51,972,511
|
$ |
2,136,908
|
$ |
83,329,275
|
$ |
2,922,306
|
|||||||||||||
49
Unrealized
losses within U.S. Government-sponsored enterprises of $607,323 consist of
twelve individual debt securities issued by the FHLB, FHLMC and FNMA of which
eleven securities have had continuous losses for more than one
year. Unrealized losses within the mortgage-backed securities
category of $1,851,910 consist of thirty individual debt securities, of which
sixteen securities have had continuous losses for more than one
year. Unrealized losses within the municipal bond category of
$358,128 consist of thirty-three individual debt securities, of which eight
securities have had continuous losses of more than a year. The
primary cause for unrealized losses within the above investment categories
is
the impact movements in market interest rates have had in comparison to the
underlying yields on these securities, and normal market
fluctuations. Unrealized losses within the equity security category
of $89,570 consist of forty-five individual equity securities, of which thirteen
have had continuous losses for more than one year.
Management
of the Company, in addition to considering current trends and economic
conditions that may affect the quality of individual securities within the
Company's investment portfolio, also considers the Company's ability and intent
to hold such securities to maturity or recovery of cost. Management
does not believe any of the Company's available-for-sale securities are
other-than-temporarily impaired at June 30, 2007, 2006 and 2005, except as
discussed below.
Based
on
management's assessment of available-for-sale securities, there has been more
than a temporary decline in market value of certain equity
securities. During the years ended June 30, 2007, 2006 and 2005,
write-downs of available-for-sale securities were $50,442, $38,394 and $27,849,
respectively, and are included in other noninterest expense in the consolidated
statements of income.
Included
in accumulated other comprehensive loss as an adjustment to stockholders' equity
are the following:
|
2007
|
2006
|
|||||||
|
Net
unrealized losses
|
$ | (2,900,827 | ) | $ | (3,973,439 | ) | ||
|
Deferred
tax effect
|
986,281
|
1,350,970
|
||||||
|
Accumulated
other comprehensive loss
|
$ | (1,914,546 | ) | $ | (2,622,469 | ) | ||
The
cost
and market values of available-for-sale securities at June 30, 2007, by
contractual maturity are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
Cost
|
Fair
Value
|
|||||||
|
Due one year or less
|
$ |
6,505,701
|
$ |
6,410,365
|
||||
|
Due after one year through five years
|
13,370,205
|
12,989,363
|
||||||
|
Due after five years through ten years
|
996,925
|
972,840
|
||||||
|
Due after ten years
|
12,460,098
|
11,979,535
|
||||||
|
33,332,929
|
32,352,103
|
|||||||
| Mortgage-backed securities (consisting of securities with interest rates ranging from 4.00% to 6.375% | ||||||||
|
maturing November 2007 to
April 2036)
|
53,987,824
|
52,138,732
|
||||||
|
Equity
securities
|
1,928,144
|
1,857,235
|
||||||
| $ |
89,248,897
|
$ |
86,348,070
|
|||||
Realized
gains and losses on sales of available-for-sale securities for the year ended
June 30, 2007 were $59,419 and $17,070, respectively, $21,073 and $3,738,
respectively, for the year ended June 30, 2006 and $72,238 and $4,298,
respectively, for the year ended June 30, 2005. The tax provision
applicable to these net realized gains amounted to $14,678, $6,008 and $23,548,
respectively.
50
3. Loans
Receivable
The
Company's lending activities are predominantly conducted in south-central and
western Maine. However, the Company occasionally purchases
residential mortgage loans in the open market out of this geographical area
when
management believes this is prudent. The Company grants single-family
and multi-family residential loans, commercial real estate loans, commercial
loans and a variety of consumer loans. In addition, the Company
grants loans for the construction of residential homes, multi-family properties,
commercial real estate properties and for land development. The
majority of loans granted by the Company are collateralized by real
estate. The ability and willingness of residential and commercial
real estate, commercial and construction loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate sector
in
the borrowers' geographic area and/or the general economy. Also, the
Company participates in indirect lending arrangements for automobile, equipment,
mobile home and recreational vehicle loans. The Company's indirect
lending activities are conducted throughout the State of Maine, but are
concentrated in south-central and western Maine.
Loans
consisted of the following as of June 30:
|
2007
|
2006
|
|||||||
|
Mortgage
loans:
|
||||||||
|
Residential
real estate
|
$ |
145,184,733
|
$ |
149,099,809
|
||||
|
Commercial
real estate
|
112,534,812
|
115,327,157
|
||||||
|
Construction
|
7,707,432
|
7,480,823
|
||||||
|
Total
mortgage loans
|
265,426,977
|
271,907,789
|
||||||
|
Commercial
loans
|
40,783,958
|
50,261,725
|
||||||
|
Consumer
and other loans
|
118,880,723
|
113,192,397
|
||||||
|
425,091,658
|
435,361,911
|
|||||||
|
Undisbursed
portion of construction loans
|
(2,256,606 | ) | (2,375,257 | ) | ||||
|
Net
deferred loan origination costs
|
2,736,366
|
2,675,875
|
||||||
|
425,571,418
|
435,662,529
|
|||||||
|
Less
allowance for loan losses
|
5,756,000
|
5,496,000
|
||||||
|
Net
loans
|
$ |
419,815,418
|
$ |
430,166,529
|
||||
Included
in the loan portfolio are unamortized premiums on purchased loans of
approximately $60,000 and $98,000 at June 30, 2007 and 2006,
respectively.
In
the
ordinary course of business, the Company has loan transactions with its
officers, directors and their associates and affiliated companies ("related
parties") at substantially the same terms as those prevailing at the time for
comparable transactions with others. Such loans amounted to
$3,110,276 and $2,792,963 at June 30, 2007 and 2006, respectively. In
2007, new loans and advances granted to related parties totaled $1,484,077,
and
payments and reductions amounted to $1,166,764. In 2006, new loans
and advances totaled $573,262 and payments and reductions amounted to
$1,089,589.
Activity
in the allowance for loan losses was as follows:
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
at beginning of year
|
$ |
5,496,000
|
$ |
5,104,000
|
$ |
4,577,000
|
||||||
|
Provision
charged to operating expenses
|
989,158
|
1,226,413
|
1,301,600
|
|||||||||
|
Transferred
to off balance sheet credit risk reserve included
in
other liabilities
|
-
|
(204,086 | ) |
-
|
||||||||
|
Loans
charged off
|
(854,631 | ) | (793,653 | ) | (935,285 | ) | ||||||
|
Recoveries
on loans previously charged off
|
125,473
|
163,326
|
160,685
|
|||||||||
|
Net
loans charged off
|
(729,158 | ) | (630,327 | ) | (774,600 | ) | ||||||
|
Balance
at end of year
|
$ |
5,756,000
|
$ |
5,496,000
|
$ |
5,104,000
|
||||||
51
As
shown
above, during fiscal 2006 the Company transferred $204,086, representing the
portion of the allowance related to unfunded loans and commitments at the
transfer date, to other liabilities.
Commercial
and commercial real estate loans with balances greater than $25,000 are
considered impaired when it is probable that the Company will not collect all
amounts due in accordance with the contractual terms of the
loan. Loans that are returned to accrual status are no longer
considered to be impaired. Certain loans are exempt from individual
impairment evaluation, including large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment, such as consumer and
residential mortgage loans and commercial loans with balances less than
$25,000.
The
allowance for loan losses includes allowances related to loans that are
identified as impaired, which are based on discounted cash flows using the
loan's effective interest rate, the fair value of the collateral for
collateral-dependent loans, or the observable market price of the impaired
loan. When foreclosure is probable, impairment is measured based on
the fair value of the collateral. Loans that experience insignificant
payment delays (less than 60 days) or insignificant shortfalls in payment
amounts (less than 10%) generally are not classified as
impaired. Restructured loans are reported as impaired in the year of
restructuring. Thereafter, such loans may be removed from the
impaired loan disclosure if the loans were paying a market rate of interest
at
the time of restructuring and are performing in accordance with their
renegotiated terms.
The
Company recognizes interest on impaired loans on a cash basis when the ability
to collect the principal balance is not in doubt; otherwise, cash received
is
applied to the principal balance of the loan.
The
following table summarizes information about impaired loans at or for the years
ended:
|
2007
|
2006
|
2005
|
||||||||||
|
Impaired
loans
|
$ |
2,498,498
|
$ |
7,128,111
|
$ |
2,190,143
|
||||||
|
Impaired
loans with related allowances
|
884,543
|
5,950,923
|
810,543
|
|||||||||
|
Allowances
on impaired loans
|
322,402
|
1,290,960
|
118,778
|
|||||||||
|
Average
balance of impaired loans during the year
|
2,269,862
|
4,584,621
|
1,760,925
|
|||||||||
|
Interest
recognized on impaired loans
|
211,346
|
71,400
|
85,900
|
|||||||||
Impaired
loans at June 30, 2006 include loans totaling $2,544,000 which were current
as
to both principal and interest payments at that date, but which were considered
impaired based on current estimates of collateral valuation.
Loans
on
nonaccrual status, including certain impaired loans described above, at June
30,
2007 and 2006, totaled approximately $5,090,000 and $5,195,000,
respectively. Interest income that would have been recorded under the
original terms of such loans, net of interest income actually recognized for
the
years ended June 30, 2007, 2006 and 2005, totaled approximately $211,000,
$158,000 and $35,000, respectively. The Company has no material
outstanding commitments to lend additional funds to customers whose loans have
been placed on nonaccrual status or the terms of which have been
modified.
The
Company was servicing, for others, loans of approximately $51,097,000 and
$54,829,000 at June 30, 2007 and 2006, respectively.
4. Premises
and Equipment
Premises
and equipment at June 30, 2007 and 2006, are summarized as follows:
|
2007
|
2006
|
|||||||
|
Land
|
$ |
1,327,621
|
$ |
875,096
|
||||
|
Buildings
|
2,058,695
|
1,790,720
|
||||||
|
Assets
recorded under capital lease
|
2,892,702
|
2,892,702
|
||||||
|
Leasehold
and building improvements
|
1,888,618
|
1,908,861
|
||||||
|
Furniture,
fixtures and equipment
|
5,663,105
|
5,245,108
|
||||||
|
13,830,741
|
12,712,487
|
|||||||
|
Less
accumulated depreciation
|
6,285,311
|
5,396,606
|
||||||
|
Net
premises and equipment
|
$ |
7,545,430
|
$ |
7,315,881
|
||||
Depreciation
and amortization of premises and equipment included in occupancy and equipment
expense, was $1,088,373, $1,048,529 and $711,339 for the years ended June 30,
2007, 2006 and 2005, respectively.
52
5. Acquired
Assets
The
following table summarizes the composition of acquired assets at June
30:
|
2007
|
2006
|
|||||||
|
Real
estate properties acquired in settlement of loans and other acquired
assets
|
$ |
-
|
$ |
12,000
|
||||
|
Less
allowance for losses
|
-
|
1,616
|
||||||
| $ |
-
|
$ |
10,384
|
|||||
Activity
in the allowance for losses on acquired assets was as follows for the years
ended June 30:
|
2007
|
2006
|
2005
|
||||||||||
|
Balance
at beginning of year
|
$ |
1,616
|
$ |
20,666
|
$ |
13,007
|
||||||
|
Provision
for losses on acquired assets
|
6,384
|
2,500
|
20,000
|
|||||||||
|
Write-downs
|
(8,000 | ) | (21,550 | ) | (12,341 | ) | ||||||
|
Balance
at end of year
|
$ |
-
|
$ |
1,616
|
$ |
20,666
|
||||||
6. Acquisition
of Insurance Agencies
Northeast
Bank Insurance Group, Inc. acquired Solon-Anson Insurance Agency, Inc. on
September 29, 2004. This acquisition used purchase accounting and
resulted in a customer list intangible asset of $2,081,500, which is being
amortized over twelve years.
Northeast
Bank Insurance Group, Inc. acquired four agencies during fiscal
2007. Each acquisition was the purchase of assets, except the Palmer
Insurance Agency which was the purchase of stock, for cash and
debt. The details of the purchases appear below including the
acquisition date and the agency’s location. Each agency will be
operated at its existing location except Russell which was relocated to the
agency office in Anson, Maine.
All
acquisitions were accounted for using the purchase method and resulted in
increases in goodwill and customer list and non-compete intangibles on the
consolidated balance sheet. All purchase and sale agreements call for
a reduction in the purchase price should the stipulated minimum commission
revenue levels not be attained over periods of one to three years from the
purchase date. The customer list intangibles and estimated useful
lives are based on estimates from a third-party appraiser. The useful
lives of these intangibles range from eleven to eighteen
years. Non-compete intangible useful lives are amortized over a range
of twelve to fifteen years. The goodwill and customer list intangible
for Russell are estimates and subject to change.
The
debt
incurred is due to the seller of each agency. Each bears an interest
rate of 6.50% over terms as follows: Palmer debt is payable over a
term of seven years; the Sturtevant debt is payable over a term of three years;
the Southern Maine debt is payable over a term of four years; and the Russell
debt is payable over a term of two years. Northeast Bank guaranteed
the debt repayment to each seller.
Northeast
Bank Insurance Group, Inc. leases the office locations for Sturtevant and
Southern Maine. These are operating leases. Northeast Bank
acquired Palmer’s agency building and land in January, 2007.
The
results of operations of Palmer, Sturtevant, Southern Maine and Russell have
been included in the consolidated financial statements since the acquisition
date. There is no pro-forma disclosure included because the four
agencies individually and in aggregate were not considered significant
acquisitions.
53
|
Palmer
|
Sturtevant
and
Ham
|
Southern
Maine
|
Russell
|
Totals
|
||||||||||||||||
|
Purchase
price
|
||||||||||||||||||||
|
Cash
paid
|
$ |
800,000
|
$ |
475,000
|
$ |
900,000
|
$ |
275,000
|
$ |
2,450,000
|
||||||||||
|
Debt
incurred
|
1,067,000
|
475,000
|
450,000
|
325,000
|
2,317,000
|
|||||||||||||||
|
Acquisition
costs
|
8,360
|
3,877
|
4,264
|
4,501
|
21,002
|
|||||||||||||||
|
Total
|
$ |
1,875,360
|
$ |
953,877
|
$ |
1,354,264
|
$ |
604,501
|
$ |
4,788,002
|
||||||||||
|
Allocation
of purchase price:
|
||||||||||||||||||||
|
Goodwill
|
1,174,274
|
324,367
|
754,764
|
219,501
|
2,472,906
|
|||||||||||||||
|
Customer
list intangible
|
600,000
|
550,000
|
520,000
|
300,000
|
1,970,000
|
|||||||||||||||
|
Non-compete
intangible
|
300,000
|
75,000
|
75,000
|
85,000
|
535,000
|
|||||||||||||||
|
Fixed
and other assets
|
5,086
|
4,510
|
4,500
|
-
|
14,096
|
|||||||||||||||
|
Deferred
income taxes
|
(204,000 | ) |
-
|
-
|
-
|
(204,000 | ) | |||||||||||||
|
Total
|
$ |
1,875,360
|
$ |
953,877
|
$ |
1,354,264
|
$ |
604,501
|
$ |
4,788,002
|
||||||||||
|
Acquisition
date
|
11/28/06
|
12/01/06
|
03/30/07
|
06/28/07
|
||||||||||||||||
|
Location
in Maine
|
Turner
|
Livermore
|
Scarborough
|
Madison
|
||||||||||||||||
$1,298,632
of the total goodwill acquired is expected to be deductible for tax
purposes.
7. Deposits
Deposits
at June 30 are summarized as follows:
|
Weighted
Average
Rate
at
June 30,
|
2007
|
2006
|
||||||||||||||||||||
|
2007
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
|
Demand
|
0.00 | % | $ |
36,332,604
|
10.0 | % | $ |
38,137,357
|
9.6 | % | ||||||||||||
|
NOW
|
2.22 | % |
53,405,241
|
14.7 | % |
54,432,157
|
13.8 | % | ||||||||||||||
|
Money
market
|
2.35 | % |
8,053,552
|
2.2 | % |
9,430,378
|
2.4 | % | ||||||||||||||
|
Regular
savings
|
0.78 | % |
21,145,567
|
5.8 | % |
24,247,324
|
6.1 | % | ||||||||||||||
|
Certificates
of deposit and brokered
time deposits:
|
||||||||||||||||||||||
|
Less
than 1.00%
|
0.75 | % |
151,674
|
0.0 | % |
150,855
|
0.0 | % | ||||||||||||||
| 1.00-3.75% | 3.46 | % |
9,973,634
|
2.7 | % |
56,262,927
|
14.2 | % | ||||||||||||||
| 3.76-5.75% | 4.94 | % |
235,151,508
|
64.5 | % |
212,373,529
|
53.8 | % | ||||||||||||||
| 5.76-7.75% | 6.17 | % |
339,997
|
0.1 | % |
258,850
|
0.1 | % | ||||||||||||||
| 4.12 | % | $ |
364,553,777
|
100.0 | % | $ |
395,293,377
|
100.0 | % | |||||||||||||
The
scheduled maturities of certificates of deposit and brokered time deposits
for
the twelve months ended June 30, respectively, are as follows:
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||
|
Less
than 1.00%
|
$ |
151,674
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
-
|
|||||||||||||
|
1.00-3.75%
|
7,163,772
|
2,735,068
|
74,794
|
-
|
-
|
-
|
|||||||||||||||||||
|
3.76-5.75%
|
196,830,663
|
21,866,789
|
11,579,940
|
2,501,660
|
2,051,349
|
321,107
|
|||||||||||||||||||
|
5.76-7.75%
|
298,492
|
9,185
|
-
|
32,320
|
-
|
-
|
|||||||||||||||||||
|
Total
|
$ |
204,444,601
|
$ |
24,611,042
|
$ |
11,654,734
|
$ |
2,533,980
|
$ |
2,051,349
|
$ |
321,107
|
|||||||||||||
54
Interest
expense on deposits for the years ended June 30, 2007, 2006 and 2005 is
summarized as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
NOW
|
$ |
1,234,207
|
$ |
1,065,675
|
$ |
808,762
|
||||||
|
Money
market
|
221,118
|
246,283
|
212,744
|
|||||||||
|
Regular
savings
|
194,258
|
227,830
|
230,201
|
|||||||||
|
Certificates
of deposit and brokered time deposits
|
11,840,590
|
9,612,518
|
7,373,091
|
|||||||||
| $ |
13,490,173
|
$ |
11,152,306
|
$ |
8,624,798
|
|||||||
In
the
fourth quarter of fiscal year 2006, the Company sold the deposits of its Lisbon
Falls, Maine branch and the branch was closed. The deposits sold
totaled approximately $8,908,000. The Company recognized a gain on
sale of deposits of $500,845 from this transaction, which is included in other
income in the 2006 consolidated statement of income.
8. Borrowings
Federal
Home Loan Bank
A
summary
of advances from the Federal Home Loan Bank of Boston are as
follows:
|
June
30, 2007
|
||||
|
Principal
Amounts
|
Interest
Rates
|
Maturity
Dates
|
||
|
$50,016,698
|
2.68%
- 5.69%
|
2008
|
||
|
30,000,000
|
4.86
- 5.21
|
2009
|
||
|
3,000,000
|
4.99
|
2011
|
||
|
10,000,000
|
4.26
|
2017
|
||
|
$93,016,698
|
||||
|
June
30, 2006
|
||||
|
Principal
Amounts
|
Interest
Rates
|
Maturity
Dates
|
||
|
$34,831,900
|
2.22%
- 5.31%
|
2007
|
||
|
31,056,698
|
2.68
- 5.68
|
2008
|
||
|
5,000,000
|
4.88
|
2009
|
||
|
5,000,000
|
4.81 -
4.99
|
2011
|
||
|
$75,888,598
|
||||
At
June
30, 2007, FHLB advances of $43,500,000 are subject to call provisions and may
be
called prior to the stated maturity.
Certain
mortgage loans, free of liens, pledges and encumbrances and certain investment
securities maintained at the FHLB not otherwise pledged have been pledged under
a blanket agreement to secure these advances. The Company is required
to own stock of the Federal Home Loan Bank of Boston in order to borrow from
the
Federal Home Loan Bank.
As
of
June 30, 2007, the Company had a $2,103,000 line of credit arrangement with
the
FHLB which was fully available. Also at June 30, 2007, the Company
had approximately $19,576,000 of additional capacity to borrow from the FHLB
for
long-term advances.
Other
borrowings
Other
borrowings consist of non-negotiable promissory notes payable to former
shareholders of acquired insurance companies.
Maturities
of notes payable for the years ending after June 30, 2007 are summarized as
follows:
|
June
30, 2007
|
||||
|
Principal Amounts
|
Interest Rates
|
Maturity Dates
|
||
|
$
534,522
|
6.50%
|
2008
|
||
|
569,471
|
6.50%
|
2009
|
||
|
428,194
|
6.50%
|
2010
|
||
|
244,721
|
6.50%
|
2011
|
||
|
161,056
|
6.50%
|
2012
|
||
|
171,525
|
6.50%
|
2013
|
||
|
182,674
|
6.50%
|
2014
|
||
|
$
2,292,163
|
||||
As
of
June 30, 2006, the Company had other borrowings of $57,129 with an interest
rate
of 3% maturing in 2007.
55
Capital
Lease Obligations
During
fiscal 2006, the Company recognized a capital lease obligation for its new
headquarters known as the Southern Gateway building located at 500 Canal Street
in Lewiston, Maine. The present value of the lease payments over
fifteen years ($264,262 per year for each of the initial ten years of the lease
term and $305,987 per year for each of the last five years) exceeded 90% of
the
fair value of the Southern Gateway building. Northeast Bank's
commercial lending and underwriting, consumer loan underwriting, loan servicing,
deposit operations, accounting, human resources, risk management, and executive
administration departments occupy the approximately 27,000 square feet of
space.
The
future minimum lease payments over the remaining terms of the lease and the
outstanding capital lease obligation at June 30, 2007 are as
follows:
|
2008
|
$ |
264,262
|
||
|
2009
|
264,262
|
|||
|
2010
|
264,262
|
|||
|
2011
|
264,262
|
|||
|
2012
|
264,262
|
|||
|
2013
and thereafter
|
2,344,740
|
|||
| Total minimuim lease payments | 3,666,050 | |||
| Less imputed interest | 1,012,539 | |||
| Capital lease obligation | $ | 2,653,511 |
Fed
Discount Window Borrower-in-Custody Program
The
Bank
also has a secured line of credit of $28,690,000 through the Fed Discount Window
Borrower-in-Custody program. The Bank pledged $35,863,000 of its
indirect auto loan portfolio as collateral for this line of
credit. If used, interest is based upon the current federal funds
rate plus 1.00%. There were no outstanding balances under this line
of credit at June 30, 2007.
Short-Term
Borrowings
Short-term
borrowings consist of securities sold under agreements to repurchase and other
sweep accounts. The weighted average interest rate on short-term
borrowings was 4.28% and 3.79% at June 30, 2007 and 2006,
respectively. Securities sold under agreement to repurchase, which
were scheduled to mature the next business day, were collateralized by
mortgage-backed and U.S. Government-sponsored enterprise securities with a
fair
value of $31,530,000 and amortized cost of $30,348,000, respectively at June
30,
2007 and a fair value of $33,112,000 and amortized cost of $34,893,000,
respectively at June 30, 2006. Sweep accounts have excess deposit
insurance coverage of $7,300,000 at June 30, 2007. The average
balance of short-term borrowings was $36,145,000 and $31,427,000 during the
years ended June 30, 2007 and 2006, respectively. The maximum amount
outstanding at any month-end during 2007 and 2006 was $44,164,000 and
$37,237,000, respectively. Securities sold under these agreements
were under the control of the Company throughout 2007 and 2006.
9. Capital
and Regulatory Matters
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet
items
as calculated under regulatory accounting practices. The Company and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
The
prompt corrective action regulations define specific capital categories based
on
an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
As
of
June 30, 2007 and 2006, the most recent notification from the Company’s and the
Bank's regulator categorized the Company and the Bank as "well capitalized"
under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratio as set
forth in the table below. There are no conditions or events since
that notification that management believes have changed the institution's
category.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios as set forth in
the
table below. At June 30, 2007 and 2006, the Company and the Bank
ratios exceeded the regulatory requirements. Management believes that
the Company and the Bank meet all capital adequacy requirements to which it
is
subject as of June 30, 2007 and 2006.
56
The
following tables illustrate the actual and required amounts and ratios for
the
Company at the dates indicated.
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be "Well
Capitalized"
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||
|
(Dollars
in Thousands)
|
|||||||||||||||
|
As
of June 30, 2007:
|
|||||||||||||||
|
Northeast
Bancorp:
|
|||||||||||||||
|
Total
capital to risk
weighted
assets
|
$ |
57,302
|
13.97% |
>$32,804
|
>8.0%
|
>$41,005
|
>10.0%
|
||||||||
|
Tier
1 capital to risk
weighted
assets
|
$ |
49,295
|
12.02% |
>$16,402
|
>4.0%
|
>$24,603
|
> 6.0%
|
||||||||
|
Tier
1 capital to total
average
assets
|
$ |
49,295
|
9.07% |
>$21,845
|
>4.0%
|
>$27,306
|
> 5.0%
|
||||||||
|
As
of June 30, 2006:
|
|||||||||||||||
|
Northeast
Bancorp:
|
|||||||||||||||
|
Total
capital to risk
weighted
assets
|
$ |
60,940
|
14.52% |
>$33,585
|
>8.0%
|
>$41,981
|
>10.0%
|
||||||||
|
Tier
1 capital to risk
weighted
assets
|
$ |
52,252
|
12.45% |
>$16,793
|
>4.0%
|
>$25,189
|
> 6.0%
|
||||||||
|
Tier
1 capital to total
average
assets
|
$ |
52,252
|
9.32% |
>$22,437
|
>4.0%
|
>$28,047
|
> 5.0%
|
||||||||
The
following tables illustrate the actual and required amounts and ratios for
the
Bank at the dates indicated.
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be "Well
Capitalized"
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||
|
(Dollars
in Thousands)
|
|||||||||||||||
|
As
of June 30, 2007:
|
|||||||||||||||
|
Northeast
Bank:
|
|||||||||||||||
|
Total
capital to risk
weighted
assets
|
$ |
51,892
|
12.71% |
>$32,668
|
>8.0%
|
>$40,835
|
>10.0%
|
||||||||
|
Tier
1 capital to risk
weighted
assets
|
$ |
46,780
|
11.46% |
>$16,334
|
>4.0%
|
>$24,501
|
> 6.0%
|
||||||||
|
Tier
1 capital to total
average
assets
|
$ |
46,780
|
8.60% |
>$21,748
|
>4.0%
|
>$27,185
|
> 5.0%
|
||||||||
|
As
of June 30, 2006:
|
|||||||||||||||
|
Northeast
Bank:
|
|||||||||||||||
|
Total
capital to risk
weighted
assets
|
$ |
56,088
|
13.44% |
>$33,395
|
>8.0%
|
>$41,743
|
>10.0%
|
||||||||
|
Tier
1 capital to risk
weighted
assets
|
$ |
50,864
|
12.18% |
>$16,697
|
>4.0%
|
>$25,046
|
> 6.0%
|
||||||||
|
Tier
1 capital to total
average
assets
|
$ |
50,864
|
9.07% |
>$22,426
|
>4.0%
|
>$28,032
|
> 5.0%
|
||||||||
57
The
Bank
may not declare or pay a cash dividend on, or repurchase, any of its capital
stock from the Parent if the effect thereof would cause the capital of the
Bank
to be reduced below the capital requirements imposed by the regulatory
authorities or if such amount exceeds the otherwise allowable amount under
FRB
rules (approximately $3,632,000 is available at June 30, 2007).
The
2006
Stock Repurchase Plan was approved and the 2004 stock repurchase plan terminated
by the Board of Directors on December 15, 2006. Under the 2006 Stock
Repurchase Plan, the Company may purchase up to 200,000 shares of its common
stock from time to time in the open market at prevailing
prices. Common stock repurchased pursuant to the plan will be
classified as authorized but un-issued shares of common stock available for
future issuance as determined by the Board of Directors, from time to
time. Total stock repurchases under the 2006 plan were 3,800 shares
for $67,944 through June 30, 2007. Total stock repurchases under the
2004 plan were 145,500 shares for $3,204,092 through December 15,
2006. The repurchase program may be discontinued by Northeast Bancorp
at any time. Total stock repurchases in fiscal 2007 were 3,800 shares
for $67,944 at an average price of $17.88 per share and in fiscal 2006 were
90,200 shares for $2,142,250 at an average price of $23.75 per
share. The remaining repurchase capacity of the 2006 Plan is 196,200
shares. Management believes that these and future purchases have not
and will not have a significant impact on the Company's
liquidity. The repurchases had a positive effect on earnings per
share during 2007 and 2006, by reducing the number of common stock shares
outstanding.
10. Earnings
Per Common Share
Basic
earnings per share (EPS) are computed by dividing net income available to common
stockholders by the weighted average number of shares
outstanding. The following table shows the weighted average number of
shares outstanding for each of the last three years. Shares issuable
relative to stock options granted have been reflected as an increase in the
shares outstanding used to calculate diluted EPS, after applying the treasury
stock method. The number of shares outstanding for basic and diluted
EPS are presented as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Average
shares outstanding, used in computing Basic EPS
|
2,451,610
|
2,493,560
|
2,518,764
|
|||||||||
|
Effect
of Dilutive Securities:
|
||||||||||||
|
Stock
and options outstanding
|
18,905
|
23,456
|
28,681
|
|||||||||
|
Options
exercised or canceled
|
47
|
9,079
|
16,100
|
|||||||||
|
Average
equivalent shares outstanding, used in computing Diluted
EPS
|
2,470,562
|
2,526,095
|
2,563,545
|
|||||||||
11. Other
Expenses
Other
expenses include the following for the years ended June 30, 2007, 2006 and
2005:
|
2007
|
2006
|
2005
|
||||||||||
|
Professional
fees
|
$ |
639,821
|
$ |
620,914
|
$ |
658,334
|
||||||
|
Advertising
expense
|
440,222
|
491,920
|
336,201
|
|||||||||
|
Write-down
of non-marketable securities
|
248,482
|
42,257
|
96,931
|
|||||||||
|
Computer
services and processing costs
|
616,173
|
580,995
|
472,154
|
|||||||||
|
Loan
expense
|
402,936
|
342,586
|
401,126
|
|||||||||
|
Write-down
of available-for-sale securities
|
50,442
|
38,394
|
27,849
|
|||||||||
|
Other
|
2,086,832
|
2,099,909
|
2,358,757
|
|||||||||
| $ |
4,484,908
|
$ |
4,216,975
|
$ |
4,351,352
|
|||||||
58
12. Income
Taxes
The
current and deferred components of income tax expense (benefit) were as follows
for the years ended June 30, 2007, 2006 and 2005:
|
2007
|
2006
|
2005
|
||||||||||
|
Federal:
|
||||||||||||
|
Current
|
$ |
845,509
|
$ |
2,089,538
|
$ |
1,965,463
|
||||||
|
Deferred
|
(329,268 | ) | (323,220 | ) | (197,522 | ) | ||||||
|
516,241
|
1,766,318
|
1,767,941
|
||||||||||
|
State
and local - current
|
62,922
|
85,049
|
85,916
|
|||||||||
| $ |
579,163
|
$ |
1,851,367
|
$ |
1,853,857
|
|||||||
Total
income tax expense is different from the amounts computed by applying the U.S.
federal income tax rates in effect to income before income taxes. The
reasons for these differences are as follows for the years ended June 30, 2007,
2006 and 2005:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amount
|
%
of
Pretax
Income
|
Amount
|
%
of
Pretax
Income
|
Amount
|
%
of
Pretax
Income
|
|||||||||||||||||||
|
Expected
income tax expense at federal tax rate
|
$ |
838,386
|
34.0 | % | $ |
1,990,892
|
34.0 | % | $ |
1,996,646
|
34.0 | % | ||||||||||||
|
State
tax, net of federal tax benefit
|
41,529
|
1.7
|
56,132
|
1.0
|
56,705
|
1.0
|
||||||||||||||||||
|
Dividend
received deduction
|
(33,547 | ) | (1.4 | ) | (30,634 | ) | (0.5 | ) | (34,310 | ) | (0.6 | ) | ||||||||||||
|
Non-taxable
interest income
|
(143,938 | ) | (5.8 | ) |
-
|
-
|
-
|
-
|
||||||||||||||||
|
Non-taxable
BOLI income
|
(118,748 | ) | (4.8 | ) | (112,829 | ) | (1.9 | ) | (93,278 | ) | (1.6 | ) | ||||||||||||
|
Other
|
(4,519 | ) | (0.2 | ) | (52,194 | ) | (0.9 | ) | (71,906 | ) | (1.3 | ) | ||||||||||||
| $ |
579,163
|
23.5 | % | $ |
1,851,367
|
31.7 | % | $ |
1,853,857
|
31.5 | % | |||||||||||||
The
tax
effect of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at June 30, 2007 and 2006,
are
presented below:
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Loans, principally due to allowance for loan losses
|
$ |
2,018,000
|
$ |
1,882,000
|
||||
|
Interest on nonperforming loans
|
72,000
|
54,000
|
||||||
|
Difference in tax and federal statement basis of
investments
|
1,125,000
|
1,444,000
|
||||||
|
Deferred compensation
|
263,000
|
169,000
|
||||||
|
Other
|
110,000
|
156,000
|
||||||
|
Total deferred tax assets
|
3,588,000
|
3,705,000
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Difference in tax and financial statement amortization of goodwill
and
other intangible assets
|
(324,000 | ) | (138,000 | ) | ||||
|
Mortgage servicing rights
|
(69,000 | ) | (110,000 | ) | ||||
|
Premises and equipment
|
(193,000 | ) | (229,000 | ) | ||||
|
Prepaid expenses
|
(159,000 | ) | (143,000 | ) | ||||
|
Other
|
-
|
(3,000 | ) | |||||
|
Total deferred tax liabilities
|
(745,000 | ) | (623,000 | ) | ||||
|
Net deferred tax asset, included in other assets
|
$ |
2,843,000
|
$ |
3,082,000
|
||||
The
Company has sufficient refundable taxes paid in available carryback years to
fully realize its recorded deferred tax assets. Accordingly, no
valuation allowance has been recorded.
59
In
prior
years, the Bank utilized the percentage of income bad debt deduction to
calculate its bad debt expense for tax purposes as was then permitted by the
Internal Revenue Code. Subsequent tax legislation required the
Company to recapture a portion of its tax bad debt reserves. Except
as stated below, the unrecaptured base year reserves will not be subject to
recapture as long as the Bank continues to carry on the business of
banking. However, the balance of the tax bad debt reserves is subject
to provisions of present law that require recapture in the case of certain
excess distributions to stockholders. For federal income tax
purposes, the Company has designated approximately $1,967,000 of net worth
as a
reserve for tax basis bad debts on loans. No deferred taxes have been
provided for base year reserve recapture as management plans to avoid the events
that would cause such recapture.
13. Employee
Benefit Plans
401(k)
Plan
The
Company offers a contributory 401(k) plan which is available to all full-time
salaried and hourly-paid employees who have attained age 18, and completed
90
days of employment. Employees may contribute up to 100% of their base
compensation, subject to IRS limitations. The Company will match 50%
up to the first 6% contributed. For the years ended June 30, 2007,
2006 and 2005, the Company contributed $220,649, $202,664 and $186,649,
respectively.
The
Company also has a profit sharing plan which covers substantially all full-time
employees. Contributions and costs are determined as a percent of
each covered employee's salary and are at the Board of Directors'
discretion. There were no discretionary contributions in 2007, 2006
or 2005.
Stock
Option Plans
The
Company has adopted Stock Option Plans. Both "incentive stock
options" and "nonqualified stock options" may be granted pursuant to the Stock
Option Plans. Under the Stock Option Plans, incentive stock options
may only be granted to employees of the Company and nonqualified stock options
may be granted to employees and directors. All options granted under
the Stock Option Plans will be required to have an exercise price per share
equal to at least the fair market value per share of common stock on the date
the option is granted. Options immediately vest upon being
granted. The options are exercisable for a maximum of ten years after
the options are granted in the case of all incentive stock options and as
determined by the Board of Directors for nonqualified stock
options.
In
accordance with the Stock Option Plans, a total of 363,250 shares of unissued
common stock were reserved for grants. At June 30, 2007, a total of
179,500 shares remained available to be granted.
A
summary
of the qualified and nonqualified stock option activity for the years ended
June
30 follows:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Shares
|
Weighted-
Average
Exercise
Price
|
Shares
|
Weighted-
Average
Exercise
Price
|
Shares
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||||||
|
Outstanding
at beginning of year
|
52,500
|
$ |
12.13
|
71,500
|
$ |
12.31
|
108,875
|
$ |
11.79
|
|||||||||||||||
|
Granted
|
-
|
-
|
-
|
-
|
1,000
|
12.75
|
||||||||||||||||||
|
Exercised
|
(500 | ) |
13.10
|
(17,500 | ) |
12.23
|
(37,875 | ) |
11.18
|
|||||||||||||||
|
Expired
|
-
|
-
|
(1,500 | ) |
14.90
|
(500 | ) |
18.50
|
||||||||||||||||
|
Outstanding
and exercisable at
end of year
|
52,000
|
$ |
12.12
|
52,500
|
$ |
12.13
|
71,500
|
$ |
12.31
|
|||||||||||||||
The
following table summarizes information about stock options outstanding at June
30, 2007:
|
Options
Outstanding and Exercisable
|
|||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
at
June
30, 2007
|
Weighted-Average
Remaining
Contractual
Life (Years)
|
Weighted-Average
Exercise
Price
|
||||||||
|
$8.00
to $9.00
|
25,000
|
2.7
|
$
8.47
|
||||||||
|
$13.10
|
15,000
|
4.1
|
13.10
|
||||||||
|
$18.50
|
12,000
|
0.6
|
18.50
|
||||||||
|
$8.00
to $18.50
|
52,000
|
2.6
|
$12.12
|
||||||||
60
14. Commitments,
Contingent Liabilities and Other Off-Balance Sheet
Risks
The
Company is a party to financial instruments with off-balance sheet risk in
the
normal course of business to meet the financing needs of its customers and
to
reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Financial
instruments with contract amounts which represent credit risk are as follows
as
of June 30:
|
2007
|
2006
|
|||||||
|
Commitments
to originate loans:
|
||||||||
|
Residential real estate mortgages
|
$ |
5,936,000
|
$ |
5,810,000
|
||||
|
Residential real estate mortgages held for sale
|
2,557,000
|
1,393,000
|
||||||
|
Commercial real estate mortgages, including multi-family residential
real estate
|
395,000
|
10,985,000
|
||||||
|
Commercial business loans
|
3,672,000
|
1,377,000
|
||||||
| $ |
12,560,000
|
$ |
19,565,000
|
|||||
|
Unused
lines of credit
|
$ |
42,745,000
|
$ |
41,130,000
|
||||
|
Standby
letters of credit
|
696,000
|
1,538,000
|
||||||
|
Unadvanced
portions of construction loans
|
2,257,000
|
2,375,000
|
||||||
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counter
party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties. As discussed in note 3, the Company has recorded an
allowance for possible losses on commitments and unfunded loans totaling
$178,818 and $204,086 at June 30, 2007 and 2006, respectively.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are
issued to support private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of June 30, 2007 and
2006, the maximum potential amount of the Company’s obligation was $696,000 and
$1,538,000, respectively, for financial and standby letters of
credit. The Company’s outstanding letters of credit generally have a
term of less than one year. If a letter of credit is drawn upon, the
Company may seek recourse through the customer’s underlying line of
credit. If the customer’s line of credit is also in default, the
Company may take possession of the collateral, if any, securing the line of
credit.
Lease
Obligations
The
Company leases certain properties and equipment used in operations under terms
of operating leases which include renewal options. Rental expense
under leases approximated $589,000, $662,000 and $708,000 for the years ended
June 30, 2007, 2006 and 2005, respectively.
Approximate
future minimum lease payments over the remaining terms of leases at June 30,
2007 are as follows:
|
2008
|
$ 379,059
|
|
2009
|
323,512
|
|
2010
|
299,321
|
|
2011
|
233,434
|
|
2012
|
232,910
|
|
2013
and thereafter
|
458,339
|
|
$
1,926,575
|
61
Legal
Proceedings
The
Company and its subsidiary are parties to litigation and claims arising in
the
normal course of business. Management believes that the liabilities,
if any, arising from such litigation and claims will not be material to the
Company's consolidated financial position or results of operations.
15. Condensed
Parent Information
Condensed
balance sheets for Northeast Bancorp at June 30, 2007 and 2006, and statements
of income and cash flows for each of the years in the three year period ended
June 30, 2007, are presented below.
|
Balance
Sheets
|
June
30,
|
|||||||
|
Assets
|
2007
|
2006
|
||||||
|
Cash
|
$ |
1,339,286
|
$ |
615,784
|
||||
|
Available-for-sale
securities
|
565,516
|
833,971
|
||||||
|
Investment
in banking subsidiary
|
51,464,689
|
50,194,825
|
||||||
|
Investment
in common securities of affiliated trusts
|
496,000
|
496,000
|
||||||
|
Goodwill,
net
|
407,897
|
407,897
|
||||||
|
Other
assets
|
3,213,580
|
3,127,862
|
||||||
|
Total
assets
|
$ |
57,486,968
|
$ |
55,676,339
|
||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Junior
Subordinated Debentures issued to affiliated trusts
|
$ |
16,496,000
|
$ |
16,496,000
|
||||
|
Other
liabilities
|
141,090
|
84,214
|
||||||
|
16,637,090
|
16,580,214
|
|||||||
|
Stockholders'
equity
|
40,849,878
|
39,096,125
|
||||||
|
Total
liabilities and stockholders' equity
|
$ |
57,486,968
|
$ |
55,676,339
|
||||
|
Statements
of Income
|
||||||||||||
|
Years
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Income:
|
||||||||||||
|
Dividends
from banking subsidiary
|
$ |
2,500,000
|
$ |
1,250,000
|
$ |
300,000
|
||||||
|
Other
income
|
233,814
|
147,233
|
175,715
|
|||||||||
|
Total
income
|
2,733,814
|
1,397,233
|
475,715
|
|||||||||
|
Expenses:
|
||||||||||||
|
Interest
on Junior Subordinated Debentures paid to
affiliated trusts
|
1,080,538
|
1,063,681
|
1,087,696
|
|||||||||
|
General
and administrative expenses
|
372,513
|
151,421
|
610,330
|
|||||||||
|
Total
expenses
|
1,453,051
|
1,215,102
|
1,698,026
|
|||||||||
|
Income
(loss) before income tax benefit and equity in
undistributed net income of subsidiary
|
1,280,763
|
182,131
|
(1,222,311 | ) | ||||||||
|
Income
tax benefit
|
427,997
|
367,542
|
602,665
|
|||||||||
|
Income
(loss) before equity in undistributed net income
of subsidiary
|
1,708,760
|
549,673
|
(619,646 | ) | ||||||||
|
Equity
in undistributed net income of subsidiary
|
177,917
|
3,454,526
|
4,638,280
|
|||||||||
|
Net
income
|
$ |
1,886,677
|
$ |
4,004,199
|
$ |
4,018,634
|
||||||
62
|
Years
Ended June 30,
|
||||||||||||
|
Statements
of Cash Flows
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ |
1,886,677
|
$ |
4,004,199
|
$ |
4,018,634
|
||||||
|
Adjustments
to reconcile net income to net cash provided
(used) by operating activities:
|
||||||||||||
|
Amortization
|
24,000
|
24,000
|
47,170
|
|||||||||
|
Undistributed
earnings of subsidiary
|
(177,917 | ) | (3,454,526 | ) | (4,638,280 | ) | ||||||
|
Write
down on available-for-sale securities
|
50,442
|
33,404
|
27,849
|
|||||||||
|
Net
gain on available-for-sale securities
|
(43,513 | ) | (17,693 | ) | (64,174 | ) | ||||||
|
Other
|
-
|
-
|
7,783
|
|||||||||
|
Writedown
of non-marketable investments
|
248,482
|
42,257
|
96,931
|
|||||||||
|
Increase
in other assets
|
(366,431 | ) | (272,411 | ) | (980,600 | ) | ||||||
|
Increase
in other liabilities
|
56,876
|
9,934
|
73,386
|
|||||||||
|
Net
cash provided (used) by operating activities
|
1,678,616
|
369,164
|
(1,411,301 | ) | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of common securities of affiliated trusts
|
-
|
-
|
(310,000 | ) | ||||||||
|
Increase
in investment of bank subsidiary
|
(400,000 | ) |
-
|
(1,800,000 | ) | |||||||
|
Proceeds
from the sales of securities of affiliated trusts
|
-
|
-
|
221,851
|
|||||||||
|
Available-for-sale
securities transferred from the bank
|
-
|
-
|
(669,045 | ) | ||||||||
|
Purchases
of available-for-sale securities
|
(1,964,213 | ) | (1,063,076 | ) | (733,351 | ) | ||||||
|
Proceeds
from sales of available-for-sale securities
|
2,249,946
|
855,635
|
748,615
|
|||||||||
|
Net
cash used by investing activities
|
(114,267 | ) | (207,441 | ) | (2,541,930 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Issuance
of common stock
|
6,550
|
213,972
|
280,170
|
|||||||||
|
Common
stock issued in connection with the purchase of branch
real estate
|
103,000
|
-
|
-
|
|||||||||
|
Repayment
of junior subordinate debentures
|
-
|
-
|
(7,394,849 | ) | ||||||||
|
Company
stock purchased
|
(67,944 | ) | (2,142,250 | ) | (698,812 | ) | ||||||
|
Dividends
paid to stockholders
|
(882,453 | ) | (897,087 | ) | (910,220 | ) | ||||||
|
Proceeds
from issuance of junior subordinated debentures
to affiliated trusts
|
-
|
-
|
10,310,000
|
|||||||||
|
Net
cash (used) provided by financing activities
|
(840,847 | ) | (2,825,365 | ) |
1,586,289
|
|||||||
|
Net
increase (decrease) in cash
|
723,502
|
(2,663,642 | ) | (2,366,942 | ) | |||||||
|
Cash,
beginning of year
|
615,784
|
3,279,426
|
5,646,368
|
|||||||||
|
Cash,
end of year
|
$ |
1,339,286
|
$ |
615,784
|
$ |
3,279,426
|
||||||
|
Supplemental
schedule of cash flow information:
|
||||||||||||
|
Interest
paid
|
$ |
1,067,097
|
$ |
1,039,681
|
$ |
1,087,696
|
||||||
16. Other
Comprehensive Income (Loss)
The
components of other comprehensive income (loss) for the years ended June 30,
2007, 2006 and 2005 are as follows:
|
2007
|
2006
|
2005
|
|||||||||
| Unrealized gains (losses) arising during the period, net of tax effect of $(361,936) in 2007, | |||||||||||
|
$997,265 in 2006 and
$(339,093) in 2005
|
$ |
702,582
|
$ | (1,935,868 | ) | $ |
658,431
|
||||
| Reclassification adjustment for losses (gains) on investments, net of write-downs,included | |||||||||||
|
in net income, net
of tax effect of $(2,753) in 2007, $8,456 in 2006, and $(35,311)
in 2005
|
5,341
|
16,414
|
(68,350 | ) | |||||||
|
Other
comprehensive income (loss)
|
$ |
707,923
|
$ | (1,952,282 | ) | $ |
726,781
|
||||
63
17. Segment
Reporting
Northeast
Bancorp through its banking subsidiary, Northeast Bank and its subsidiary,
Northeast Bank Insurance Group, Inc., provides a broad range of financial
services to individuals and companies in western and south-central
Maine. These services include lending, demand, savings and time
deposits, cash management, investment, insurance and trust
services. While the Company's senior management team monitors the
operations of the subsidiaries, the subsidiaries are primarily organized to
operate in the banking industry. Substantially all income and
services are derived from banking products and services in
Maine. Accordingly, the Company's subsidiaries are considered by
management to be aggregated in one reportable operating segment.
18. Junior
Subordinated Debentures
NBN
Capital Trust II and III were created in December 2003 and NBN Capital Trust
IV
was created December 2004. Each such trust is a Delaware statutory
trust (together, the "Private Trusts"). The exclusive purpose of the
Private Trusts was (i) issuing and selling Common Securities and
Preferred Securities in a private placement offering, (ii) using the proceeds
of
the sale of the Private Trust Securities to acquire Junior Subordinated
Deferrable Interest Notes ("Junior Subordinated Debentures"); and (iii) engaging
only in those other activities necessary, convenient, or incidental
thereto. Accordingly the Junior Subordinated Debentures are the sole
assets of each of the Private Trusts.
The
following table summarizes the junior subordinated debentures issued by the
Company to each affiliated trust and the trust preferred and common securities
issued by each affiliated trust at June 30, 2007 and 2006. Amounts
include junior subordinated debentures acquired by the affiliated trusts from
the Company with the capital contributed by the Company in exchange for the
common securities of such trust. The trust preferred securities were
sold in two separate private placement offerings. The Company has the
right to redeem the junior subordinated debentures, in whole or in part, on
or
after March 30, 2009 for NBN Capital Trust II and III, and on or after February
23, 2010, for NBN Capital Trust IV at the redemption price specified in the
Indenture plus any accrued but unpaid interest to the redemption
date.
|
Affiliated
Trusts
|
Trust
Preferred
Securities
|
Common
Securities
|
Junior
Subordinated
Debentures
|
Interest
Rate
|
Maturity
Date
|
||||||
|
NBN
Capital Trust II
|
$ 3,000,000
|
$ 93,000
|
$ 3,093,000
|
8.16%
|
March 30,
2034
|
||||||
|
NBN
Capital Trust III
|
3,000,000
|
93,000
|
3,093,000
|
6.50%
|
March 30,
2034
|
||||||
|
NBN
Capital Trust IV
|
10,000,000
|
310,000
|
10,310,000
|
5.88%
|
February 23,
2035
|
||||||
|
Total
|
$ 16,000,000
|
$ 496,000
|
$ 16,496,000
|
6.42%
|
|||||||
NBN
Capital Trust II pays a variable rate based on three month LIBOR plus 2.80%,
NBN
Capital Trust III pays a 6.50% fixed rate until March 30, 2009 when the rate
changes to a variable rate based on three month LIBOR plus 2.80%, and NBN
Capital Trust IV pays a 5.88% fixed rate until February 23, 2010 when the rate
changes to a variable rate based on three month LIBOR plus
1.89%. Accordingly, the Preferred Securities of the Private Trusts
currently pay quarterly distributions at an annual rate of 8.16% for the stated
liquidation amount of $1,000 per Preferred Security for NBN Capital Trust II,
an
annual rate of 6.50% for the stated liquidation amount of $1,000 per Preferred
Security for NBN Capital Trust III and an annual rate of 5.88% for the stated
liquidation amount of $1,000 per Preferred Security for NBN Capital Trust
IV. The Company has fully and unconditionally guaranteed all of the
obligations of each trust. The guaranty covers the quarterly
distributions and payments on liquidation or redemption of the Private Trust
Preferred Securities, but only to the extent of funds held by the
trusts. Based on the current interest rates, the annual interest
expense is approximately $1,060,000.
19. Fair
Value of Financial Instruments
Fair
value estimates, methods and assumptions are set forth below for the Company's
significant financial instruments.
Cash
and Cash Equivalents - The fair value of cash, due from banks, interest
bearing deposits and FHLB overnight deposits approximates their relative book
values, as these financial instruments have short maturities.
Available-for-sale
Securities - The fair value of available-for-sale securities is estimated
based on bid prices published in financial newspapers or bid quotations received
from securities dealers.
Federal
Home Loan Bank and Federal Reserve Bank Stock - The carrying value of
Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock
approximates fair value based on redemption provisions of the FHLB and the
FRB.
Loans
and Loans held-for-sale - Fair values are estimated for portfolios of loans
with similar financial characteristics. The fair value of performing
loans is calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The estimates of maturity
are based on the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of current
economic conditions, lending conditions and the effects of estimated
prepayments.
64
Fair
value for significant nonperforming loans is based on estimated cash flows
and
is discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows
and discount rates are judgmentally determined using available market
information and historical information.
Management
has made estimates of fair value using discount rates that it believes to be
reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the fair
value presented would be indicative of the value negotiated in an actual
sale.
The
fair
value of loans held-for-sale is estimated based on bid quotations received
from
loan dealers.
Interest
Receivable - The fair value of this financial instrument approximates the
book value as this financial instrument has a short maturity. It is
the Company's policy to stop accruing interest on loans past due by more than
ninety days. Therefore this financial instrument has been adjusted
for estimated credit loss.
Deposits
- The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts and money market
accounts, is equal to the amount payable on demand. The fair values
of time deposits are based on the discounted value of contractual cash
flows.
The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
The
fair
value estimates do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market. If that value was considered, the fair value of
the Company's net assets could increase.
Borrowings
- The fair value of the Company's borrowings with the Federal Home Loan Bank
is
estimated by discounting the cash flows through maturity or the next repricing
date based on current rates available to the Company for borrowings with similar
maturities. The fair value of the Company’s short-term borrowings,
capital lease obligation and other borrowings is estimated by discounting the
cash flows through maturity based on current rates available to the Company
for
borrowings with similar maturities.
Junior
Subordinated Debentures - The fair value of the Company's Junior
Subordinated Debentures is estimated based on current interest
rates.
Commitments
to Originate Loans - The Company has not estimated the fair value of
commitments to originate loans due to their short term nature and their relative
immateriality.
Limitations
- Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial
instrument. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings
of
a particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments
and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair
value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that
are not considered financial instruments include the deferred tax asset,
premises and equipment and intangible assets, including the customer
base. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
65
The
following table presents the estimated fair value of the Company's significant
financial instruments at June 30, 2007 and 2006:
|
June
30, 2007
|
June
30, 2006
|
|||||||||||||||
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
|||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ |
10,742
|
$ |
10,742
|
$ |
12,104
|
$ |
12,104
|
||||||||
|
Available-for-sale
securities
|
86,348
|
86,348
|
86,138
|
86,138
|
||||||||||||
|
Regulatory
stock (FHLB and FRB)
|
5,297
|
5,297
|
5,958
|
5,958
|
||||||||||||
|
Loans
held-for-sale
|
1,636
|
1,665
|
681
|
703
|
||||||||||||
|
Loans,
net
|
419,815
|
422,596
|
430,167
|
437,196
|
||||||||||||
|
Interest
receivable
|
2,587
|
2,587
|
2,679
|
2,679
|
||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
(with no stated maturity)
|
118,937
|
118,937
|
126,247
|
126,247
|
||||||||||||
|
Time
deposits
|
245,617
|
245,009
|
269,046
|
266,685
|
||||||||||||
|
Federal
Home Loan Bank advances
|
93,017
|
92,625
|
75,889
|
75,457
|
||||||||||||
|
Other
borrowings
|
2,292
|
2,292
|
57
|
57
|
||||||||||||
|
Short-term
borrowings
|
33,105
|
33,045
|
29,637
|
29,587
|
||||||||||||
|
Capital
lease obligation
|
2,654
|
2,557
|
2,781
|
2,656
|
||||||||||||
|
Junior
Subordinated Debentures
|
16,496
|
16,064
|
16,496
|
15,034
|
||||||||||||
20. Branch
Acquisition
On
September 1, 2006, the Bank acquired its South Paris branch located at 235
Main
Street, South Paris, Maine from a director of Northeast Bancorp for a purchase
price of $400,000. The price was determined by an independent,
third-party appraisal. The consideration paid was $297,000 in cash
and 5,000 shares of Northeast Bancorp common stock (valued at $103,000 based
on
the $20.60 share price on August 31, 2006). This branch was
previously leased from the director. This acquisition was not
material to the balance sheet or the results of operations.
21. Subsequent
Events
The
Board
of Directors approved a new deferred compensation plan for the senior executives
of the Bank and its subsidiary.
Northeast
Bank Insurance Group Inc. acquired the Hartford Agency in Lewiston Maine on
August 30, 2007 for $1,358,000 in cash and debt.
66
|
Item
8.b. Statistical Disclosures Required by Industry Guide
3
|
|||||||||||||||||||||||||||||||||||||
|
Table
1
|
|||||||||||||||||||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
|||||||||||||||||||||||||||||||||||||
|
Distribution
of Assets, Liabilities and Stockholders' Equity ($ in
thousands)
|
|||||||||||||||||||||||||||||||||||||
|
Interest
Rates and Interest Differential
|
|||||||||||||||||||||||||||||||||||||
|
Years
Ended June 30, 2007, 2006 and 2005
|
|||||||||||||||||||||||||||||||||||||
|
June
30, 2007
|
June
30, 2006
|
June
30, 2005
|
|||||||||||||||||||||||||||||||||||
|
Average
|
Interest
|
Average
|
Average
|
Interest
|
Average
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||||||||||
|
Daily
|
Income/
|
Yield/
|
Daily
|
Income/
|
Yield/
|
Daily
|
Income/
|
Yield/
|
|||||||||||||||||||||||||||||
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||||||||||||
|
Assets:
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
|||||||||||||||||||||||||||||||||||||
|
Investment
securities (1)
|
$ |
84,705
|
$ |
3,935
|
4.65 | % | $ |
80,050
|
$ |
3,461
|
4.32 | % | $ |
69,451
|
$ |
2,715
|
3.91 | % | |||||||||||||||||||
|
Loans
(2)(3)(4)
|
433,576
|
31,367
|
7.23 | % |
448,611
|
31,643
|
7.05 | % |
453,379
|
29,619
|
6.53 | % | |||||||||||||||||||||||||
|
Regulatory
stock
|
5,529
|
368
|
6.66 | % |
6,919
|
336
|
4.86 | % |
6,982
|
265
|
3.80 | % | |||||||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||||||||||||||||
|
(5)
|
4,380
|
210
|
4.79 | % |
3,588
|
134
|
3.73 | % |
3,998
|
75
|
1.88 | % | |||||||||||||||||||||||||
| Total interest-earning | |||||||||||||||||||||||||||||||||||||
| assets/interest | |||||||||||||||||||||||||||||||||||||
|
income/average rates
|
|||||||||||||||||||||||||||||||||||||
|
earned
|
528,190
|
35,880
|
6.79 | % |
539,168
|
35,574
|
6.60 | % |
533,810
|
32,674
|
6.12 | % | |||||||||||||||||||||||||
|
Non-interest
earning assets:
|
|||||||||||||||||||||||||||||||||||||
|
Cash
& due from banks
|
6,794
|
8,845
|
11,948
|
||||||||||||||||||||||||||||||||||
| Bank premises and | |||||||||||||||||||||||||||||||||||||
|
equipment, net
|
7,345
|
7,050
|
4,230
|
||||||||||||||||||||||||||||||||||
|
Other
assets
|
21,705
|
19,816
|
18,512
|
||||||||||||||||||||||||||||||||||
| Allowance for loan | |||||||||||||||||||||||||||||||||||||
|
losses
|
(5,728 | ) | (5,451 | ) | (4,862 | ) | |||||||||||||||||||||||||||||||
| Total non-interest | |||||||||||||||||||||||||||||||||||||
|
earning
assets
|
30,116
|
30,260
|
29,828
|
||||||||||||||||||||||||||||||||||
|
Total
assets
|
$ |
558,306
|
$ |
569,428
|
$ |
563,638
|
|||||||||||||||||||||||||||||||
|
Liabilities
& Stockholders' Equity:
|
|||||||||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
|||||||||||||||||||||||||||||||||||||
|
NOW
|
$ |
54,667
|
$ |
1,234
|
2.26 | % | $ |
59,969
|
$ |
1,158
|
1.93 | % | $ |
65,761
|
$ |
809
|
1.23 | % | |||||||||||||||||||
|
Money
market
|
9,357
|
221
|
2.36 | % |
13,093
|
246
|
1.88 | % |
17,096
|
213
|
1.25 | % | |||||||||||||||||||||||||
|
Savings
|
22,309
|
194
|
0.87 | % |
27,453
|
228
|
0.83 | % |
29,056
|
230
|
0.79 | % | |||||||||||||||||||||||||
|
Time
|
256,268
|
11,841
|
4.62 | % |
255,599
|
9,520
|
3.72 | % |
243,612
|
7,373
|
3.03 | % | |||||||||||||||||||||||||
| Total interest- | |||||||||||||||||||||||||||||||||||||
|
bearing deposits
|
342,601
|
13,490
|
3.94 | % |
356,114
|
11,152
|
3.13 | % |
355,525
|
8,625
|
2.43 | % | |||||||||||||||||||||||||
| Short-term borrowings | |||||||||||||||||||||||||||||||||||||
|
(6)
|
36,145
|
1,505
|
4.16 | % |
31,427
|
928
|
2.95 | % |
30,572
|
403
|
1.32 | % | |||||||||||||||||||||||||
|
Borrowed
funds
|
83,024
|
4,021
|
4.84 | % |
82,143
|
3,617
|
4.40 | % |
82,542
|
3,851
|
4.67 | % | |||||||||||||||||||||||||
| Junior subordinated | |||||||||||||||||||||||||||||||||||||
|
debentures
|
16,496
|
1,081
|
6.55 | % |
16,496
|
1,064
|
6.45 | % |
15,248
|
1,088
|
7.14 | % | |||||||||||||||||||||||||
| Total interest-bearing | |||||||||||||||||||||||||||||||||||||
| liabilities/interest | |||||||||||||||||||||||||||||||||||||
| expense/average rates | |||||||||||||||||||||||||||||||||||||
|
paid
|
478,266
|
20,097
|
4.20 | % |
486,180
|
16,761
|
3.45 | % |
483,887
|
13,967
|
2.89 | % | |||||||||||||||||||||||||
| Non-interest bearing | |||||||||||||||||||||||||||||||||||||
|
liabilities:
|
|||||||||||||||||||||||||||||||||||||
| Demand deposits and | |||||||||||||||||||||||||||||||||||||
|
escrow
accounts
|
35,420
|
39,162
|
37,841
|
||||||||||||||||||||||||||||||||||
|
Other
liabilities
|
3,500
|
3,827
|
3,237
|
||||||||||||||||||||||||||||||||||
|
Total
liabilities
|
517,186
|
529,169
|
524,965
|
||||||||||||||||||||||||||||||||||
|
Stockholders'
equity
|
41,120
|
40,259
|
38,673
|
||||||||||||||||||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||||||||||||||||||
|
stockholders'
equity
|
$ |
558,306
|
$ |
569,428
|
$ |
563,638
|
|||||||||||||||||||||||||||||||
|
Net
interest income
|
$ |
15,783
|
$ |
18,813
|
$ |
18,707
|
|||||||||||||||||||||||||||||||
|
Interest
rate spread
|
2.59 | % | 3.15 | % | 3.23 | % | |||||||||||||||||||||||||||||||
|
Net
yield on interest earning assets (7)
|
2.99 | % | 3.49 | % | 3.50 | % | |||||||||||||||||||||||||||||||
| (1) | The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity. Interest | ||||||||||||||||||||||||||||||||||||
| income and yield are stated on a fully tax equivalent basis using a 30.90% tax rate. | |||||||||||||||||||||||||||||||||||||
|
(2)
|
Non-accruing
loans are included in computation of average balance, but unpaid
interest
on
|
||||||||||||||||||||||||||||||||||||
|
nonperforming
loans has not been included for purposes of determining interest
income.
|
|||||||||||||||||||||||||||||||||||||
|
(3)
|
Interest
income on loans includes amortization of net deferred costs of
$998 in
2007, $946
in 2006, and $902 in 2005.
|
||||||||||||||||||||||||||||||||||||
|
(4)
|
Includes
Loans Held for Sale.
|
||||||||||||||||||||||||||||||||||||
|
(5)
|
Short
term investments include FHLB overnight deposits and other
interest-bearing deposits.
|
||||||||||||||||||||||||||||||||||||
|
(6)
|
Short-term
borrowings include securities sold under repurchase agreement and
sweep
accounts.
|
||||||||||||||||||||||||||||||||||||
|
(7)
|
The
net yield on interest earning assets is net interest income divided
by total interest-earning assets.
|
||||||||||||||||||||||||||||||||||||
67
|
Northeast
Bancorp Consolidated
|
|||||||||||||
|
Investment
Securities Portfolio
|
|||||||||||||
|
($
in thousands)
|
|||||||||||||
|
As
of June 30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
Available-for-sale
(1)
|
|||||||||||||
| Debt securities issued by U.S. Government-sponsored enterprises | $ |
21,158
|
$ |
24,694
|
$ |
25,762
|
|||||||
|
Mortgage-backed
securities
|
52,139
|
48,126
|
46,154
|
||||||||||
|
Municipal
bonds
|
10,709
|
10,770
|
-
|
||||||||||
|
Corporate
bonds
|
485
|
478
|
493
|
||||||||||
|
Equity
securities
|
1,857
|
2,070
|
1,937
|
||||||||||
|
Total
available-for-sale (2):
|
$ |
86,348
|
$ |
86,138
|
$ |
74,346
|
|||||||
|
(1)
|
Carried
at estimated fair value. Northeast Bancorp does not have any securities
classified as held-to-maturity.
|
||||||||||||
|
(2)
|
Cost
of such securities ($ in thousands) was $89,249 as of June 30,
2007,
$90,111 as of June 30, 2006 and $75,361 as of June 30,
2005.
|
||||||||||||
|
Table
3
|
||||||||||||||||||||||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||||||||||||||||||||||
|
Investment
Maturity at Fair Value
|
||||||||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
After
One Year
|
After
Five Years
|
|||||||||||||||||||||||||||||||||||||||
|
But
Within
|
But
Within
|
|||||||||||||||||||||||||||||||||||||||
|
Within
One Year
|
5
Years
|
10
Years
|
After
10 Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||||||||
|
As
of June 30, 2007
|
||||||||||||||||||||||||||||||||||||||||
| U. S. Government | ||||||||||||||||||||||||||||||||||||||||
|
sponsored
enterprises
|
$ |
6,410
|
3.26 | % | $ |
12,505
|
4.31 | % | $ |
973
|
5.14 | % | $ |
1,270
|
5.22 | % | $ |
21,158
|
4.09 | % | ||||||||||||||||||||
| Mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
|
securities
|
1,295
|
4.63 | % |
-
|
0.00 | % |
19,202
|
4.19 | % |
31,642
|
5.26 | % |
52,139
|
4.85 | % | |||||||||||||||||||||||||
| Municipal bonds (Tax | ||||||||||||||||||||||||||||||||||||||||
|
equivalent
yields)
|
-
|
0.00 | % |
-
|
0.00 | % |
-
|
0.00 | % |
10,709
|
5.97 | % |
10,709
|
5.97 | % | |||||||||||||||||||||||||
|
Corporate bonds
|
-
|
0.00 | % |
485
|
4.05 | % |
-
|
0.00 | % |
-
|
0.00 | % |
485
|
4.05 | % | |||||||||||||||||||||||||
|
Equity
securities
|
1,857
|
4.99 | % |
-
|
0.00 | % |
-
|
0.00 | % |
-
|
0.00 | % |
1,857
|
4.99 | % | |||||||||||||||||||||||||
| $ |
9,562
|
3.78 | % | $ |
12,990
|
4.30 | % | $ |
20,175
|
4.24 | % | $ |
43,621
|
5.43 | % | $ |
86,348
|
4.80 | % | |||||||||||||||||||||
|
As
of June 30, 2006
|
||||||||||||||||||||||||||||||||||||||||
| U. S. Government | ||||||||||||||||||||||||||||||||||||||||
|
sponsored
enterprises
|
$ |
-
|
0.00 | % | $ |
20,573
|
3.35 | % | $ |
2,868
|
4.85 | % | $ |
1,253
|
5.23 | % | $ |
24,694
|
3.62 | % | ||||||||||||||||||||
| Mortgage-backed | ||||||||||||||||||||||||||||||||||||||||
|
securities
|
-
|
0.00 | % |
766
|
4.38 | % |
23,872
|
4.19 | % |
23,488
|
5.08 | % |
48,126
|
4.63 | % | |||||||||||||||||||||||||
| Municipal bonds (Tax | ||||||||||||||||||||||||||||||||||||||||
|
equivalent
yields)
|
- | 0.00 | % |
-
|
0.00 | % |
-
|
0.00 | % |
10,770
|
5.97 | % |
10,770
|
5.97 | % | |||||||||||||||||||||||||
|
Corporate bonds
|
-
|
0.00 | % |
478
|
4.05 | % |
-
|
0.00 | % |
-
|
0.00 | % |
478
|
4.05 | % | |||||||||||||||||||||||||
|
Equity
securities
|
2,070
|
6.56 | % |
-
|
0.00 | % |
-
|
0.00 | % |
-
|
0.00 | % |
2,070
|
6.56 | % | |||||||||||||||||||||||||
| $ |
2,070
|
6.56 | % | $ |
21,817
|
3.41 | % | $ |
26,740
|
4.26 | % | $ |
35,511
|
5.36 | % | $ |
86,138
|
4.55 | % | |||||||||||||||||||||
68
|
Table
4
|
||||||||||||||||||||||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||||||||||||||||||||||
|
Loan
Portfolio
|
||||||||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
As
of
|
June
30, 2007
|
June
30, 2006
|
June
30, 2005
|
June
30, 2004
|
June
30, 2003
|
|||||||||||||||||||||||||||||||||||
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
|||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Loan
portfolio:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
real estate
|
$ |
145,184
|
34.34 | % | $ |
149,100
|
34.44 | % | $ |
148,840
|
32.46 | % | $ |
138,031
|
32.10 | % | $ |
125,437
|
33.33 | % | ||||||||||||||||||||
|
Commercial
real estate
|
112,535
|
26.61 | % |
115,327
|
26.63 | % |
125,899
|
27.46 | % |
127,866
|
29.74 | % |
97,854
|
26.00 | % | |||||||||||||||||||||||||
|
Construction
|
5,451
|
1.29 | % |
5,106
|
1.18 | % |
12,201
|
2.66 | % |
8,367
|
1.95 | % |
7,201
|
1.92 | % | |||||||||||||||||||||||||
|
Commercial
|
40,784
|
9.64 | % |
50,262
|
11.61 | % |
68,716
|
14.99 | % |
64,304
|
14.95 | % |
67,585
|
17.96 | % | |||||||||||||||||||||||||
|
Consumer
and other
|
118,881
|
28.12 | % |
113,192
|
26.14 | % |
102,865
|
22.43 | % |
91,434
|
21.26 | % |
78,235
|
20.79 | % | |||||||||||||||||||||||||
|
Total
loans
|
422,835
|
100.00 | % |
432,987
|
100.00 | % |
458,521
|
100.00 | % |
430,002
|
100.00 | % |
376,312
|
100.00 | % | |||||||||||||||||||||||||
|
Net
deferred loan costs
|
2,736
|
2,676
|
2,531
|
2,592
|
2,675
|
|||||||||||||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
5,756
|
5,496
|
5,104
|
4,577
|
4,016
|
|||||||||||||||||||||||||||||||||||
|
Net
loans
|
$ |
419,815
|
$ |
430,167
|
$ |
455,948
|
$ |
428,017
|
$ |
374,971
|
||||||||||||||||||||||||||||||
|
Table
5
|
||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||
|
Maturities
and Repricing of Loans ($ in thousands)
|
||||||||||||||||||||
|
As
of June 30, 2007
|
||||||||||||||||||||
|
1
Year
|
1
to 5
|
5
to 10
|
Over
10
|
Total
|
||||||||||||||||
|
or
Less
|
Years
|
Years
|
Years
|
Loans
|
||||||||||||||||
|
Mortgages:
|
||||||||||||||||||||
|
Residential
|
$ |
30,526
|
$ |
26,273
|
$ |
21,749
|
$ |
66,636
|
$ |
145,184
|
||||||||||
|
Commercial
|
44,821
|
61,851
|
4,206
|
1,657
|
112,535
|
|||||||||||||||
|
Construction
|
5,451
|
-
|
-
|
-
|
5,451
|
|||||||||||||||
|
Non-mortgage
loans:
|
||||||||||||||||||||
|
Commercial
|
21,112
|
18,337
|
1,335
|
-
|
40,784
|
|||||||||||||||
|
Consumer
and other
|
1,330
|
39,061
|
23,863
|
54,627
|
118,881
|
|||||||||||||||
|
Total
loans
|
$ |
103,240
|
$ |
145,522
|
$ |
51,153
|
$ |
122,920
|
$ |
422,835
|
||||||||||
|
Type
of interest rate:
|
||||||||||||||||||||
|
Predetermined
rate, maturity greater than 1 year
|
$ |
227,728
|
||||||||||||||||||
|
Floating
or adjustable rate due
after one year
|
91,867
|
|||||||||||||||||||
|
Total
due after 1 year:
|
$ |
319,595
|
||||||||||||||||||
|
Scheduled
repayments are reported in the maturity category in which
the payment is
due. Demand loans and overdrafts are reported in one
|
||||||||||||||||||||
|
year
or less. Maturities are based upon contract terms.
|
||||||||||||||||||||
69
|
Table
6
|
|||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
|||||||||||||||||||||
|
Summary
of Loan Losses Experience
|
|||||||||||||||||||||
|
($
in thousands)
|
|||||||||||||||||||||
|
As
of or For Years Ended June 30,
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
Average
net loans outstanding during the period (1)
|
$ |
432,539
|
$ |
448,070
|
$ |
452,951
|
$ |
395,774
|
$ |
380,948
|
|||||||||||
|
Total loans
at end of period (1)
|
$ |
425,571
|
$ |
435,663
|
$ |
461,052
|
$ |
432,594
|
$ |
378,987
|
|||||||||||
|
Allowance
at beginning of period
|
$ |
5,496
|
$ |
5,104
|
$ |
4,577
|
$ |
4,016
|
$ |
3,496
|
|||||||||||
|
Loans
charged-off during the period:
|
|||||||||||||||||||||
|
Residential
real estate
|
60
|
15
|
67
|
142
|
120
|
||||||||||||||||
|
Commercial
real estate
|
6
|
35
|
7
|
124
|
22
|
||||||||||||||||
|
Commercial
|
251
|
326
|
389
|
49
|
130
|
||||||||||||||||
|
Consumer
and other
|
538
|
417
|
472
|
422
|
699
|
||||||||||||||||
|
Total
loans charged-off
|
855
|
793
|
935
|
737
|
971
|
||||||||||||||||
|
Recoveries
on loans previously charged-off:
|
|||||||||||||||||||||
|
Residential
real estate
|
1
|
1
|
0
|
60
|
41
|
||||||||||||||||
|
Commercial
real estate
|
26
|
25
|
10
|
34
|
55
|
||||||||||||||||
|
Commercial
|
4
|
6
|
41
|
120
|
166
|
||||||||||||||||
|
Consumer
and other
|
95
|
131
|
109
|
122
|
138
|
||||||||||||||||
|
Total
recoveries
|
126
|
163
|
160
|
336
|
400
|
||||||||||||||||
|
Net
loans charged off during the period
|
729
|
630
|
775
|
401
|
571
|
||||||||||||||||
|
Provision
for loan losses
|
989
|
1,226
|
1,302
|
962
|
1,091
|
||||||||||||||||
|
Reclassified
to off-balance sheet credit risk reserve
|
0
|
(204 | ) |
0
|
0
|
0
|
|||||||||||||||
|
Allowance
at end of period
|
$ |
5,756
|
$ |
5,496
|
$ |
5,104
|
$ |
4,577
|
$ |
4,016
|
|||||||||||
|
Ratio
of net charge-offs to average loans outstanding
|
0.17 | % | 0.14 | % | 0.17 | % | 0.10 | % | 0.15 | % | |||||||||||
|
Allowance
as a percentage of total loans
|
1.35 | % | 1.26 | % | 1.11 | % | 1.06 | % | 1.06 | % | |||||||||||
|
Allowance
as a percentage of
|
|||||||||||||||||||||
|
non-performing
and nonaccrual loans (2)
|
113.08 | % | 105.79 | % | 300.59 | % | 272.93 | % | 219.57 | % | |||||||||||
|
(1)
|
Excludes
loans held for sale.
|
||||||||||||||||||||
|
(2)
|
The
increase in non-performing loans in fiscal 2007 and 2006
caused the
allowance as a percentage of non-performing and nonaccrual
|
||||||||||||||||||||
|
loans
to decrease compared to prior years.
|
|||||||||||||||||||||
|
Management
believes that the allowance for loan losses is adequate.
|
|||||||||||||||||||||
|
For
each period indicated, this table summarizes loans outstanding
at the end
of each period, the average amount of loans outstanding,
|
|||||||||||||||||||||
|
changes
in the allowance for loan losses, and other selected
statistics.
|
|||||||||||||||||||||
70
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance
for Loan Losses
|
||||||||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
| As of |
June
30, 2007
|
June
30, 2006
|
June
30, 2005
|
June
30, 2004
|
June
30, 2003
|
|||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
||||||||||||||||||||||||||||||||||||
|
Loans
in Each
|
Loans
in Each
|
Loans
in Each
|
Loans
in Each
|
Loans
in Each
|
||||||||||||||||||||||||||||||||||||
|
Category
to
|
Category
to
|
Category
to
|
Category
to
|
Category
to
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
|||||||||||||||||||||||||||||||
|
Allocation
of allowance for loan losses:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
real estate
|
$ |
808
|
34.34 | % | $ |
672
|
34.44 | % | $ |
730
|
32.46 | % | $ |
636
|
32.10 | % | $ |
516
|
33.33 | % | ||||||||||||||||||||
|
Commercial
real estate
|
2,000
|
26.61 | % |
2,156
|
26.63 | % |
1,670
|
27.46 | % |
989
|
29.74 | % |
855
|
26.00 | % | |||||||||||||||||||||||||
|
Construction
|
64
|
1.29 | % |
56
|
1.18 | % |
69
|
2.66 | % |
48
|
1.95 | % |
7
|
1.92 | % | |||||||||||||||||||||||||
|
Commercial
|
1,042
|
9.64 | % |
1,037
|
11.61 | % |
753
|
14.99 | % |
1,374
|
14.95 | % |
1,640
|
17.96 | % | |||||||||||||||||||||||||
|
Consumer
and other
|
1,667
|
28.12 | % |
1,470
|
26.14 | % |
1,737
|
22.43 | % |
1,530
|
21.26 | % |
998
|
20.79 | % | |||||||||||||||||||||||||
|
Unallocated
|
175
|
0.00 | % |
105
|
0.00 | % |
145
|
0.00 | % |
0
|
0.00 | % |
0
|
0.00 | % | |||||||||||||||||||||||||
|
Total
|
$ |
5,756
|
100.00 | % | $ |
5,496
|
100.00 | % | $ |
5,104
|
100.00 | % | $ |
4,577
|
100.00 | % | $ |
4,016
|
100.00 | % | ||||||||||||||||||||
|
This
table shows how the allowance for loan losses was allocated
for the
periods indicated.
|
||||||||||||||||||||||||||||||||||||||||
|
The
allowance for loan losses is established through a provision
for loan
losses charged to operations. Loan losses are charged against the
allowance when management believes that the collectibility
of the loan
principal is unlikely. Recoveries on loans previously
charged off are
credited to the allowance.
|
||||||||||||||||||||||||||||||||||||||||
|
The
allowance is an amount that management believes will
be adequate to absorb
probable loan losses based on evaluations of collectibility
and prior loss
experience. The evaluation takes into consideration such factors
as changes in the nature and volume of the portfolio,
overall portfolio
quality, specific problem loans, and current economic
conditions that may
affect the borrowers' ability to pay. Management also obtains
collateral appraisals when considered
necessary.
|
||||||||||||||||||||||||||||||||||||||||
71
|
Table
8
|
||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||
|
Non-performing
Loans
|
||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||
|
As
of June 30,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Nonaccrual
loans:
|
||||||||||||||||||||
|
Residential
real estate
|
$ |
439
|
$ |
521
|
$ |
515
|
$ |
214
|
$ |
568
|
||||||||||
|
Commercial
real estate
|
1,444
|
1,260
|
33
|
47
|
524
|
|||||||||||||||
|
Commercial
loans
|
708
|
1,423
|
3
|
85
|
28
|
|||||||||||||||
|
Consumer
and other
|
461
|
109
|
60
|
101
|
76
|
|||||||||||||||
|
Total
nonaccrual loans
|
3,052
|
3,313
|
611
|
447
|
1,196
|
|||||||||||||||
|
Current
nonaccrual loans (1)
|
2,038
|
1,882
|
1,087
|
1,230
|
633
|
|||||||||||||||
|
Total
non-performing loans (2)
|
5,090
|
5,195
|
1,698
|
1,677
|
1,829
|
|||||||||||||||
|
Acquired
assets
|
-
|
10
|
89
|
39
|
97
|
|||||||||||||||
|
Total
non-performing assets
|
$ |
5,090
|
$ |
5,205
|
$ |
1,787
|
$ |
1,716
|
$ |
1,926
|
||||||||||
|
Non-performing
loans to total loans
|
1.20 | % | 1.19 | % | 0.37 | % | 0.39 | % | 0.49 | % | ||||||||||
|
Non-performing
assets to total assets
|
0.91 | % | 0.92 | % | 0.31 | % | 0.32 | % | 0.41 | % | ||||||||||
|
As
of June 30, 2007, there were no troubled debt restructured
loans.
|
||||||||||||||||||||
|
See
additional information concerning non-performing
and impaired loans in
note 3 of the consolidated financial statements as
well as in Management's
Discussion and Analysis.
|
||||||||||||||||||||
|
(1)
As of June 30, 2007, comprised of commercial real
estate loans of $589
thousand, commercial loans of $1,396 thousand, residential
real estate
loans of $38 thousand and consumer loans of $15 thousand.
|
||||||||||||||||||||
|
(2)
Total non-performing loans increased in fiscal 2007
and 2006 as compared
to prior years primarily from commercial real estate and
commercial loans. Loans past due 90 days or more and discretionary
actions by management to place loans on non-accural
account for the
increase in both portfolios. Estimated credit losses
were included in the
determination of the adequacy of the allowance for
loan
losses.
|
||||||||||||||||||||
72
|
Table
9
|
||||||||||||||||||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||||||||||||||||||
|
Average
Deposits ($ in thousands) and Rates
|
||||||||||||||||||||||||||||||||||||
|
For
Years Ended
|
June
30, 2007
|
June
30, 2006
|
June
30, 2005
|
|||||||||||||||||||||||||||||||||
|
|
|
%
of
|
|
|
%
of
|
|
|
%
of
|
||||||||||||||||||||||||||||
|
Amount
|
Rate
|
Deposits
|
Amount
|
Rate
|
Deposits
|
Amount
|
Rate
|
Deposits
|
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
Average
deposits:
|
||||||||||||||||||||||||||||||||||||
| Non-interest bearing demand deposits | ||||||||||||||||||||||||||||||||||||
|
and escrow accounts
|
$ |
35,420
|
0.00 | % | 9.37 | % | $ |
39,162
|
0.00 | % | 9.91 | % | $ |
37,841
|
0.00 | % | 9.62 | % | ||||||||||||||||||
|
Regular
savings
|
22,309
|
0.87 | % | 5.90 | % |
27,453
|
0.83 | % | 6.95 | % |
29,056
|
0.79 | % | 7.39 | % | |||||||||||||||||||||
|
NOW
and money market
|
64,024
|
2.27 | % | 16.94 | % |
73,062
|
1.80 | % | 18.48 | % |
82,857
|
1.23 | % | 21.06 | % | |||||||||||||||||||||
|
Time
deposits
|
256,268
|
4.62 | % | 67.79 | % |
255,599
|
3.76 | % | 64.66 | % |
243,612
|
3.03 | % | 61.93 | % | |||||||||||||||||||||
|
Total
average deposits
|
$ |
378,021
|
3.57 | % | 100.00 | % | $ |
395,276
|
2.82 | % | 100.00 | % | $ |
393,366
|
2.19 | % | 100.00 | % | ||||||||||||||||||
|
This
table shows the average daily amount of deposits
and average rates paid on
such deposits for the periods indicated.
|
||||||||||||||||||||||||||||||||||||
|
Table
10
|
||||
|
Northeast
Bancorp Consolidated
|
||||
|
Maturities
of Certificates of Deposit $100,000 & Over
|
||||
|
As
of June 30, 2007
|
||||
|
($
in thousands)
|
||||
|
Balance
|
||||
|
3
months or less
|
$ |
25,535
|
||
|
Over
3 through 6 months
|
10,138
|
|||
|
Over
6 through 12 months
|
23,860
|
|||
|
Over
12 months
|
8,565
|
|||
|
Total certificates
of deposit $100,000 & over
|
$ |
68,098
|
||
|
Table
11
|
||||||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||||||
|
Short-term
Borrowings
|
||||||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||||||
|
As
of or For Years Ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
|
Balance
at year end
|
$ |
33,105
|
4.28 | % | $ |
29,637
|
3.79 | % | $ |
33,379
|
1.48 | % | ||||||||||||
|
Average
outstanding during year
|
36,145
|
4.16 | % |
31,427
|
2.95 | % |
30,572
|
1.32 | % | |||||||||||||||
|
Maximum
outstanding at any month end
|
44,164
|
37,237
|
36,506
|
|||||||||||||||||||||
|
Short-term
borrowings consist of securities sold under agreements to repurchase
and
other sweep accounts. These borrowings were scheduled to mature
within 180 days. Securities sold under agreements to repurchase were
collateralized by mortgage-backed and U. S.
Government-sponsored enterprise securities with a fair value of
$31,530,000 and amortized cost of $30,348,000 at June 30, 2007,
and a fair
value of $33,112,000 and amortized cost of $34,893,000 at June
30, 2006. Sweep accounts have excess deposit insurance coverage of
$7,300,000 at June 30, 2007. Securities sold under these agreements
were
under the control of the Company throughout 2007 and
2006.
|
||||||||||||||||||||||||
73
|
Table
12
|
||||||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||||||
|
FHLB
Advances Due in 1 Year or Less
|
||||||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||||||
|
As
of or For Years Ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
|
Balance
at year end
|
$ |
50,017
|
5.17 | % | $ |
34,832
|
4.03 | % | $ |
48,500
|
4.89 | % | ||||||||||||
|
Average
outstanding during year
|
34,672
|
4.45 | % |
38,606
|
4.27 | % |
40,541
|
5.08 | % | |||||||||||||||
|
Maximum
outstanding at any month end
|
50,017
|
49,306
|
50,761
|
|||||||||||||||||||||
|
This
table shows the Federal Home Loan Bank Advances the Company had
due to
mature in one year or less as of June 30, 2007, 2006, and
2005.
|
||||||||||||||||||||||||
|
Table
13
|
||||||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||||||
|
Maturities
and Repricing of Interest-Earning Assets & Interest-bearing
Liabilities
|
||||||||||||||||||||
|
As
of June 30, 2007
|
||||||||||||||||||||
|
($
in thousands)
|
||||||||||||||||||||
|
Term
to Repricing or Maturity
|
||||||||||||||||||||
|
Less
Than
|
1-5
|
Over
5
|
%
of
|
|||||||||||||||||
|
1
Year
|
Years
|
Years
|
Total
|
Total
|
||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||
|
Investment
securities
|
$ |
9,562
|
$ |
12,990
|
$ |
63,796
|
$ |
86,348
|
16.68 | % | ||||||||||
|
Regulatory
stock
|
4,826
|
- |
471
|
5,297
|
1.02 | % | ||||||||||||||
|
Short-term
investments (1)
|
3,313
|
- | - |
3,313
|
0.64 | % | ||||||||||||||
|
Mortgage
loans:
|
||||||||||||||||||||
|
Residential
real estate:
|
||||||||||||||||||||
|
Fixed
rate loans
|
115
|
2,922
|
87,693
|
90,730
|
17.52 | % | ||||||||||||||
|
Variable
loans
|
30,411
|
23,351
|
692
|
54,454
|
10.52 | % | ||||||||||||||
|
Commercial
real estate
|
44,821
|
61,851
|
5,863
|
112,535
|
21.73 | % | ||||||||||||||
|
Construction
|
5,451
|
-
|
-
|
5,451
|
1.05 | % | ||||||||||||||
|
Other
loans:
|
||||||||||||||||||||
|
Commercial
|
21,112
|
18,337
|
1,335
|
40,784
|
7.88 | % | ||||||||||||||
|
Consumer
and other
|
1,330
|
39,061
|
78,490
|
118,881
|
22.96 | % | ||||||||||||||
|
Total
loans
|
103,240
|
145,522
|
174,073
|
422,835
|
81.66 | % | ||||||||||||||
|
Total
interest-earning assets
|
$ |
120,941
|
$ |
158,512
|
$ |
238,340
|
$ |
517,793
|
100.00 | % | ||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||
|
Customer
deposits:
|
||||||||||||||||||||
|
NOW
accounts
|
$ |
53,405
|
$ |
-
|
$ |
-
|
$ |
53,405
|
11.29 | % | ||||||||||
|
Money
market accounts
|
8,054
|
-
|
-
|
8,054
|
1.70 | % | ||||||||||||||
|
Regular
savings
|
21,145
|
-
|
-
|
21,145
|
4.47 | % | ||||||||||||||
|
Time
deposits
|
204,463
|
40,833
|
321
|
245,617
|
51.91 | % | ||||||||||||||
|
Total
customer deposits
|
287,067
|
40,833
|
321
|
328,221
|
69.37 | % | ||||||||||||||
|
Borrowings:
|
||||||||||||||||||||
|
Short-term
borrowings
|
33,105
|
-
|
-
|
33,105
|
7.00 | % | ||||||||||||||
|
FHLB
advances and other borrowings
|
55,551
|
29,403
|
10,355
|
95,309
|
20.14 | % | ||||||||||||||
|
Junior
subordinated debentures
|
3,093
|
13,403
|
-
|
16,496
|
3.49 | % | ||||||||||||||
|
Total
borrowings
|
91,749
|
42,806
|
10,355
|
144,910
|
30.63 | % | ||||||||||||||
|
Total
interest-bearing liabilities
|
$ |
378,816
|
$ |
83,639
|
$ |
10,676
|
$ |
473,131
|
100.00 | % | ||||||||||
|
Interest
sensitivity gap
|
$ | (257,875 | ) | $ |
74,873
|
$ |
227,664
|
$ |
44,662
|
|||||||||||
|
Cumulative
gap
|
$ | (257,875 | ) | $ | (183,002 | ) | $ |
44,662
|
$ |
44,662
|
||||||||||
|
Cumulative
gap ratio
|
31.93 | % | 60.43 | % | 109.44 | % | 109.44 | % | ||||||||||||
|
Cumulative
gap as a percentage of total assets
|
-46.31 | % | -32.87 | % | 8.02 | % | 8.02 | % | ||||||||||||
|
(1)
Includes interest-earning deposits and loans held for
sale.
|
||||||||||||||||||||
|
This
table summarizes the anticipated maturities and repricing of
the Company's
interest-earning assets and interest-bearing liabilities
|
||||||||||||||||||||
|
at
June 30, 2007.
|
||||||||||||||||||||
|
The
Company's internal asset/liability analysis considers regular
savings, NOW
and money market accounts core deposits. Due to this
|
||||||||||||||||||||
|
consideration,
the Company's internal asset/liability model has these core deposits
designated in a five year or greater maturity category and
|
||||||||||||||||||||
|
not
one year or less as the above schedule shows. Because of this
difference, the Company does not consider its cumualtive
gap position
|
||||||||||||||||||||
|
to
be as high of a negative amount as presented in the schedule
above.
|
||||||||||||||||||||
74
|
Table
14
|
||||||||||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||
|
Quarterly
Data (Unaudited)
|
||||||||||||||||
|
For
Year Ended June 30, 2007
|
||||||||||||||||
|
1st
Qtr
|
2nd
Qtr
|
3rd
Qtr
|
4th
Qtr
|
|||||||||||||
|
Sept.
30
|
Dec.
31
|
Mar.
31
|
June
30
|
|||||||||||||
|
2006
|
2006
|
2007
|
2007
|
|||||||||||||
|
Interest
income
|
||||||||||||||||
|
Interest
on loans
|
$ |
7,942,105
|
$ |
7,951,759
|
$ |
7,779,765
|
$ |
7,692,918
|
||||||||
|
Interest
& dividends on investments
|
||||||||||||||||
|
&
available-for-sale securities
|
1,079,884
|
1,084,560
|
1,042,775
|
1,108,589
|
||||||||||||
|
Total
interest and dividend income
|
9,021,989
|
9,036,319
|
8,822,540
|
8,801,507
|
||||||||||||
|
Interest
expense
|
||||||||||||||||
|
Deposits
|
3,350,654
|
3,352,163
|
3,365,204
|
3,422,152
|
||||||||||||
|
FHLB
advances and other borrowings
|
970,138
|
967,609
|
993,900
|
1,089,704
|
||||||||||||
|
Short-term
borrowings
|
307,829
|
437,547
|
398,246
|
361,314
|
||||||||||||
|
Junior
Subordinated Debentures
|
277,991
|
276,883
|
270,912
|
254,752
|
||||||||||||
|
Total
interest expense
|
4,906,612
|
5,034,202
|
5,028,262
|
5,127,922
|
||||||||||||
|
Net
interest income
|
4,115,377
|
4,002,117
|
3,794,278
|
3,673,585
|
||||||||||||
|
Provision
for loan losses
|
300,786
|
375,546
|
200,043
|
112,783
|
||||||||||||
|
Net
interest income after provision for
loan losses
|
3,814,591
|
3,626,571
|
3,594,235
|
3,560,802
|
||||||||||||
|
Securities
transactions
|
4,386
|
17,878
|
8,443
|
11,642
|
||||||||||||
|
Other
operating income
|
1,458,042
|
1,869,280
|
2,379,096
|
2,196,060
|
||||||||||||
|
Other
operating expense
|
4,669,678
|
4,964,155
|
5,265,250
|
5,176,103
|
||||||||||||
|
Income
before income taxes
|
607,341
|
549,574
|
716,524
|
592,401
|
||||||||||||
|
Income
tax expense
|
152,674
|
132,218
|
191,557
|
102,714
|
||||||||||||
|
Net
income
|
$ |
454,667
|
$ |
417,356
|
$ |
524,967
|
$ |
489,687
|
||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
|
$ |
0.19
|
$ |
0.17
|
$ |
0.21
|
$ |
0.20
|
||||||||
|
Diluted
|
$ |
0.18
|
$ |
0.17
|
$ |
0.21
|
$ |
0.20
|
||||||||
|
Northeast
Bancorp Consolidated
|
||||||||||||||||
|
Quarterly
Data (Unaudited)
|
||||||||||||||||
|
For
Year Ended June 30, 2006
|
||||||||||||||||
|
1st
Qtr
|
2nd
Qtr
|
3rd
Qtr
|
4th
Qtr
|
|||||||||||||
|
Sept.
30
|
Dec.
31
|
Mar.
31
|
June
30
|
|||||||||||||
|
2005
|
2005
|
2006
|
2006
|
|||||||||||||
|
Interest
income
|
||||||||||||||||
|
Interest
on loans
|
$ |
8,018,116
|
$ |
7,978,433
|
$ |
7,698,250
|
$ |
7,948,204
|
||||||||
|
Interest
& dividends on investments
|
||||||||||||||||
|
&
available-for-sale securities
|
852,350
|
922,229
|
975,370
|
1,063,256
|
||||||||||||
|
Total
interest and dividend income
|
8,870,466
|
8,900,662
|
8,673,620
|
9,011,460
|
||||||||||||
|
Interest
expense
|
||||||||||||||||
|
Deposits
|
2,513,254
|
2,771,214
|
2,808,774
|
3,059,064
|
||||||||||||
|
FHLB
advances and other borrowings
|
1,008,655
|
775,365
|
856,253
|
976,658
|
||||||||||||
|
Short-term
borrowings
|
160,437
|
224,204
|
251,767
|
291,280
|
||||||||||||
|
Junior
Subordinated Debentures
|
262,056
|
266,346
|
264,548
|
270,731
|
||||||||||||
|
Total
interest expense
|
3,944,402
|
4,037,129
|
4,181,342
|
4,597,733
|
||||||||||||
|
Net
interest income
|
4,926,064
|
4,863,533
|
4,492,278
|
4,413,727
|
||||||||||||
|
Provision
for loan losses
|
300,505
|
300,104
|
325,356
|
300,448
|
||||||||||||
|
Net
interest income after provision for loan losses
|
4,625,559
|
4,563,429
|
4,166,922
|
4,113,279
|
||||||||||||
|
Securities
transactions
|
6,736
|
3,031
|
1,683
|
5,885
|
||||||||||||
|
Other
operating income
|
1,390,298
|
1,384,568
|
1,779,952
|
2,022,728
|
||||||||||||
|
Other
operating expense
|
4,459,094
|
4,386,326
|
4,692,209
|
4,670,875
|
||||||||||||
|
Income
before income taxes
|
1,563,499
|
1,564,702
|
1,256,348
|
1,471,017
|
||||||||||||
|
Income
tax expense
|
521,402
|
493,506
|
382,607
|
453,852
|
||||||||||||
|
Net
income
|
$ |
1,042,097
|
$ |
1,071,196
|
$ |
873,741
|
$ |
1,017,165
|
||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
|
$ |
0.41
|
$ |
0.42
|
$ |
0.35
|
$ |
0.43
|
||||||||
|
Diluted
|
$ |
0.41
|
$ |
0.42
|
$ |
0.35
|
$ |
0.41
|
||||||||
75
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
|
Not
applicable
|
|
|
Item
9A.
|
Controls
and Procedures
|
|
The
Corporation carried out an evaluation, under the supervision and
with the
participation of the Corporation’s management, including the Corporation’s
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of its disclosure controls and procedures, as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the
Corporation’s Chief Executive Officer and Chief Financial Officer
concluded that as of June 30, 2007, the Corporation’s disclosure controls
and procedures are effective. Disclosure controls and
procedures are controls and procedures that are designed to ensure
that
information required to be disclosed in the Corporation’s reports filed or
submitted under the Exchange Act is recorded, processed, summarized
and
reported within the time periods specified in the Securities and
Exchange
Commission’s rules and forms.
An
evaluation was performed under the supervision and with the participation
of the Company's management, including its Chief Executive Officer
and
Chief Financial Officer, of the effectiveness of the design and
operation
of our internal controls and procedures over financial reporting
(as
defined in Rule 13a-15(e) of the Exchange Act) as of the end of
the period
covered by this annual report.
Management
is responsible for establishing and maintaining adequate internal
controls
over financial reporting. We do not expect that our disclosure
controls
and procedures will prevent all error and all fraud. A control
system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objective
will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits
of
controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation
of controls
can provide absolute assurance that all control issues, errors,
and
instances of fraud, if any, within the Company have been or will
be
detected. The inherent limitations include, among other things,
the realities that judgments in decision-making can be faulty,
and that
breakdowns can occur because of simple error or
mistake. Controls and procedures also can be circumvented by
the individual acts of some persons, by collusion of two or more
people,
or by management or employee override of the controls and
procedures. The design of any system of controls and procedures
is based in part upon certain assumptions about the likelihood
of future
events, and there can be no assurance that any design will succeed
in
achieving its stated goals under all potential future
conditions. Over time, controls and procedures may become
inadequate because of changes in conditions or deterioration in
the degree
of compliance with its policies or procedures. Because of the
inherent limitation in a cost-effective control system, misstatements
due
to error or fraud may occur and not be detected.
Based
on their evaluation of disclosure controls and procedures, our
Chief
Executive Officer and Chief Financial Officer concluded, subject
to the
limitations described above, that our internal controls and procedures
over financial reporting as of the end of the period covered by
this
report were effective.
There
have been no significant changes in our internal controls, or in
other
factors that could significantly affect our internal controls,
subsequent
to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation, including any corrective actions with
regard
to significant deficiencies or material weaknesses.
The
Company is not subject to an attestation report from its registered
public
accounting firm until the fiscal year ended June 30,
2008. Thus, no attestation report on management's assessment of
our internal controls over financial reporting is included in this
annual
report.
|
|
|
Item
9B.
|
Other
Information.
|
|
None.
|
PART
III
|
Item
10.
|
Directors
and Executive Officers of the Registrant.
|
|
The
information required by Item 10 of Form 10-K with respect to our
directors
and executive officers is incorporated by reference from the information
contained in the section captioned "Election of Directors" in the
Company's definitive Proxy Statement for the 2007 Annual Meeting
of
Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Company's
2007
fiscal year (the "2007 Proxy Statement"). Certain information
with respect to executive officers is included in Part I, Item
4 of this
report. The information required by Item 10 of Form 10-K with
respect to compliance with Section 16(a) of the Securities Exchange
Act of
1934 is incorporated by reference from the information contained
in the
section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2007 Proxy Statement. Information regarding
the information required by Item 406 of Regulation S-K is incorporated
herein by reference from the information contained in the section
captioned “Corporate Governance – Code of Ethics” in the 2007 Proxy
Statement. The information required by Item 10 of Form 10-K
with respect to our audit committee is incorporated by reference
from the
information contained in the section captioned "Corporate Goverence
Board
Committee and Membership and Meetings – Audit Committee” in the Company's
2007 Proxy Statement.
|
|
|
Item
11.
|
Executive
Compensation
|
|
The
information required by Item 11 of Form 10-K is incorporated by
reference
from the information contained in the sections captioned "Election
of
Directors - Compensation of Directors," “Compensation of Executive
Officers”, "Compensation Discussion and Analysis”, and "Compensation
Committee Interlocks and Insider Participation" in the 2007 Proxy
Statement.
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholders
|
|
The
information required by Item 12 of Form 10-K is incorporated by
reference
from the information contained in the section captioned "Security Ownership
of
Management and Certain Beneficial Owners" in the 2007 Proxy
Statement
|
|
|
The
following table provided information about the Company's Common
Stock that
may be issued upon the exercise of stock options under all of the
registrant's equity compensation plans in effect as of June 30,
2007.
|
76
|
Plan
category
|
(a)
Number
of securities to be
issued
upon exercise of
outstanding
options
|
(b)
Weighted-average
exercise
price of
outstanding
options
|
(c)
Number
of securities
remaining
available for
future
issuance under
equity
compensation plan
(excluding
securities
referenced
in the first
column
(a))
|
|
Equity
compensation
Plan
approved by
Security
holders (1)
|
52,000
|
$ 12.12
|
179,500
|
|
Equity
compensation
Plan
not approved by
Security
holders
|
0
|
$ 0.00
|
0
|
|
(1)
|
Includes
stock options granted or available under stockholder approved
Stock Option Plans in 2001, 1999, 1992 and 1989 (the "Stock Option
Plans").
|
|
Our
Stock Option Plans provide for a proportionate adjustment to the
number of
shares reserved for issuance in the event of any stock dividend,
stock
split, combination, recapitalization, or similar event.
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions
|
|
The
information required by Item 13 of Form 10-K is incorporated by
reference
from the information contained in the section captioned "Related
Party
Transactions" and “Corporate Governance – Director Qualifications and
Independence” in the 2007 Proxy Statement.
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
|
The
information required by Item 14 of Form 10-K is incorporated herein
by
reference from the information contained in the section "Relationship
with
Independent Accountants" in the 2007 Proxy Statement.
|
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
|
(a)
|
List
of Financial Statements Filed as Part of This
Report
|
|
The
following financial statements are submitted herewith in response
to Part
II Item 8:
|
|
|
Consolidated
Balance Sheets as of June 30, 2007 and 2006
|
|
|
Consolidated
Statements of Income for the years ended June 30, 2007, 2006 and
2005
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the years ended
June 30,
2007, 2006 and 2005
|
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2007, 2006
and
2005
|
|
|
(b)
|
Exhibits
|
|
The
exhibits listed below are filed herewith or are incorporated herein
by
reference to other filings.
|
|
|
3.1
|
Conformed
Articles of Incorporation of Northeast Bancorp
|
|
3.2
|
Bylaws
of Northeast Bancorp
|
|
4.1
|
Form
of Indenture with respect to Northeast Bancorp's Junior Subordinated
Debentures, incorporated by reference to Exhibit 4.1 to Northeast
Bancorp's Registration Statement on Form S-2 (No. 333-88853-01),
filed
with the Securities and Exchange Commission on October 12,
1999.
|
|
4.2
|
Form
of Junior Subordinated Debentures (included in Exhibit 4.1), incorporated
by reference to Exhibit 4.2 to Northeast Bancorp's Registration
Statement
of Form S-2 (No. 333-88853-01), filed with the Securities and Exchange
Commission on October 12, 1999.
|
|
4.3
|
Trust
Agreement of NBN Capital Trust (including Certificate of Trust
of NBN
Capital Trust), incorporated by reference to Exhibit 4.3 to Northeast
Bancorp's Registration Statement on Form S-2 (No. 333-88853-01),
filed
with the Securities and Exchange Commission October 12,
1999.
|
|
4.4
|
Form
of Amended and Restated Trust Agreement of NBN Capital Trust, incorporated
by reference to Exhibit 4.4 to Northeast Bancorp's Registration
Statement
on Form S-2 (No. 333-88853-01), filed with the Securities and Exchange
Commission on October 12, 1999.
|
|
4.5
|
Form
of Preferred Securities of NBN Capital Trust (included in Exhibit
4.4),
incorporated by reference to Exhibit 4.5 to Northeast Bancorp's
Registration Statement on Form S-2 (No. 333-88853-01), filed with
the
Securities and Exchange Commission on October 12, 1999.
|
|
4.6
|
Form
of Guarantee Agreement, incorporated by reference to Exhibit 4.6
to
Northeast Bancorp's Registration Statement on Form S-2 (No. 333-88853-01),
filed with the Securities and Exchange Commission on October 12,
1999.
|
|
10.1
|
1987
Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp),
incorporated by reference to Bethel Bancorp's Registration Statement
on
Form S-1 (No. 33-12815), filed with the Securities and Exchange
Commission.
|
|
10.2
|
1989
Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp)
|
|
10.3
|
1992
Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp)
|
|
10.4
|
1999
Stock Option Plan of Northeast Bancorp
|
|
10.5
|
2001
Stock Option Plan of Northeast Bancorp incorporated by reference
to
Northeast Bancorp's Registration Statement on Form S-8, filed with
the
Securities and Exchange Commission on March 31, 2002.
|
|
11
|
Statement
regarding computation of per share earnings is submitted herewith
as
Exhibit 11.
|
|
21
|
A
list of subsidiaries of Northeast Bancorp.
|
|
23.1
|
The
Consent of Shatswell, MacLeod & Company, P.C.
|
| 23.2 | The Consent of Banker Newman & Noyes, Limited Liability Company. |
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
32.1
|
Certificate
of the Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **
|
|
With
the exception of the information expressly incorporated herein
by
reference, the Company's 2007 Proxy
Statement for the 2007 Annual Meeting of Shareholders is not to
be deemed
filed as part of this Annual Report on Form
10-K.
|
77
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
NORTHEAST
BANCORP
|
Date: September
21, 2007
|
By: /s/
James D. Delamater
|
|
James
D. Delamater, President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
/s/
John B. Bouchard
John
B. Bouchard
|
Director
|
September
21, 2007
|
|
/s/
James P. Day
James
P. Day
|
Director
|
September
21, 2007
|
|
/s/
James D. Delamater
James
D. Delamater
|
Director,
President
and Chief
Executive
Officer
(Principal
Executive Officer)
|
September
21, 2007
|
|
/s/
Ronald J. Goguen
Ronald
J. Goguen
|
Director
|
September
21, 2007
|
|
/s/
Philip C. Jackson
Philip
C. Jackson
|
Director
|
September
21, 2007
|
|
/s/
Judith W. Kelley
Judith
W. Kelley
|
Chairman
of the Board
|
September
21, 2007
|
|
/s/
Pender J. Lazenby
Pender
J. Lazenby
|
Director
|
September
21, 2007
|
|
/s/
John Rosmarin
John
Rosmarin
|
Vice-Chairman
of the Board
|
September
21, 2007
|
|
/s/
John Schiavi
John
Schiavi
|
Director
|
September
21, 2007
|
|
/s/
Stephen W. Wight
Stephen
W. Wight
|
Director
|
September
21, 2007
|
|
/s/
Dennis A. Wilson
Dennis
A. Wilson
|
Director
|
September
21, 2007
|
|
/s/
Robert S. Johnson
Robert
S. Johnson
|
Chief
Financial Officer
(Principal
Financial and
Accounting
Officer)
|
September
21, 2007
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Exhibit
|
|
3.1
|
Conformed
Articles of Incorporation of Northeast Bancorp
|
|
3.2
|
Bylaws
of Northeast Bancorp
|
|
4.1
|
Form
of Indenture with respect to Northeast Bancorp's Junior Subordinated
Debentures, incorporated by reference to Exhibit 4.1 to Northeast
Bancorp's Registration Statement on Form S-2 (No. 333-88853-01),
filed
with the Securities and Exchange Commission.
|
|
4.2
|
Form
of Junior Subordinated Debentures (included in Exhibit 4.1), incorporated
by reference to Exhibit 4.2 to Northeast Bancorp's Registration
Statement
of Form S-2 (No. 333-88853-01), filed with the Securities and Exchange
Commission.
|
|
4.3
|
Trust
Agreement of NBN Capital Trust (including Certificate of Trust
of NBN
Capital Trust), incorporated by reference to Exhibit 4.3 to Northeast
Bancorp's Registration Statement on Form S-2 (No. 333-88853-01),
filed
with the Securities and Exchange Commission.
|
|
4.4
|
Form
of Amended and Restated Trust Agreement of NBN Capital Trust, incorporated
by reference to Exhibit 4.4 to Northeast Bancorp's Registration
Statement
on Form S-2 (No. 333-88853-01), filed with the Securities and Exchange
Commission.
|
|
4.5
|
Form
of Preferred Securities of NBN Capital Trust (included in Exhibit
4.4),
incorporated by reference to Exhibit 4.5 to Northeast Bancorp's
Registration Statement on Form S-2 (No. 333-88853-01), filed with
the
Securities and Exchange Commission.
|
|
4.6
|
Form
of Guarantee Agreement, incorporated by reference to Exhibit 4.6
to
Northeast Bancorp's Registration Statement on Form S-2 (No. 333-88853-01),
filed with the Securities and Exchange Commission.
|
|
10.1
|
1987
Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp),
incorporated by reference to Bethel Bancorp's Registration Statement
on
Form S-1 (No. 33-12815), filed with the Securities and Exchange
Commission.
|
|
10.2
|
1989
Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp)
|
|
10.3
|
1992
Stock Option Plan of Northeast Bancorp (formerly known as Bethel
Bancorp)
|
|
10.4
|
1999
Stock Option Plan of Northeast Bancorp
|
|
10.5
|
2001
Stock Option Plan of Northeast Bancorp incorporated by reference
to
Northeast Bancorp's Registration Statement on Form S-8, filed with
the
Securities and Exchange Commission on March 31, 2002.
|
|
11
|
Statement
regarding computation of per share earnings is submitted herewith
as
Exhibit 11.
|
|
21
|
A
list of subsidiaries of Northeast Bancorp.
|
| 23.1 | The Consent of Shatswell, MacLeod & Company, P.C. |
|
23.2
|
The
Consent of Baker Newman & Noyes, Limited Liability
Company.
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
32.1
|
Certificate
of the Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule
13a-14(b)).
|
78
NORTHEAST
BANCORP
ARTICLES
OF INCORPORATION
|
FIRST:
|
The
name of the corporation is NORTHEAST
BANCORP.
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SECOND:
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The
name of its Clerk, who must be a Maine resident and the address of
its
registered office shall be:
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Suzanne
M. Carney
500
Canal
Street, Lewiston, Maine 04240
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THIRD:
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The
number of directors constituting the initial board of directors of
the
corporation is nine, as follows:
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Gordon
M.
Gillies, 3 Broad St, Bethel, Maine 04217
E.
Louise
Lincoln, PO box 527, Bethel, Maine 04217
John
W.
Trinward, 8 Vernon St., Bethel, Maine 04217
Stephen
W. Wight, RFD 2, Box 1688, Bethel, Maine 04217
Edmond
J.
Vachon, Paradise St., Bethel, Maine 04217
Ronald
C.
Kendall, PO Box 1, Bethel, Maine 04217
Norris
T.
Brown, Clark St., Bethel, Maine 04217
Philip
C.
Jackson, 12 Smith St, Bethel, Maine 04217
James
D.
Delamater, Route 121, Oxford, Maine 04270
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FOURTH:
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The
board of directors is authorized to increase or decrease the number
of
directors. The minimum number shall be nine directors and the
maximum number shall be twelve
directors.
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FIFTH:
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SHARES
- There shall be 15,000,000 authorized shares of $1.00 par value
Common
Stock, which may be issued by the Corporation from time to time by
vote of
the Board without the approval of the holders of the Common
Stock. Upon payment of lawful consideration, such shares shall
be deemed fully paid and nonassessable. Except as the Board
shall have otherwise specified or except as otherwise provided by
law,
voting power shall be vested exclusively in the Common
Stock. The holders of the Common Stock shall be entitled to one
vote for each share of Common Stock owned. Dividends, as
declared by the Board out of lawfully available funds, shall be payable
on
the Common Stock subject to any rights or preferences of the Preferred
Stock.
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There
shall be 1,000,000 authorized shares of $1.00 par value Preferred Stock which
may be issued from time to time in one or more series as may be determined
by
the Board of Directors of the Corporation. Each series of Preferred
is to be distinctly designated to distinguish the shares in the series from
the
shares of all other series and classes. The relative rights and
preferences of the Preferred Stock and the variations of rights and preferences
between different series of Preferred Stock may be fixed and determined by
the
Board of Directors by resolution or resolutions adopted prior to the issuance
of
any shares of a particular series of Preferred Stock. All shares of
Preferred shall be identical except as to the following relative rights and
preferences, as to which there may be variations between different
series:
| a. | The rate of dividend; |
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b.
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Whether
shares may be redeemed and, if so, the redemption price and the terms
and
conditions of redemption;
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c.
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The
amount payable upon shares in event of voluntary and involuntary
liquidation;
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d.
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Sinking
fund provisions, if any, for the redemption or purchase of
shares;
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e.
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The
terms and conditions, if any, on which shares may be converted;
or
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f.
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Voting
rights, if any.
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Upon
any
liquidation, dissolution or winding up of the affairs of the Corporation,
whether voluntary or involuntary, holders of Common Stock are entitled to
receive pro rata the remaining assets of the Corporation after the holders
of
Preferred Stock have been paid in full any sums to which they may be
entitled.
There
shall be no cumulative voting for Directors or otherwise.
SUMMARY
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The
aggregate par value of all authorized shares (of all classes) having
a par
value is $4,000,000. The total number of authorized shares (of
all classes) without par value is zero
shares.
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SIXTH:
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Meetings
of the shareholders may be held outside the State of
Maine.
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SEVENTH:
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There
are no preemptive rights.
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EIGHTH:
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INTERNAL
AFFAIRS OF THE CORPORATION
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Section
1.
(a) Number,
Qualifications and Term of Office.
Subject
to the provisions hereof relating to the initial Board, the number of directors
of the corporation shall be no less than 9 and no more than 12. The
exact number of Directors within the minimum and maximum limitations specified
in the preceding sentence shall be fixed from time to time by the Board pursuant
to a resolution adopted by the majority of the entire Board. No
decrease in the number of directors constituting the Board shall shorten the
term of any incumbent director. Each Director elected to succeed
those directors whose terms expire at or after the 1997 annual meeting of
Shareholders shall be elected to serve until the next annual meeting of
shareholders and until his or her successor is elected and
qualified. Directors need not be Shareholders or residents of the
State of Maine.
(b) Vacancies.
Any
vacancy in the Board caused by death, resignation, retirement, disqualification,
removal or other cause, shall be filled by a majority vote of the remaining
Directors, though less than a quorum. A Director so chosen shall hold
office for the unexpired term of their predecessors in office. Any
Directorship to be filled by reason of an increase in the authorized number
of
directors may be filled by the Board for a term of office continuing only until
the next election of Directors by Shareholders.
(c) Removal
of Directors.
At
any
meeting of Shareholders called expressly for the purpose, any Director may
be
removed from office by the affirmative vote of the holders of seventy-five
percent (75%) of the shares entitled to vote or if removal is for cause, then
by
a majority of the shares then entitled to vote. For "cause" shall
mean a final adjudication by a court of competent jurisdiction that the Director
(i) is liable for negligence or misconduct in the performance of his duty,
(ii)
guilty of a felony conviction, or (iii) has failed to act or has acted in a
manner which is in derogation of the Director's duties.
(d) Nomination
of Directors.
In
addition to the right of the Board to make nominations for the election of
Directors, nominations for the election of Directors may be made by any
Shareholder entitled to vote for the election of Directors if that Shareholder
complies with all of the following provisions:
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a.
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Advance
notice of such proposed nomination shall be received by the Secretary
of
the Corporation not less than thirty (30) days nor more than sixty
(60)
days prior to any meeting of the Shareholders called for the election
of
the Directors; provided, however, that if fewer than fourteen (14)
days'
notice of the meeting is given to Shareholders, such written notice
of a
proposed nomination shall be received not later than the close of
the
tenth day following the day on which the notice of the meeting was
mailed
to Shareholders.
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b.
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Each
notice shall set forth (i) the name, age, business address and, if
known,
residence address of each nominee proposed in such notice, (ii) the
principal occupation or employment of each such nominee; and (iii)
the
number of shares of stock of the Corporation which are beneficially
owned
by each such nominee. In addition, the Shareholder making such
nomination shall promptly provide any other information reasonably
requested by the Corporation.
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c.
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The
nomination made by a Shareholder may only be made in a meeting of
the
Shareholders of the Corporation called for the election of Directors
at
which such Shareholder is present in person or by proxy, and can
only be
made by a Shareholder who has complied with the notice provisions
of (a)
and (b) above.
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d.
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The
Chairman of the meeting may in his discretion determine and declare
to the
meeting that a nomination was not made in accordance with the foregoing
procedures, and if he should so determine, he shall so declare to
the
meeting and the defective nomination shall be
disregarded.
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Section
2. Voting for Business Combinations.
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(a)
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Neither
the Corporation nor any subsidiary of which the Corporation owns
at least
a majority of the equity securities ordinarily entitled to vote for
the
election of Directors ("Subsidiary"), shall be a party to any of
the
transactions specified herein (a "Business Combination") or enter
into any
agreement providing for any Business Combination unless the conditions
specified in (b), (c) and (d) below shall have been
satisfied:
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(i)
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any
merger or consolidation (whether in a single transaction or a series
of
related transaction) other than a merger or consolidation of the
Corporation and any of its subsidiaries or a merger or consolidation
of
any subsidiaries of the Corporation;
or
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(ii)
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any
sale, lease, exchange, transfer or distribution of all or substantially
all or a substantial portion of the property or assets of the Corporation
or any of its subsidiaries, including its goodwill;
or
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(iii)
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the
issuance of any securities, or of any rights warrants or options
to
acquire any securities of the Corporation or any of its subsidiaries,
to
any Shareholders other than by stock dividend declared and paid to
all
Shareholders of the Corporation or pursuant to an employee stock
ownership
plan or an employee stock option plan established by the Corporation;
or
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(iv)
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any
reclassification of the stock of the Corporation or any of its
subsidiaries or any recapitalization or other transaction (other
than a
redemption of stock) which has the effect, directly or indirectly,
of
increasing the proportionate share of stock of the Corporation or
any of
its subsidiaries held by any person;
or
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(v)
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the
dissolution of the Corporation or any subsidiary thereof or any partial
or
complete liquidation of the Corporation or any subsidiary
thereof.
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(b)
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The
vote of the holders of at least eighty percent (80%) of the outstanding
shares entitled to vote for the election of Directors shall be required
to
approve or authorize any Business Combination to which the Corporation
or
any Subsidiary is party unless the aggregate of the cash and fair
market value of the consideration to be paid to all the holders of
the
Common Stock of the Corporation in connection with the Business
Combination (when adjusted for stock splits, stock dividends,
reclassification of shares or otherwise) shall be equal to the highest
price per share paid by the other party or parties to the Business
Combination (the "Acquiring Party") in acquiring any of the Corporation's
Common Stock; provided however, that the consideration to be paid
to the
holders of the Common Stock of the Corporation shall be in the same
form
as that paid by the Acquiring Party in acquiring the shares of the
Common
Stock held by it except to the extent that any Stockholder of the
Corporation shall otherwise agree.
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(c)
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Subject
to the provisions in (b) above, the vote of the holders of at least
seventy-five percent (75%) of the outstanding shares entitled to
vote for
the election of Directors shall be required to approve or authorize
any
Business Combination to which the Corporation or any Subsidiary is
a party
unless the Business Combination shall have been approved by at
least two-thirds (2/3) of the Directors of the Corporation who are
not
affiliated with, or Shareholders of, the Acquiring
Party.
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In
connection with the exercise of its judgment in determining what is in the
best
interests of the Corporation and of the Shareholders, when evaluating a Business
Combination or a proposal by another person or persons to make a Business
Combination or a tender or exchange offer, the Board may, in addition to
considering the adequacy of the amount to be paid in connection with any such
transaction, consider all of the following factors and other factors which
it
deems relevant: (i) the social and economic effects of the
transaction on the Corporation and its subsidiaries, employees, depositors,
loan
and other customers, creditors and other elements of the communities in which
the Corporation and its subsidiaries operate or are located; (ii) the
business and financial condition and earnings prospects of the acquiring person
or persons, including but not limited to debt service and other existing
financial obligations, financial obligations to be incurred in connection with
the acquisition, and other likely financial obligations of the acquiring person
or persons, and the possible effect of such conditions upon the Corporation
and
its subsidiaries and the other elements of the communities in which the
Corporation and its subsidiaries operate or are located; and (iii) the
competence, experience and integrity of the acquiring person or persons and
its
or their management.
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(d)
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In
the event that all of the conditions set forth in (b) and (c) above
are
met, the Corporation or any Subsidiary may enter into any Business
Combination under the terms and conditions specified in the Maine
Business
Corporation Act.
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(e)
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The
affirmative vote of the holders of at least eighty percent (80%)
of all of
the shares of the Corporation entitled to vote for the election of
Directors shall be required to amend or repeal, or to adopt any provisions
in contravention of or inconsistent with this Section 2, notwithstanding
the fact that a lesser percentage may be specified by
law.
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Section
3. Special Meetings and Consent Meetings.
Special
meetings of the Shareholders may be called by the Chairman, President, the
Board, or by the Secretary upon written request of the holders of not less
than
ten percent (10%) of all the shares entitled to vote.
Section
4. Acquisition of Stock.
(a) Restrictions
on Offers and Acquisitions.
For
a
period of five (5) years from the effective date of the conversion, no person
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of (i) more than ten percent (10%) of the issued and outstanding
shares of any class of an equity security of the Corporation; (ii) more than
ten
percent (10%) of any class of securities convertible into, or exercisable for,
any class of an equity security of the Corporation; (iii) any securities
convertible into, or exercisable for, any equity securities of the Corporation
if assuming conversion or exercise by such person of all securities of which
such person is the beneficial owner which are convertible into, or exercisable
for, such equity securities (but of no securities convertible into, or
exercisable for, such equity securities of which such person is not the
beneficial owner), such person would be the beneficial owner of more than ten
percent (10%) of any class of an equity security of the
Corporation.
For
the
same five year period, each share beneficially owned in violation of the
foregoing percentage limitation, as determined by the Board, shall not be voted
by any person or counted as voting shares in connection with any matter
submitted to the shareholders for a vote.
For
the
purposes of this Section 4:
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(i)
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The
term "person" shall mean and include any individual, group acting
in
concert, Corporation, partnership, or other organization or entity,
together with its affiliates and associates;
and
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(ii)
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The
term "offer" includes every offer to buy or acquire, solicitation
of an
offer to sell, tender offer for, or request or invitation for tenders
of,
a security (including, without limitation, shares of any class of
capital
stock of the Corporation) or interest in a security for
value.
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(iii)
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The
term "conversion" shall mean the completed process whereby Bethel
Savings,
FSB Bank will be converted from a federally chartered mutual savings
bank
to a federally charted stock savings bank and Bethel Bancorp shall
become
the holding company for Bethel Savings Bank,
FSB.
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(b)
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Exclusion
for Underwriters, Directors, Officers and Employees. The
restriction contained in this Section 4 shall not apply to any offer
with
a view toward public resale made exclusively to the Corporation or
the
underwriters or a selling group acting on its behalf. In
addition, the Directors, Officers and employees of the Corporation
or any
subsidiary thereof shall not be deemed to be a group with respect
to their
individual acquisition of equity stock of the
Corporation.
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(c) Readoption
of Restriction by Shareholders.
This
Section 4 may be readopted for additional one-year or longer periods by vote
of
the holders of a majority of the outstanding voting shares present or
represented at a duly convened annual or special meeting of Shareholders of
the
Corporation.
(d) Exception
in Cases of Advance Approval.
This
Section 4 shall not apply to any offer or acquisition referred to in (a) above
if such offer or acquisition was approved in advance of such offer or
acquisition by two-thirds (2/3) of the entire Board utilizing the standard
set
forth in Section 2(c).
(e) Enforcement
of this Section 4.
The
Corporation may by law or by resolution of the Directors adopt such provisions
or resolutions as are necessary to provide for the enforcement of this Section
4.
(f) Amendments
of this Section 4.
Notwithstanding
any other provisions of these Articles of Incorporation or the By-Laws of the
Corporation, and notwithstanding the fact that some lesser percentage may be
specified by law, this Section 4 shall not be amended, altered, changed or
repealed without:
| a. | the affirmative vote of two-thirds (2/3) of the Board; and |
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b.
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the
affirmative vote by the holders of at least two-thirds (2/3) of the
outstanding shares entitled to
vote.
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This
vote
shall be in addition to any vote of the Preferred Stock as may be required
by
the provisions of any series thereof or applicable by law.
The
readoption of Section 4 for additional one-year or longer periods, as provided
in (c) above, shall not be an amendment, alteration or change for the purposes
of this paragraph.
Section
5. Amendments.
(a) Amendments
to Articles of Incorporation.
Except
as
otherwise provided for in the Articles above, the affirmative vote of the
holders of at least two-thirds (2/3) of all of the shares of the Corporation
entitled to vote for the election of Directors, shall be required to amend
or
repeal, or to adopt any provision in contravention of or inconsistent with
these
Articles notwithstanding the fact that a lesser percentage may be specified
by
law.
(b) Amendments
to By-Laws.
The
By-Laws of the Corporation may be amended at any time by the affirmative vote
of
a majority of the entire Board, subject to repeal, change or adoption
of any contravening or inconsistent provision only by vote of the holders
of at least two-thirds (2/3) of all the shares entitled to vote on the matter
at
a meetings expressly called for that purpose.
Section
6. Right of Shareholders Following Control
Transaction.
The
provisions of ME Rev. Stat. Ann.Title 13-A, Section 910 shall not be applicable
to the Corporation.
Articles
of Incorp.
Amended
2002
NORTHEAST
BANCORP
BY-LAWS
As
of February 1998
ARTICLE
I
MEETINGS
OF SHAREHOLDERS
Section
1. Place of
Meeting. All meetings of the shareholders of the Corporation
shall be held at the principal office of the Corporation in the State of Maine,
or at such other place, within or without the State of Maine, as may, from
time
to time, be fixed by the Board of Directors or as shall be specified or fixed
in
the respective notices or waivers of notice thereof.
Section
2. Annual
Meetings. The annual meeting of the shareholders shall be
held not more than one hundred, thirty-five (135) days after the close of the
fiscal year of the Corporation, on such date and at such hour as may be fixed
by
the Board of Directors and stated in the notice of such meeting or on such
other
date and at such time as shall be stated in the notice of the meeting or
otherwise specified by the President. The Clerk shall serve
personally or by mail a written notice not less than ten (10) days nor more
than
sixty (60) days before such meeting, addressed to each shareholder at his
address as it appears on the stock book; but at any meeting at which all
shareholders not present shall have waived notice in writing, the giving of
notice as above required, may be foregone.
Section
3. Special
Meetings. A special meeting of the shareholders for any
purpose or purposes, unless otherwise prescribed by statue, may be called at
any
time by the Chairman of the Board, if any, the President, or a Vice-President,
or by a majority of the Board of Directors, or upon written application
therefore to the Clerk by the holders of not less than ten percent (10%) of
the
shares entitled to vote at the meeting. Written notice of such
meeting, stating the purpose for which it is called, shall be served personally,
or by mail, not less than ten (10) nor more than sixty (60) days before the
date
set for such meeting. If mailed, it shall be directed to every
shareholder at his address as it appears on the stock book, but, at any meeting
at which all shareholders shall be present, or of which all shareholders not
present have waived notice in writing, the giving of notice as above required
may be foregone. No business other than that specified in the call
for the meeting shall be transacted at any special meeting of the
shareholders.
Section
4. Quorum. At each
meeting of the shareholders, the presence, in person or by proxy, of the holders
of a majority of the issued and outstanding stock of the corporation entitled
to
vote at such meeting, shall constitute a quorum for the transaction of business
except where otherwise provided by law or by the Articles of Incorporation
of
the Corporation or any amendment thereto. In the absence of a quorum
at any meeting or any adjournment thereof, the shareholders of the Corporation
present in person or by proxy and entitled to vote shall have the power to
adjourn the meeting, from time to time, until shareholders holding the requisite
amount of stock shall be present or represented. At any such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally
called. Notice of any adjourned meeting of the shareholders shall not
be required to be given, except when expressly required by law.
Section
5. Organization. The
Chairman of the Board, if any, or in the absence of the Chairman of the Board,
the President or a Vice-President, or a Chairman designated by the Board of
Directors or by the shareholders shall preside at every meeting of the
shareholders. In the absence of the Secretary, the presiding officer
shall appoint a secretary pro tempore.
Section
6. Voting. (a) Each
shareholder of the corporation having voting rights shall, except as otherwise
provided by law or by the Articles of Incorporation of the Corporation, at
every
meeting of the shareholders be entitled to one vote in person or by proxy for
each share of the stock of the Corporation registered in his name on the books
of the Corporation
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(1)
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on
the date fixed pursuant to Section 2 of Article VI of the By-laws
as the
record date for the determination of shareholders entitled to vote
at such
meeting, notwithstanding the sale, or other disposal or transfer
on the
books of the Corporation of such share on or after the date so fixed,
or
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(2)
|
if
no such record date shall have been fixed, then at the date on which
notice of such meeting is mailed.
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(b) At
any meeting of shareholders at which a quorum is present, the holders of a
majority in interest of the stock having voting rights represented thereat
in
person or by proxy shall decide any question brought before such meeting unless
a larger or different vote or proportion is required by law or by the Articles
of Incorporation of the Corporation or by these By-laws.
(c) When
so requested by a majority of the holders of outstanding shares present at
the
meeting, a written ballot shall be used for any vote of the
shareholders. If a written ballot shall be used, each ballot shall
state the name of the shareholder voting, the number of shares owned by him,
and
if such ballot be cast by proxy, the name of the proxy.
Section
7. Shareholders' Action Without
Meeting. Any action which, under any provision of the Maine
Business Corporation Act, may be taken at a meeting of shareholders, may be
taken without such a meeting, if consent in writing, setting forth the action
so
taken or to be taken, is signed severally or collectively by the holders of
all
the issued and outstanding shares of stock entitled to vote upon such
action. The Secretary shall file such consent or consents with the
minutes of the meetings of the Shareholders.
ARTICLE
II
BOARD
OF DIRECTORS
Section
1. General
Powers. The property, affairs and business of the
Corporation shall be controlled and managed by the Board of
Directors. Without limiting the generality of the foregoing, such
control shall include the power to: hire employees, professional,
clerical and secretarial; enter into employment agreements with employees where
deemed advisable; determine levels of employee compensation, including wages,
salaries, bonuses and other fringe benefits; terminate the employment of an
employee; determine conditions of employment, including hours of work, work
responsibility, vacation time, and sick leave; authorize the purchase or rental
of property and determine all policies of the Corporation with regard to the
conduct of the business of the Corporation. The Board of Directors
may, from time to time, delegate particular responsibilities to specified
officers of the Corporation as it shall deem advisable. They may
adopt such rules and regulations for the conduct of their meeting and the
management of the Corporation not inconsistent with these By-laws, the
Corporation's Articles of Incorporation, or the laws of the State of Maine
as
they may deem proper.
Section
2. Number, qualifications and Term of
Office. The number of directors of the Corporation shall be
no less than nine (9) and no more than twelve (12). The number of
directors who are also employed by the Company or any affiliate of the Company
shall not exceed three (3). The board will use its best efforts to fill any
vacancy promptly. The exact number of Directors, within the minimum
and maximum limitations specified in the preceding sentence, shall be fixed,
from time to time, by the Board pursuant to a resolution adopted by a majority
of the entire Board. No decrease in the number of directors
constituting the Board shall shorten the term of any incumbent director.
Beginning with the 1997 annual meeting of shareholders, Directors shall be
elected for terms of one year. No term of an existing director shall
be shortened to less than their elected term. Directors need not be
shareholders or residents of the State of Maine.
Section
3. Manner of
Election. At the annual meeting of shareholders, the persons
receiving the largest number of votes cast, shall be Directors.
Section
4. Quorum and Manner of
Acting. A majority of the total number of Directors then
holding office, shall constitute a quorum for the transaction of business at
any
meeting except where otherwise provided by statute, the Corporation's Articles
of Incorporation or these By-laws; but, less than a quorum may adjourn the
meeting. At all meetings of the Board of Directors, each Director
present is to have one vote. At all meetings of the Board of
Directors, all questions, the manner of deciding which, is not specifically
regulated by statute or the Corporation's Articles of Incorporation, shall
be
determined by a majority of the Directors present at the meeting.
Section
5. Place of Meeting,
etc. The Board of Directors may hold its meetings and have
one or more offices at such places within or without the State of Maine as
the
Board, from time to time, may determine or, in the case of meetings, as shall
be
specified or fixed in the respective notices or waivers of notice
thereof.
Section
6. Books and
Records. The correct and complete books and records of
account and minutes of the proceedings of Shareholders and the Board of
Directors shall be kept at the registered office of the
Corporation.
Section
7. First
Meeting. The Board of Directors shall meet for the purpose
of organization, the election of officers and the Clerk, and the transaction
of
other business as soon as practicable after each annual election of Directors,
on the same day and at the same place at which regular meetings of the Board
are
held, or as may be otherwise provided by resolution of the
Board. Notice of such meeting need not be given. Such
meeting may be held at any other time or place which shall be specified in
a
notice given as hereinafter provided for special meetings of the Board of
Directors or in a consent and waiver of notice, thereof, signed by all the
Directors.
Section
8. Regular
Meetings. Regular meetings of the Board of Directors shall
be held at such place and at such time as the Board shall, from time to time,
by
resolution, determine. A regular meeting of the board of directors
shall be held immediately after and at the same place as the annual meeting
of
shareholders. Notice of regular meetings need not be
given.
Section
9. Special Meetings;
Notice. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board, if any, or by the President,
or by the Clerk at the request of any two Directors at the time being in
office. Notice of each such meeting shall be mailed to each Director,
addressed to him at his residence or usual place of business, at least two
(2)
days before the day on which the meeting is to be held, or shall be sent to
him
at such place by telegraph, cable, radio or wireless, or be given personally
or
by telephone, not later than the day before the day on which the meeting is
to
be held. Every such notice shall state the time and place of the
meeting, but, need not state the purpose thereof. Notice of any
meeting of the Board need not be given to any Directors, however, if waived
by
him in writing or by telegraph, cable, radio or wireless, whether before or
after such meeting be held, or if he shall be present at such meeting unless
his
attendance at the meeting is expressly for the purpose of objecting to the
transaction of any business because the meeting is not lawfully convened; and
any meeting of the Board shall be a legal meeting without any notice thereof
having been given, if all of the Directors shall be present
thereat.
Section
10. Resignations. Any
Director of the Corporation may resign at any time by giving written notice
to
the President or to the Clerk of the Corporation. Such resignation
shall take effect at the time specified therein; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make
it
effective.
Section
11. Removal of
Directors. At any meeting of Shareholders called expressly
for the purpose, any Director may be removed from office by the affirmative
vote
of the holders of seventy-five percent (75%) of the shares entitled to vote
or
if removal is for cause, then by a majority of the shares then entitled to
vote. For "cause" shall mean a final adjudication by a court of
competent jurisdiction that the Director (i) is liable for negligence or
misconduct in the performance of his duty, (ii) guilty of a felony conviction,
(iii) has failed to act or has acted in a manner which is in derogation of
the
Director's duties.
Section
12. Vacancies. Any
vacancy in the Board caused by death, resignation, retirement, disqualification,
removal, or other cause, shall be filled by a majority vote of the remaining
Directors, though less than a quorum. A Director so chosen shall hold
office for the unexpired term of their predecessor in office. Any Directorship
to be filled by reason of an increase in the authorized number of Directors
may
be filled by the Board for a term of office continuing only until the next
election of Directors by the Shareholders.
Section
13. Compensation. Directors
shall receive such compensation for attendance at regular or special meetings
as
the Board of Directors shall, from time to time, determine.
Section
14. Directors' Participation in Meeting
by Telephone. A Director may participate in a meeting of the
Board of Directors by means of conference telephone or similar communication
equipment enabling all Directors participating in the meeting to hear one
another. Participation in a meeting pursuant to this section shall
constitute presence in person at such meeting.
Section
15. Director's Action Without
Meeting. If all the Directors then holding office severally
or collectively consent in writing to any action taken or to be taken by the
Corporation, such action shall be valid as though it had been authorized at
a
meeting of the Board of Directors. The Clerk shall file such consent
or consents with the minutes of the meetings of the Board of
Directors.
Section
16. Presumption of
Assent. A director of the Company who is present
at a meeting of the board of directors at which action on any institutional
manner is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless a written dissent to such action shall be filed with the person acting
as the secretary of the meeting before the adjournment thereof or shall be
forwarded by registered mail to the secretary of the Company within five (5)
days after the date on which a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who
voted in favor of such action.
Section
17. Age Limitation on
Directors. No person of an age of 80 years or older will be
eligible for election, re-election, appointment, or reappointment to the board
of directors of the savings bank. No director shall serve as such
beyond the annual meeting of the savings bank immediately following the
attainment of the specified age. This provision shall not apply to
any director who was a member of the board of Bethel Savings Bank on August
15,
1987, or the board of Brunswick Federal Savings on July 10, 1990.
ARTICLE
III
COMMITTEES
Section
1. Designation;
Vacancies. The Board of Directors, by a resolution passed by
a majority of the whole Board, may designate such number of their members not
less than two (2), including the President of the Corporation, as it may, from
time to time, determine to constitute an Executive Committee, each member of
which, unless otherwise determined by the Board, shall continue to be a member
thereof until the expiration of his term of office as a Director.
Section
2. Powers. During
the intervals between the meetings of the Board of Directors, the Executive
Committee shall have all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, except those
prescribed by applicable Maine law, and may exercise such powers in such manner
as the Executive Committee shall deem best for the interests of the Corporation
in all cases in which specific directions shall not have been given by the
Board
of Directors.
Section
3. Procedure; Meetings;
Quorum. The Executive Committee shall make its own rules of
procedure and shall meet at such times and at such place or places as may be
provided by such rules or by resolution of the Executive Committee. A
majority of the whole number of the members of the Executive Committee shall
constitute a quorum at any meeting thereof, and the act of a majority of those
present at a meeting at which a quorum is present shall be the act of the
Executive Committee. The Board of Directors shall have power at any
time to change the members of the Executive Committee, to fill vacancies, and
to
discharge the Executive Committee.
Section
4. Other
Committees. The Board of Directors, by resolution passed by
a majority of the whole Board, may designate members of the board to constitute
other committees, which shall in each case consist of such number of Directors
and shall have and may exercise such powers as the Board may determine and
specify in the respective resolutions appointing them. Such
committees shall have such name or names as may be determined, from time to
time, by resolution adopted by the Board of Directors. The Board of
Directors shall have power at any time to change the members of any such
committee, to fill vacancies, and to discharge any such committee.
Section
5. Compensation. Members
of the Executive Committee or of other committees of the Board of Directors
shall receive such compensation for their services as members of such committees
as the Board of Directors shall, from time to time, determine.
ARTICLE
IV
OFFICERS
Section
1. Number. The
officers of the Corporation may include a Chairman of the Board and shall
include a President, Treasurer, Secretary and such other officers as the Board
of Directors may, from time to time, deem appropriate. One person may
hold the office and perform the duties of more than one of said
officers. The Corporation shall also have a Clerk, who shall not be
an officer.
Section
2. Election, Term of Office and
Qualifications. The officers, and the Clerk, shall be
elected annually by the Board of Directors. Each officer shall hold
office, and the Clerk shall remain Clerk of the Corporation, until his successor
shall have been elected and shall have qualified, or until his death or until
he
shall have resigned or shall have been removed in the manner hereinafter
provided.
Section
3. Removal. Any
officer, or the Clerk, may be removed by the Board of Directors whenever, in
its
judgement, the best interests of the Corporation will be served by such
action.
Section
4. Resignations. Any
officer, or the Clerk, may resign at any time by giving written notice to the
Board of Directors or to the President or to the Clerk. Such
resignation shall take effect at the time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make if effective.
Section
5. Vacancies. A
vacancy in any office, or in the position of Clerk, because of death,
resignation, removal or any other cause shall be filled for the unexpired
portion of the term in the manner prescribed in these By-laws for election
or
appointment to such office or position of Clerk.
Section
6. The Chairman of the
Board. The Chairman of the Board, if there shall be one,
shall be elected by the board from among its members who are directors who
are
not employed by the Company or any affiliate of the Company, and shall, if
present, preside at all meetings of the shareholders and of the Board of
Directors. Except where, by law, the signature of the President is
required, he shall possess the same power as the President to sign all
certificates, contracts and other instruments of the Corporation which may
be
authorized by the Board of Directors or by the Executive
Committee. He shall, in general, perform all duties incident to the
office of the Chairman of the Board, subject, however, to the direction and
control of the Board of Directors and of the Executive Committee, and such
other
duties as, from time to time, may be assigned to him by the Board of Directors
or by the Executive Committee.
Section
7. The
President. The President shall be the chief executive and
administrative officer of the Corporation and shall have general and active
supervision and direction over the day-to-day business and affairs of the
Corporation and over its several officers, subject, however, to the direction
and control of the Board of Directors and of the Executive
Committee. At the request of the Chairman of the Board, or in case of
his absence or inability to act, the President may act in his
place. He shall sign or countersign all certificates, contracts and
other instruments of the Corporation as authorized by the Board of Directors,
and shall perform all such other duties as, from time to time, may be assigned
to him by the Board of Directors or the Executive Committee.
Section
8. The
Vice-Presidents. Each Vice-President shall have such powers
and perform such duties as the Board of Directors may, from time to time,
prescribe. At the request of the President, or in case of his absence
or inability to act, any Vice President may act in his place, and when so acting
shall have all the powers and be subject to all the restrictions of the
President.
Section
9. The Clerk. The
Clerk, who shall be an inhabitant of the State of Maine and shall keep his
office therein, shall perform the functions provided in the Maine Business
Corporation Act, as it may be amended. The Clerk shall keep, or cause
to be kept in books provided for the purpose the minutes of the meetings of
the
shareholders and of the Board of Directors; shall see that all notices are
duly
given in accordance with the provisions of these By-laws and as required by
law;
shall be the custodian of the records, stock certificates records and of the
seal of the corporation and see that the seal is affixed to all documents the
execution of which on behalf of the Corporation under its seal is duly
authorized in accordance with the provisions of these By-laws.
Section
10. The
Secretary. The Secretary shall perform such duties and have
such powers as are required or permitted by law and as the Board of Directors
shall, from time to time, designate. In his absence, an Assistant
Secretary or a secretary pro tempore shall perform his duties, and the Assistant
Secretary shall have such other powers and duties as the Board of Directors
shall, from time to time, designate. In the absence of the Clerk, the
Secretary shall keep or cause to be kept, in books provided for the purpose,
the
minutes of the meetings of the shareholders and of the Board of Directors and
shall perform such other functions as are provided to be performed by the
Clerk.
Section
11. The
Treasurer. The Treasurer shall be the financial officer of
the Corporation; shall have charge and custody of, and be responsible for,
all
funds of the Corporation, and deposit all such funds in the name of the
Corporation in such banks, trust companies or other depositories as shall be
selected by the Board of Directors; shall receive, and give receipts for, moneys
due and payable to the Corporation from any source whatsoever; and in general,
shall perform all the duties incident to the office of Treasurer and such other
duties as, from time to time, may be assigned to him by the Board of Directors
or by the President.
Section
12. Salaries. The
salaries of the Chairman of the Board, President, Treasurer, Secretary, other
officers and the Clerk, shall be fixed, from time to time, by the Board of
Directors. No officer or the Clerk shall be prevented from receiving
such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE
V
CONTRACTS,
CHECKS, NOTES, ETC.
Section
1. Execution of
Contracts. All contracts and agreements authorized by the
Board of Directors, and all checks, drafts, notes, bonds, bills of exchange
and
orders for the payment of money shall, unless otherwise directed by the Board
of
Directors, or unless otherwise required by law, be signed by any two of the
following officers: The Chairman of the Board, President,
Vice-President, Treasurer, or Secretary. The Board of Directors may,
however, authorize any one of said officers to sign checks, drafts and orders
for the payment of money singly and without necessity of counter signature,
and
may designate officers and employees of the Corporation other than those named
above, or different combinations of such officers and employees, who may, in
the
name of the Corporation, execute checks, drafts, and orders for the payment
of
money on its behalf.
Section
2. Loans. No loans,
to the Corporation, shall be contracted on behalf of the Corporation and no
negotiable paper shall be signed in its name unless authorized by resolution
of
the Board of Directors. When authorized by the Board of Directors to
do so, any officer or agent of the Corporation thereunto authorized may effect
loans and advances at any time for the Corporation from any bank, trust company
or other institution, or from any firm, corporation or individual, and for
such
loans and advances may make, execute and deliver promissory notes, bonds or
other certificates or evidences of indebtedness of the Corporation and, when
authorized so to do, may pledge, hypothecate or transfer any securities or
advances. Such authority may be general or confined to specific
instances.
ARTICLE
VI
STOCK
AND DIVIDENDS
Section
1. Certificate of
Stock. Every stockholder shall be entitled to have a
certificate certifying the number of shares owned by him in the
Corporation. The certificates shall be in such form as the Board of
Directors shall approve. They shall be signed by the President and
countersigned by the Secretary and may be sealed with the seal of the
Corporation or a facsimile thereof. Such certificates shall be
transferable on the stock books of the Corporation in person or by attorney,
but, except as hereinafter provided in the case of loss, destruction or
mutilation of certificates, no transfer of stock shall be entered until the
previous certificate, if any, given for the same shall have been surrendered
and
cancelled.
A
record
of shareholders giving the names and addresses of all shareholders and the
number and class of the shares held by each, shall be kept at the Corporation's
registered office or principal place of business.
The
person in whose name shares of stock stand on the books of the Corporation
shall
be deemed the owner thereof for all purposes as regards the
Corporation.
The
Board
of Directors may make such rules and regulations as it may deem expedient,
not
inconsistent with these By-laws, concerning the issue, transfer and registration
of certificates for shares of the capital stock of the Corporation.
Section
2. Closing of Transfer Books or Fixing
of Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the Corporation may provide that
the
stock transfer books shall be closed for a stated period but not to exceed,
in
any case, sixty (60) days. If the stock transfer books shall be
closed for the purpose of determining shareholders entitled to notice of or
to
vote at a meeting of shareholders, such books shall be closed for at least
ten(10) days immediately preceding such meeting. In lieu of closing
the stock transfer books, the Board of Directors may fix in advance a date
as
the record date for any such determination of shareholders, such date in any
case to be not more than sixty (60) days and, in case of a meeting of
shareholders, not less than ten (10) days prior to the date on which the
particular action, requiring such determination of shareholders, is to be
taken.
Section
3. Lost, Destroyed or Mutilated
Certificates. In case of loss, destruction or mutilation of
any certificate of stock, another may be issued in its place upon proof of
such
loss, destruction or mutilation and upon satisfying such other requirements
as
the Board of Directors shall specify, including such provision for indemnity
as
may seem advisable to the Board of Directors.
Section
4. Dividends. Subject
to the provisions of the Articles of Incorporation of the Corporation, and
to
the extent permitted by law, the Board of Directors may declare dividends on
the
shares of stock of the Corporation at such times and in such amounts as, in
its
opinion, are advisable in view of the condition of the affairs of the
Corporation.
ARTICLE
VII
FISCAL
YEAR
The
fiscal year of the Corporation shall be fixed by the Board of
Directors.
ARTICLE
VIII
SEAL
The
Board
of Directors shall provide a corporate seal which shall be in the form of a
circle and shall bear the name of the Corporation and words and figures
indicating the year and state in which the Corporation was
incorporated.
ARTICLE
IX
WAIVER
OF NOTICE
Whenever
any notice is required to be given to any shareholder or Director by these
By-laws or the Articles of Incorporation or the laws of the State of Maine,
a
waiver of the notice in writing, signed by the person or persons entitled to
the
notice, whether before or after the time stated therein, shall be deemed
equivalent to giving the notice.
ARTICLE
X
INDEMNIFICATION
Section
1. Power to
Indemnify. To the extent permitted by law or regulation, the
Company shall indemnify any person who was or is a director, executive officer
or secretary of the corporation, and may indemnify any other person who is
or
was a party, or is threatened to be made a party, to any threatened, pending
or
completed action, suit or proceeding, whether civil, criminal, administrative
or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a member, director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, as
follows:
(a) if
the action, suit or proceeding is not by or in the right of the Company, against
expenses (including attorneys' fees), and against judgements, fines and amounts
paid in settlement actually and reasonably incurred by him in good faith and
in
a manner he reasonably believed to be in or not opposed to the best interest
of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe this conduct was unlawful (the termination of any
action, suit or proceeding by judgement, order, settlement or conviction or
upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person acted or failed to act other than in good faith
and
in a manner which he reasonably believed to be in or not opposed to the best
interest of the Company, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful);
(b) if
the action, suit or proceeding is by or in the right of the Company, to procure
a judgement in its favor, against expenses (including attorneys' fees) but
excluding judgements and fines, and, except as hereinafter set forth, amounts
paid in settlement, actually and reasonably incurred by him in connection with
the defense of settlement of such action, suit or proceeding if he acted in
good
faith and in a manner he reasonably believed to be in or not opposed to the
best
interests of the Company, except that no indemnification shall be made in
respect of any claim, issue or manner as to which such person shall have been
adjudged to be liable to the Company for negligence or misconduct in the
performance of his duty to the Company unless and only to the extent that the
court in which such action, suit or proceeding was brought shall determine
upon
application that, despite the adjudication of liability but in view of all
the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
Section
2. Right to
Indemnification. To the extent that a director, officer,
employee or agent of the Company has been successful on the merits or otherwise
in defense of any civil or criminal action, suit or proceeding referred to
above, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section
3. Procedure to be
Followed. Any indemnification under (a) or (b) above, shall
be made by the Company only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in such paragraph (a) or (b). Such determination
shall be as follows:
(a) by
a majority vote of a quorum of the board of directors consisting only of
directors who were not parties to such action, suit or proceeding,
or
(b) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by a written opinion of independent legal
counsel appointed by a majority of the disinterested directors for that purpose,
or,
(c) by
the court or other body before which the action, suit or proceeding is or was
pending upon application made by the Company or the director, officer, employee
or agent, or the attorney or to the person rendering services in connection
with
the defense, whether or not such application by the director, officer, employee
or agent, or attorney or other person is opposed by the Company and in any
such
case indemnification may include the expenses (including attorneys' fees)
actually and reasonably paid in connection with such application.
Section
4. Payment of Expenses in
Advance. Expenses (including attorneys' fees) incurred in
defending a civil or criminal action, suit or in a proceeding referred to above
may be paid by the Company in advance of the final disposition if such action,
suit or proceeding as authorized by the board of directors in the manner
provided above upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately
be
determined that he is entitled to be indemnified by the Company, as authorized
in these bylaws.
Section
5. Other
Rights. The indemnification provided by these bylaws shall
not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any statute, agreement, vote of
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee
or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Section
6. Insurance. The
Company shall have power to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company
or is
or was serving at the request of the Company as a member, director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or
other enterprise, against any liability asserted against him and incurred by
him
in any such capacity, or arising out of his status as such, whether or not
the
Company would have the power to indemnify his against such liability under
the
provisions of these bylaws.
ARTICLE
XI
EMERGENCY
PREPAREDNESS
In
the
event of an emergency in the conduct of the business of the Company resulting
from an attack on the continental United States or any other such disaster
resulting in a major disruption of the conduct of the business of the
Company:
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1.
|
The
officers and employees of the Company shall continue to conduct the
business of the Company under such guidance from the Board of Directors
as
may be available, except as to matters which by statue require specific
approval of the Board of Directors, and subject to any directive
of duly
constituted authority during
emergency.
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2.
|
In
the absence or disability of any officer, or upon the refusal of
any
officer to act, the Board of Directors may delegate for the time
being
that officer's powers and duties to any other officer or
director.
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3.
|
In
the event of an emergency so severe as to prevent the conduct and
management of the business of the Company by the Board of Directors
and
the officers as contemplated by these by-laws, any two or more available
directors shall constitute an interim Executive Committee for the
full
conduct and management of the business of the Company, subject to
such
regulations as the Board of Directors may from time to time adopt
for
emergency preparedness, until such time as the interim Executive
Committee
determines that the Company can resume the conduct and management
of the
business of the Company in the manner contemplated by the
by-laws.
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4.
|
If,
as a consequence of an emergency, the Chief Executive Officer of
the
Company cannot be located or is unable to assume and continue his
normal
executive duties, then his powers and duties shall, without further
action
of the Board of Directors, be assumed by one of the following officers
in
the seniority set forth:
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(a)
President(unless he is serving as Chief Executive Officer)
(b)
Executive Vice President
(c)
Senior Vice Presidents (in order of seniority)
(d)
Treasurer
The
officer so assuming the powers and duties of the Chief Executive Officer shall
continue to serve until the majority of the available directors certify in
writing that either he is unable to serve longer in that capacity or an officer
senior to him is available to assume the powers and duties of the Chief
Executive Officer.
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5.
|
If,
as a consequence of an emergency, the Treasurer of the Company cannot
be
located or is unable to assume and continue his normal duties, then
the
powers and duties of the Treasurer shall, without further action
of the
Board of Directors, be assumed by one of the following officers in
the
seniority set forth:
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(a)
President(unless he is serving as Chief Executive Officer)
(b)
Executive Vice President
(c)
Senior Vice Presidents (in order of seniority)
(d)
Assistant Treasurer or Comptroller.
The
officer so assuming the powers and duties of the Treasurer shall continue to
serve until the majority of the available directors certify in writing that
either he is unable to serve longer in that capacity or an officer senior to
him
is available to assume the powers and duties of the Treasurer
Anyone
dealing with the Company may accept a certificate of two or more officers that
a
specified individual is the acting Treasurer hereunder and rely upon that
certificate to remain in full force and effect until modified or cancelled
by a
certificate of change signed by three officers of the Company.
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6.
|
If
during such emergency, or as a consequence thereof, the business
of the
Company cannot be conducted and managed at its main office, business
may
be conducted and managed at such temporary location or locations
as may be
designated by the Board of Directors or by its interim Executive
Committee
for which provision is made above; and the business of the Company
shall
be returned from the temporary location or locations to the main
office of
the Company as soon as practicable.
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ARTICLE
XII
AMENDMENTS,
ETC.
Section
1. Amendments. The
By-laws of the Corporation may be amended at any time by the affirmative vote
of
a majority of the entire Board, subject to repeal, change or adoption of any
contravening or inconsistent provision only by vote of the holders of at least
two-thirds (2/3) of all the shares entitled to vote on the matter at a meeting
expressly called for that purpose.
Section
2. Supplemental
Resolutions. The Board of Directors by resolution, adopted
by (i) two-thirds of the Directors who are not affiliated with any acquiring
or
offering person in the case of Sections 2 and 4 of Exhibit B to the Articles
of
Incorporation or (ii) a majority of the Directors in all other cases, may
supplement, interpret, clarify or enforce the provisions of the Articles of
Incorporation and By-laws. Such resolution shall be binding and may
be relied upon for all purposes provided that the resolution is not inconsistent
with law, the Articles of Incorporation or these By-laws.
*****
BETHEL
BANCORP
1989
STOCK OPTION PLAN
I. THE
PLAN
1. Purpose.
The purpose of this Plan is to provide a means whereby Bethel Bancorp (the
"Company") may, through the grant of stock options to Key Employees, as defined
below, and Directors, as defined below, attract and retain persons of ability
as
employees and Directors and motivate such persons to exert their best efforts
on
behalf of the Company or any present or future Subsidiary thereof. As used
herein the term "Subsidiary" shall mean any corporation which at the time an
option is granted under this Plan qualifies as a subsidiary of the Company
under
the definition
of "subsidiary corporation" contained in Section 425 (f) of the Internal
Revenue Code of 1986 (the "Code"), as amended from time to time, or any similar
provision hereafter enacted, except that such term shall not include any
corporation which is classified as a foreign corporation pursuant to Section
7701 of the Code. The term "Key Employees" means those employees (including
officers and directors who are also employees) of the Company or of any
Subsidiary, who, in the judgment of the Committee defined in Section 2 below,
are considered especially important to the future of the Company. The term
"Directors" means those members of the Board of Directors of the Company (the
"Board") or of any Subsidiary, who are not Key Employees and, who, in the
judgment of the Committee, are considered especially important to the future
of
the Company. The term "stock options", means options to purchase Common Stock,
$1.00 par value, of the Company ("Stock") and in the case of stock options
granted pursuant to Article II hereof, which at the time such options are
granted qualify as incentive stock options within the meaning of Section 422A
of
the Code.
2. Administration
of the Plan. The Plan shall be administered by the Stock Option Committee
(the "Committee") of the Board. The Committee shall consist of at least three
members of the Board and serve at the Board's pleasure. All decisions and
selections by the Committee pursuant to the provisions of the Plan shall be
made
by a majority of its members. A member of the Committee who is eligible to
receive a stock option under the Plan shall not vote on any question relating
specifically to himself. Any decision reduced to writing and signed by all
of
the members shall be fully effective as if it had been unanimously made at
a
duly held meeting of the Committee.
Except
as
otherwise expressly reserved to the Board in this Plan, the Committee may
interpret the Plan, describe, amend and rescind any rules and regulations
necessary or appropriate for the administration of the Plan or for the continued
qualification of any stock options granted to Key Employees and make such other
determinations and take such other actions as it deems necessary or advisable.
Without limiting the generality of the foregoing, the Committee may, in its
discretion, treat all or any portion of any period during which a Key Employee
is on military leave or on an approved leave of absence from the Company or
a
Subsidiary as a period of employment by the Company or such Subsidiary, as
the
case may be, and not as an interruption of employment, for purposes of
maintaining the Key Employee's continuous status as an employee and accrual
of
rights under any option granted hereunder. Any interpretation, determination
or
other action made or taken by the Committee shall be final, binding and
conclusive.
3. Final
Authority with Respect to the Plan. Notwithstanding any other provisions
hereof to the contrary, final authority as to the administration of the Plan
rests in the full Board. It is a requirement of the Plan that the Committee
submit their interpretations, determinations and actions to the full Board
for
final approval. A Board member who is eligible to receive a stock option under
the Plan may not vote on any question relating specifically to
himself.
II. INCENTIVE
STOCK OPTIONS
1. Incentive
Stock Options. Subject to the provisions of the Plan, the Committee may
grant stock options from time to time which qualify as incentive stock options
within the meaning of Section 422A of the Code ("Incentive Stock Options")
in
accordance with provisions of this Article II.
2. Shares
Subject to Incentive Stock Options. Incentive Stock Options may be granted
by the Company from time to time to Key Employees to purchase an aggregate
of
33,000 shares of Stock. The Company shall reserve said number of shares for
Incentive Stock Options granted under the Plan subject to adjustment as provided
in Section 1 of Article V. The shares issued upon the exercise of Incentive
Stock Options granted under the Plan may be authorized and unissued shares
or
shares held by the Company in its treasury. If any Incentive Stock Options
granted hereunder should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject to
an
Incentive Stock Option shall, unless the Plan shall have been terminated, be
available for the grant of other Incentive Stock Options under the
Plan.
3. Grant
of Incentive Stock Options to Key Employees. Subject to the provisions of
the Plan and in particular this Article II, the Committee shall (i) determine
and designate from time to time those Key Employees to whom Incentive Stock
Options are to be granted and the number of shares of Stock to be optioned
to
each such employee and (ii) determine the time or times when and the manner
in
which each Incentive Stock option shall be exercisable and the duration of
the
exercise period. Notwithstanding the above (i) no option shall be granted
pursuant to this Section 3 after the expiration of ten years from the effective
date of the Plan as defined in Section 5 of Article V hereof and (ii)
the
aggregate
fair market value (determined as of the date the Incentive Stock Option is
granted) of Stock which is first exercisable by any employee during any calendar
year under all stock option plans of the Company and its Subsidiaries shall
not
exceed $100,000. Incentive Stock Options need not be identical and in fixing
the
terms of any Incentive Stock Option, the Committee may take into account such
individual factors bearing on the value of an employee as it considers
appropriate.
No Director as defined in Section 1 of Article I shall be entitled to receive
any Incentive Stock Option under this Article II.
4. Terms
and Conditions of Incentive Stock Options. Each Incentive Stock Option
granted under the Plan to a Key Employee pursuant to Section 3 hereof shall
be
evidenced by an agreement with the optionee (the "Incentive Stock Option
Agreement") in a form approved by the Committee. Each Incentive Stock Option
and
the Incentive Stock Option Agreement shall be subject to the following express
terms and conditions and to such other terms and conditions as the Committee
may
deem appropriate.
(a) Incentive
Stock Option Period. Subject to the terms of Section 3 hereof, each
Incentive Stock Option Agreement shall specify the period for which the
Incentive Stock option or any portion thereof is granted and exercisable, as
determined by the Committee, and shall provide that the Incentive Stock Option
shall expire at the end of such period. In no event shall any Incentive Stock
Option be exercisable after the expiration of 10 years from the date of grant
unless the Incentive Stock Option price is determine pursuant to Section 4(c)(2)
hereof in which event the Incentive Stock. Option shall not be exercisable
after
the expiration of 5 years from the date of grant.
(b) Date
of Grant. The date of grant of an Incentive Stock Option to a Key Employee
under the Plan shall, for all purposes, be the date on which the Committee
makes
the determination of granting such Incentive Stock Option. Notice of the
determination shall be given to each Key Employee to whom an Incentive Stock
Option is so granted within a reasonable time after the date of such
grant.
(c) Incentive
Stock Option Price.
(1) The
option price per share of Stock shall be determined by the Committee at the
time
any Incentive Stock Option is granted and except as provided in subsection
(2)
below shall not be less than the fair market value of one share of Stock on
the
date the Incentive Stock Option is granted. The fair market value of a share
of
Stock on the date of grant shall be the mean between the highest and lowest
quoted selling prices on such date in the over-the-counter market, as reported
by any market makers in the Stock.
(2) If an
Incentive Stock Option is granted to a Key Employee then owning Stock possessing
more than 10% of the total combined voting power of all classes of stock of
the
Company or any Subsidiary taking into account the attribution rules of Section
425(d) of the Code, then the Committee shall set the Incentive Stock Option
price per share of Stock at 110% of the Incentive Stock Option price determined
pursuant to subsection (1) hereof.
(d) Exercise
of Incentive Stock Option. The Incentive Stock Option Agreement shall
provide the amount of the aggregate fair market value (determined as of the
date
the Incentive Stock Option is granted) of the Stock which may be exercised
for
the first time during any calendar year of the option period and may provide
that after the date Stock is first exercisable, the option may be exercised
in
whole or in part at any time or times during the remainder of option
period.
(e)
Exercise During Employment or Following Retirement, Disability or Death.
Unless otherwise provided in the terms of an Incentive Stock Option Agreement,
an Incentive Stock option may he exercised by an optionee only while he is
an
employee of the Company or a Subsidiary and has maintained continuous status
as
an employee since the date of the grant of the Incentive Stock Option, except
if
his continuous employment is terminated by reason of the employee's voluntary
termination of employment, disability or death. If the continuous employment
of
an optionee is terminated as a result of the employee's voluntary termination
of
employment, he may, hut only within a period of 90 days beginning the day
following the date of such termination of employment (and no later than the
date
the Incentive Stock Option would otherwise expire), exercise his option to
the
extent that he was entitled to exercise it at the date of such termination.
If
the continuous employment of an optionee is terminated as a result of the
optionee's disability, he may, but only within the one year period from the
date
of such termination of employment (and no later than the date the Incentive
Stock Option would otherwise expire), exercise his option to the extent he
was
entitled to exercise it at the date of such termination. If the continuous
employment of an optionee is terminated by death, then to the extent that the
optionee would have been entitled to exercise the Incentive Stock option
immediately prior to his death, such Incentive Stock Option of the deceased
optionee may be exercised within 90 days from the date of his death (but no
later than the date on which such Incentive Stock option would otherwise expire)
by the person or persons (including his estate) to whom his rights under such
Incentive Stock option shall have passed by will or by the laws of descent
and
distribution. Termination of continuous employment for any other reason shall
result in cancellation of the Incentive Stock Option.
The
terms "continuous employment" and "continuous status as an employee" mean the
absence of any interruption or termination of employment with the Company or
with any present or future Subsidiary. Employment shall not be considered
interrupted in the case of transfers between the Company and any Subsidiary
or
between Subsidiaries, nor in the case of any military leave or any approved
leave of absence which the Committee, in its discretion, treats as a period
of
employment.
(f) Non-transferability.
No Incentive Stock Option granted to a Key Employee under the Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, an Incentive Stock option shall be
exercisable only by him.
(g) Code
Requirements. Each Incentive Stock Option Agreement shall contain such terms
and provisions as the Committee may determine to be necessary or desirable
in
order to qualify such Incentive Stock Option as an incentive stock option within
the meaning of Section 422A of the Code.
(h) No
Rights as Shareholder. No optionee shall have any rights as a shareholder
with respect to any shares of Stock subject to his Incentive Stock option prior
to the date of issuance to him of a certificate or certificates for such
shares.
(i) No
Rights to Continued Employment. The Plan and any Incentive Stock Option
granted pursuant to Section 3 of this Article II shall not confer upon any
Key
Employee any right with respect to continuance of employment by the Company
or
any Subsidiary nor shall they interfere in any way with the right of the Company
or any subsidiary employing an optionee to terminate his employment at any
time.
5. Disposition
of Shares by Key Employees No share of Stock acquired as a result of the
exercise of an Incentive Stock Option granted to a Key Employee under the Plan
shall be transferable other than by will or by the laws of descent and
distribution before the latter of the expiration of the two year period
beginning on the date such Incentive Stock Option was granted or the expiration
of the one year period beginning on the date of the transfer of such share
pursuant to such exercise.
III.
NONQUALIFIED STOCK OPTIONS
1. Nonqualified
Stock Options. Subject to the provisions of the Plan, the Committee may
grant other stock options ("Nonqualified Stock options") from time to time
in
accordance with the provisions of this Article III.
2. Share
Subject to Nonqualified Stock Options. Nonqualified Stock Options may be
granted by the Company from time to time to Key Employees and Directors to
purchase an aggregate of 12,000 shares of Stock. The Company shall reserve
said
number of shares for Nonqualified Stock Options granted under the Plan subject
to adjustment as provided in Section 1 of Article V. The shares issued upon
the
exercise of Nonqualified Stock Options granted under the Plan may be authorized
and unissued shares or shares held by the Company in its treasury. If any
Nonqualified Stock Options granted hereunder should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased shares which were subject to a Nonqualified Stock Option shall,
unless the Plan shall terminate, be available for the grant of other
Nonqualified Stock Options under the Plan.
3. Grant
of Nonqualified Stock Options to Key Employees and Directors. Subject to the
provisions of the Plan and in particular this Article III, the Committee shall
(i) determine and designate from time to time those Key Employees and Directors
to whom Nonqualified Stock Options are to be granted and the number of shares
of
Stock to be optioned to each such person and (ii) determine the time or times
and the manner in which each nonqualified Stock option shall be exercisable
and
the duration of the exercise period. Nonqualified Stock Options need not be
identical and in fixing the terms of any Incentive Stock Option, the Committee
may take into account such individual factors bearing on the value of the
employee or Director as it considers appropriate.
4. Terms
and Conditions of Nonqualified Stock Options. Each Nonqualified Stock Option
granted under the Plan to a Key Employee or Director pursuant to Section 3
hereof shall be evidenced by an agreement with the optionee (the "Nonqualified
Stock Option Agreement") in a form approved by the Committee. Each Nonqualified
Stock Option and the Nonqualified Stock Option Agreement shall be subject to
the
following express terms and conditions and to such other terms and conditions
as
the Committee may deem appropriate.
(a) Nonqualified
Stock Option Period. Each Nonqualified Stock Option Agreement shall specify
the period for which the Nonqualified Stock Option thereunder is granted and
exercisable, as determined by the Committee, and shall provide that the option
shall expire at the end of such period.
(b) Date
of Grant. The date of grant of a Nonqualified Stock Option to a Key Employee
or Director under the Plan shall, for all purposes, be the date on which the
Committee makes the determination of granting such Nonqualified Stock Option.
Notice of such determination shall be given to each Key Employee or Director
to
whom an option is so granted within a reasonable period of time after the date
of such grant.
(c) Nonqualified
Stock Option Price
(1) The
option price per share of Stock shall be determined by the Committee at the
time
any Nonqualified Stock option is granted and except as provided in Subsection
(2) below shall not be less than the fair market value of one share of Stock
on
the date the Nonqualified Stock option is granted. The fair market value of
a
share of Stock on the date of grant shall be the mean between the highest and
lowest quoted selling prices on such date in the over-the-counter market, as
reported by any market makers in the Stock.
(2) If
a Nonqualified Stock Option is granted to a Key Employee or Director then owning
Stock possessing more than 10% of the total combined voting power of all classes
of Stock of the Company or any Subsidiary taking into account the attribution
rules of Section 425(d) of the Code, then the Committee shall set the option
price per share of Stock at 110% of the option price determined pursuant to
subsection (1) hereof.
(d) Exercise
of Nonqualified Stock Option The Nonqualified Stock option-Agreement may
provide that the option may be exercised in whole or in part at any time or
times during the option period.
(e) Exercise
During Employment or Board Tenure. Unless otherwise provided under the terms
of a Nonqualified Stock Option Agreement, a Nonqualified Stock option granted
to
a Key Employee or Director may be exercised by an optionee only while he is
an
employee or Director of the Company or a Subsidiary and has maintained
continuous status as an employee or Director since the date of the grant of
the
Nonqualified Stock Option, except if his continuous employment or directorship
is terminated by reason of the optionee's voluntary termination of employment
or
directorship, disability or death. If the continuous employment or directorship
of an optionee is terminated as a result of the optionee's voluntary
termination, he may, but only within a period of 90 days beginning the date
following the date of such termination of employment or directorship (and no
later than the date the Nonqualified Stock Option would otherwise expire),
exercise his option to the extent that he was entitled to exercise it at the
date of such termination. If the continuous employment or directorship of an
optionee is terminated as a result of optionee's disability, he may, but only
within the one year period from the date of such termination of employment
or
directorship (and no later than the date the Incentive Stock Option would
otherwise expire), exercise his option to the extent he was entitled to exercise
it at the date of such termination. If the continuous employment or directorship
of an optionee is terminated by death, then to the extent that the optionee
would have been entitled to exercise the Nonqualified Stock option immediately
prior to his death, such Nonqualified Stock option of a deceased optionee may
be
exercised within 90 days from the date of his death (but no later than the
date
on which such Nonqualified Stock Option would otherwise expire) by the person
or
persons (including his estate) to whom his rights under such NonQualified Stock
option shall have passed by will or by the laws of descent and distribution.
Termination of continuous employment or directorship for any other reason shall
result in cancellation of the Nonqualified Stock option.
The
terms "continuous employment" and "continuous status as an employee" mean the
absence of any interruption or termination of employment with the Company or
with any present or future Subsidiary. Employment shall not be considered
interrupted in the case of transfers between the Company and any Subsidiary
or
between Subsidiaries, nor in the case of any military leave or any approved
leave of absence which the committee, in its discretion, treats as a period
of
employment.
The
terms "continuous directorship" and "continuous status as a Director" mean
the
absence of any interruption or termination as a Director of the Company or
with
any present or future Subsidiary. Directorship shall not be considered
interrupted in the case of transfers between the Company and any Subsidiary
or
between Subsidiaries.
(f) Non-transferability.
No Nonqualified Stock Option granted to a Key Employee or Director under the
Plan shall be transferrable other than by will or by the laws of descent and
distribution. During the lifetime of the optionee, a Nonqualified Stock Option
shall be exercisable only by him.
(g) No
Rights as Shareholder. No optionee shall have any rights as a shareholder
with respect to any shares of Stock subject to his Nonqualified Stock Option
prior to the date of issuance to him of a certificate or certificates for such
shares.
(h) No
Rights to Continued Employment or Directorship. The Plan and any
Nonqualified Stock Option granted pursuant to Section 3 of this Article III
shall not confer upon any Key Employee or Director any right with respect to
continuance of employment by or as a Director of the Company or any subsidiary
nor shall they interfere in any way with the right of any party to terminate
his
employment or directorship at any time.
5. Disposition
of Shares. No share of Stock acquired as a result of the exercise of a
Nonqualified Stock Option granted under the Plan shall be subject to any
restrictions on transferability or otherwise.
IV.
EXERCISE AND PURCHASE PROVISIONS
1. Limitation
on Exercise of options. Each option granted under the Plan shall provide
that the option may not he exercised in whole or in part by the optionee for
less than 100 shares of Stock unless only less than 100 shares of Stock remain
subject to the option. In addition, an option may not be exercised for a
fractional share.
2. Payment
of-Purchase Price upon Exercise of Option. Each option granted under the
Plan shall provide that the purchase price of the shares as to which an option
is exercised will be paid to the Company at the time of exercise, either in
cash
or in Stock already owned by the optionee having a total fair market value,
as
determined by the Committee, equal to the purchase price, or a combination
of
cash and Stock having a total fair market value, as so determined, equal to
the
purchase price.
3. Procedure
for Exercising Options. Each option granted under the Plan shall be
exercisable at such times and under such conditions as shall be permissible
under the terms of the Plan and the Incentive Stock Option Agreement or the
Nonqualified Stock Option Agreement, as the case may be.
An
option may be exercised, subject to the applicable provisions of this Plan
relative to its termination and limitations on its exercise, from time to time
only by (i) written notice of intent to exercise the option with respect to
a
specified number of shares and (ii) payment to the Company (contemporaneously
with delivery of each such notice) of the option price as provided in Section
1
hereof. Each such notice and payment shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the Company at
its
executive offices.
V.
MISCELLANEOUS PROVISIONS
1. Adjustments
in Event of Change in Common Stock. In the event of any change in the Common
Stock of the Company by reason of any stock dividend, recapitalization,
reorganization, merger, consolidation, split-up, combination, or exchange of
shares, or rights offering to purchase Common Stock at a price substantially
below fair market value, or of any similar change affecting the Stock, the
number and kind of shares which thereafter may be optioned
and sold under the Plan pursuant to Articles II and III hereof and the number
and kind of shares subject to option in outstanding option agreements and the
purchase price per share thereof shall he appropriately adjusted consistent
with
such change in such manner as the Committee may deem equitable to prevent
substantial dilution or enlargement of the rights granted to, or available
for,
participants in the Plan.
2. Compliance
With Other Laws and Regulations The Plan, the grant and exercise of options
thereunder and the obligations of the Company to sell and deliver shares under
such options, shall be subject to all applicable federal and state laws, rules
and regulations and to such approvals by any government or regulatory agency
as
may he required. The Company shall not be required to issue or deliver any
certificates for shares of Stock prior to the completion of any registration
or
qualification of such shares under any federal or state law, or any ruling
or
regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable.
3. Modification
of Options. At any time and from time to time the Board of Directors of the
Company may authorize the modification of any outstanding option, provided
no
such modification, extension or renewal shall confer on the holder of said
option any right or benefit which could not he conferred on him by the grant
of
a new option at such time or impair the option without the consent of the holder
of the option.
4. Amendment
and Termination of the Plan. The Board of Directors of the Company may
alter, suspend or discontinue the Plan except that no action of the Board may
increase(other than as provided in Section 1 hereof) the maximum number of
shares permitted to be optioned under the Plan, reduce the minimum option price
provided for in Section 4(c) of Article II or extend the period within which
options may he exercised, unless such action of the Board shall be subject
to
approval or ratification by the shareholders of the Company.
5. Effective
Date of the Plan. The effective date of the Plan shall be the date of its
adoption on by the Board of Directors of the Company, but such adoption shall
be
subject to approval and ratification of a majority of the shareholders of the
Company entitled to vote. Notwithstanding any provision hereof to the contrary,
this Plan shall not take effect unless the Company purchases all of the issued
and outstanding stock of Bethel Savings Bank FSB.
6. Interpretation
of Article II Options. The terms of this Plan which relate to the grant of
an Incentive Stock option to a Key Employee are subject to all present and
future rules and regulations of the Secretary of the Treasury or his delegate
regarding the qualifications of incentive stock options under Section 422A
of
the Code. If any such provision of the Plan conflicts with any such rule or
regulation, then the provision of the Plan shall be void and of no force and
effect.
AMENDMENT
ONE TO BETHEL BANCORP 1989 STOCK OPTION PLAN
Amendment
One made by Bethel Bancorp (the "Company") to the Bethel Bancorp 1989 Stock
Option Plan (the "Plan").
1. Section
5 of Article II shall be amended by deleting Section 5 of Article II in its
entirety and substituting therefor the following Section 5 of Article
II:
"5. Disposition
of Shares by Key Employees. With respect to shares of Stock acquired as a
result of the exercise of an Incentive Stock Option, any disposition of such
shares other than by will or by the laws of descent and distribution before
the
later of the expiration of the two-year period beginning on the date such
Incentive Stock Option was granted or the expiration of the one-year period
beginning on the date of the transfer of such share pursuant to such exercise,
will not be prohibited by the Plan, but may disqualify the disposition from
receiving favorable tax treatment under Section 421(a) of the
Code."
2. Section
6 of Article V shall be amended by deleting Section 6 of Article V in its
entirety and substituting therefor the following Section 6 of Article
V:
"6. Interpretation
of Incentive Stock Options. The terms of this Plan which relate to the grant
of Incentive Stock Options to Key Employees are intended to comply with rules
and regulations regarding the qualification of Incentive Stock Options under
Section 422 of the Code, and the Plan shall be interpreted and construed
accordingly. Except with respect to certain disqualifying dispositions of Stock
acquired as a result of the exercise of an Incentive Stock Option, which are
not
prohibited by the Plan, if a provision of the Plan conflicts with any such
rule
or regulation, then the provision of the Plan shall be void and of no force
and
effect."
3. Section
4(c) of Article III of the Plan shall be amended by deleting Section 4(c) of
Article III in its entirety and substituting therefor the following Section
4(c)
of Article III:
"(c) Non-qualified
Stock Option Price. The option price per share of Stock shall be determined
by the Committee at the time any Non-qualified Stock Option is granted and
shall
not be less than the fair market value of one share of Stock on the date the
Non-qualified Stock Option is granted."
4. Amendment
One shall be effective as of the date hereof.
IN
WITNESS WHEREOF, the Company has caused this Amendment One to be executed by
its
duly authorized President as of the ____day of________,1994.
BETHEL
BANCORP
By:
/s/ James
D. Delamater
James
D.
Delamater,President
BETHEL
BANCORP
1992
STOCK OPTION PLAN
I.
THE
PLAN
1.1 Purpose. The
purpose of this Plan is to provide a means whereby Bethel Bancorp (the
"Company") may, through the grant of stock options to Key Employees, as defined
below, and to certain other individuals, as set out in Article III, attract,
retain and motivate persons of ability to exert their best efforts on behalf
of
the Company or any present or future Subsidiary thereof. As used herein the
term
"Subsidiary" shall mean any corporation which at the time an option is granted
under this Plan qualifies as a subsidiary of the Company under the definition
of
" subsidiary corporation" contained in Section 425(f) of the Internal Revenue
Code of 1954 (the "Code"), as amended from time to time, or any similar
provision hereafter enacted, except that such term shall not include any
corporation which is classified as a foreign corporation pursuant to Section
7701 of the Code. The term "Key Employees" means those employees (including
officers who are also employees) of the Company or of any Subsidiary, who,
in
the judgment of the Committee defined in Section 1.2 below, are considered
especially important to the future of the Company. The term "stock options",
means options to purchase Common Stock, $1.00 par value, of the Company
("Stock") and in the case of stock options granted pursuant to Article II
hereof, which at the time such options are granted qualify as Incentive Stock
Options within the meaning of Section 422 of the Code.
1.2 Administration
of the Plan. The Plan shall be administered by the Stock
Option Committee (the "Committee") of the Board of Directors of the Company
(the
"Board"). The Committee shall consist of not less than three members who shall
be appointed by the Board and serve at the Board's pleasure. Each member of
the
Committee shall be a member of the Board. Any vacancy occurring in the
membership of the Committee shall be filled by appointment by the Board. All
decisions and selections by the Committee pursuant to the provisions of the
Plan
shall be made by a majority of its members. A member of the Committee who is
eligible to receive an stock option under the Plan shall not
vote
on
any question relating specifically to that member. Any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been unanimously made at a duly held meeting of the
Committee.
Except
as otherwise expressly reserved to the Board in this Plan, the Committee may
interpret the Plan, prescribe, amend and rescind any rules and regulations
necessary or appropriate for the administration of the Plan or for the continued
qualification under the Code of any stock options granted to Key Employees
and
may make such other determinations and take such other actions as it deems
necessary or advisable. Without limiting the generality of the foregoing, the
Committee may, in its sole discretion, treat all or any portion of any period
during which a Key Employee is on military leave or on an approved leave of
absence from the Company or a Subsidiary as a period of employment by the
Company or such Subsidiary, as the case may be, and not as an interruption
of
employment, for purposes of maintaining the Key Employee's continuous status
as
an employee and accrual of rights under any Incentive Stock Options. Any
interpretation, determination or other action made or taken by the Committee
shall be final, binding and conclusive, subject only to the full Board's
authority as set forth in Section 1.3 hereof.
1.3 Final
Authority with Respect to the Plan. Notwithstanding any
other provisions hereof to the contrary, final authority as to the
administration of the Plan rests in the full Board. It is a requirement of
the
Plan that the Committee submit its interpretations, determinations and actions
to the full Board for final approval. A Board member who is eligible to receive
a stock option under the Plan may not vote on any question relating specifically
to that member.
II.
INCENTIVE STOCK OPTIONS
2.1 Incentive
Stock Options. Subject to the provisions of the Plan, the
Committee may grant stock options from time to time which qualify as Incentive
Stock Options within the meaning of Section 422 of the Code ("Incentive Stock
Options") in accordance with provisions of this Article II.
2.2 Shares
Subject to Incentive Stock Options. Incentive Stock Options
may be granted by the Company from time to time to Key Employees to purchase
an
aggregate of 52,000 shares of Stock. The Company shall reserve said number
of
shares for Incentive Stock Options granted under the Plan subject to adjustment
as provided in section 5.1. The shares issued upon the exercise of Incentive
Stock Options granted under the Plan may be authorized and unissued shares
or
shares held by the company in its treasury. If any Incentive Stock Options
granted hereunder should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject to
an
Incentive Stock Option shall, unless the Plan shall have been terminated, be
available for the grant of other Incentive Stock options under the
Plan.
2.3 Grant
of Incentive Stock Options to Key Employees. Subject to the
provisions of the Plan and in particular this Article II, the Committee shall
(i) determine and designate from time to time those Key Employees to whom
Incentive Stock Options are to be granted and the number of shares of Stock
to
be optioned to each such employee and (ii) determine the time or times when
and
the manner in which each Incentive Stock Option shall be exercisable and the
duration of the exercise period. Notwithstanding the above, no option shall
be
granted pursuant to this Section 2.3 after the expiration of ten years from
the
effective date of the Plan as defined in Section 5.5.
Incentive
Stock options need not be identical and in fixing the terms of any Incentive
Stock Option, the Committee may take into account such individual factors
bearing on the value of an employee as it considers appropriate.
2.4 Terms
and Conditions of Incentive Stock Options. Each Incentive
Stock Option granted under the Plan to a Key Employee pursuant to Section 2.3
hereof shall be evidenced by an agreement with the optionee (the "Incentive
Stock Option Agreement") in a form approved by the Committee. Each Incentive
Stock Option and the Incentive Stock Option Agreement shall be subject to the
following express terms and conditions and to such other terms and conditions
as
the Committee may deem appropriate from time to time.
(a) Incentive
Stock Option Period. Subject to the terms of Section 2.3
hereof, each Incentive Stock option Agreement shall specify the period for
which
the Incentive Stock Option thereunder is granted and exercisable, as determined
by the Committee, and shall provide that the Incentive Stock Option shall expire
at the end of such period. In no event shall any Incentive Stock Option be
exercisable after the expiration of 10 years from the date of grant provided,
however, that if the Incentive Stock Option price is determined pursuant to
Section 2.4 (c)(2) hereof, then the Incentive Stock Option shall not be
exercisable after the expiration of 5 years from the date of grant.
(b) Date
of Grant. The date of grant of an Incentive Stock Option to
a Key Employee under the Plan shall, for all purposes, be the date on which
the
Committee makes the determination of granting such Incentive Stock Option.
Notice of the determination shall be given to each Key Employee to whom an
Incentive Stock Option is so granted within a reasonable time after the date
of
such grant.
(c) Incentive
Stock Option Price.
(1) The
option price per share of Stock shall be determined by the Committee at the
time
any Incentive Stock option is granted and except as provided in subsection
(2)
below shall not be less than the fair market value of one share of Stock on
the
date that the Incentive Stock Option is granted. The Committee shall have full
authority to determine the fair market value of a share of stock. If the stock
is traded in the over-the-counter market, then such fair market value shall
be
deemed to be the arithmetical mean between the asked and the bid prices between
the opening of the market and closing on such date, as reported by any market
makers in the stock. If the stock is traded on an exchange, then such fair
market value shall be deemed to be the arithmetical mean of the high and low
prices at which it is quoted or traded between the opening of the market and
closing on such day on the exchange on which it generally has the greatest
trading volume.
(2) If
an Incentive Stock Option is granted to a Key Employee then owning Stock
possessing more than 10% of the total combined voting power of all classes
of
stock of the Company or any Subsidiary taking into account the attribution
rules
of Section 425(d) of the Code, then the Committee shall set the Incentive Stock
Option price per share of Stock at 110% of the Incentive Stock option price
determined pursuant to subsection (1) hereof.
(d) Exercise
of Incentive Stock Option. In the event that the
aggregate fair market value (determined at the time the option is granted)
of
stock with respect to which options are exercisable hereunder for the first
time
by any eligible employee during any one calendar year (under this Plan and
all
other Incentive Stock Option Plans of the Company or any parent or subsidiary
of
the Company) shall exceed $100,000, such options shall be treated as options
which are not Incentive Stock Options, taking options into account in the order
in which they were granted. In the case of an option that is to be treated
in
part as an Incentive Stock Option and in part as a Non-Incentive Stock Option,
the Company may designate the shares of stock that are to be treated as stock
acquired pursuant to the exercise of an Incentive Stock option by issuing a
separate certificate for such shares and identifying the certificate as
Incentive Stock Option
shares in the stock transfer records of the Company.
(e) Exercise
During Employment or Following Retirement Disability or
Death. Unless otherwise provided in the terms of an
Incentive Stock Option Agreement, an Incentive Stock Option may be exercised
by
an optionee only while the optionee is an employee of the Company or a
Subsidiary and has maintained continuous status as an employee since the date
of
the grant of the Incentive Stock Option, except if the optionee's continuous
employment is terminated by reason of the optionee's voluntary termination
of
employment, disability or death. If the continuous employment of an optionee
is
terminated as a result of the optionee's voluntary termination of employment,
then the optionee may, but only within a period of 90 days beginning the day
following the date of such termination of employment (and no later
than the date the Incentive Stock Option would otherwise expire), exercise
the
option to the extent that the optionee was entitled to exercise it at the date
of such termination. If the continuous employment of an optionee is terminated
as a result of the optionee's disability, such optionee may, but only within
a
one year period from the date of such termination of employment (and no later
than the date the Incentive Stock Option would otherwise expire), exercise
the
option to the extent that the optionee was entitled to exercise it at the date
of such termination. Termination of continuous employment for any other reason
(except death) shall result in the immediate and contemporaneous cancellation
of
the Incentive Stock Option. If the continuous employment of an optionee is
terminated by death, then to the extent that the optionee would have been
entitled to exercise the Incentive Stock Option immediately prior to the
optionee's
death, such Incentive Stock Option of the deceased optionee may be exercised
within 90 days from the date of the optionee's death (but no later than the
date
on which such Incentive Stock Option would otherwise expire) by the person
or
persons (including the optionee's estate) to whom the optionee's rights under
such Incentive Stock Option shall have passed by will or by the laws of descent
and distribution.
The
terms "continuous employment" and "continuous status as an employee" mean the
absence of any interruption or termination of employment with the Company or
with any present or future Subsidiary. Employment shall not be considered
interrupted in the case of transfers between the Company and any Subsidiary
or
between Subsidiaries, nor in the case of any military leave or any approved
leave of absence which the, Committee, in its sole discretion, treats as a
period of employment.
(f) Non-transferability. No
Incentive Stock Option granted to a Key Employee under the Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, an Incentive Stock Option shall be
exercisable only by the optionee. Any attempt to transfer Stock or a Stock
Option in violation of the terms of either the Plan or any Incentive Stock
Option Agreement shall be null and void.
(g) Code
Requirements. Each Incentive Stock Option Agreement shall
contain such terms and provisions as the Committee may determine to be necessary
or desirable in order to qualify such Incentive Stock Option as an Incentive
Stock Option within the meaning of Section 422 of the Code.
(h) No
Rights as Shareholder. No optionee shall have any rights as
a shareholder with respect to any shares of Stock subject to the optionee's
Incentive Stock Option prior to the date of issuance to the optionee of a
certificate or certificates for such shares.
(i) No
Rights to Continued Employment. The Plan and any Incentive
Stock Option granted pursuant to Section 2.3 of this Article II shall not confer
upon any Key Employee any right with respect to continuance of employment by
the
Company or any Subsidiary nor shall they interfere in any way with the right
of
the Company or any Subsidiary employing an optionee to terminate the optionee's
employment at any time.
2.5. Disposition
of Shares by Key Employees. No share of Stock acquired as a
result of the exercise of an Incentive Stock Option granted to a Key Employee
under the Plan shall be transferable other than by will or by the laws of
descent and distribution before the later of the expiration of the two year
period beginning on the date such Incentive Stock Option was period beginning
on
the date such Incentive Stock Option was granted or the expiration of the one
year period beginning on the date of the transfer of such share pursuant to
such
exercise. Each certificate representing shares of Stock acquired by the exercise
of an Incentive Stock Option by a Key Employee shall bear a legend thereon
stating the shares of Stock represented thereby are not transferable except
in
accordance with the terms of the Plan.
III.
NONQUALIFIED STOCK OPTIONS
3.1. Nonqualified
Stock Options. Subject to the provisions of the Plan, the
Committee may grant other stock options ("Nonqualified Stock Options") from
time
to time in accordance with the provisions of this Article III. Nonqualified
Stock Options shall only be granted to an individual whose relationship to
the
Company is one of the following:
(a) The
individual is a Key Employee; or
(b) The
individual is a member of the Board.
Such
an individual shall be referred to hereafter as a "NQSO Optionee," and such
relationship shall be referred to hereafter as the individual's "Eligibility
Status."
3.2 Shares
Subject to Nonqualified Stock Options. Nonqualified Stock
Options may be granted by the Company from time to time to NQSO Optionees to
purchase an aggregate of 6,000 shares of Stock. The Company shall reserve said
number of shares for Nonqualified Stock Options granted under the Plan subject
to adjustment as provided in Section 5.1. The shares issued upon the exercise
of
Nonqualified Stock Options granted under the Plan may be authorized and unissued
shares or shares held by the Company in its treasury. If any Nonqualified Stock
Options granted hereunder should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased shares which were subject
to a Nonqualified Stock Option shall, unless the Plan shall terminate, be
available for the grant of other Nonqualified Stock Options under the
Plan.
3.3 Grant
of Nonqualified Stock Options to NQSO Optionees. Subject to
the provisions of the Plan and in particular this Article III, the Committee
shall (i) determine and designate from time to time those NQSO Optionees to
whom
Nonqualified Stock Options are to be granted and the number of shares of Stock
to be optioned to each such person and (ii) determine the time or times and
the
manner in which each Nonqualified Stock Option shall be exercisable and the
duration of the exercise period. Nonqualified Stock Options need not be
identical and in fixing the terms of any Incentive Stock Option, the Committee
may take into account such individual factors bearing on the value of the NQSO
Optionee as it considers appropriate.
3.4 Terms
and Conditions of Nonqualified Stock Options. Each
Nonqualified Stock Option granted under the Plan to a NQSO Optionee pursuant
to
Section 3.3 hereof shall be evidenced by an agreement with the NQSO Optionee
(the "Nonqualified Stock Option Agreement") in a form approved by the Committee.
Each Nonqualified Stock Option and the Nonqualified Stock Option Agreement
shall
be subject to the following express terms and conditions and to such other
terms
and conditions as the Committee may deem appropriate.
(a) Nonqualified
Stock Option Period. Each Nonqualified Stock Option
Agreement shall specify the period for which the Nonqualified Stock option
thereunder is granted and exercisable, as determined by the Committee, and
shall
provide that the option shall expire at the end of such period.
(b) Date
of Grant. The date of grant of a Nonqualified Stock Option
to a NQSO Optionee under the Plan shall, for all purposes, be the date on which
the Committee makes the determination of granting such Nonqualified Stock
Option. Notice of such determination shall be given to each NQSO Optionee to
whom an option is so granted within a reasonable period of time after the date
of such grant.
(c) Nonqualified
Stock Option Price. The
option price per share of Stock shall be determined by the Committee at the
time
any Nonqualified Stock Option is granted and shall not be less than the fair
market value of one share of Stock on the date the Nonqualified Stock Option
is
granted.
(d) Exercise
of Nonqualified Stock Option. The Nonqualified Stock Option
Agreement may provide that the option may be exercised in whole or in part
at
any time or times during the option period.
(e) Exercise
During Employment or Following Retirement, Disability or
Death. Unless otherwise provided under the terms of a
Nonqualified Stock option Agreement, a Nonqualified Stock Option granted to
an
NQSO Optionee may be exercised by such optionee only while the NQSO Optionee
maintains the optionee's Eligibility Status with the Company or a Subsidiary
and
has maintained continuous Eligibility Status since the date of the grant of
the
Nonqualified Stock Option, except as follows. If the continuous Eligibility
Status of an optionee is terminated as a result of the optionee's voluntary
termination, the optionee may, but only within a period of 90 days beginning
the
date following the date of such termination of Eligibility Status (and no later
than the date the Nonqualified Stock option would otherwise expire), exercise
the option to the extent the optionee was entitled to exercise it at the date
of
such termination. If the continuous Eligibility Status of an optionee is
terminated as a result of optionee's disability, the optionee may, but only
within a one year period from the date of such termination of Eligibility Status
(and no later than the date the Nonqualified Stock Option would otherwise
expire), exercise the option to the extent the optionee was entitled to exercise
it at the date of such termination. Termination of continuous Eligibility Status
for any other reason (except death) shall result in cancellation of the
Nonqualified Stock Option. If the continuous Eligibility Status of an optionee
is terminated by death, then to the extent that the optionee would have been
entitled to exercise the Nonqualified Stock Option immediately prior to the
optionee's death, such Nonqualified Stock Option of the deceased optionee may
be
exercised within 90 days from the date of the optionee's death (but no later
than the date on which such Nonqualified Stock Option would otherwise expire)
by
the person or persons (including the optionee's estate) to whom the optionee's
rights under such NonQualified Stock Option shall have passed by will or by
the
laws of descent and distribution.
The
term "continuous Eligibility Status" shall mean the absence of any interruption
or termination of Eligibility Status with the Company or with any present or
future Subsidiary. Eligibility Status shall not be considered interrupted in
the
case of transfers between the Company and any Subsidiary or between
Subsidiaries, nor in the case of any military leave or any approved leave of
absence which the Committee, in its discretion, treats as a period of
Eligibility Status.
(f) Non-transferability. No
Nonqualified Stock Option granted to a NQSO optionee under the Plan shall be
transferrable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, a Nonqualified Stock Option shall be
exercisable only by the optionee.
(g) No
Rights as Shareholder. No NQSO Optionee shall have any
rights as a shareholder with respect to any shares of Stock subject to the
optionee's Nonqualified Stock Option prior to the date of issuance to the
optionee of a certificate or certificates for such shares.
(h) No
Rights to Continued Employment. The Plan and any
Nonqualified Stock option granted pursuant to Section 3.3 shall not confer
upon
any NQSO Optionee any right with respect to continuance of Eligibility Status
by
the Company or any Subsidiary nor shall they interfere in any way with the
right
of any party to terminate the optionee's Eligibility Status at any
time.
3.5 Disposition
of Shares. Shares of Stock acquired as a result of the
exercise of a Nonqualified Stock Option granted under the Plan shall not be
subject to any restrictions on transferability imposed by this
Plan.
IV.
EXERCISE AND PURCHASE PROVISIONS
4.1 Limitation
on Exercise of Options. Each option granted under the Plan
shall provide that the option may not be exercised in whole or in part by the
optionee for less than 100 shares of Stock unless only less than 100 shares
of
Stock remain subject to the option. In addition, an option may not be exercised
for a fractional share.
4.2 Payment
of Purchase Price upon Exercise of Option. Each option
granted under the Plan shall provide that the purchase price of the shares
as to
which an option is exercised will be paid to the Company at the time of
exercise, either in cash or in Stock already owned by the optionee having a
total fair market value, as determined by the Committee, equal to the purchase
price, or a combination of cash and Stock having a total fair market value,
as
so determined, equal to the purchase price.
4.3 Procedure
for Exercising Options. Each option granted under. the Plan
shall be exercisable at such times and under such conditions as shall be
permissible under the terms of the Plan and the Incentive Stock Option Agreement
or the Nonqualified Stock Option Agreement, as the case may be.
An
option may be exercised, subject to the applicable provisions of this Plan
relative to its termination and limitations on its exercise, from time to time
only by (i) written notice of intent to exercise the option with respect to
a
specified number of shares and (ii) payment to the Company (contemporaneously
with delivery of each such notice) of the option price as provided in section
4.2 hereof. Each such notice and payment shall be delivered, or mailed by
prepaid registered or certified mail, addressed to the Treasurer of the Company
at its executive offices.
V.
MISCELLANEOUS PROVISIONS
5.1 Adjustments
in Event of Change in Stock. In the event of any change in
the Stock of the Company by reason of any stock dividend, recapitalization,
reorganization, merger, consolidation, split-up, combination, or exchange of
shares, or rights offering to purchase Stock at a price substantially below
fair
market value, or of any similar change affecting the Stock, the number and
kind
of shares which thereafter may be optioned and sold pursuant to the Plan and
the
number and kind of shares subject to option in outstanding option agreements
and
the purchase price per share thereof shall be appropriately adjusted consistent
with such change in such manner as the Committee may
deem
equitable to prevent substantial dilution or enlargement of the rights granted
to, or available for, participants in the Plan.
5.2 Compliance
With Other Laws and Regulations. The Plan, the grant and
exercise of options thereunder and the obligations of the Company to sell and
deliver shares under such options, shall be subject to all applicable federal
and state laws, rules and regulations and to such approvals by any government
or
regulatory agency as may be required. The Company shall not be required to
issue
or deliver any certificates for shares of Stock prior to the completion of
any
registration or qualification of such shares under any federal or state law,
or
any ruling or regulation of any government body which the Company shall, in
its
sole discretion, determine to be necessary or advisable.
5.3 Modification
of Options. At any time and from time to time the Board may
authorize the modification of any outstanding option, provided no such
modification, extension or renewal shall confer on the holder of said option
any
right or benefit which could not be conferred by the grant of a new option
at
such time or impair the option without the consent of the holder of the
option.
5.4 Amendment
and Termination of the Plan. The Board may amend, suspend
or terminate the Plan except that no action of the Board may increase (other
than as provided in Section 5.1) the maximum number of shares permitted to
be
optioned under the Plan, reduce the minimum option price provided for in Section
2.4(c) or extend the period within which options may be exercised, unless such
action of the Board shall be subject to approval or ratification by the
shareholders of the Company.
5.5 Effective
Date of the Plan. The effective date of the Plan shall be the date of its
adoption by the Board, but such adoption shall be subject to approval and
ratification of a majority of the shareholders of the Company entitled to
vote.
5.6 Interpretation
of Incentive Stock Options. The terms of this Plan which
relate to the grant of an Incentive Stock Option to a Key Employee are subject
to all present and future rules and regulations of the Secretary of the Treasury
or the Secretary's delegate regarding the qualifications of Incentive Stock
Options under Section 422 of the Code. If any such provision of the Plan
conflicts with any such rule or regulation, then the provision of the Plan
shall
be void and of no force and effect.
NHK/646/AAO
Companies
Whose Employees are Eligible to Participate in Bethel Bancorp.
1992
Stock Option Plan
1. Bethel
Bancorp.
2. Bethel
Savings Bank, FSB
3. Brunswick
Federal Savings, F.A.
4. Bethel
Service Corporation
341646/BM1
NORTHEAST
BANCORP
1999
STOCK OPTION PLAN
ARTICLE
I
The
Plan
1.1
Establishment of the Plan.
Northeast
Bancorp, a Maine corporation (the "Company"), hereby establishes the "Northeast
Bancorp 1999 Stock Option Plan" (hereinafter referred to as the
"Plan"). The Plan permits the grant of incentives in the form of
Nonqualified Stock Options, Incentive Stock Options, and any combination
thereof. Unless otherwise defined, all capitalized terms have the
meaning ascribed to them in Article II.
1.2
Purpose.
The
purpose of the Plan is to advance the interests of the Company and its
stockholders by offering officers, employees, and directors incentives that
will
promote the identification of their personal interests with the long-term
financial
success of the Company and with growth in shareholder value. The Plan
is designed to strengthen the Company's ability to recruit, attract, and retain,
highly qualified managers, consultants, and staff, and qualified and
knowledgeable
independent directors capable of furthering the future success of the Company
by
encouraging the ownership of Shares (as defined below) by such employees and
directors and to strengthen the mutuality of interest between employees and
directors, on one hand, and the Company's stockholders, on the other
hand. The equity investments granted under the Plan are expected to
provide employees with an incentive for productivity and to provide both
employees and directors with an opportunity to share in the growth and value
of
the Company.
ARTICLE
II
Definitions
As
used
in this Plan, unless the context otherwise requires, the following capitalized
terms are defined as follows:
2.1
"Award" shall mean any award under this Plan of any Stock
Option. Each separate grant of a Stock Option, and each group of
Stock Options, which mature on a separate date is treated as a separate
Award.
2.2
"Board" or "Board of Directors" means the Board of Directors of the Company,
as
constituted from time to time.
2.3
"Cause" means a determination by the Board of Directors that a
Participant
has: (a) engaged in any type of disloyalty to the Company, including without
limitation fraud, embezzlement, theft, or dishonesty in the course of his or
her
employment or service, or has otherwise breached a duty owed to the Company,
(b)
been convicted of a misdemeanor involving moral turpitude or a felony, (c)
pled
nolo contendere to a felony, (d) disclosed trade secrets or confidential
information of the Company to unauthorized parties, except as may be required
by
law, or (e) materially breached any material agreement with the Company, unless
such agreement was materially breached first by the Company.
2.4
"Change of Control" shall have the meaning set forth in Section 7.2 of this
Plan.
2.5
"Code" means the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder. Reference to any provision of the Code or
rule or regulation thereunder shall be deemed to include any amended or
successor provision, rule, or regulation.
2.6
"Committee" means the committee appointed by the Board in accordance with
Section 3.1 of the Plan, if one is appointed, to administer this
Plan. If no such committee has been appointed, the term Committee
shall refer to the Board of Directors.
2.7
"Common Stock" or "Shares" means the shares of common stock, $1.00 par value
per
share, of the Company.
2.8
"Company" shall mean Northeast Bancorp or any successor thereto as provided
in
Section 11.8 hereto.
2.9
"Date
of Exercise" means the date on which the Company receives notice of the exercise
of a Stock Option in accordance with the terms of Section 6.8 of this
Plan.
2.10
"Date of Grant" or "Award Date" shall be the date on which an Award is made
by
the Committee under this Plan. Such date shall be the date designated
in a resolution adopted by the Committee pursuant to which the Award is made;
provided, however, that such date shall not be earlier than the date of such
resolution and action thereon by the Committee. In the absence of a
date of grant or award being specifically set forth in the Committee's
resolution, or a fixed method of computing such date, then the Date of Grant
shall be the date of the Committee's resolution and action.
2.11
"Director" means any person who is a member of the Board of
Directors.
2.12
"Employee" means any person who is an officer or full-time employee of the
Company or any of its Subsidiaries and who receives from it regular compensation
(other than pension, retirement allowance, retainer, or fee under
contract). An Employee does not include independent contractors or
temporary employees.
2.13
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time
to time.
2.14
"Exercise Period" means the period during which a Stock Option may be
exercised.
2.15
"Exercise Price" means the price for Shares at which a Stock Option may be
exercised.
2.16
"Fair Market Value" of a share of Common Stock on a particular date shall be
the
closing price for a share of Common Stock as quoted on the American Stock
Exchange ("AMEX"), or the National Association of Securities Dealers Automated
Quotation System National Market ("Nasdaq-NMS"), or any other national
securities exchange on which the Common Stock is listed (as reported by the
Wall
Street Journal or, if not reported thereby, any other authoritative source
selected by the Committee), or if there is no trading on that date, on the
next
preceding date on which there were reported share prices. If the
Common Stock is quoted on any other inter-dealer quotation system (but not
quoted by Nasdaq-NMS or any national securities exchange), then the Fair Market
Value per Common Stock on a particular date shall be the mean of the bid and
asked prices for a share of Common Stock as reported in the Wall Street Journal
or, if not reported thereby, any other authoritative source selected by the
Committee. If the Common Stock is not quoted by the Nasdaq-NMS or any
other inter-dealer quotation system, and are not listed on any national
securities exchange,
then the "Fair Market Value" of a share of Common Stock shall be determined
by
the Committee pursuant to any reasonable method adopted by it in good faith
for
such purpose. In the case of an Incentive Stock Option, if the
foregoing method of determining the fair market value is inconsistent with
Section 422 of the Code, "Fair Market Value" shall be determined by the
Committee in a manner consistent with the Code and shall mean the value as
so
determined.
2.17
"Incentive Stock Option" or "ISO" means any Stock Option awarded under this
Plan
intended to be and designated as an incentive stock option within the meaning
of
Section 422 of the Code.
2.18
"Non-Employee Director" shall have the meaning as set forth in, and interpreted
under, Rule 16b-3(b)(3) promulgated by the SEC under the Exchange Act, or any
successor definition adopted by the SEC.
2.19
"Nonqualified Stock Option" means any Stock Option awarded under this Plan
which
is not an Incentive Stock Option.
2.20
"Participant" means each Employee or Director to whom an Award has been granted
under this Plan.
2.21
"Payment Shares" shall have the meaning set forth in Section 6.8(b) of this
Plan.
2.22
"Person" shall mean an individual, partnership, corporation, limited liability
company or partnership, trust, joint venture, unincorporated association, or
other entity or association.
2.23
"Plan" means this Northeast Bancorp 1999 Stock Option Plan as defined in Section
1.1 hereof.
2.24
"SEC" means the Securities and Exchange Commission.
2.25
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
2.26
"Stock Option" means any Incentive Stock Option or Nonqualified Stock Option
to
purchase Common Stock that is awarded under this Plan.
2.27
"Stock Option Agreement" means the written agreement between the Company and
a
Participant implementing the grant of, and evidencing and reflecting the terms
of, an Award.
2.28
"Subsidiary" or "Subsidiaries" means any corporation or corporations other
than
the Company organized under the laws of the United States or any other
jurisdiction that the Board of Directors designates, in an unbroken chain of
corporations beginning with the Company if each corporation other than the
last
corporation in the unbroken chain owns more than 50% of the total combined
voting power of all classes of stock in one of the other corporation in such
chain.
ARTICLE
III
Administration
of the Plan
3.1
The Committee.
This
Plan
shall be administered by the Committee, subject to such terms and conditions
as
the Board may prescribe from time to time. Pursuant to applicable
provisions of the Company's Articles of Incorporation, as amended, and Bylaws,
the Committee, which shall be appointed by the Board, shall consist of no fewer
than three (3) members of the Board. Members of the Committee shall
serve for such period of time as the Board may determine. From time
to time the Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause), and appoint new members, fill
vacancies however caused, and remove all members and thereafter directly
administer the Plan. During such times as the Company's Common Stock
is registered under the Exchange Act, all members of the Committee shall be
Non-Employee Directors and "outside directors" as defined under Section
162(m)(4) (C)(i) of the Code.
3.2
Duties and Powers of the Committee.
Subject
to the express provisions of this Plan, the Committee shall have all the power
and authority to, and shall be authorized to take any and all actions required,
necessary, or desirable to administer the Plan. In addition to any
other powers, subject to the provisions of the Plan, the Committee shall have
the following powers:
(a)
subject to Section 3.3 of this Plan, to select the Employees and Directors
to
whom Awards may from time to time be granted pursuant to this Plan;
(b)
to determine all questions as to eligibility;
(c)
to determine the number of shares of Common Stock to be covered by each Award
granted under this Plan;
(d)
subject to the limitations set forth in Section 4.1 of this Plan, to determine
whether and to what extent Incentive Stock Options, Nonqualified Stock Options,
or any combination thereof, are to be granted or awarded hereunder;
(e)
to determine the terms and conditions (to the extent not inconsistent with
this
Plan) of any Award granted hereunder, all provisions of each Stock Option
Agreement, which provisions need not be identical (including, but not limited
to, the Exercise Price, the Exercise Period, any restriction or limitation,
any
vesting schedule or acceleration thereof, or any forfeiture restrictions or
waiver thereof, regarding any Stock Option or other Award and the Common Stock
relating thereto, based on such factors as the Committee shall determine, in
its
sole discretion);
(f)
to determine whether, and to what extent, and under what circumstances grants
of
Stock Options under this Plan are to operate on a tandem basis and/or in
conjunction with or apart from other cash awards made by the Company outside
of
this Plan;
(g)
to determine whether and under what circumstances a Stock Option may be settled
in cash, Common Stock, or any combination thereof under Section 6.8 of this
Plan;
(h)
to determine whether, and to what extent, and under what circumstances shares
of
Common Stock under this Plan shall be deferred either automatically or at the
election of the Participant;
(i)
to prescribe, amend, waive, or rescind rules or regulations relating to the
Plan's administration;
(j)
to accelerate the vesting or Exercise Date of any Award, or to waive compliance
by a holder of an Award of any obligation to be performed by such holder or
the
terms and conditions of an Award;
(k)
to construe and interpret the provisions of the Plan or any Stock Option
Agreement;
(l)
to amend the terms of previously granted Awards so long as the terms as amended
are consistent with the terms of the Plan and provided that the consent of
the
Participant is obtained with respect to any amendment that would be detrimental
to the Participant;
(m)
require, whether or not provided for in the pertinent Stock Option Agreement,
of
any person exercising a Stock Option, or otherwise receiving an Award, at the
time of such exercise or receipt, the making of any representations or
agreements that the Board of Directors or Committee may deem necessary or
advisable in order to comply with the securities laws of the United States
or of
any applicable jurisdiction;
(n)
to delegate to an appropriate officer of the Corporation the authority to select
Employees for Awards and to recommend to the Committee the components of the
Award to each, including vesting requirements, subject in each case to final
approval by the Committee of the selection of the Employee and the
Award;
(o)
to authorize any person to execute on behalf of the Company any instrument
required to effectuate an Award or to take such other actions as may be
necessary or appropriate with respect to the Company's rights pursuant to Awards
or agreements relating to the Awards or the exercise thereof; and
(p)
to make all other determinations and take all other actions necessary or
advisable for the administration of the Plan.
3.3
Awards to Members of the Committee.
Each
Award granted to a Director or members of the Committee shall be approved by
the
entire Board of Directors and shall be evidenced by minutes of a meeting or
the
written consent of the Board of Directors and a Stock Option
Agreement.
3.4
Requirements Relating to Section 162(m) of the Code.
Any
provision of this Plan notwithstanding: (a) transactions with respect
to persons whose remuneration is subject to the provisions of Section 162(m)
of
the Code shall conform to the requirements of Section 162(m)(4)(C) of the Code
unless the Committee determines otherwise; (b) the Plan is intended to give
the
Committee the authority to grant Awards that qualify as performance-based
compensation under Section 162(m)(4)(C) of the Code as well as Awards that
do
not qualify; and (c) any provision of the Plan that would prevent the Committee
from exercising the authority referred to in Section 3.4(b) of this Plan or
that
would prevent an Award that the Committee intends to qualify as
performance-based compensation under Section 162(m)(4)(C) of the Code from
so
qualifying shall be administered, interpreted, and construed to carry out the
Committee's intention and any provision that cannot be so administered,
interpreted, and construed shall to that extent be disregarded.
3.5
Decisions Final and Binding.
All
decisions, determinations, and actions taken by the Committee, and the
interpretation and construction of any provision of the Plan or any Stock Option
Agreement by the Committee shall be final, conclusive, and binding, unless
otherwise determined by the Board.
3.6
Limitation on Liability.
Notwithstanding
anything herein to the contrary, except as otherwise provided under applicable
Maine law, no member of the Board of Directors or of the Committee shall be
liable for any good faith determination, act, or failure to act in connection
with the Plan or any Award hereunder.
ARTICLE
IV
Shares
Subject to the Plan
4.1
Number of Shares.
Subject
to adjustment as provided in Section 4.4, the maximum aggregate number of Shares
that may be issued under this Plan shall not exceed 135,000 Shares, which Shares
may be either authorized but unissued Shares or Shares issued and thereafter
reacquired by the Company. Stock Options awarded under the Plan may
be either Incentive Stock Options or Nonqualified Stock Options, as determined
by the Committee.
Except
as
provided in Sections 4.2 and 4.3 of this Plan, Shares issued upon the exercise
of an Award granted pursuant to the Plan shall not again be available for the
grant of an Award hereunder.
4.2
Lapsed Awards.
If
any
Award granted under this Plan shall terminate, expire, lapse, or be cancelled
for any reason without having been exercised in full, any unissued Shares which
had been subject to the Stock Option Agreement relating thereto shall again
become available for the grant of an Award under this Plan.
4.3
Delivery of Shares as Payment.
In
the
event a Participant pays the Exercise Price for Shares pursuant to the exercise
of an Stock Option with previously acquired Shares, the number of Shares
available for future Awards under the Plan shall be reduced only by the net
number of new Shares issued upon the exercise of the Stock Option.
Notwithstanding anything to the contrary herein, no fractional Shares will
be
delivered under the Plan.
4.4
Capital Adjustments.
(a)
If by reason of a merger, consolidation, reorganization, recapitalization,
combination of Shares, stock split, reverse stock split, stock dividend,
separation (including a spin-off or split-off), or other such similar event,
the
number of outstanding Shares of the Company are increased, decreased, changed
into, or been exchanged for a different number or kind of shares, or if
additional shares or new and different shares are issued in respect of such
Shares, the Committee in its sole discretion may adjust proportionately (i)
the
aggregate maximum number of Shares available for issuance under the Plan, (ii)
the number and class of Shares covered by outstanding Awards denominated in
Shares or units of Shares, (iii) the Exercise Price and grant prices related
to
outstanding Awards, and (iv) the appropriate Fair Market Value and other price
determinations for such Awards.
(b)
In the event of any other change in corporate structure affecting the Common
Stock or any distribution (other than normal cash dividends) to holders of
shares of Common Stock, such adjustments in the number and kind of shares and
the exercise, grant, or conversion prices of the affected Awards as may be
deemed equitable by the Committee shall be made to give proper effect to such
event.
(c)
In the event of a corporate merger, consolidation, or acquisition of property
or
stock, separation (including spin-offs and split-offs), reorganization or
liquidation, the Committee shall be authorized to cause the Company to issue
or
assume stock options, whether or not in a transaction to which Section 424(a)
of
the Code applies, by means of substitution of new Stock Options for previously
issued stock options or an assumption of previously issued stock
options. In such event, the aggregate maximum number of Shares
available for issuance under Section 4.1 of the Plan will be increased to
reflect such substitution or assumption.
(d)
If any adjustment made pursuant to this Article IV would result in the possible
issuance of fractional Shares under any then-outstanding Award, the Committee
may adjust the outstanding Awards so as to eliminate fractional Shares.
(e)
Any adjustment to be made with respect to Incentive Stock Options shall comply
with Sections 422 and 424 of the Code.
ARTICLE
V
Eligibility
Awards
may be made to any Employee or Director, except that (a) only Employees
(including employees who also serve as Director) may receive Incentive Stock
Options, and (b) the grant of Awards to Directors must comply with Section
3.3.
A Participant who has been granted an Award may be granted additional
Awards.
ARTICLE
VI
Stock
Options
6.1
Stock Options.
Each
Stock Option granted under this Plan shall be either an Incentive Stock Option
or a Nonqualified Stock Option.
6.2
Grant of Stock Options.
Subject
to the terms and provisions of this Plan, the Committee shall have the authority
to grant to any Participant one or more Incentive Stock Options, Nonqualified
Stock Options, or both kinds of Stock Options. Subject to Section 4.1
and Article V, the Committee has complete and sole discretion in determining
the
number of Shares subject to Stock Options to be granted to a Participant;
provided, however, that the aggregate Fair Market Value (determined at the
time
the Award is made) of Shares with respect to which a Participant may first
exercise ISOs granted under the Plan during any calendar year may not exceed
$100,000 or such amount as shall be specified under Section 422 of the Code
and
the rules and regulations promulgated thereunder. To the extent that
any Stock Option does not qualify as an Incentive Stock Option (whether because
of its provisions or the time and manner of its exercise or otherwise), such
Stock Options or portion thereof which does not qualify shall constitute a
Nonqualified Stock Option. To the extent that a Stock Option is to be
treated in part as an Incentive Stock Option and in part as a Nonqualified
Stock
Option, the Company may designate the Shares that are to be treated as Shares
acquired pursuant to an Incentive Stock Option by issuing a separate certificate
as Incentive Stock Option Shares in the stock transfer records of the
Company. Stock Options granted at different times need not contain
similar provisions.
6.3
Incentive Stock Options.
Anything
in the Plan to the contrary notwithstanding, no term of this Plan relating
to
Incentive Stock Options shall be interpreted, amended, or altered, nor shall
any
discretion or authority granted under this Plan be so exercised, so as to
disqualify the Plan under Section 422 of the Code, or, without the consents
of
the Participants affected, to disqualify any Incentive Stock Option under
Section 422 of the Code.
6.4
Stock Option Agreement.
Each
Stock Option granted under this Plan shall be evidenced by a Stock Option
Agreement between the Company and the Participant in accordance with Section
6.2
that specifies the Exercise Price, the Exercise Period, the number of Shares
to
which the Stock Option pertains, method of exercise and the form of
consideration payable therefor, any vesting requirements, any conditions imposed
upon the exercise of the Stock Options in the event of retirement, death,
disability, or other termination of service, and such other provisions and
conditions, not inconsistent with this Plan, as the Committee may
determine. Each Stock Option Agreement relating to a grant of Stock
Options shall clearly specify whether the Stock Option is intended to be an
Incentive Stock Option within the meaning of Section 422 of the Code, or a
Nonqualified Stock Option not intended to be within the provisions of Section
422 of the Code.
6.5
Exercise Price.
The
Exercise Price per Share purchasable under any Stock Option granted under this
Plan shall be determined by the Committee at the Date of Grant, subject to
the
following limitations:
(a)
In the case of a Stock Option intended to be an Incentive Stock Option, the
Exercise Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the Date of Grant or, in the case of any optionee who, at the
time such Incentive Stock Option is granted, owns Common Stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or of its parent corporation or Subsidiaries, not less than 110% of
the
of the Fair Market Value of the Common Stock on the Date of Grant.
(b)
In the case of a Stock Option intended to be a Nonqualified Stock Option, the
Exercise Price shall not be less than 85% of the Fair Market Value of the Common
Stock on the Date of Grant.
(c)
In no event shall the Exercise Price of any Stock Option be less than the par
value of the Common Stock.
6.6
Exercise Period.
The
Exercise Period of each Stock Option granted shall be fixed by the Committee
and
shall be specified in the Stock Option Agreement; provided, however, that no
Incentive Stock Option shall be exercisable later than ten years after the
Award
Date, and no Incentive Stock Option which is granted to any optionee who, at
the
time such Stock Option is granted, owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or of its
parent corporation or Subsidiaries, shall be exercisable after the expiration
of
five years from the Award Date.
6.7
Exercise of Stock Options.
Stock
Options granted under the Plan shall be exercisable at such time or times and
be
subject to such terms and conditions as shall be set forth in the Stock Option
Agreement (as may determined by the Committee at the time of such grant), which
need not be the same for all Participants. Such terms and conditions
may include performance criteria with respect to the Company or the Participant,
and as shall be permissible under the other terms of the Plan. No
Stock Option, however, shall be exercisable until the expiration of the vesting
period, if any, set forth in the Stock Option Agreement. To the
extent that no vesting conditions are stated in the Stock Option Agreement,
the
Stock Options represented thereby shall be fully vested at the Date of
Grant.
6.8
Method of Exercise.
(a)
Subject to the provisions of the Stock Option Agreement, Stock Options may
be
exercised in whole at any time, or in part from time to time with respect to
whole Shares only, during the Exercise Period by the delivery to the Company
of
a written notice of intent to exercise the Stock Option, in such form as the
Committee may prescribe, setting forth the number of Shares with respect to
which the Stock Option is to be exercised; provided, however, that the minimum
exercise amount permitted at any time shall be one hundred (100)
Shares. The Exercise Price, which shall accompany the written notice
of exercise, shall be payable to the Company in full (along with the taxes
described in the last sentence of this Section 6.8(a)) by the Participant who,
if so provided in the Stock Option Agreement, may: (i) deliver cash
or a check (acceptable to the Committee in accordance with guidelines
established for this purpose) in satisfaction of all or any part of the Exercise
Price; (ii) deliver, or cause to be withheld from the Stock Option, Shares
valued at Fair Market Value on the Date of Exercise in satisfaction of all
or
any part of the Exercise Price, (iii) deliver any combination of cash and
Shares, or (iv) deliver any other consideration and method of payment permitted
under any laws to which the Company is subject, in each such case as the
Committee may determine.
(b)
If the Exercise Price is to be paid by the surrender of previously acquired
and
owned Common Stock, the Participant will make representations and warranties
satisfactory to the Company regarding his title to the Common Stock used to
effect the purchase (the "Payment Shares"), including, without limitation,
representations and warranties that the Participant has good and marketable
title to such Payment Shares free and clear of any and all liens, encumbrances,
charges, equities, claims, security interests, options or restrictions, and
has
full power to deliver such Payment Shares without obtaining the consent or
approval of any person or governmental authority other than those which have
already given consent or approval in a manner satisfactory to the
Company. If such Payment Shares were acquired upon previous exercise
of Incentive Stock Options granted within two years prior to the exercise of
the
Stock Option or acquired by the Participant within one year prior to the
exercise of the Stock Option, such Participant shall be required, as a condition
to using the Payment Shares in payment of the Exercise Price of the Stock
Option, to acknowledge the tax consequences of doing so, in that such previously
exercised Incentive Stock Options may have, by such action, lost their status
as
Incentive Stock Options, and the Participant may recognize ordinary income
for
tax purposes as a result.
6.8
Transfer Restrictions.
Neither
the Stock Options granted under the Plan nor any rights or interest in such
Stock Options may be sold, pledged, hypothecated, assigned, or otherwise
disposed of or transferred by such Participant, other than by will or by the
laws of descent and distribution. Except as permitted by the
Committee, during the lifetime of Participant to whom a Stock Option is granted,
the Stock Options shall be exercisable only by him or her or, in the event
of
the Participant's permanent and total disability as determined by the Committee
in accordance with applicable Company policies, by his or her legal
representative.
6.10
Termination of Stock Options.
(a)
Termination by Death. Unless the Committee provides otherwise in the
Stock Option Agreement, if a Participant's employment or service with the
Company or its Subsidiaries terminates by reason of death, then for a period
of
one year (or such other period as the Committee may specify at grant) from
the
date of such death or until the end of the Exercise Period of such Stock Option,
whichever period is shorter, the Award may be exercised by the legal
representative
of the estate or by a person who acquires the right to exercise such Stock
Option by bequest or inheritance, subject to the limitations of Section 6.11
with respect to Incentive Stock Options, to the extent that such Participant
was
entitled to exercise the Award at the date of such death.
(b)
Termination by Disability. Unless the Committee provides otherwise in the Stock
Option Agreement, if a Participant's employment or service with the Company
or
its Subsidiaries terminates by reason of permanent and total disability, as
determined by the Committee in accordance with applicable Company personnel
policies, then for a period of one year (or such other period as the Committee
may specify at grant) from the date of such termination of employment or
service, or until the end of the Exercise Period of such Stock Option, whichever
is shorter, the Award may be exercised by the Participant, or his or her legal
representative, subject to the limitations of Section 6.11 with respect to
Incentive Stock Options, to the extent that such Participant was entitled to
exercise the Award at the date of such termination; provided, however, that,
if
the Participant dies within such one year period (or such other period as the
Committee may specify at grant), then for a period of one year from the date
of
death or until the end of the Exercise Period of such Stock Option, whichever
period is shorter, any unexercised Stock Options held by such Participant shall
thereafter be exercisable to the extent to which they were exercisable at the
time of such termination due to disability. In the event of
termination of employment by reason of permanent and total disability, as
determined by the Committee in accordance with applicable Company personnel
policies, if an Incentive Stock Option is exercised after the expiration of
the
exercise periods that apply for purposes of Section 422 of the Code (currently
one year from such termination), such Stock Option will thereafter be treated
as
a Nonqualified Stock Option.
(c)
Termination by Retirement. Unless the Committee provides otherwise in
the Stock Option Agreement, if a Participant's employment or service with the
Company or its Subsidiaries terminates by reason of normal or late retirement
under any retirement plan of the Company or its Subsidiaries or, with the
consent of Committee, then for a period of three months (or such other period
as
the Committee may specify at grant) from the date of such termination of
employment or service, or until the end of the Exercise Period of such Stock
Option, whichever is shorter, the Award may be exercised by the Participant,
or
his or her legal representative, subject to the limitations of Section 6.11
with
respect to Incentive Stock Options, to the extent that such Participant was
entitled to exercise the Award at the date of such termination; provided,
however, that, if the Participant dies within such three month period, then
for
a period of one year from the date of death or until the end of the Exercise
Period of such Stock Option, whichever period is shorter, any unexercised Stock
Options held by such Participant shall thereafter be exercisable to the extent
to which they were exercisable at the time of such retirement. In the
event of termination of employment by reason of retirement pursuant
to any retirement plan of the Company or its Subsidiaries or with the consent
of
the Committee, if an Incentive Stock Option is exercised after the expiration
of
the exercise periods that apply for purposes of Section 422 of the Code
(currently three months from such termination), such Stock Option will
thereafter be treated as a Nonqualified Stock Option.
(d)
Other Termination of Employee. Unless otherwise determined by the
Committee at or after grant and except as provided in Section 7.1 hereof, if
a
Participant's employment by the Company terminates for any reason other than
death, disability, or retirement covered by Sections (a), (b), or (c) of this
Plan: (i) any Stock Options that were not exercisable at the date of such
termination (which date shall be determined by the Committee in its sole
discretion) will expire automatically, and (ii) any Stock Options exercisable
on
the date of termination will remain exercisable only for the lesser of three
months or the balance of such Exercise Period of such Stock Option; provided,
however, that the Participant was not involuntarily terminated by the Company
for Cause. If the Participant dies within such three month period (or
such other period as the Committee may specify at grant), then for a period
of
one year from the date of death or until the end of the Exercise Period of
such
Stock Option, whichever period is shorter, any unexercised Stock Options held
by
such Participant shall thereafter be exercisable to the extent to which they
were exercisable at the time of such termination. Notwithstanding any
other provision of this Plan except for Section 7.1 hereof, upon termination
of
a Participant's employment with the Company or any of its Subsidiaries for
Cause, all of the Participant's unexercised Stock Options will terminate
immediately upon the date of such termination (which date shall be determined
by
the Committee in its sole discretion) and the Participant shall forfeit all
Shares for which the Company has not yet delivered share certificates to the
Participant. In such event, the Company shall refund to the
Participant the Exercise Price paid to it, if any, in the same form as it was
paid (or in cash at the Company's discretion). The Company may
withhold delivery of share certificates pending resolution of any inquiry that
could lead to a finding that a termination of a Participant's employment was
for
Cause.
(e)
Except as covered by Sections 6.10(a), (b), or (c) of this Plan, if a
Participant serving as a Non-Employee Director terminates his or her service
by
resigning from the Board of Directors or by failing to run for election to
an
additional term as a Director after being offered nomination for an additional
term by a nominating or similar committee of the Board of Directors (or in
lieu
of such committee, by the entire Board of Directors), then (i) any Stock Options
that were not exercisable at the date of such termination of service will expire
automatically, and (ii) any exercisable Stock Options as of such date held
by
the Participant may thereafter be exercised by the Participant for a period
of
three months from the date of such resignation or, in the case of a failure
to
run for election to an additional term, from (A) the date of such stockholder
meeting at which such election of Directors takes place, or (B) until the end
of
the Exercise Period, whichever is shorter (or such other period as the Committee
may specify at grant). If a Participant serving as a Non-Employee
Director does not resign and is not offered nomination for an additional term,
all Stock Options held by such Participant shall immediately vest on the date
that the Participant's service as a Director of the Company terminates and
such
Stock Options shall be exercisable until the end of the Exercise Period for
such
Stock Options. Notwithstanding any other provision of this Plan, upon
removal of a Director by shareholders of the Company for cause under applicable
state law, all of the Participant's unexercised Stock Options will terminate
immediately upon the date of such termination (which date shall be determined
by
the Committee in its sole discretion) and the Participant shall forfeit all
Shares for which the Company has not yet delivered share certificates to the
Participant. In such event, the Company shall refund to the
Participant the Exercise Price paid to it, if any, in the same form as it was
paid (or in cash at the Company's discretion).
6.11
Incentive Stock Option Limitations.
(a)
To the extent that the aggregate Fair Market Value (determined as of the Date
of
Grant) of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by a Participant during any calendar year under
the Plan and/or any other stock option plan of the Company or any Subsidiary
or
parent corporation (within the meaning of Section 425 of the Code) exceeds
$100,000, such Stock Options shall be treated as Stock Options which are not
Incentive Stock Options.
(b)
To the extent (if any) permitted under Section 422 of the Code, or the
applicable rules and regulations promulgated thereunder or any applicable
Internal Revenue Service pronouncement, if (i) a Participant's employment with
the Company or any Subsidiary is terminated by reason of death, disability,
or
retirement covered by Section 6.10(a), (b), or (c) of this Plan, and (ii) the
portion of the Incentive Stock Option that is otherwise exercisable during
the
post-termination period specified under Sections 6.10(a), (b), or (c), applied
without regard to the $100,000 limitation currently contained in Section 422(d)
of the Code, is greater than the portion of the Stock Option that is immediately
exercisable as an "incentive stock option" during such post-termination period
under Section 422 of the Code, such excess shall be treated as a Nonqualified
Stock Option.
(c)
In the event that the application of any of the provisions of Section 6.11
(a)
or (b) of this Plan not be necessary in order for Stock Options to qualify
as
Incentive Stock Options, or should additional provisions be required, the
Committee may amend the Plan accordingly, without the necessity of obtaining
the
approval of the stockholders of the Company.
6.12
Buy-Out and Settlement Provisions.
The
Committee may at any time offer to buy-out a Stock Option previously granted,
based on such terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer is made.
6.13
No Rights as Stockholder.
No
Participant or transferee of a Stock Option shall have any rights as a
stockholder of the Company with respect to any Shares subject to a Stock Option
(including without limitation, rights to receive dividends, vote, or receive
notice of meetings) prior to the purchase of such Shares by the exercise of
such
Stock Option as provided in this Plan. A Stock Option shall be deemed
to be exercised and the Common Stock thereunder purchased when written notice
of
exercise has been delivered to the Company in accordance with Section 6.8 of
the
Plan and the full Exercise Price for the Shares with respect to which the Stock
Options is exercised has been received by the Company, accompanied with any
agreements required by the terms of the Plan and the applicable Stock Option
Agreement; provided, however, that if the Participant has been terminated for
Cause, only those shares of Common Stock for which a certificate has been
delivered to the Participant by the Company will be deemed to be purchased
by
such Participant. Full payment may consist of such consideration and
method of payment allowable under this Article VI of the Plan. No
adjustment will be made for a cash dividend or other rights for which the record
date precedes the Date of Exercise, except as provided in Section 4.4 of the
Plan.
6.14
Sale of Common Stock Upon Exercise of Stock Option.
Unless
the Committee provides otherwise in the Stock Option Agreement, Common Stock
acquired pursuant to the exercise of Stock Option shall not be subject to any
restrictions on transferability under this Plan, except as provided in Section
11.1 of this Plan. With respect to Common Stock acquired pursuant to
the exercise of an Incentive Stock Option, a transfer or other disposition
of
such Common Stock by a Participant (other than by will or the laws of descent
and distribution) may not qualify for favorable tax treatment under Section
421(a) of the Code if such transfer or other disposition shall occur before
the
expiration of the later of (i) the two year period commencing on the Date of
Grant of the ISO, or (ii) the one year period commencing on the Date of Exercise
of the ISO.
ARTICLE
VII
Change
of Control
7.1
Acceleration of Options; Lapse of Restrictions.
(a)
In the event of a Change of Control of the Company, (i) each Stock Option then
outstanding under the Plan shall be fully exercisable, regardless of any
unsatisfied vesting requirements established under the terms of the pertinent
Stock Option Agreements, and remain so for the duration of the Stock Option
as
specified in the Stock Option Agreement, and (ii) all conditions or restrictions
related to an Award shall be accelerated or released; all in a manner, in the
case of persons subject to Section 16(b) of the Exchange Act, as to conform
with
the provisions of Rule 16b-3 thereunder.
(b)
Awards that remain outstanding after a Change of Control shall not be terminated
as a result of a termination of service covered by Section 6.10, and shall
continue to be exercisable until the end of the Exercise Period in accordance
with their original terms, except in the case of a Participant's death in which
case termination shall occur within one year from the date of
death.
(c)
Notwithstanding the foregoing, if any right granted pursuant to this
Section 7.1 would make a Change of Control transaction ineligible for pooling
of
interests accounting treatment under applicable accounting principles that,
but
for this Section 7.1, would have been available for such accounting treatment,
then the Committee shall have the authority to substitute stock for cash which
would otherwise be payable pursuant to this Section 7.1 having a Fair Market
Value equal to such cash.
7.2
Definition of Change of Control.
For
purposes of this Plan, a "Change of Control" is deemed to have occurred
if:
(a)
any individual, entity, or group (within the meaning of Sections 13(d)(3) or
14(d)(2) of the Exchange Act), is or becomes, directly or indirectly, the
"beneficial owner" (as defined by Rule 13d-3 promulgated under the Exchange
Act)
of 25% or more of the combined voting power of the then outstanding securities
of the Company entitled to vote generally in the election of Directors ("Voting
Securities"); provided, however, that any acquisition by the following will
not
constitute a Change of Control:
(i)
the Company or any of its Subsidiaries,
(ii)
any employee benefit plan (or related trust) of the Company or its Subsidiaries,
or
(iii)
any corporation with respect to which, following such acquisition, more than
50%
of the combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially
owned by the Persons who were the beneficial owners
of the Voting Securities immediately prior to such acquisition
in substantially the same proportion as their ownership
immediately prior to such acquisition of the Voting Securities;
or
(b)
(i) a tender offer or an exchange offer is made to acquire securities of the
Company whereby following such offer the offerees will hold, control, or
otherwise have the direct or indirect power to exercise voting control over
50%
or more of the Voting Securities, or (ii) Voting Securities are first purchased
pursuant to any other tender or exchange offer.
(c)
as a result of a tender offer or exchange offer for the purchase of securities
of the Company (other than such an offer by the Company for its own securities),
or as a result of a proxy contest, merger, consolidation, or sale of assets,
or
as a result of a combination of the foregoing, during any period of two
consecutive years, individuals who, at the beginning of such period constitute
the Board, plus any new Directors of the Company whose election or nomination
for election by the Company's stockholders was or is approved by a vote of
at
least two-thirds of the Directors of the Company then still in office who either
were Directors of the Company at the beginning of such two year period or whose
election or nomination for election was previously so approved (but excluding
for this purpose, any individual whose initial assumption of office was or
is in
connection with the actual or threatened election contest relating to the
election of Directors of the Company (as such term is used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act)), cease for any reason during
such two year period to constitute at least two-thirds of the members of the
Board; or
(d)
the stockholders of the Company approve a reorganization, merger, consolidation,
or other combination, with or into any other corporation or entity regardless
of
which entity is the survivor, other than a reorganization, merger,
consolidation, or other combination, which would result in the Voting Securities
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into Voting Securities of the surviving
entity) at least 60% of the combined voting power of the Voting Securities
or of
the voting securities of the surviving entity outstanding immediately after
such
reorganization, merger, consolidation; or other combination; or
(e)
the stockholders of the Company approve a plan of liquidation or winding-up
of
the Company or an agreement for the sale or disposition by the Company of all
or
substantially all of the Company's assets, or any distribution to security
holders of assets of the Company having a value equal to 30% or more of the
total value of all assets of the Company.
7.3
Occurrence of a Change of Control.
A
Change
of Control will be deemed to have occurred:
(a)
with respect to any acquisition referred to in Section 7.2(a) above, the date
on
which the acquisition of such percentage shall have been completed;
(b)
with respect to a tender or exchange offer, the date the offer referred to
in
Section 7.2(b)(i) above is made public or when documents are filed with the
SEC
in connection therewith pursuant to Section 14(d) of the Exchange Act, or the
date of the purchase referenced in Section 7.2(b)(ii);
(c)
with respect to a change in the composition of the Board of Directors referred
to in Section 7.2(c), the date on which such change is adopted or is otherwise
effective, whichever first occurs; or
(d)
with respect to any stockholder approval referred to in Section 7.2(d) or (e),
the date of any approval.
7.4
Application of this Article VII.
The
provisions of this Article VII shall apply to successive events that may occur
from time to time but shall only apply to a particular event if it occurs prior
to the expiration of this Plan and each Award issued pursuant to this
Plan.
ARTICLE
VIII
Amendment,
Modification, or Termination of Plan
Insofar
as permitted by applicable law, the Board, by resolution, shall have the power
at any time, and from time to time, to amend, modify, suspend, terminate or
discontinue the Plan or any part thereof. The Board is specifically
authorized to amend the Plan and take such other action as it deems necessary
or
appropriate to comply with Section 162(m) of the Code and the rules and
regulations promulgated thereunder. Such amendment or modification
may be without stockholder approval except to the extent that such approval
is
required by the Code, or pursuant to the rules and regulations under the Section
16 of the Exchange Act, by any national securities exchange or inter-dealer
quotation system on which the Shares are then listed, quoted, or reported,
by
any regulatory authority or board having jurisdiction with respect thereto,
or
under any applicable laws, rules, or regulations. Notwithstanding the provisions
of this Article VIII, no termination, amendment, or modification of the Plan,
other than those pursuant to Article IV hereof, shall in any manner adversely
affect any Award theretofore granted under the Plan, without the written consent
of the Participant so affected.
ARTICLE
IX
Modification,
Extension, and Renewal of Stock Options and Awards
Subject
to the terms and conditions, and within the limitations, of the Plan, the
Committee may modify, extend, or renew outstanding Stock Options, prospectively
or retroactively, or accept the surrender of outstanding Stock Options (to
the
extent not theretofore exercised) granted under the Plan or any other plan
of
the Company or a Subsidiary, and authorize the granting of new Stock Options
pursuant to the Plan in substitution therefor (to the extent not theretofore
exercised), and the substituted Stock Options may specify a lower exercise
price
or a longer term than the surrendered Stock Options or have any other provisions
that are authorized by the Plan. Notwithstanding the foregoing
provisions of this Article IX, (a) no amendment or modification of an Award
which adversely affects the Participant shall not be made without the consent
of
the affected Participant, and (b) no Incentive Stock Option may be modified,
amended, extended, or reissued if such action would cause it to cease to be
an
"Incentive Stock Option" within the meaning of Section 422 of the Code, unless
the Participant specifically acknowledges and consents to the tax consequences
of such action.
ARTICLE
X
Indemnification
of the Committee
In
addition to such other rights of indemnification as they may have as Directors
or as members of the Committee, the members of the Committee shall not be liable
for any act, omission, interpretation, construction, or determination made
in
good faith in connection with their administration of and responsibilities
with
respect to the Plan, and the Company hereby agrees to indemnify the members
of
the Committee against any claim, loss, damage, or reasonable expense, including
attorneys' fees, actually and reasonably incurred in connection with the defense
of any action, suit, or proceeding, or in connection with any appeal therein,
to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any Award granted or
made
hereunder, and against all amounts reasonably paid by them in settlement thereof
or paid by them in satisfaction of a judgment in any such action, suit, or
proceeding, if such members acted in good faith and in a manner which they
believed to be in, and not opposed to, the best interests of the Company and
its
Subsidiaries.
ARTICLE
XI
General
Provisions
11.1
Conditions Upon Issuance of Shares.
Shares
shall not be issued pursuant to the exercise of an Stock Option unless the
exercise of such Stock Option and the issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
or inter-dealer quotation system upon which the Shares may then be listed,
and
shall be further subject to the approval of counsel for the Company with respect
to such compliance. The Committee may require each person purchasing
or otherwise acquiring Shares pursuant to a Stock Option under the Plan to
represent to and agree with the Company in writing to the effect that the
Participant: (a) is acquiring the Shares for his or her own personal account,
for investment purposes only, and not with an intent or a view to distribution
within the meaning of Section 2(11) of the Securities Act (unless such shares
have been issued to the Participant pursuant to a registration statement
declared effective by the SEC), and (b) will not sell, assign, pledge,
hypothecate, or otherwise dispose of or transfer the Shares to be issued upon
exercise of such Option except as permitted by this Plan and except in
compliance with the Securities Act and the securities laws of all other
applicable jurisdictions, as supported by an opinion of counsel if so requested
by the Committee. As a further condition to the issuance of such
Shares, the Participant shall provide any other representation, warranty, or
covenant as the Committee or its counsel deems necessary under the Securities
Act and the securities laws of all other applicable jurisdiction. In
addition to any legend required by this Plan, the certificates for the Shares
may include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
11.2
Reservation of Shares.
The
Company shall at all times reserve and keep available such number of Shares
as
shall be sufficient to satisfy the requirements of the Plan. The
Company shall use its best efforts to seek to obtain from appropriate regulatory
agencies any requisite authorization in order to issue and sell such number
of
Shares as shall be sufficient to satisfy the requirements of the
Plan. The inability of the Company to obtain from any such regulatory
agency having jurisdiction the requisite authorization(s) deemed by the
Company's counsel to be necessary for the lawful issuance and sale of
any Shares hereunder, or the inability of the Company to confirm to its
satisfaction that any issuance and sale of any Shares hereunder will meet
applicable legal requirements, shall relieve the Company of any liability in
respect to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
11.3
Limitation on Legal Rights.
The
establishment of the Plan shall not confer upon any Employee or Director any
legal or equitable right against the Company, except as expressly provided
in
the Plan.
11.4
Not a Contract of Employment.
This
Plan
is purely voluntary on the part of the Company, and the continuation of the
Plan
shall not be deemed to constitute a contract between the Company and any
Participant, or to be consideration for or a condition of the employment or
service of any Participant. Participation in the Plan shall not give
any Employee or Director any right to be retained in the service of the Company
or any of its Subsidiaries, nor shall anything in this Plan affect the right
of
the Company or any of its Subsidiaries to terminate any such Employee with
or
without cause.
11.5
Other Compensation Plans.
The
adoption of the Plan shall not affect any other Stock Option or incentive or
other compensation plans in effect for the Company or any of its Subsidiaries,
nor shall the Plan preclude the Company or any Subsidiary from establishing
any
other forms of incentive or other compensation plan or arrangements for
Employees or Director of the Company or any of its Subsidiaries.
11.6
Assumption by the Company.
The
Company or its Subsidiaries may assume options, warrants, or rights to purchase
shares issued or granted by other companies whose shares or assets shall be
acquired by the Company or its Subsidiaries or which shall be merged into or
consolidated with the Company or its Subsidiaries. The adoption of
this Plan shall not be taken to impose any limitations on the powers of the
Company or its Subsidiaries or affiliates to issue, grant, or assume options,
warrants, rights, or restricted shares, otherwise than under this Plan, or
to
adopt other Stock Option or restricted share plans or to impose any requirements
of shareholder approval upon the same.
11.7
Creditors.
The
interests of any Participant under this Plan is not subject to the claims of
creditors and may not, in any way, be assigned, alienated, or
encumbered.
11.8
Plan Binding on Successors.
All
obligations of the Company under this Plan and any Awards granted hereunder
shall be binding upon any successor and assign of the Company, whether the
existence of such successor or assign is a result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all
of
the business or assets of the Company.
11.9
Unfunded Status of Plan.
This
Plan
is intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any Participant
any rights that are greater than those of a general creditor of the
Company.
11.10
Withholding.
(a)
Tax Withholding.
The
Company shall have the power and the right to deduct or withhold, or require
a
Participant to remit to the Company, an amount sufficient to satisfy federal,
state, and local taxes (including the Participant's FICA obligation) required
by
law to be withheld with respect to any grant, exercise, or payment under or
as a
result of this Plan.
(b)
Share Withholding.
To
the
extent the Code requires withholding upon the exercise of Nonqualified Stock
Options, or upon the occurrence of any other similar taxable event, the
Committee may permit or require, subject to any rules it deems appropriate,
the
withholding requirement to be satisfied, in whole or in part, with or without
the consent of the participant, by having the Company withhold Shares having
a
Fair Market Value equal to the amount required to be withheld. The
value of the Shares to be withheld shall be based on Fair Market Value of the
Shares on the date that the amount of tax to be withheld is to be
determined.
11.10
Singular, Plural; Gender.
Whenever
used in this Plan, nouns in the singular shall include the plural, and vice
versa, and the masculine pronoun shall include the feminine gender.
11.11
Headings.
Headings
to the Sections and subsections are included for convenience and reference
and
do not constitute part of the Plan.
11.12
Costs.
The
Company shall bear all expenses incurred in administrating this Plan, including
original issue, transfer, and documentary stamp taxes, and other expenses of
issuing the Shares pursuant to Awards granted hereunder.
11.13
Governing Law.
This
Plan
and the actions taken in connection herewith shall be governed, construed,
and
administered in accordance with the laws of the State of Maine (regardless
of
the law that might otherwise govern under applicable Maine principles of
conflicts of laws).
ARTICLE
XII
Effectiveness
of the Plan
This
Plan
shall become effective on the date that it is adopted by both the Board of
Directors; provided, however, that it shall become limited to a Nonqualified
Stock Option Plan if it is not approved by the stockholders of the Company
within one year (365 days) of its adoption by the Board of Directors, by a
majority of the votes cast at a duly held stockholder meeting at which a quorum
representing a majority of the Company's outstanding voting shares is present,
either in person or by proxy. The Committee may make awards hereunder
prior to stockholder approval of the Plan; provided, however, that any and
all
Stock Options awarded shall automatically be converted into Nonqualified Stock
Options if the Plan is not approved by such stockholders within 365 days of
its
adoption by the Board of Directors.
ARTICLE
XIII
Term
of the Plan
Unless
sooner terminated by the Board pursuant to Article VIII hereof, this Plan shall
terminate ten (10) years from its effective date and no Awards may be granted
after termination, but Awards granted prior to such termination may extend
beyond that date. The Board of Directors may terminate this Plan at
any time. The termination shall not affect the validity of any Stock
Option outstanding on the date of termination.
Date
Approved by Board of Directors: September 17, 1999
/s/
Suzanne M. Carney
Clerk
Certification
Date
Approved by the Stockholders: November 9, 1999
/s/
Suzanne M. Carney
Clerk
Certification
Exhibit
11. Statement Regarding Computation of Per Share Earnings
|
Year
Ended
June
30, 2007
|
Year
Ended
June
30, 2006
|
|||||||
|
EQUIVALENT
SHARES:
|
||||||||
|
Weighted
average shares outstanding
|
2,451,610
|
2,493,560
|
||||||
|
Total
diluted shares
|
2,470,562
|
2,526,095
|
||||||
|
Net
income
|
$ |
1,886,677
|
$ |
4,004,199
|
||||
|
Basic
earnings per share
|
$ |
0.77
|
$ |
1.61
|
||||
|
Diluted
earnings per share
|
$ |
0.76
|
$ |
1.59
|
||||
Exhibit
21. Securities of Registrant
|
Name
of Subsidiary
|
Jurisdiction
of
Incorporation
|
Year
Acquired
of
Formed
|
Percentage
of
Voting
Securities
Owned
|
||||
|
ASI
Data Services Inc
|
Maine
|
1993
|
100 | % | |||
| Northeast Bank (and its 100% owned subsidiary, Northeast Bank Insurance Group, Inc.) |
Maine
|
1987
|
100 | % | |||
Exhibit
23.1 Consent of Independent Registered Public Accountant
SHATSWELL,
MacLEOD & COMPANY, P.C.
CERTIFIED
PUBLIC ACCOUNTANTS
To
the
Board of Directors
Northeast
Bancorp
Lewiston,
Maine
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in the Registration Statements on
Form
S-8 (No. 333-85206), (No. 33-32095), (No. 33-58538), (No. 33-32096),
(No. 33-87976) and (No. 333-135452) of Northeast Bancorp of our report dated
September 6, 2007, related to our audit of the consolidated financial statements
of Northeast Bancorp and Subsidiary included in the Annual Report on Form 10-K
for the year ended June 30, 2007.
|
West
Peabody, Massachusetts
|
/s/
SHATSWELL, MacLEOD & COMPANY, P.C.
|
|
September
26, 2007
|
SHATSWELL,
MacLEOD & COMPANY,
P.C.
|
Exhibit
23.2 Consent of Independent Registered Public Accountant
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statements on Form
S-8
(No. 333-85206), (No. 33-32095), (No. 33-58538),
(No. 33-32096), (No. 33-87976) and (No. 333-135452) of Northeast
Bancorp of our report dated August 11, 2006, relating to our audit of the
consolidated financial statements at June 30, 2006 and for the years ended
June 30, 2006 and 2005 of Northeast Bancorp and Subsidiaries, which appears
in the Annual Report on Form 10-K of Northeast Bancorp and Subsidiaries for
the
year ended June 30, 2007.
|
|
/s/
Baker Newman & Noyes
|
|
Portland,
Maine
|
Baker
Newman & Noyes
|
| September 27, 2007 |
Limited
Liability
Company
|
Exhibit
31.1. Certification of the Chief Executive
Officer
Chief
Executive Officer Certification
Pursuant
To Section 302 Of
The
Sarbanes-Oxley Act Of 2002
|
I,
James D. Delamater, certify that:
|
|
|
1.
|
I
have reviewed this annual report on Form 10-K of Northeast
Bancorp;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have
|
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
(b) Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on
such evaluation; and
|
|
|
(c) Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth quarter in the case of an
annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|
|
5.
|
The
registrant's other certifying officer(s) and I have disclosed, based
on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent function):
|
|
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record,
process, summarize and report financial information;
and
|
|
|
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
|
|
September
21, 2007
|
/s/
James D. Delamater
|
|
James
D. Delamater
|
|
|
Chief
Executive Officer
|
Exhibit
31.2 Certification of the Chief Financial Officer
Chief
Financial Officer Certification
Pursuant
To Section 302 Of
The
Sarbanes-Oxley Act Of 2002
|
I,
Robert S. Johnson, certify that:
|
|
|
1.
|
I
have reviewed this annual report on Form 10-K of Northeast
Bancorp;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
(b) Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on
such evaluation; and
|
|
|
(c) Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth quarter in the case of an
annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|
|
5.
|
The
registrant's other certifying officer(s) and I have disclosed, based
on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent function):
|
|
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record,
process, summarize and report financial information;
and
|
|
|
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
|
|
September
21, 2007
|
/s/
Robert S. Johnson
|
|
Robert S. Johnson
|
|
|
Chief Financial Officer
|
Exhibit
32 Certificate of the Chief Executive and Officer Chief Financial
Officer
Certification
of the Chief Executive Officer Pursuant to
18
U.S.C. Section 1350,
As
Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
|
In
connection with the Annual Report of Northeast Bancorp. (the "Company")
on
Form 10-K for the annual period ending June 30, 2007 as filed with
the
Securities and Exchange Commission on the date hereof (the "Report"),
I,
James D. Delamater, as Chief Executive Officer of the Company, hereby
certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to 906
of the
Sarbanes-Oxley Act of 2002, to the best of his
knowledge, that:
|
|
|
(1) The
Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
|
|
|
(2) The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company
for the dates and the periods covered by the Report.
|
|
|
A
signed original of this written statement has been provided to Northeast
Bancorp and will be retained by Northeast Bancorp and furnished to
the
Securities and Exchange Commission or its staff upon
request.
|
|
|
September
21, 2007
|
/s/
James D. Delamater
|
|
James
D. Delamater
|
|
|
Chief
Executive Officer
|
Certification
of the Chief Financial Officer Pursuant to
18
U.S.C. Section 1350,
As
Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
|
In
connection with the Annual Report of Northeast Bancorp. (the "Company")
on
Form 10-K for the annual period ending June 30, 2007 as filed with
the
Securities and Exchange Commission on the date hereof (the "Report"),
I,
Robert S. Johnson, as Chief Financial Officer of the Company, hereby
certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to 906
of the
Sarbanes-Oxley Act of 2002, to the best of his
knowledge, that:
|
|
|
(1) The
Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
|
|
|
(2) The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company
for the dates and the periods covered by the Report.
|
|
|
A
signed original of this written statement has been provided to Northeast
Bancorp and will be retained by Northeast Bancorp and furnished to
the
Securities and Exchange Commission or its staff upon
request.
|
|
|
September
21, 2007
|
/s/
Robert S. Johnson
|
|
Robert
S. Johnson
|
|
|
Chief
Financial Officer
|