Securities and Exchange Commission
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: May 14, 1998
Northeast Bancorp
(Exact Name of Registrant as Specified in its Charter)
Maine 0-16123 01-0425066
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
232 Center Street, Auburn, Maine 04210
(Address of Principal Executive Offices) (Zip Code)
(207) 777-6411
Registrant's Telephone Number, Including Area Code
Item 5 - Other Events
On October 24, 1997, the Northeast Bancorp (the Company) completed the merger
of its subsidiary bank Northeast Bank with Cushnoc Bank and Trust Company
(Cushnoc) of Augusta, Maine. On October 24, 1997, Cushnoc had approximately
$21,000,000 in total assets and $2,200,000 in stockholders' equity. Under the
terms of the agreement, the Company issued 2.089 shares of common stock for
2
each share of Cushnoc, which had 90,000 common shares outstanding. The
acquisition was accounted for under the pooling of interest method. In
accordance with the pooling of interest accounting method, the Company's
financial statements and information provided for previous reporting periods
have been restated to include Cushnoc's financial information.
Included herein is data previously submitted as part of the Company's Form 10-K
for the fiscal year ended June 30, 1997, restated to give retroactive effect to
the acquisition of Cushnoc.
Information previously submitted in Form 10-K for the fiscal year ended June
30, 1997, which has been restated for the business combination includes:
Item 6 - Selected Financial Data
Item 7 - Management's Discussion and Analysis
Item 8 - Financial Statements
Item 8b - Supplementary Financial Information
Item 6--Selected Financial Data
Northeast Bancorp
Selected Financial Data
Years Ended June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest income $21,936 $20,105 $18,953 $15,668 $15,843
Interest expense 11,291 10,087 8,841 7,124 7,751
-------------------------------------------------------
Net interest income 10,645 10,018 10,112 8,544 8,092
Provision for loan losses 614 639 691 1,045 924
Other operating income (1) 1,827 1,909 1,760 2,209 1,412
Net securities gains 259 279 419 347 108
Other operating expenses (2) 9,608 9,442 9,093 8,053 6,582
Writedowns on equity and debt securities 110 94 0 84 61
-------------------------------------------------------
Income before income taxes 2,399 2,031 2,507 1,918 2,045
Income tax expense 909 738 878 697 788
Cumulative effect of change in accounting
principle -- -- -- 260 --
-------------------------------------------------------
Net income $ 1,490 $ 1,293 $ 1,629 $ 1,481 $ 1,257
=======================================================
Primary earnings per share (3) $ 0.89 $ 0.79 $ 1.05 $ 0.99 $ 0.92
Fully diluted earnings per share (3) $ 0.85 $ 0.76 $ 0.99 $ 0.96 $ 0.94
=======================================================
3
Cash dividends per common share $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32
=======================================================
Common dividend payout ratio 37.65% 42.11% 16.16% 16.67% 15.02%
=======================================================
At June 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Total assets $284,077 $244,782 $207,580 $212,072 $198,237
Total loans 222,682 187,210 187,777 175,687 164,587
Total deposits 172,921 164,855 168,682 142,972 139,009
Total borrowings 81,793 54,140 38,274 49,051 41,183
Total stockholders' equity 22,096 20,364 19,388 17,730 15,982
Return on assets (net income/average assets) 0.57% 0.55% 0.71% 0.73% 0.67%
Return on equity (net income/average net worth) 7.05% 6.31% 8.81% 8.73% 8.11%
Average equity/average assets 8.09% 8.67% 8.10% 8.34% 8.28%
-------------------------------------------------------------
<1> Includes fees for services to customers and gains on sale of loans.
<2> Includes salaries, employee benefits and occupancy.
<3> Per share data for the years prior to 1996 have been retroactively
restated as a result of the stock split in December 1995.
Restated to include Cushnoc Bank & Trust financial information.
Item 7 - Management's Discussion and Analysis
DESCRIPTION OF OPERATIONS
- -------------------------
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company with the Office of Thrift Supervision ("OTS") as its primary regulator.
The Company has one wholly-owned banking subsidiary, Northeast Bank, FSB (the
"Bank"), which has branches located in Auburn, Augusta, Bethel, Harrison, South
Paris, Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine.
Prior to July 1, 1996, the Company conducted business as Bethel Bancorp. The
Company's board of directors voted to assume the name of Northeast Bancorp as
of July 1, 1996. At the 1996 annual meeting, the Company's shareholders
approved changing the Company's name from Bethel Bancorp to Northeast Bancorp.
On July 1, 1996, the Company's two wholly-owned banking subsidiaries, Bethel
Savings Bank, F.S.B. and Brunswick Federal Savings, F.A. merged following
4
receipt of regulatory approval. The merged banking subsidiary's name was
changed to Northeast Bank, FSB.
The Bank's deposits are primarily BIF-insured. Deposits at the Brunswick branch
are SAIF-insured and represent 30% of the Bank's total deposits at June 30,
1997.
The Company relocated its corporate headquarters and opened a new retail
banking facility at 232 Center Street, Auburn, Maine, in February, 1997.
On October 24, 1997 the Company completed the merger of its subsidiary Bank
with Cushnoc Bank and Trust Company (Cushnoc) of Augusta, Maine. On October 24,
1997, Cushnoc had approximately $21,000,000 in total assets and $2,200,000 in
stockholders' equity. Under the terms of the agreement, the Company issued
2.089 shares of its common stock for each share of Cushnoc, which had 90,000
common shares outstanding. The acquisition was accounted for under the pooling
of interest method. In accordance with the pooling of interest accounting
method, the Company's financial statements and information provided for
previous reporting periods have been restated to include Cushnoc's financial
information.
FINANCIAL CONDITION
- -------------------
The overall strategy of the Company is to increase the core earnings of the
Bank by the development of strong net interest margins, non-interest fee
income, and by increasing volume through a larger market area.
The state of Maine's economy in which the Company operates, including the south
central and mid-coast region of Cumberland, Androscoggin and Sagadahoc
counties, has stabilized with moderate growth. The banking business has become
increasingly competitive over the past several years. The Bank's major
competitors for deposits and loans consist primarily of other Maine-based
banks, regional and money center banks, and non-bank financial institutions.
Many of the Bank's competitors are larger in size and, consequently, possess
greater financial resources. The principal factors in competing for deposits
are convenient office locations, flexible hours, interest rates and services,
while those relating to loans are interest rates, the range of lending services
offered and lending fees. The Bank believes that the local character of its
business and its "community bank" management philosophy will improve its
ability to compete in its market areas. The Company has enhanced its product
lines and now provides a range of financial services such as loans, deposits
and investments through its relationship with Commonwealth Financial Services,
Inc., trust services through the Bank's trust department, employee retirement
benefits through First New England Benefits ("FNEB"), a division of the Bank's
trust department, and leasing services through its relationship with LGIC
Leasing.
The Company believes that it has adequate capital, as total equity represents
7.78% of total assets and that its capital position will support future growth
and development as well as allow for additional provisions to the allowance for
loan losses, if needed, without significant impairment of the financial
stability of the Company. The Company's assets totaled $284,077,431 as of June
30, 1997, an increase of $39,295,428 compared to June 30, 1996. Loan volume was
enhanced during the 1997 fiscal year due to whole loan purchases on the
secondary market. The loans purchased were funded with advances through the
Federal Home Loan Bank of Boston ("FHLB"). The Bank has focused its business
5
development efforts towards full service credit packages and financial
services, as well as competitively priced mortgage packages.
Cash and cash equivalents increased by $4,900,397 at June 30, 1997 compared to
June 30, 1996. The increase in cash equivalents was primarily the result of the
timing of cash items clearing through the Federal Reserve and increased
liquidity requirements due to the growth of the Bank during fiscal 1997.
The Bank's loan portfolio had a balance of $222,682,134 as of June 30, 1997,
which represents an increase of $35,472,654 compared to June 30, 1996. From
June 30, 1996 to June 30, 1997, the loan portfolio increased by $32,515,000 in
real estate mortgage loans, $299,000 in consumer loans, and by $2,659,000 in
commercial loans. During fiscal 1997, the Bank purchased approximately
$25,000,000 of residential whole loans on the secondary market. The loans
purchased are secured by properties located throughout the State of Maine and
were originated and are being serviced by a local Maine bank. The loan
portfolio contains elements of credit and interest rate risk. The Bank
primarily lends within its local market areas, which management believes helps
it to better evaluate credit risk. The Bank also maintains a well
collateralized position in real estate mortgages.
At June 30, 1997, residential real estate mortgages made up 63% of the total
loan portfolio, in which 49% of the residential loans are variable rate
products, as compared to 63% and 48%, respectively, at June 30, 1996. It is
management's intent to increase the proportion of variable rate residential
real estate loans to reduce the interest rate risk in this area.
At June 30, 1997, 22% of the Bank's total loan portfolio is commercial real
estate mortgages. Commercial real estate loans have minimal interest rate risk
as 89% of the portfolio consists of variable rate products. At June 30, 1996,
commercial real estate mortgages made up 21% of the total loan portfolio, in
which 83% of the commercial real estate loans were variable rate products.
Similar to the residential mortgages, the Bank tries to mitigate credit risk by
lending in its local market areas as well as maintaining a well collateralized
position in real estate.
Commercial loans make up 9% of the total loan portfolio in which 83% of the
balance were variable rate instruments at June 30, 1997. At June 30, 1996
commercial loans made up 8% of the total loan portfolio, of which 87% of the
balance were variable rate instruments. The credit loss exposure on commercial
loans is highly dependent on the cash flow of the customers' business. The Bank
attempts to mitigate losses through lending in accordance with the Company's
credit policies.
Consumer loans make up 6% of the total loan portfolio as of June 30, 1997 which
compares to 8% at June 30, 1996. Since these loans are primarily fixed rate
products, they have interest rate risk when market rates increase. These loans
also have credit risk with, at times, minimal collateral security. Management
attempts to mitigate these risks by keeping the products offered short-term,
receiving a rate of return commensurate with the risk, and lending to
individuals in the Bank's known market areas.
In fiscal year 1997, the Company adopted FASB Statement No. 122, "Accounting
for Mortgage Servicing Rights an amendment of FASB Statement No. 65" and
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities". The effect of adopting the new accounting
standards did not have a significant effect on the Company's financial
6
condition, liquidity, or results of operations. These statements are more fully
described in footnote 1 to the consolidated financial statements.
The Banks's allowance for loan losses was $2,741,809 as of June 30, 1997 versus
$2,760,872 as of June 30, 1996, representing 1.23% and 1.47% of total loans,
respectively. The Bank had non-performing loans totaling $2,881,000 and
$3,182,000 at June 30, 1997 and 1996, which was 1.29% and 1.70% of total loans,
respectively. Non-performing loans represented 1.01% and 1.30% of total assets
at June 30, 1997 and 1996, respectively. The Bank's allowance for loan losses
was equal to 95% and 87% of the total non-performing loans at June 30, 1997 and
1996, respectively. At June 30, 1997, the Bank had approximately $586,000 of
loans classified substandard, exclusive of the non-performing loans stated
above, that could potentially become non-performing due to delinquencies or
marginal cash flows. As of June 30, 1997, the amount of such loans has
decreased from the June 30, 1996 amount by $1,955,000. This decrease was
primarily due to substandard loans being classified as non-performing or
liquidated through the sale of foreclosed assets. Management takes an
aggressive posture in reviewing its loan portfolio to classify certain loans
substandard. The following table represents the Bank's non-performing loans as
of June 30, 1997 and 1996:
Description June 30, 1997 June 30, 1996
----------------------- ------------- -------------
1-4 Family Mortgages $ 1,072,000 $ 1,291,000
Commercial Mortgages 1,247,000 1,495,000
Commercial Installment 521,000 320,000
Consumer Installment 41,000 76,000
-----------------------------
Total non-performing $ 2,881,000 $ 3,182,000
=============================
Although the growth in non-performing, delinquent and substandard loans has
been reversed, management continues to allocate substantial resources to the
collection area in an effort to control the amount of such loans. The Bank's
delinquent loan accounts, as a percentage of total loans, decreased during the
1997 fiscal year. This decrease was largely due to improved collection efforts
and the increase in the Bank's loan portfolio.
The following table reflects the annual trend of total delinquencies 30 days or
more past due, including non-performing loans, for the Bank as a percentage of
total loans:
6/30/94 6/30/95 6/30/96 6/30/97
------- ------- ------- -------
3.28% 2.46% 3.24% 1.93%
7
The level of the allowance for loan losses as a percentage of total loans
decreased and the level of the allowance for loan losses as a percentage of
total non-performing loans increased at June 30, 1997 compared to June 30,
1996. The decrease in the level of allowance for loan losses as a percentage of
total loans was primarily due to the increase in the Bank's total loan
portfolio. The decrease was also supported by the Bank's lower delinquency
levels and decreased non-performing and substandard loans. As previously
discussed, loans classified substandard decreased in the 1997 fiscal year, when
compared to the 1996 fiscal year. Classified loans are also considered in
management's analysis of the adequacy of the allowance for loan losses. Based
on reviewing the credit risk and collateral of these classified loans,
management has considered the risks of the classified portfolio and believes
the allowance for loan losses is adequate. Net charge-offs for the Bank were
$633,490, $539,234, and $757,878, for the three years ended June 30, 1997, June
30, 1996, and June 30, 1995, respectively.
At June 30, 1997, total impaired loans were $1,661,698, of which $844,457 had
related allowances of $369,474. This compares to total impaired loans of
$1,530,650, of which $1,063,720 had related allowances of $499,200, at June
30,1996. During the year ended June 30, 1997, the income recognized related to
impaired loans was $50,690 and the average balance of outstanding impaired
loans was $1,330,983. This compares to income recognized related to impaired
loans of $87,128 and the average balance of impaired loans being $1,799,087 at
June 30, 1996. The Bank recognizes interest on impaired loans on a cash basis
when the ability to collect the principal balance is not in doubt; otherwise,
cash received is applied to the principal balance of the loan.
On a regular and ongoing basis, management evaluates the adequacy of the Bank's
allowance for loan losses. The process of evaluating the allowance involves a
high degree of management judgment. The methods employed to evaluate the
allowance for loan losses are quantitative in nature and consider such factors
as the loan mix, the level of non-performing loans, delinquency trends, past
charge-off history, loan reviews and classifications, collateral, and the
current economic climate.
Management believes that the allowance for loan losses is adequate considering
the level of risk in the loan portfolio. While management uses its best
judgement in recognizing loan losses in light of available information, there
can be no assurance that the Company will not have to increase its provision
for loan losses in the future as a result of changing economic conditions,
adverse markets for real estate or other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance for loan losses based
on their judgments about information available to them at the time of their
examination. The Bank's most recent examination by the OTS was on August 19,
1996. At the time of the exam the regulators proposed no additions to the
allowance for loan losses.
At June 30, 1997, the Bank had a total of $563,207 in other real estate owned
versus $584,626 as of June 30, 1996. The Bank has an allowance for losses on
other real estate owned that was established to provide for declines in real
estate values and to consider estimated selling costs. The allowance for losses
on other real estate owned totaled $50,839 at June 30, 1997 versus $100,000 at
June 30, 1996. The Company provided for this allowance through a charge against
earnings of $39,000 and $94,711 for the years ended June 30, 1997 and 1996,
respectively. In 1997 and 1996, write downs of other real estate owned totaled
$88,161 and $-0-, respectively. The Company increased the June 30, 1996
8
allowance for losses on other real estate owned to provide for additional
losses due to its plan to aggressively sell the other real estate owned
property. Management periodically receives independent appraisals to assist in
its valuation of the other real estate owned portfolio. As a result of its
review of the independent appraisals and the other real estate owned portfolio,
the Company believes the allowance for losses on other real estate owned is
adequate to state the portfolio at lower of cost, or fair value less estimated
selling costs.
As of June 30, 1997, trading account securities had decreased by $172,621
compared to the balance of such assets at June 30, 1996. This decrease was
attributed to the sale of securities in which management traded for net
securities gains. Trading account securities consist of equity securities
purchased with the intent to be subsequently sold to provide net securities
gains, and are carried at market value. Realized and unrealized gains and
losses on trading account securities are recognized in the statements of income
as they occur. Transactions are accounted for as of the trade date using the
specific identification method.
Since the last quarter of fiscal 1995, the remainder of the Company's total
securities portfolio has been classified as available for sale. Equity
securities, and debt securities which may be sold prior to maturity, are
classified as available for sale and are carried at market value. Changes in
market value, net of applicable income taxes, are reported as a separate
component of stockholders' equity. Gains and losses on the sale of securities
are recognized at the time of the sale using the specific identification
method. The amortized cost and market value of available for sale securities at
June 30, 1997 was $29,316,950 and $28,810,625, respectively. The reduction in
carrying value from the cost was primarily attributable to the decline in
market value of mortgage-backed securities, which was due to the change in
current market prices from the price at the time of purchase. The net
unrealized loss on mortgage-backed securities has decreased from $1,164,000 at
June 30, 1996 to $410,000 at June 30, 1997 due to improvements in interest
rates. Substantially all of the mortgage-backed securities are high grade
government backed securities. As in any long term earning asset in which the
earning rate is fixed, the market value of mortgage-backed securities will
fluctuate based on changes in market interest rates from the time of purchase.
Since these mortgage-backed securities are backed by the U.S. Government, there
is no risk of loss of principal. Management believes that the yields currently
received on this portfolio are satisfactory and intends to hold these
securities for the foreseeable future.
Management reviews the portfolio of investments on an ongoing basis to
determine if there has been an other-than-temporary decline in value. Some of
the considerations management makes in the determination are market valuations
of particular securities and economic analysis of the securities' sustainable
market values based on the underlying companies' profitability. Based on
management's assessment of the securities portfolio in fiscal 1997, 1996 and
1995, there have been other-than-temporary declines in values of individual
equity securities in the amounts of $110,000, $93,819, and $-0-, respectively.
Such securities have been written down through an adjustment against earnings
and are included in other expenses in the statements of income.
The Company increased its investment in FHLB stock by $1,362,700, compared to
June 30, 1996, due to the increase in FHLB borrowings. As discussed below, the
Bank had a large increase in FHLB borrowings to fund loan growth. The FHLB
requires institutions to hold a certain level of FHLB stock based on advances
outstanding.
9
The Bank has used off-balance-sheet risk financial instruments 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. The Bank
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. Hence, these instruments have the same elements
of credit and interest rate risk. The Company limits its involvement in
derivative financial instruments to covered call and put contracts. Gains and
losses from entering into these contracts were immaterial to the results of
operations of the Company in fiscal 1997, 1996 and 1995. The total value of
securities under call and put contracts at any one time is immaterial to the
Company's financial position, liquidity, or results of operations.
Off-balance-sheet risk financial instruments are more fully described in
footnote 18 to the financial statements.
The Company's premises and equipment increased by a net of $331,248 during
fiscal 1997. The increase was primarily due to the construction of the new
Auburn retail branch as well as the relocation of the Company's headquarters to
the Auburn location.
The increase in accrued interest receivable on loans of $121,181 during fiscal
1997 was primarily due to the increase in the loan portfolio. The increase in
other assets during fiscal 1997 of $492,934 was primarily due to the increase
in federal tax receivables and in deferred tax assets, caused by temporary
differences between the Company's financial statements and its tax returns. The
balance in real estate held for investment decreased by $98,166, during fiscal
1997 when compared to June 30, 1996, due to the Company establishing an
allowance for losses on real estate held for investment of $100,000. The
allowance for losses in real estate held for investment totaled $100,000 at
June 30, 1997 versus $-0- at June 30, 1996. The Company provided for this
allowance through a charge against earnings of $100,000 for the year ended June
30, 1997.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered C.D.'s when national
deposit interest rates are less than the interest rates on local market
deposits as well as to supplement the growth in earning assets. Brokered C.D.'s
carry the same risk as local deposit C.D.'s, in that both are interest rate
sensitive with respect to the Bank's ability to retain the funds. The Bank also
utilizes FHLB advances, as alternative sources of funds, when the interest
rates of the advances are less than market deposit interest rates as well as to
fund short-term liquidity demands.
Total deposits were $172,921,286 and securities sold under repurchase
agreements were $5,098,622 as of June 30, 1997. These amounts represent an
increase of $8,066,043 and $1,335,656, respectively, compared to June 30, 1996.
Broker deposits represented $7,185,566 of total deposits at June 30, 1997,
which increased by $1,538,428 compared to June 30, 1996's $5,647,138 balance.
Total borrowings from the FHLB were $80,494,471 as of June 30, 1997, for an
increase of $27,856,994 compared to June 30, 1996. Mortgages, free of liens,
pledges and encumbrances and certain non-pledged mortgage-backed securities are
required to be pledged to secure FHLB advances. The increase in deposits,
repurchase agreements and FHLB advances were utilized to fund the loan growth
during fiscal 1997.
Notes payable decreased by $203,581 during the 1997 fiscal year due to the
scheduled principal payments on the Fleet Bank of Maine loan incurred to
finance, in part, the purchase of a bank in prior years. The note is payable in
10
eighteen quarterly principal payments of $76,389. Interest is payable monthly
at an 8% fixed rate. Other liabilities increased by $508,303 compared to June
30, 1996, due primarily to increases in accrued expenses and escrow accounts.
CAPITAL RESOURCES & LIQUIDITY
- -----------------------------
Liquidity is defined as the ability to meet unexpected deposit withdrawals and
increased loan demand of a short-term nature with a minimum loss of principal.
The Bank's primary sources of funds are its interest bearing deposits, cash and
due from banks, deposits with the FHLB, certificates of deposit, loan payments
and prepayments and other investments maturing in less than two years as well
as securities available for sale. In addition, the Bank has unused borrowing
capacity from the FHLB through its advances program. The Bank's current advance
availability, subject to the satisfaction of certain conditions, is
approximately $38,000,000 over and above the 1997 end-of-year advances
reported. The Company's ability to access the principal sources of liquid funds
listed above is immediate and adequate to support the Company's budgeted
growth.
Cross selling strategies are employed by the Bank to develop deposit growth.
Even though deposit interest rates increased during fiscal 1997, the rate of
return was much stronger in other financial instruments such as mutual funds
and annuities. Like other companies in the banking industry, the Bank will be
challenged to maintain and or increase its core deposit liquidity base.
Total equity of the Company was $22,095,580 as of June 30, 1997 versus
$20,363,567 at June 30, 1996. In October of 1997 the Company issued 2.089
shares of its common stock for each share of Cushnoc, which had 90,000 common
shares outstanding. The number of common shares issued to Cushnoc shareholders
was 187,940 shares and all fractional shares were paid in cash. In March of
1997 Square Lake Holding Corporation exercised 25,000 warrants at an aggregate
price of $175,000. Square Lake Holding Corporation is a Maine corporation and
subsidiary of a Canadian corporation of which Ronald Goguen is a 95%
shareholder and director. Mr. Goguen, who is also a director of this Company,
and the affiliates he controls, owns approximately 19.9% of common shares
outstanding of the Company. During fiscal 1997, 20,000 stock options were
exercised by various employees of the Company. The proceeds from the exercised
warrants and options were utilized as general working capital and contributed
to the growth of the Company's total equity. As of June 30, 1997, 296,000
shares of unissued common stock are reserved for issuance pursuant to stock
options as well as 108,764 outstanding warrants. The Company repurchased 2,030
treasury shares at a cost of $28,420 during fiscal 1997 and 4,100 treasury
shares at a cost of $52,277 during fiscal 1996. These treasury shares were
utilized in fiscal 1997, for the employee stock bonus and options plans as well
as the exercise of warrants. On December 15, 1995, the Company paid a 100%
stock dividend to all shareholders. Earnings per share have been restated as a
result of the stock dividend and the acquisition of Cushnoc Bank under the
pooling of interest method of accounting. Based in part on this dividend and
the acquisition of Cushnoc Bank, the common shares outstanding increased to
1,417,850 shares on June 30, 1996.
The total equity to total assets ratio of the Company was 7.78% as of June 30,
1997 and 8.32% at June 30, 1996. The reduction in the equity to assets ratio
during fiscal 1997, when compared to fiscal 1996, was primarily due to the
Company leveraging the Bank in the purchase of mortgage loans through the
11
increased use of FHLB advances. Book value per common share was $13.74 as of
June 30, 1997 versus $12.91 at June 30, 1996.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
which was enacted on December 19, 1991, contains various provisions intended to
recapitalize the Bank Insurance Fund ("BIF") and also affects a number of
regulatory reforms that impact all insured depository institutions, regardless
of the insurance fund in which they participate. Among other things, FDICIA
grants OTS broader regulatory authority to take prompt corrective action
against insured institutions that do not meet capital requirements, including
placing undercapitalized institutions into conservatorship or receivership.
FDICIA also grants OTS broader regulatory authority to take corrective action
against insured institutions that are otherwise operating in an unsafe and
unsound manner.
Regulations implementing the prompt corrective action provisions of FDICIA
became effective December 19, 1992 and defined specific capital categories
based on an institution's capital ratios. OTS has issued regulations requiring
a minimum regulatory tangible capital equal to 1.5% of adjusted total assets,
core capital of 3.0%, leverage capital of 4.0% and a risk-based capital
standard of 8.0%. Regulatory capital requirements are also discussed in
footnote 11 of the consolidated financial statements. At June 30, 1997, the
Bank was in compliance with regulatory capital requirements as follows:
Northeast Bank, F.S.B.
---------------------------------------------------------------
Actual Capital Required Capital Excess Capital
--------------------- -------------------- --------------
Amount Ratio Amount Ratio Amount
----------- ------ ----------- ----- --------------
Tangible capital $19,930,000 7.07% $ 4,226,000 1.50% $ 15,704,000
Core capital $19,930,000 7.07% $ 8,452,000 3.00% $ 11,478,000
Leverage capital $19,930,000 7.07% $11,269,000 4.00% $ 8,661,000
Risk-based capital $21,237,000 12.18% $13,953,000 8.00% $ 7,284,000
RESULTS OF OPERATIONS
- ---------------------
Net income for the year ended June 30, 1997 was $1,489,745 versus $1,292,849
for the year ended June 30, 1996 and $1,629,114 for the year ended June 30,
1995. Primary earnings per share was $.89 and fully diluted earnings per share
was $.85 for the year ended June 30, 1997. Primary and fully diluted earnings
per share were $.79 and $.76, respectively, for the year ended June 30, 1996
and $1.05 and $.99, respectively for the year ended June 30, 1995. Net income
and earnings per have been restated for fiscal years 1997,1996 and 1995 to
include the acquisition of Cushnoc Bank under the pooling of interest method of
accounting. The weighted average number of shares outstanding in fiscal 1996
and 1995, as well as the reported earnings per share for these two years, have
been restated as a result of the Company's 100% stock dividend in December,
1995. The increase in net income for the year ended June 30, 1997, when
compared to June 30, 1996, was primarily due to the increase in net interest
income and the reduction in the Company's operational expenses, exclusive of
12
the one time FDIC SAIF assessment described below. The Company experienced a
reduction in net income in fiscal 1996, as compared to fiscal 1995, primarily
due to the expenses attributed to the merger and name change of the subsidiary
banks, the costs associated with the acquisition of the Key Bank branches, and
the general growth in infrastructure expenses of the Company. The Company's
overall return on average assets ("ROAA") was .57% for the year ended June 30,
1997, .55% for the year ended June 30, 1996, and .71% for the year ended June
30, 1995.
In September of 1996, Congress enacted comprehensive legislation amending the
FDIC BIF-SAIF deposit insurance assessment on savings and loan institution
deposits. The legislation imposed a one-time assessment on institutions holding
SAIF insured deposits on March 31, 1995, in an amount necessary for the SAIF to
reach its 1.25% Designated Reserve Ratio. Institutions with SAIF deposits were
required to pay an assessment rate of 65.7 cents per $100 of domestic deposits
held as of March 31, 1995. The Bank held approximately $57,900,000 of SAIF
deposits as of March 31,1995. This resulted in an expense of $380,000 which was
reflected in the Company's September 30, 1996 quarter end financial statements.
During the December 31, 1996 quarter, Congress issued final legislation which
enabled certain qualifying institutions to apply for a 20% discount on the
special assessment. The Bank received a credit of $83,140 reducing the
assessment expense in the December 31, 1996 quarter. The net effect of the one
time assessment was $296,860 and decreased the Company's primary earnings per
share by $.15 and the fully diluted earnings per share by $.12 for the fiscal
year ended June 30, 1997. Commencing in 1997 and continuing through 1999, the
Bank is required to pay an annual assessment of 1.29 cents for every $100 of
domestic BIF insured deposits and 6.44 cents for every $100 of domestic SAIF
insured deposits. Commencing in 2000 and continuing through 2017, banks would
be required to pay a flat annual assessment of 2.43 cents for every $100 of
domestic deposits. If there are no additional deposit assessments in the
future, it is anticipated that the Company may save approximately $80,000
annually commencing in fiscal 1998.
The Company's net interest income for the years ended June 30, 1997, June 30,
1996 and June 30, 1995 was $10,644,833, $10,018,230 and $10,112,172,
respectively. Net interest income for fiscal 1997 increased $626,603, or 6.25%,
compared to the amount at June 30, 1996. Total interest and dividend income
increased $1,830,582 for the year ended June 30, 1997 compared to the year
ended June 30, 1996, resulting from the following items: (I) interest income on
loans increased by $1,118,771 resulting from an increase of $1,573,250 due to
an increase in the volume of loans, which was offset by the decrease of
$454,479 due to decreased interest rates on loans, (II) interest and dividend
income on investment securities increased by $992,206 resulting from a $970,843
increase due to increased volume and an increase of $21,363 due to increased
interest rates on investments, and (III) interest income on short term liquid
funds decreased by $280,395 resulting from a $243,375 decrease due to decreased
volume and a decrease of $37,020 due to decreased interest rates on deposits at
the FHLB and other institutions.
The increase in total interest expense of $1,203,979 for fiscal 1997 compared
to 1996 resulted from the following items: (I) interest expense on deposits
decreased by $244,827 resulting from a $36,114 decrease due to decreased
deposits and a decrease of $208,713 due to decreased deposit interest rates,
(II) interest expense on repurchase agreements increased by $33,243 resulting
from a $46,631 increase due to increased volume offset, in part, by a decrease
of $13,388 due to decreasing interest rates, and (III) interest expense on
borrowings increased $1,415,563 resulting from an increase of $1,533,310 due to
an increase in volume which was offset by the decrease of $117,747 due to the
13
change in the mix of interest rates on borrowings. The changes in net interest
income, as explained above, are also presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1997 versus June 30, 1996
Difference Due to
-------------------------
Volume Rate Total
----------- ---------- -----------
Investments $ 970,843 $ 21,363 $ 992,206
Loans 1,573,250 (454,479) 1,118,771
FHLB & Other Deposits (243,375) (37,020) (280,395)
---------------------------------------
Total Interest Earning Assets 2,300,718 (470,136) 1,830,582
Deposits (36,114) (208,713) (244,827)
Repurchase Agreements 46,631 (13,388) 33,243
Borrowings 1,533,310 (117,747) 1,415,563
---------------------------------------
Total Interest-Bearing Liabilities 1,543,827 (339,848) 1,203,979
---------------------------------------
Net Interest Income $ 756,891 $(130,288) $ 626,603
=======================================
Rate/Volume amounts spread proportionately between Volume and Rate.
Net interest income for fiscal 1996 decreased $93,942, or .93%, compared to the
amount for the year ended June 30, 1995. Total interest and dividend income
increased $1,151,653 for the year ended June 30, 1996 compared to the year
ended June 30, 1995, resulting from the following items: (I) interest income on
loans increased by $891,833 resulting from an increase of $481,801 due to an
increase in the volume of loans and an increase of $410,032 due to increased
interest rates on loans, (II) interest and dividend income on investment
securities increased by $5,251 resulting from a $60,305 increase due to
increased volume, which was offset by the decrease of $55,054 due to decreased
interest rates on investments, and (III) interest income on short term liquid
funds increased by $254,569 resulting from a $135,691 increase due to increased
volume and an increase of $118,878 due to increased interest rates on deposits
at the FHLB and other institutions.
The increase in total interest expense of $1,245,595 for fiscal 1996 compared
to 1995 resulted from the following items: (I) interest expense on deposits
increased by $1,160,241 resulting from a $299,165 increase due to increased
deposits and an increase of $861,076 due to higher deposit interest rates, (II)
interest expense on repurchase agreements increased by $81,289 resulting from
an $82,258 increase due to increased volume offset, in part, by a decrease of
$969 due to decreasing interest rates, and (III) interest expense on borrowings
increased $4,065 resulting from a decrease of $164,211 due to a decrease in
volume which was more than offset by the increase of $168,276 due to the change
14
in the mix of interest rates on borrowings. The changes in net interest income,
as explained above, are also presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the Year ended
June 30, 1996 versus June 30, 1995
Difference Due to
-------------------------
Volume Rate Total
---------- ----------- ----------
Investments $ 60,305 $ (55,054) $ 5,251
Loans 481,801 410,032 891,833
FHLB & Other Deposits 135,691 118,878 254,569
---------------------------------------
Total Interest Earning Assets 677,797 473,856 1,151,653
Deposits 299,165 861,076 1,160,241
Repurchase Agreements 82,258 (969) 81,289
Borrowings (164,211) 168,276 4,065
---------------------------------------
Total Interest-Bearing Liabilities 217,212 1,028,383 1,245,595
---------------------------------------
Net Interest Income $ 460,585 $ (554,527) $ (93,942)
=======================================
Rate/Volume amounts spread proportionately between Volume and Rate.
The majority of the Company's income is generated from the Bank. Management
believes that the Bank is slightly asset sensitive based on its own internal
analysis which considers its core deposits long term liabilities that are
matched to long term assets; therefore, it will generally experience a
contraction in its net interest margins during a period of falling rates.
Management believes that the maintenance of a slight asset sensitive position
is appropriate since historically interest rates tend to rise faster than they
decline.
Approximately 22% of the Bank's loan portfolio is comprised of floating rate
loans based on a prime rate index. Interest income on these existing loans will
increase as the prime rate increases, as well as approximately 35% of other
loans in the Bank's portfolio that are based on short-term rate indices such as
the one-year treasury bill. An increase in short-term interest rates will also
increase deposit and FHLB advance rates, increasing the Company's interest
expense. Although the Company has experienced some net interest margin
compression, the impact on net interest income will depend on, among other
things, actual rates charged on the Bank's loan portfolio, deposit and advance
rates paid by the Bank, and loan volume.
The provision for loan losses was $614,427 for fiscal 1997 compared to $638,860
and $690,633 for 1996 and 1995, respectively. Net charge-offs amounted to
$633,490 during fiscal 1997 versus $539,234 and $757,878 for 1996 and 1995,
15
respectively. The Bank intends to continue to aggressively manage the
non-performing assets, through sales, work-outs and charge-offs, to reduce the
amount of non-performing assets.
Non-interest income was $2,086,241 for the year ended June 30, 1997, $2,187,593
for June 30, 1996 and $2,178,580 for June 30, 1995. Generally, the Bank
continues to generate an increasing level of non-interest income through
service charges and fees for other services. This component totaled $851,725
for the year ended June 30, 1997, $817,162 for the year ended June 30, 1996 and
$739,597 for June 30, 1995. The increase in 1997 was primarily due to growth in
the deposit accounts and other branch services.
Net securities gains were $259,430, $278,895, and $419,313 for fiscal 1997,
1996 and 1995, respectively. The major reason for the increase in 1995 was that
the Company sold some of its available for sale and trading securities, taking
advantage of the fluctuation in higher market prices.
Gains on the sale of loans amounted to $201,418 for fiscal 1997 and was a
decrease of $50,179 compared to the balance in fiscal 1996. Gains on the sale
of loans amounted to $251,597 for fiscal 1996 and was an increase of $90,615
compared to $160,982 for fiscal 1995. The decrease in gain on sales of loans in
1997, compared to 1996, was primarily due to the Bank's reduced volume in
underwriting and selling Freddie Mac, Fannie Mae and SBA guaranteed commercial
loans. Gains on the sale of loans in fiscal 1996 increased due to increased
volume in underwriting Freddie Mac and Fannie Mae loans. The Company's loan
sales activity is dependent on market interest rates as well as local
competition. The Company receives income from servicing mortgage loans for
others that the Bank originated and sold. The outstanding balance of such loans
decreased from approximately $39,940,000 at June 30, 1996 to $34,683,000 at
June 30, 1997. In addition to loans originated and sold by the Company, during
1993 the Company purchased loan servicing rights from another institution. The
balance of the loans serviced under this agreement was approximately $7,826,000
and $9,676,000 at June 30, 1997 and 1996, respectively. Fees for servicing
loans were $275,496 for the year ended June 30, 1997 versus $302,261 and
$306,220 for the years ended June 30, 1996 and 1995, respectively.
Total non-interest expense for the Company was $9,718,337 for fiscal 1997,
$9,536,288 for fiscal 1996, and $9,093,247 for fiscal 1995. The increase in
non-interest expense of $182,049 for fiscal 1997 compared to 1996 was due, in
part, to the following items: (I) occupancy expense increased by $26,459 due to
the expenses associated with the opening of the new Auburn retail branch, (II)
equipment expense increased by $30,500 due to the depreciation expense
associated with the new Auburn branch equipment as well as general maintenance
costs, and (III) FDIC deposit insurance increased by $236,209 primarily due to
the SAIF assessment described above. The non-interest expense increases above
were offset by the reduction of $72,752 in compensation expense due to the
Company restructuring its internal departments.
Other operating expenses decreased by $38,367 in fiscal 1997 compared to 1996
primarily due to the following: a decrease of $8,000 in business insurances and
computer services due to the savings in merging the two subsidiary banks, a
decrease of $78,000 in other real estate owned and the provision for other real
estate owned expenses, a decrease of $9,000 in telephone expenses due to the
Company's telephone network system, a decrease of $27,000 in travel & meeting
expenses, and a decrease of $31,000 in correspondent banking fees due to the
merger of the subsidiary banks, and decreases in the Company's other general
business expenses. These decreases in other expenses were primarily offset by
the following increases: an increase of $49,000 due to hiring third party
16
consultants for marketing and compliance, an increase of $22,000 in supplies
expense, and an increase of $109,000 in advertising expense to continue the
Company's strategy in increasing market exposure.
The increase in non-interest expense of $443,041 for fiscal 1996 compared to
1995 was due, in part, to the following items: (I) compensation expenses
increased by $174,456 as the result of the additional employees from the Key
Bank branch acquisition, general growth in the Company, as well as annual
salary increases and other benefits expenses, (II) occupancy expense increased
by $109,200 due to the expense associated with the branches acquired from Key
Bank and general maintenance on existing locations, and (III) equipment expense
increased by $77,435 due to depreciation on new assets, as well as increased
maintenance costs from new assets acquired and the equipment acquired from Key
Bank. The non-interest expense increases above were offset by the reduction of
$199,000 in deposit insurance expense due to the FDIC reducing its BIF deposit
insurance assessment from $.23 per $100 of deposits to an annual fee of $2,000.
Other operating expenses increased by $280,448 in fiscal 1996 compared to 1995
due primarily to the following: an increase of $46,000 in computer servicing
expense due to the merger of the two subsidiary banks and increased ATM
services, an increase of $54,000 in collection expense due to non-performing
loans, an increase of $13,000 in postage expense due to additional customer
mailings concerning the merger of the two subsidiary banks, an increase of
$74,000 in goodwill expense due to a full years recognition of goodwill from
the acquisition of the Key Bank branches, an increase of $94,000 due to the
write-down on equity securities to current market values, a one time expense of
$166,000 due to direct expenses associated with the merger and name change of
the two subsidiary banks, and increases due to normal business growth. These
increases in other expenses were offset by the following reductions: a decrease
of $41,000 in supplies expense due to savings from bulk orders, a decrease of
$60,000 in telephone expense due to the Company's new telephone network system,
a decrease of $24,000 in other real estate owned and the provision for other
real estate owned expenses, and a $41,000 decrease in the Company's other
general business expenses.
MARKET RISKS
- ------------
The Company's success is 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 manages other risks, as in credit and liquidity risk, in the normal
course of its business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the Company's financial condition and results of operations. Because the
Company's portfolio of trading assets is immaterial, the Company is not exposed
to significant market risk from trading activities. The Company does not
currently use derivatives to manage market and interest rate risks.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. ALCO establishes policies that monitors and coordinates the
Company's sources, uses and pricing of funds. The committee is also involved in
formulating the economic projections for the Company's budget and strategic
plan.
17
The Company continues to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. To accomplish this, management has undertaken steps to
increase the percentage of variable rate assets, as a percentage of its total
earning assets. In recent years, the focus has been to originate adjustable
rate residential and commercial real estate loans, which reprice or mature more
quickly than fixed-rate real estate loans. The Company also originates
adjustable-rate consumer loans and commercial business loans. 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.
The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate rise or fall in interest rates (rate
shock) over a twelve and twenty-four month period. The model is based on the
actual maturity and repricing characteristics of interest-rate sensitive assets
and liabilities. The model incorporates assumptions regarding the impact of
changing interest rates on the prepayment rate of certain assets and
liabilities. The assumptions are based on the Company's historical prepayment
speeds on assets and liabilities when interest rates increase or decrease by
200 basis points or greater. The model factors in projections for anticipated
activity levels by product lines offered by the Company. The simulation model
also takes into account the Company's increased ability to control the rates on
deposit products than over adjustable-rate loans tied to published indices.
Based on the information and assumptions in effect at June 30, 1997, management
believes that a 200 basis point rate shock over a twelve month period, up or
down, would not significantly affect the Company's annualized net interest
income.
The table below represents in tabular form contractual balances of the
Company's on balance sheet financial instruments in U.S. dollars at the
expected maturity dates as well as the fair value of those on balance sheet
financial instruments for the period ended June 30, 1997. The expected maturity
categories take into consideration historical prepayment speeds as well as
actual amortization of principal and does not take into consideration
reinvestment of cash. Principal prepayments are the amounts of principal
reduction, over and above normal amortization, that the Company has experienced
in the past twenty four months. The Company's assets and liabilities that do
not have a stated maturity date, as in cash equivalents and certain deposits,
are considered to be long term in nature by the Company and are reported in the
thereafter column. The Company does not consider these financial instruments
materially sensitive to interest rate fluctuations and historically the
balances have remained fairly constant over various economic conditions. The
weighted average interest rates for the various assets and liabilities
presented are actual as of June 30, 1997.
The fair value of cash, interest bearing deposits at other banks, and interest
receivable approximate their book values due to their short maturities. The
fair value of available for sale securities are based on bid quotations from
security dealers or on bid prices published in financial newspapers. FHLB stock
does not have a market and the fair value is unknown. The fair value of loans
are estimated in portfolios with similar financial characteristics and takes
into consideration discounted cash flows through the estimated maturity or
repricing dates using estimated market discount rates that reflect credit risk.
The fair value of loans held for sale is based on bid quotations from loan
dealers. The fair value of demand deposits, NOW, money market, and savings
accounts is the amount payable upon demand. The fair value of time deposits is
18
based upon the discounted value of contractual cash flows, which is estimated
using current rates offered for deposits of similar remaining terms. The fair
value of repurchase agreements approximate the carrying value due to their
short maturity. The fair value of FHLB borrowings is estimated by discounting
the cash flows through maturity or the next repricing date based on current
rates offered by the FHLB for borrowings with similar maturities. The fair
value of the note payable approximates the carrying value due to the note
payable's interest rate approximating market rates. The Company has reviewed
and analyzed the impact of Cushnoc's financial instruments on the Company's
market risk. The Company's analysis concludes that Cushnoc's financial
instruments have no material effect on the Company's market risk and that the
carrying value of their financial instruments approximates fair value. Based on
these results the following market risk table has not been restated to include
Cushnoc's financial instruments.
Market Risk
6/30/97
(In Thousands)
Expected Maturity Date
------------------------------------------------------------------------------------
6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- ------- -----------
Financial Assets:
Cash $ -- $ -- $ -- $ -- $ -- $ 5,152 $ 5,152 $ 5,152
Weighted Average Interest Rate -- -- -- -- -- -- --
Interest Bearning Deposits at other Banks
Variable Rate -- -- -- -- -- 10,509 10,509 10,509
Weighted Average Interest Rate -- -- -- -- -- 5.77% 5.77%
Available for Sale Securities
US Government Treasuries & Agencies
Fixed Rate 249 -- -- 250 -- 1,000 1,499 1,455
Weighted Average Interest Rate 5.35% -- -- 5.40% -- 7.18% 6.57%
Corporate Bonds
Fixed Rate -- -- -- -- -- 149 149 143
Weighted Average Interest Rate -- -- -- -- -- 5.95% 5.95%
Mortgage Backed Securities
Fixed Rate 1,742 1,917 2,110 2,320 2,553 14,416 25,058 24,648
Weighted Average Interest Rate 7.15% 7.15% 7.15% 7.15% 7.15% 7.15% 7.15%
Equity Securities 897 -- -- -- -- -- 897 851
Dividend Yield 3.82% -- -- -- -- -- 3.82%
FHLB Stock -- -- -- -- -- 3,950 3,950 3,950(1)
Weighted Average Interest Rate -- -- -- -- -- 6.50% 6.50%
Loans Held For Sale
Fixed Rate 240 -- -- -- -- -- 240 242
Weighted Average Interest Rate 8.19% -- -- -- -- -- 8.19%
Loans
Residential Mortgages
Fixed Rate 9,211 9,263 10,165 11,139 12,225 12,497 64,500 65,950
Weighted Average Interest Rate 8.80% 8.94% 8.93% 8.93% 8.93% 8.92% 8.91%
Variable Rate 10,144 10,624 11,760 12,537 13,420 13,205 71,690 71,402
Weighted Average Interest Rate 8.89% 8.82% 8.82% 8.78% 8.74% 8.71% 8.79%
19
Commercial Real Estate
Fixed Rate 605 711 746 1,087 1,082 933 5,164 4,705
Weighted Average Interest Rate 9.35% 9.40% 9.17% 9.20% 9.19% 9.09% 9.22%
Variable Rate 5,810 4,409 5,640 5,041 5,220 7,664 33,784 32,982
Weighted Average Interest Rate 10.03% 10.10% 10.14% 10.15% 10.12% 10.12% 10.11%
Commercial
Fixed Rate 1,315 644 1,020 1,013 193 28 4,213 4,060
Weighted Average Interest Rate 11.05% 9.93% 10.23% 10.13% 9.24% 8.67% 10.37%
Variable Rate 4,400 2,022 1,173 1,653 1,311 1,690 12,249 11,896
Weighted Average Interest Rate 9.81% 9.91% 10.51% 10.46% 10.53% 10.72% 10.18%
Consumer
Fixed Rate 1,911 2,209 2,447 2,845 1,351 2,822 13,585 13,016
Weighted Average Interest Rate 10.25% 10.39% 10.23% 9.63% 11.18% 11.15% 10.42%
Variable Rate 254 132 216 137 142 290 1,171 1,154
Weighted Average Interest Rate 9.51% 8.56% 8.75% 8.46% 8.57% 8.89% 8.87%
Interest Receivable 1,480 -- -- -- -- -- 1,480 1,480
Weighted Average Interest Rate -- -- -- -- -- -- --
Finanical Liabilities:
Deposits (with no stated maturity)
Demand Deposits -- -- -- -- -- 12,056 12,056 12,056
Weighted Average Interest Rate -- -- -- -- -- -- --
NOW -- -- -- -- -- 11,429 11,429 11,429
Weighted Average Interest Rate -- -- -- -- -- 1.26% 1.26%
Money Market -- -- -- -- -- 12,318 12,318 12,318
Weighted Average Interest Rate -- -- -- -- -- 3.44% 3.44%
Regular Savings -- -- -- -- -- 20,389 20,389 20,389
Weighted Average Interest Rate -- -- -- -- -- 2.60% 2.60%
Time Deposits
Fixed Rate 69,621 15,259 5,088 2,451 4,670 10 97,099 97,591
Weighted Average Interest Rate 6.55% 5.89% 6.35% 6.20% 6.44% 5.00% 6.42%
Variable Rate 759 361 -- -- -- -- 1,120 1,120
Weighted Average Interest Rate 5.01% 5.06% -- -- -- -- 5.03%
Repurchase Agreements
Fixed Rate 616 -- -- -- -- -- 616 616
Weighted Average Interest Rate 5.18% -- -- -- -- -- 5.18%
Variable Rate 4,483 -- -- -- -- -- 4,483 4,483
Weighted Average Interest Rate 4.12% -- -- -- -- -- 4.12%
FHLB Advances
Fixed Rate 53,408 15,606 3,000 273 1,442 4,264 77,993 77,987
Weighted Average Interest Rate 5.71% 5.72% 6.27% 6.40% 6.30% 6.58% 5.80%
Variable Rate 1,000 -- -- -- -- -- 1,000 1,003
Weighted Average Interest Rate 6.20% -- -- -- -- -- 6.20%
Notes Payable
Fixed Rate 306 306 306 306 75 -- 1,299 1,299
Weighted Average Interest Rate 8.00% 8.00% 8.00% 8.00% 8.00% -- 8.00%
<1> FHLB stock does not have a market; therefore, its fair value is unknown.
IMPACT OF INFLATION
- -------------------
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation.
20
Unlike many 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.
RECENT ACCOUNTING DEVELOPMENTS
- ------------------------------
In February, 1997, FASB issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("Statement 128"). Statement 128 supersedes APB
Opinion No. 15,"Earnings Per Share" (APB 15) and specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. It replaces
the presentation of primary EPS with a presentation of basic EPS and fully
diluted EPS with diluted EPS. Statement 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS data
presented shall be restated to conform with Statement 128. Management has not
determined the impact of Statement 128.
In February 1997, FASB issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure"("Statement 129"). This
Statement was issued in connection with Statement 128,"Earnings Per Share". It
is not expected that the issuance of Statement 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions. Statement 129 is effective for financial statements for periods
ending after December 15, 1997. Management does not expect the requirements of
Statement 129 to have a material impact on capital disclosures.
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement 130"). Statement 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. This Statement requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed in equal prominence with the other financial statements. It requires
that an enterprise display an amount representing total comprehensive income
for each period. It does not require per share amounts of comprehensive income
to be disclosed. Statement 130 is effective for both interim and annual periods
after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. Management has not
determined the impact of the adoption of Statement No. 130.
In June of 1997, FASB issued Statement of Financial Accounting Standards No.
131,"Disclosures about Segments of an Enterprise and Related Information",
("Statement 131"). Statement 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 is
effective for financial statements for periods beginning after December 15,
1997. Earlier application is encouraged. In the initial year of application,
21
comparative information for earlier years is to be restated, unless it is
impracticable to do so. Management has not determined the impact of the
adoption of Statement 131.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based on
various assumptions (some of which are beyond the Company's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology; such as "may", "will", "believe", "expect",
"estimate", "anticipate", "continue", or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the Company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk
management, asset/liability management, the financial securities markets, and
the availability of and the costs associated with sources of liquidity.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northeast Bancorp and Subsidiary
We have audited the supplemental consolidated statements of financial condition
of Northeast Bancorp and Subsidiary (formed as a result of the consolidation of
Northeast Bancorp and Subsidiary and Cushnoc Bank and Trust Company) as of June
30, 1997 and 1996, and the related supplemental consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1997. The supplemental consolidated
financial statements give retroactive effect to the merger of Northeast Bancorp
and Subsidiary and Cushnoc Bank and Trust Company on October 24, 1997, which
has been accounted for using the pooling of interests method as described in
the notes to the supplemental consolidated financial statements. These
supplemental consolidated financial statements are the responsibility of the
Northeast Bancorp's management. Our responsibility is to express an opinion on
these supplemental consolidated financial statements based on our audits. We
did not audit the financial statements of Cushnoc Bank and Trust Company, for
the years ended December 31, 1996, 1995 and 1994, which statements reflect
total assets constituting 7.8% for 1997 and 9.2% for 1996 of the related
supplemental consolidated financial statement totals, and which reflect
interest income constituting 8.7%, 10.5% and 10.7% of the related supplemental
consolidated financial statement totals for the years ended June 30, 1997, 1996
and 1995, respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and in our opinion, insofar as it relates to
data included for Cushnoc Bank and Trust Company, is based solely on the report
of the other auditors.
22
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
supplemental 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, after giving retroactive effect
to the merger of Cushnoc Bank and Trust Company, as described in the notes to
the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
Portland, Maine Baker Newman & Noyes
August 6, 1997 Limited Liability Company
NORTHEAST BANCORP AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
ASSETS
1997 1996
------------ ------------
Cash and due from banks $ 6,112,425 $ 4,184,082
Interest bearing deposits 443,021 650,430
Federal Home Loan Bank overnight deposits 12,218,898 9,039,435
----------------------------
18,774,344 13,873,947
Trading account securities, at market value 25,000 197,621
Available for sale securities, at market value (notes 2, 8 and 10) 28,810,625 31,381,884
Loans held for sale (note 3) 240,000 448,475
Loans receivable (notes 4 and 8):
Mortgage loans:
Residential real estate 139,633,099 115,825,574
Construction loans 3,673,584 5,208,806
Commercial real estate 46,443,071 37,518,049
----------------------------
23
189,749,754 158,552,429
Less:
Undisbursed portion of construction loans 1,076,936 2,243,814
Net deferred loan origination fees 203,819 354,212
----------------------------
Total mortgage loans 188,468,999 155,954,403
Commercial loans 19,421,552 16,762,592
Consumer and other loans 14,791,583 14,492,485
----------------------------
222,682,134 187,209,480
Less allowance for loan losses 2,741,809 2,760,872
----------------------------
Net loans 219,940,325 184,448,608
Premises and equipment - net (note 5) 4,774,561 4,443,313
Other real estate owned - net (note 6) 563,207 584,626
Real estate held for investment - net of an allowance for losses of
$100,000 at June 30, 1997 and $0 at June 30, 1996 361,654 459,820
Accrued interest receivable - loans 1,344,360 1,223,179
Accrued interest receivable - investments 295,733 290,918
Federal Home Loan Bank stock, at cost (note 8) 4,121,000 2,758,300
Goodwill, net of accumulated amortization of $1,236,433 in 1997 and
$940,059 in 1996 (note 16) 2,220,289 2,557,913
Other assets (note 15) 2,606,333 2,113,399
----------------------------
$284,077,431 $244,782,003
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ ------------
Liabilities:
Deposits (note 7):
Demand $ 13,784,339 $ 13,061,841
NOW 14,368,105 16,242,694
Money market 15,236,189 15,306,742
Regular savings 22,483,976 23,493,853
Brokered deposits 7,185,566 5,647,138
Certificates of deposit under $100,000 81,154,696 73,455,278
Certificates of deposit $100,000 or more 18,708,415 17,647,697
----------------------------
Total deposits 172,921,286 164,855,243
24
FHLB Borrowings (note 8) 80,494,471 52,637,477
Notes payable (note 9) 1,298,611 1,502,192
Securities sold under repurchase agreements (notes 2 and 10) 5,098,622 3,762,966
Other liabilities 2,168,861 1,660,558
----------------------------
Total liabilities 261,981,851 224,418,436
Commitments and contingent liabilities (notes 9, 16, 17 and 18)
Stockholders' equity (notes 11, 12, 13 and 17):
Series A cumulative convertible preferred stock; $1 par value,
1,000,000 shares authorized; 45,454 shares issued and outstanding 999,988 999,988
Series B cumulative convertible preferred stock; $1 par value,
1,000,000 shares authorized; 71,428 shares issued and outstanding 999,992 999,992
Common stock, $1 par value, 3,000,000 shares authorized; 1,462,909
and 1,421,950 shares issued at June 30, 1997 and 1996,
respectively; 1,462,909 and 1,417,850 shares outstanding in 1997
and 1996, respectively 1,462,909 1,421,950
Additional paid-in capital 7,699,882 7,516,227
Retained earnings 11,266,984 10,315,041
Net unrealized losses on available for sale securities (note 2) (334,175) (837,354)
Treasury stock at cost, 4,100 shares at June 30, 1996 -- (52,277)
----------------------------
Total stockholders' equity 22,095,580 20,363,567
----------------------------
$284,077,431 $244,782,003
============================
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1997, 1996, and 1995
1997 1996 1995
------------ ------------ ------------
Interest and dividend income:
Interest on loans $ 18,973,560 $ 17,854,789 $ 16,962,956
Interest on Federal Home Loan Bank overnight deposits 429,531 707,262 446,753
Interest on investments held to maturity, excluding
mortgage backed securities -- -- 75,691
Interest and dividends on available for sale securities 234,242 193,275 136,914
Interest on mortgage backed securities 2,043,331 1,166,148 1,103,126
25
Dividends on Federal Home Loan Bank stock 227,360 155,256 198,006
Other interest income 27,697 28,409 30,040
--------------------------------------------
Total interest income 21,935,721 20,105,139 18,953,486
Interest expense:
Deposits (note 7) 7,103,375 7,348,202 6,187,961
Repurchase agreements 199,453 166,210 84,921
Borrowed funds 3,988,060 2,572,497 2,568,432
--------------------------------------------
Total interest expense 11,290,888 10,086,909 8,841,314
--------------------------------------------
Net interest income before provision for loan losses 10,644,833 10,018,230 10,112,172
Provision for loan losses (note 4) 614,427 638,860 690,634
--------------------------------------------
Net interest income after provision for loan losses 10,030,406 9,379,370 9,421,538
Noninterest income:
Fees and service charges on loans 194,020 201,504 204,990
Fees for other services to customers 657,705 615,658 534,608
Net securities gains (note 2) 171,080 231,344 49,045
Gain on trading securities 88,350 47,551 370,268
Gain on sales of loans (note 3) 201,418 251,597 160,982
Loan servicing fees 275,496 302,261 306,220
Other income 498,172 537,678 552,468
--------------------------------------------
Total noninterest income 2,086,241 2,187,593 2,178,581
NORTHEAST BANCORP AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
Years Ended June 30, 1997, 1996, and 1995
1997 1996 1995
------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits (note 17) $ 4,614,802 $ 4,687,554 $ 4,513,098
Occupancy expense (note 5) 783,434 756,975 647,073
Equipment expense (note 5) 893,605 863,105 785,670
FDIC insurance expense (note 11) 390,494 154,285 353,485
Other (notes 2 and 14) 3,036,002 3,074,369 2,793,921
--------------------------------------------
26
Total noninterest expense 9,718,337 9,536,288 9,093,247
--------------------------------------------
Income before income taxes 2,398,310 2,030,675 2,506,872
Income tax expense (note 15) 908,565 737,826 877,758
--------------------------------------------
Net income $ 1,489,745 $ 1,292,849 $ 1,629,114
============================================
Net income per common share (notes 12 and 17):
Primary earnings per share .89 .79 1.05
Fully diluted earnings per share .85 .76 .99
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1997, 1996 and 1995
Net Unrealized
Additional Losses on
Preferred Stock Common Paid-in Treasury Retained Available for
Series A and B Stock Capital Stock Earnings Sale Securities Total
--------------- ---------- ---------- --------- ----------- --------------- ------------
Balance at June 30, 1994 $ 1,999,980 $ 735,340 $6,701,343 $ -- $ 8,730,886 $ (438,023) $ 17,729,526
Net income -- -- -- -- 1,629,114 -- 1,629,114
Decrease in net unrealized losses
on available for sale securities -- -- -- -- -- 342,516 342,516
Issuance of common stock -- 102 2,091 -- -- -- 2,193
Dividends on preferred stock -- -- -- -- (140,000) -- (140,000)
Dividends on common stock at $.32
per share -- -- -- -- (175,175) -- (175,175)
--------------------------------------------------------------------------------------------
Balance at June 30, 1995 1,999,980 735,442 6,703,434 -- 10,044,825 (95,507) 19,388,174
Net income -- -- -- -- 1,292,849 -- 1,292,849
Common stock - warrants exercised -- 50,000 650,000 -- -- -- 700,000
Stock split in the form of a
dividend -- 597,743 -- -- (597,743) -- --
Increase in net unrealized losses
on available for sale securities -- -- -- -- -- (741,847) (741,847)
Treasury stock purchased -- -- -- (52,277) -- -- (52,277)
27
Issuance of common stock -- 765 10,793 -- -- -- 11,558
Stock options exercised -- 38,000 152,000 -- -- -- 190,000
Dividends on preferred stock -- -- -- -- (139,999) -- (139,999)
Dividends on common stock at $.32
per share -- -- -- -- (284,891) -- (284,891)
--------------------------------------------------------------------------------------------
Balance at June 30, 1996 1,999,980 1,421,950 7,516,227 (52,277) 10,315,041 (837,354) 20,363,567
Net income -- -- -- -- 1,489,745 -- 1,489,745
Issuance of common stock through
exercise of stock options and
purchase of treasury stock -- 20,000 83,450 (28,420) -- -- 75,030
Exercise of stock warrants -- 19,940 88,005 67,055 -- -- 175,000
Decrease in net unrealized losses
on available for sale securities -- -- -- -- -- 503,179 503,179
Treasury stock issued - employee
stock bonus -- -- (268) 13,642 -- -- 13,374
Issuance of common stock -- 1,019 12,468 -- -- -- 13,487
Dividends on preferred stock -- -- -- -- (139,997) -- (139,997)
Dividends on common stock at $.32
per share -- -- -- -- (397,805) -- (397,805)
--------------------------------------------------------------------------------------------
Balance at June 30, 1997 $ 1,999,980 $1,462,909 $7,699,882 $ -- $11,266,984 $ (334,175) $22,095,580
============================================================================================
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,489,745 $ 1,292,849 $ 1,629,114
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 614,427 638,860 690,634
Provision for losses on other real estate owned 39,000 94,711 107,173
Provision for losses on real estate held for investment 100,000 -- --
Treasury stock bonused to employees 13,374 -- --
Deferred income tax expense (benefit) (72,290) 42,236 93,143
Depreciation of premises and equipment and other 665,193 745,638 674,332
Goodwill amortization 296,374 308,913 235,098
Net gain on sale of available for sale securities (171,080) (231,344) (49,045)
Net gains on sale of loans (201,418) (251,597) (160,982)
28
Originations of loans held for sale (2,178,115) (11,585,640) (4,273,878)
Proceeds from sale of loans held for sale 2,430,823 11,781,652 4,325,745
Net change in trading account securities 172,621 (196,246) 171,696
Other (111,206) (52,288) (7,326)
Change in other assets and liabilities:
Increase in interest receivable (125,996) (209,848) (336,129)
Increase in other assets and liabilities (117,869) (110,294) (359,451)
--------------------------------------------
Net cash provided by operating activities 2,843,583 2,267,602 2,740,124
Cash flows from investing activities:
Proceeds from the sale of available for sale securities 12,377,154 16,858,706 12,173,773
Purchase of available for sale securities (12,129,135) (39,604,596) (2,439,155)
Proceeds from maturities and principal payments on available for sale
securities 3,256,713 2,778,278 906,210
Proceeds from maturities and principal payments on held to maturity
securities -- -- 1,645,454
Purchase of held to maturity securities -- -- (12,399,309)
Purchases of loans (25,425,642) -- --
Net increase in loans (10,910,942) (19,928) (12,541,411)
Additions to premises and equipment (1,043,176) (424,061) (1,025,057)
Proceeds from sale of investment in real estate -- 24,251 238,189
Purchase of investment in real estate and improvements (6,156) (40,068) (13,397)
Proceeds from sale of other real estate owned 519,871 681,386 638,156
(Purchase) sale of Federal Home Loan Bank stock (1,362,700) (506,200) 189,300
Cash received from acquisition of bank branches -- -- 25,547,199
--------------------------------------------
Net cash (used) provided by investing activities (34,724,013) (20,252,232) 12,919,952
NORTHEAST BANCORP AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 8,066,043 $ (3,826,275) $ (2,034,623)
Net increase in repurchase agreements 1,335,656 1,177,579 2,585,387
Dividends paid (537,802) (424,890) (315,175)
Treasury stock purchased (28,420) (52,277) --
Stock options exercised 103,450 190,000 --
Warrants exercised 175,000 700,000 --
Issuance of common stock 13,487 11,558 2,193
Net borrowings (payments) from (to) Federal Home Loan Bank 27,856,994 16,363,190 (10,256,198)
Principal payments on notes payable (203,581) (507,899) (510,115)
--------------------------------------------
29
Net cash provided (used) by financing activities 36,780,827 13,630,986 (10,528,531)
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,900,397 (4,353,644) 5,131,545
Cash and cash equivalents, beginning of year 13,873,947 18,227,591 13,096,046
--------------------------------------------
Cash and cash equivalents, end of year $ 18,774,344 $ 13,873,947 $ 18,227,591
--------------------------------------------
Supplemental schedule of cash flow information:
Interest paid $ 11,159,387 $ 10,103,852 $ 8,841,647
Income taxes paid 641,000 919,000 795,000
Supplemental schedule of noncash investing and financing activities:
Transfer from loans to other real estate owned $ 538,019 $ 387,468 $ 987,304
Transfer from other real estate owned to loans -- -- 382,718
Loans originated to finance the sales of other real estate owned -- 184,732 399,550
Transfer of securities into available for sale securities, at fair
value -- -- 20,371,960
Transfer of securities out of held to maturity securities, at
amortized cost -- -- (20,324,699)
Net change in valuation for unrealized losses on available for sale
securities 503,179 741,847 (295,255)
Net change in deferred taxes for unrealized losses on available for
sale securities 259,214 382,164 (176,446)
In connection with the acquisition of bank branches in 1995, the Company
assumed deposit liabilities (see note 16).
See accompanying notes.
NORTHEAST BANCORP AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of Northeast Bancorp and Subsidiary
(the Company) conform to generally accepted accounting principles and
general practice within the banking industry.
Merger
------
All financial information includes the results of Cushnoc Bank and Trust
Company for all periods presented prior to the merger on October 24, 1997
(See note 16). The merger was accounted for as a pooling of interests.
Cushnoc Bank and Trust Company had a fiscal year based on the twelve
30
months ending December 31. The financial information for Cushnoc Bank and
Trust Company has been included using the same fiscal year presentation
as Northeast Bancorp, which has a fiscal year based on the twelve months
ended June 30. The effect of the different fiscal years is not
significant to the supplemental consolidated financial statements. Upon
consummation of the merger, Cushnoc Bank and Trust Company was merged
into the Company's banking subsidiary, Northeast Bank, F.S.B.
Business
--------
Northeast Bancorp provides a full range of banking services to individual
and corporate customers throughout south central and western Maine
through its wholly owned subsidiary, Northeast Bank, F.S.B. The bank is
subject to competition from other financial institutions. The bank is
subject to the regulations of the Federal Deposit Insurance Corporation
(FDIC) and the Office of Thrift Supervision (OTS) and undergoes periodic
examinations by these agencies. Prior to July 1, 1996, the Company
conducted business as Bethel Bancorp.
Basis of Financial Statement Presentation
-----------------------------------------
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the balance sheet and
income and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowance for loan losses and the carrying value of real estate acquired
through foreclosure, management obtains independent appraisals for
significant properties.
A substantial portion (86%) of the Company's loans are secured by real
estate in the State of Maine. In addition, all of the real estate
acquired through foreclosure is located in the same market. Accordingly,
the ultimate collectibility of a substantial portion of the Company's
loan portfolio and the recovery of the carrying amount of real estate
acquired through foreclosure are susceptible to changes in market
conditions in Maine.
Principles of Consolidation
---------------------------
The accompanying supplemental consolidated financial statements include
the accounts of Northeast Bancorp, a savings and loan holding company,
and its wholly-owned subsidiary, Northeast Bank, F.S.B. (including the
bank's wholly-owned subsidiary, Northeast Financial Services, Inc.)
All significant intercompany transactions and balances have been
eliminated in consolidation.
31
Cash Equivalents
----------------
Cash equivalents consist of cash and due from banks, Federal Home Loan
Bank overnight deposits and interest bearing deposits. For purposes of
the statements of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less to be
cash equivalents. 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, 1997, the reserve balance was approximately $503,000.
Investments
-----------
Trading Account Securities
--------------------------
Trading account securities, consisting of equity securities purchased
with the intent to be subsequently sold to provide net securities
gains, are carried at market value. Realized and unrealized gains and
losses on trading account securities are recognized in the statements
of income as they occur. Transactions are accounted for as of the
trade date using the specific identification method.
Available for Sale Securities
-----------------------------
Equity securities, and debt securities which may be sold prior to
maturity, are classified as available for sale and are carried at
market value. Changes in market value, net of applicable income taxes,
are reported as a separate component of stockholders' equity. When a
decline in market value of a security is considered other than
temporary, the loss is charged to other expense in the supplemental
consolidated statements of income as a writedown. Premiums and
discounts are amortized and accreted over the term of the securities
on the level yield method adjusted for prepayments. Gains and losses
on the sale of securities are recognized at the time of the sale using
the specific identification method.
Federal Home Loan Bank Stock
----------------------------
Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale and Mortgage Banking Activities
---------------------------------------------------
Loans originated for sale are specifically identified and carried at the
lower of aggregate cost or estimated market value, estimated based on bid
quotations from loan dealers.
Effective July 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 122, Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement No. 65.
Statement No. 122 requires that the Company recognize as separate assets
the rights to service mortgage loans for others, and requires the
assessment of capitalized mortgage servicing rights for impairment based
32
on the current fair value of those rights. This assessment includes
servicing rights capitalized prior to adoption of Statement No. 122. As
required by Statement No. 122, the Company capitalizes mortgage servicing
rights at their allocated cost based on the relative fair values upon the
sale of the related loans. The impact of adoption of Statement No. 122
was not material to the Company's financial position, liquidity or
results of operations.
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The impact of adoption of Statement No.
125 was not material to the Company's financial position, liquidity or
results of operations.
The Company's mortgage servicing rights asset at June 30, 1997 and 1996
is not material and is included in other assets in the supplemental
consolidated statements of financial position.
Gains and losses on sales of mortgage loans are determined using the
specific identification method and recorded as gain on sales of mortgage
loans in the supplemental consolidated statements of income. The gains
and losses resulting from the sales of loans with servicing retained are
adjusted to recognize the present value of future servicing fee income
over the estimated lives of the related loans.
Mortgage servicing rights are amortized on an accelerated method over the
estimated weighted average life of the loans. Amortization is recorded as
a charge against loan servicing fee income. The Company's assumptions
with respect to prepayments, which affect the estimated average life of
the loans, are adjusted periodically to reflect current circumstances.
The Company evaluates the estimated life of its servicing portfolio based
on data which is disaggregated to reflect note rate, type and term on the
underlying loans.
Mortgage servicing fees received from investors for servicing their loan
portfolios are recorded as loan servicing fees income when received. Loan
servicing costs are charged to noninterest expenses when incurred.
Loans
-----
Loans are carried at the principal amounts outstanding plus premiums paid
reduced by partial charge-offs and net deferred loan fees. 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. 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.
33
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the
allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are
credited to the allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses based on evaluations of collectibility and
prior loss experience. The evaluation takes into consideration such
factors as changes in the nature and volume of the portfolio, overall
portfolio quality, specific problem loans, and current and anticipated
economic conditions that may affect the borrowers' ability to repay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
changing economic conditions and the economic prospects of the borrowers
might necessitate future additions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance
based on their judgments about information available to them at the time
of their examination.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line and accelerated methods
over the estimated useful lives of the assets or the term of the lease,
if shorter. Maintenance and repairs are charged to current expense as
incurred and the cost of major renewals and betterments are capitalized.
Long-lived assets are evaluated periodically for other-than-temporary
impairment. An assessment of recoverability is performed prior to any
writedown of the asset. If circumstances suggest that their value may be
permanently impaired, then an expense would be charged in the 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 income in the period that includes the enactment date.
Other Real Estate Owned
-----------------------
Other real estate owned is comprised of (1) properties or other assets
acquired through foreclosure proceedings, or acceptance of a deed or
34
title in lieu of foreclosure and (2) other assets repossessed in
connection with non-real estate loans. Other real estate owned is carried
at the lower of cost or fair value of the collateral less estimated
selling expenses. Losses arising from the acquisition of such properties
are charged against the allowance for loan losses. Operating expenses and
any subsequent provisions to reduce the carrying value are charged to
current period earnings. Gains and losses upon disposition are reflected
in earnings as realized.
Real Estate Held for Investment
-------------------------------
Real estate properties held for investment are carried at the lower of
cost, including costs of improvements and amenities incurred subsequent
to acquisition, or fair value. Costs relating to development and
improvement of property are capitalized, whereas costs relating to
holding property are expensed. The Company recorded an allowance for
losses of $100,000 during the year ended June 30, 1997 in accordance with
the provisions of FASB Statement No. 121. The provision has been included
as a reduction to other income on the statement of income.
Goodwill
--------
Goodwill arising from acquisitions is being amortized on a straight-line
basis over ten to fifteen years. Goodwill is reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the asset.
Advertising Expense
-------------------
Advertising costs are expensed as incurred. Advertising costs were
approximately $187,000, $78,000 and $83,000, for the years ended June 30,
1997, 1996 and 1995, respectively.
Reclassification
----------------
Certain prior year accounts and balances in the supplemental consolidated
financial statements have been reclassified to conform to the current
year presentation.
2. Available for Sale Securities
-----------------------------
A summary of the cost and approximate fair values of available for sale
securities at June 30, 1997 and 1996 follows:
1997 1996
------------------------- -------------------------
Fair Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
35
Debt securities issued by the U.S. Treasury and
other U.S. Government corporations and agencies $ 2,948,527 $ 2,905,402 $ 2,943,161 $ 2,870,740
Corporate bonds 259,749 252,805 260,919 250,278
Equity securities 896,739 850,582 462,167 440,330
Mortgage-backed securities 25,211,935 24,801,836 28,984,355 27,820,536
-----------------------------------------------------
$29,316,950 $28,810,625 $32,650,602 $31,381,884
=====================================================
The gross unrealized gains and unrealized losses on available for sale
securities are as follows:
1997 1996
----------------------- -----------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
Debt securities issued by the U. S. Treasury and
other U. S. Government corporations and agencies $ -- $ 43,125 $ -- $ 72,421
Corporate bonds -- 6,944 -- 10,641
Equity securities 28,965 75,122 5,321 27,158
Mortgage-backed securities 37,503 447,602 17,664 1,181,483
------------------------------------------------
$ 66,468 $572,793 $ 22,985 $1,291,703
================================================
At June 30, 1997, investment securities with a market value of
approximately $9,161,000 were pledged as collateral to secure outstanding
repurchase agreements.
At June 30, 1997 and 1996, included in net unrealized losses on available
for sale securities as a reduction to stockholders' equity are net
unrealized losses of $506,325 and $1,268,718, respectively, net of the
deferred tax effect of $172,150 and $431,364, respectively.
The cost and fair values of available for sale securities at June 30,
1997 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.
Fair
Cost Value
----------- -----------
36
Due in one year $ 398,829 $ 398,829
Due after one year through five years 1,403,991 1,396,491
Due after five years through ten years 405,456 398,512
Due after ten years 1,000,000 964,375
--------------------------
3,208,276 3,158,207
Mortgage-backed securities (including securities
with interest rates ranging from 5.15% to 9.0%
maturing September 2003 to January 2027) 25,211,935 24,801,836
Equity securities 896,739 850,582
--------------------------
$29,316,950 $28,810,625
==========================
The realized gains and losses on available for sale securities for the
year ended June 30, 1997 were $171,205 and $125, respectively, for the
year ended June 30, 1996 were $248,542 and $17,198, respectively, and for
the year ended June 30, 1995 were $280,257 and $231,212, respectively.
Based on management's assessment of available for sale securities, there
has been more than a temporary decline in fair value of certain
securities. At June 30, 1997, 1996 and 1995, write-downs of available for
sale securities were $110,000, $93,819 and $0, respectively, and are
included in other expense in the statements of income.
During 1995, the Company purchased $12,399,000 in securities it
classified as held to maturity, since at the time of acquisition Company
management had the intention, and the Company had the ability, to hold
such securities until maturity. In the last quarter of fiscal 1995, as a
result of its planning process and changes in market conditions, Company
management determined that it no longer possessed the intent to hold such
securities to maturity. Consequently, the Company transferred its entire
held to maturity portfolio, with an aggregate cost of $20,325,000 and an
aggregate fair value of $20,372,000 (including unrealized gains and
losses of $191,000 and $144,000, respectively) to available for sale. The
Company subsequently sold selected of the aforementioned securities with
an aggregate cost of $11,900,000 and realized gains of $273,000 and
realized losses of $225,000. The Company's decision not to hold these
securities to maturity does not satisfy the limited criteria of Financial
Accounting Standards No. 115 which specifies circumstances in which it is
permissible to sell or transfer held to maturity securities.
Consequently, the Company will, for the foreseeable future, classify its
securities portfolio as available for sale, or trading.
3. Loans Held for Sale
-------------------
A summary of the carrying value and market value of loans held for sale
at June 30, 1997 and 1996 follows:
37
June 30, 1997 June 30, 1996
------------------- -------------------
Carrying Market Carrying Market
Value Value Value Value
-------- -------- -------- --------
Real estate mortgages $240,000 $242,400 $448,475 $452,960
=========================================
At June 30, 1997 and 1996, gross unrealized gains on loans held for sale
were $2,400 and $4,485, respectively, and there were no unrealized
losses.
4. Loans
-----
The Company's lending activities are conducted in south central and
western Maine. 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. Most loans granted by
the Company are collateralized by real estate. The ability and
willingness of residential and commercial real estate, commercial and
construction loan borrowers to honor their repayment commitments is
generally dependent on the health of the real estate economic sector in
the borrowers' geographic area and the general economy.
In the ordinary course of business, the Company has loan transactions
with its officers, directors and their associates and affiliated
companies ("related parties") at substantially the same terms as those
prevailing at the time for comparable transactions with others. Such
loans amounted to $2,165,044 and $2,665,284 at June 30, 1997 and 1996,
respectively. New loans granted to related parties in 1997 totaled
$413,169; payments and reductions amounted to $913,409. In 1996, new
loans granted to related parties totaled $478,166; payments and
reductions amounted to $813,351.
Activity in the allowance for loan losses was as follows:
Years Ended June 30,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Balance at beginning of year $2,760,872 $2,661,246 $2,728,491
Provision charged to operating expenses 614,427 638,860 690,634
Loans charged off (772,250) (620,301) (813,890)
Recoveries on loans charged off 138,760 81,067 56,011
------------------------------------
38
Net loans charged off (633,490) (539,234) (757,879)
------------------------------------
Balance at end of year $2,741,809 $2,760,872 $2,661,246
====================================
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. Except for certain restructured loans, impaired loans are loans
that are on nonaccrual status. 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 1997 and 1996 allowance for loan losses related to loans that are
identified as impaired includes impairment reserves, which are based on
discounted cash flows using the loan's effective interest rate, or the
fair value of the collateral for collateral-dependent loans, or the
observable market price of the impaired loan. When foreclosure is
probable, impairment is measured based on the fair value of the
collateral. Loans that experience insignificant payment delays (less than
60 days) and insignificant shortfalls in payment amounts (less than 10%)
generally are not classified as impaired, as well as, commercial loans
with balances less than $25,000. 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. A loan is classified as an
insubstance foreclosure when the Company has taken possession of the
collateral, regardless of whether formal foreclosure proceedings take
place.
At June 30, 1997, total impaired loans were $1,661,698 of which $844,457
had related allowances of $369,474. During the year ended June 30, 1997,
the income recognized related to impaired loans was $50,690 and the
average balance of outstanding impaired loans was $1,330,983. At June 30,
1996, total impaired loans were $1,530,650 of which $1,063,720 had
related allowances of $499,200. During the year ended June 30, 1996, the
income recognized related to impaired loans was $87,128 and the average
balance of outstanding impaired loans was $1,799,087. The Company
recognizes interest on impaired loans on a cash basis when the ability to
collect the principal balance is not in doubt; otherwise, cash received
is applied to the principal balance of the loan.
Loans on nonaccrual status, including impaired loans described above, at
June 30, 1997 and 1996 totaled approximately $2,881,000 and $3,182,000,
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, 1997, 1996 and 1995, totaled approximately
$203,000, $251,000 and $277,000, 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.
39
The Company was servicing for others, mortgage loans originated and sold
of approximately $34,683,000, $39,940,000 and $32,560,000 at June 30,
1997, 1996 and 1995, respectively. In the past, the Company purchased
loan servicing rights from another institution. The balance of the loans
serviced under this agreement was approximately $7,826,000, $9,676,000
and $12,983,000 at June 30, 1997, 1996 and 1995, respectively.
5. Premises and Equipment
----------------------
Premises and equipment at June 30, 1997 and 1996 are summarized as
follows:
1997 1996
---------- ----------
Land $1,044,109 $1,044,109
Buildings 2,573,698 2,605,541
Leasehold and building improvements 1,061,448 690,331
Furniture, fixtures and equipment 4,180,570 3,658,431
------------------------
8,859,825 7,998,412
Less accumulated depreciation 4,085,264 3,555,099
------------------------
Net premises and equipment $4,774,561 $4,443,313
========================
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense, was $660,871, $741,180 and $667,596 for
the years ended June 30, 1997, 1996 and 1995, respectively.
6. Other Real Estate Owned
-----------------------
The following table summarizes the composition of other real estate owned
at June 30:
1997 1996
-------- --------
Real estate properties acquired in settlement of loans $614,046 $684,626
Less allowance for losses 50,839 100,000
--------------------
$563,207 $584,626
====================
40
Activity in the allowance for losses on other real estate owned was as
follows:
1997 1996 1995
-------- -------- --------
Balance at beginning of year $100,000 $ 5,289 $ 49,405
Provision for losses on other real estate owned 39,000 94,711 107,173
Other real estate owned write-downs (88,161) -- (151,289)
--------------------------------
Balance at end of year $ 50,839 $100,000 $ 5,289
================================
7. Deposits
--------
Deposits at June 30 are summarized as follows:
Weighted
Average Rate 1997 1996
at June 30, ---------------------- ----------------------
1997 Amount Percent Amount Percent
------------ ------------ ------- ------------ -------
Demand 0.00% $ 13,784,339 8.0% $ 13,061,841 7.9%
NOW 1.46 14,368,105 8.3 16,242,694 9.9
Money market 3.37 15,236,189 8.8 15,306,742 9.3
Regular savings 2.67 22,483,976 13.0 23,493,853 14.2
Certificates of deposit:
1.00 - 3.75% 1.37 328,940 .2 268,988 .2
3.76 - 5.75% 5.35 56,951,216 32.9 58,580,972 35.5
5.76 - 7.75% 6.24 49,635,723 28.7 36,782,841 22.3
7.76 - 9.75% 8.75 132,798 .1 1,117,312 .7
------------------------------------------------------------
4.33% $172,921,286 100.0% $164,855,243 100.0%
============================================================
At June 30, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 1999 2000 2001 2002 Thereafter
----------- ----------- ---------- ---------- ---------- ----------
41
1.00 - 3.75% $ 297,692 $ 6,992 $ 24,256 $ -- $ -- $ --
3.76 - 5.75% 49,385,999 6,314,562 742,704 422,665 75,243 10,043
5.76 - 7.75% 28,006,332 10,192,651 4,813,940 2,028,549 4,594,251 --
7.76 - 9.75% 131,183 1,615 -- -- -- --
Interest expense on deposits for the years ended June 30, 1997, 1996 and
1995 is summarized as follows:
1997 1996 1995
---------- ---------- ----------
NOW $ 216,437 $ 319,899 $ 302,281
Money market 536,623 555,919 590,110
Regular savings 592,148 642,216 658,995
Certificates of deposit 5,758,167 5,830,168 4,636,575
--------------------------------------
$7,103,375 $7,348,202 $6,187,961
======================================
8. Federal Home Loan Bank Borrowings
---------------------------------
A summary of borrowings from the Federal Home Loan Bank are as follows:
June 30, 1997
-------------------------------------------
Principal Interest Maturity
Amounts Rates Dates
----------- ------------- --------
$55,458,706 4.97% - 6.39% 1998
15,606,482 5.64% - 6.20% 1999
3,000,000 6.27% 2000
273,080 6.40% 2001
1,441,827 6.21% - 6.49% 2002
740,762 6.61% - 6.64% 2003
1,973,614 6.36% - 6.67% 2004
2,000,000 6.65% 2005
-----------
$80,494,471
===========
June 30, 1996
-------------------------------------------
42
Principal Interest Maturity
Amounts Rates Dates
----------- ------------- --------
$31,400,000 5.17% - 8.30% 1997
5,573,000 4.97% - 6.86% 1998
14,500,000 5.64% - 6.35% 1999
325,000 6.40% 2001
839,477 6.61% - 6.64% 2003
-----------
$52,637,477
===========
Mortgages, free of liens, pledges and encumbrances, investment securities
not otherwise pledged, and the Company's Federal Home Loan Bank stock
equal to at least 200% of the borrowings from that bank have been pledged
to secure these borrowings. The Company is required to own stock of the
Federal Home Loan Bank of Boston in order to borrow from the Federal Home
Loan Bank. One of the Federal Home Loan Bank borrowings held at June 30,
1997 is adjustable and, therefore, the rate is subject to change.
9. Notes Payable
-------------
Notes payable at June 30, 1997 and 1996 primarily consisted of a $2.5
million loan from an unrelated financial institution for the acquisition
of a bank. The note is payable in eighteen equal quarterly principal
payments of $76,389. Interest is payable monthly at 8%. The Company has
pledged Northeast Bank F.S.B. common stock and a $1 million key man life
insurance policy as collateral for the loan.
The loan agreement contains certain covenants which limits capital
expenditures of the Company and the amount of nonperforming loans and
requires minimum loan loss reserves, capital, return on assets, and the
Company is required to obtain approval from the lender before the Company
can commit to a merger or consolidation with another entity. At June 30,
1997, the Company complied with these covenants with the exception of the
merger and consolidation covenant which was approved by the lender.
10. Securities Sold Under Repurchase Agreements
-------------------------------------------
During 1997 and 1996, the Company sold securities under agreements to
repurchase. The weighted average interest rate on repurchase agreements
was 4.25% at June 30, 1997 and 1996. These borrowings, which were
scheduled to mature within 180 days, were collateralized by FHLMC and
GNMA securities with a market value of $9,161,000 and amortized cost of
$9,300,000 at June 30, 1997, and a market value of $5,689,000 and
amortized cost of $5,875,000 at June 30, 1996. The repurchase agreements
averaged $4,566,000 and $3,516,000 during the years ended June 30, 1997
and 1996, respectively. The maximum amount outstanding at any month-end
during 1997 and 1996 was $5,214,000 and $4,201,000, respectively.
Securities sold under these agreements were under the control of the
Company during 1997 and 1996.
43
11. Regulatory Capital and Other Matters
------------------------------------
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company'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."
Management believes that as of June 30, 1997 and June 30, 1996, the
Company meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the OTS
categorized the Company as well capitalized. There are no conditions or
events since that notification that management believes have changed the
Company's category. The following is a summary of the actual capital
amounts and ratios, as of June 30, 1997 and June 30, 1996, compared to
the OTS minimum bank capital adequacy requirements and their requirements
for classification as a well capitalized institution.
For
Minimum Classification As
Actual Capital Adequacy Well Capitalized
--------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- --------- ----- --------- ------
(Dollars in Thousands)
As of June 30, 1997:
Tangible capital:
Northeast Bancorp $18,180 6.4% >=$ 4,232 >=1.5% >=$ 4,232 >= 1.5%
Northeast Bank 19,930 7.1% >= 4,226 >=1.5% >= 4,226 >= 1.5%
Core capital:
Northeast Bancorp $18,180 6.4% >=$ 8,463 >=3.0% >=$14,106 >= 5.0%
Northeast Bank 19,930 7.1% >= 8,452 >=3.0% >= 14,087 >= 5.0%
Risked-based capital (total capital):
Northeast Bancorp $19,491 11.1% >=$14,022 >=8.0% >=$17,528 >=10.0%
Northeast Bank 21,237 12.2% >= 13,953 >=8.0% >= 17,442 >=10.0%
44
As of June 30, 1996:
Tangible capital:
Northeast Bancorp $16,629 6.8% >=$ 3,642 >=1.5% >=$ 3,642 >= 1.5%
Northeast Bank 17,600 7.3% >= 3,628 >=1.5% >= 3,628 >= 1.5%
Core capital:
Northeast Bancorp $16,629 6.8% >=$ 7,284 >=3.0% >=$12,140 >= 5.0%
Northeast Bank 17,600 7.3% >= 7,255 >=3.0% >= 12,092 >= 5.0%
Risked-based capital (total capital):
Northeast Bancorp $17,803 12.1% >=$11,792 >=8.0% >=$14,741 >=10.0%
Northeast Bank 18,774 12.8% >= 11,716 >=8.0% >= 14,645 >=10.0%
The Company is also subject to certain capital requirements established
by the FDIC. At June 30, 1997 and June 30, 1996, the Company's capital
exceeded the regulatory requirements.
The Company may not declare or pay a cash dividend on, or repurchase, any
of its capital stock if the effect thereof would cause the capital of the
Company to be reduced below the capital requirements imposed by the OTS.
In September of 1996, Congress enacted comprehensive legislation amending
the FDIC BIF-SAIF deposit insurance assessments on savings and loan
institution deposits. The legislation imposed a one-time assessment on
institutions holding SAIF deposits at March 31, 1995. As a result of this
legislation, the Company incurred a special assessment of approximately
$297,000 during 1997. This assessment is included in FDIC insurance
expense in the 1997 supplemental consolidated statement of income.
12. Earnings Per Share
------------------
Earnings per share have been computed on the basis of the weighted
average number of shares of common stock outstanding. The weighted
average number of shares outstanding were: 1,517,000, 1,458,000 and
1,415,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
Common stock equivalents and potentially dilutive securities were
considered in the calculations of weighted average shares outstanding,
since their effect was dilutive. Preferred stock dividends have been
deducted from net income in the calculation of earnings per share for
each of the years.
In February 1997, the FASB issued Statement No. 128, Earnings Per Share.
This Statement requires disclosure of "basic" and "diluted" earnings per
share. The Statement is required to be implemented retroactively in the
second quarter of fiscal year 1998. Management has not determined the
impact of the adoption of Statement No. 128.
13. Preferred Stock
---------------
The preferred stock, Series A and B, may be converted to common stock on
a two to one ratio at the option of the holder and carries voting rights.
Dividends are to be paid to the holder of the preferred stock quarterly
45
at a rate equal to interest at prime rate less two percent but in no
event less than 7% per annum. The Series B preferred stock was issued
with warrants attached for a term of seven years to purchase shares of
the Company's common stock at $7 per share. During 1997 25,000 such
warrants were exercised for a total of $175,000. At June 30, 1997, there
remains outstanding warrants to purchase 108,764 shares of the Company's
common stock which expire May 1999.
14. Other Expenses
--------------
Other expenses includes the following for the years ended June 30, 1997,
1996 and 1995:
1997 1996 1995
---------- ---------- ----------
Professional fees $ 398,704 $ 350,214 $ 343,024
Insurance 125,670 133,734 128,523
Supplies 263,648 241,403 282,991
Real estate owned expenses 64,907 87,442 99,272
Provision for losses on OREO 39,000 94,711 107,173
Goodwill amortization 296,374 308,913 235,098
Write-down on securities 110,000 93,819 --
Other 1,737,699 1,764,133 1,597,840
--------------------------------------
$3,036,002 $3,074,369 $2,793,921
======================================
15. Income Taxes
------------
The current and deferred components of income tax expense (benefit) were
as follows for the years ended June 30, 1997, 1996 and 1995:
1997 1996 1995
-------- -------- --------
Federal:
Current $942,244 $664,655 $752,258
Deferred (72,290) 42,236 93,143
--------------------------------
869,954 706,891 845,401
State and local - current 38,611 30,935 32,357
--------------------------------
46
$908,565 $737,826 $877,758
================================
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, 1997, 1996 and 1995:
1997 1996 1995
----------------- ----------------- -----------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ------ -------- ------ -------- ------
Expected income tax expense at federal tax rate $815,425 34.0% $690,430 34.0% $852,336 34.0%
State tax, net of federal tax benefit 25,483 1.1 20,417 1.0 21,562 .9
Amortization of goodwill 42,192 1.8 42,192 2.1 34,671 1.4
Dividend received deduction (6,873) (.3) (6,903) (.3) (5,333) (.2)
Low income/rehabilitation credit (20,000) (.8) (20,000) (1.0) (20,000) (.8)
Other 52,338 2.1 11,690 .5 (5,478) (.3)
--------------------------------------------------------
$908,565 37.9% $737,826 36.3% $877,758 35.0%
========================================================
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1997 and 1996 are presented below:
1997 1996
---------- ----------
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 890,000 $ 698,000
Deferred gain on loan sales 67,000 59,000
Interest on nonperforming loans 60,000 77,000
Difference in tax and financial statement bases of investments 241,000 492,000
Difference in tax and financial statement amortization of goodwill 73,000 48,000
Other 63,000 82,000
------------------------
Total deferred tax assets 1,394,000 1,456,000
Deferred tax liabilities:
Loan loss reserve - tax (73,000) (61,000)
Other (32,000) (35,000)
------------------------
47
Total deferred tax liabilities (105,000) (96,000)
------------------------
Net deferred tax assets, included in other assets $1,289,000 $1,360,000
========================
The Company has sufficient refundable taxes paid in available carryback
years to fully realize its recorded deferred tax asset of $1,394,000.
Accordingly, no valuation allowance has been recorded at June 30, 1997
and 1996.
During 1997, as a result of an IRS examination and other factors, the
Company's deferred tax asset was increased on a net basis by $116,000,
with an offset to current taxes payable.
In August 1996, the provisions repealing the then current thrift bad debt
rules were passed by Congress. The new rules eliminate the 8% of taxable
income method for deducting additions to the tax bad debt reserves for
all thrifts for tax years beginning after December 31, 1995. These rules
also require that all thrift institutions recapture all or a portion of
their tax bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Company has previously recorded a
deferred tax liability equal to the tax bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax
expense.
The unrecaptured base year reserves will not be subject to recapture as
long as the Company continues to carry on the business of banking. In
addition, the balance of the pre-1988 tax bad debt reserves continue to
be subject to provisions of present law that require recapture in the
case of certain excess distributions to stockholders. For federal income
tax purposes, the Company has designated approximately $2,400,000 of net
worth as a reserve for tax bad debts on loans. The use of this amount for
purposes other than to absorb losses on loans would result in taxable
income and financial statement tax expense at the then current tax rate.
16. Mergers and Acquisitions
------------------------
Merger of Bank
--------------
Effective October 24, 1997, the Company issued approximately 188,000
shares of its common stock for all the outstanding common stock of
Cushnoc Bank and Trust Company, of Augusta, Maine. The Cushnoc Bank and
Trust Company shareholders received 2.089 shares of the Company's common
stock for each share of Cushnoc Bank and Trust Company's common stock.
The merger qualified as a tax-free reorganization and was accounted for
as a pooling of interests. Accordingly, the Company's supplemental
consolidated financial statements were restated for all periods prior to
the business combination to include the results of operations, financial
positions and cash flows of Cushnoc Bank and Trust Company. No
adjustments were necessary to conform Cushnoc Bank and Trust Company's
methods of accounting to the methods used by the Company. There were no
significant intercompany transactions prior to consummation of the
merger.
48
The results of operations previously reported by the separate companies
and the combined amounts presented in the accompanying supplemental
consolidated financial statements are summarized below:
Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
Interest Income:
Northeast Bancorp $20,029,140 $17,994,862 $16,922,925
Cushnoc Bank 1,906,581 2,110,277 2,030,561
---------------------------------------------
Combined $21,935,721 $20,105,139 $18,953,486
=============================================
Net Income (Loss):
Northeast Bancorp $ 1,507,103 $ 1,193,420 $ 1,489,381
Cushnoc Bank (17,358) 99,429 139,733
---------------------------------------------
Combined $ 1,489,745 $ 1,292,849 $ 1,629,114
=============================================
Acquisition of Bank Branches
----------------------------
During 1995, the Company acquired four branches from Key Bank of Maine.
The total deposits assumed were $27,749,000. The premium paid to Key Bank
for these deposits was $1,590,228. In addition to the assumed deposits,
the Company acquired real estate, buildings and furniture totalling
$498,500 and other miscellaneous assets and liabilities which are
immaterial. The excess of cost over the net assets acquired is being
amortized over 10 years. The acquisition was accounted for using purchase
accounting.
17. Employee Benefit Plans
----------------------
Profit Sharing Plan
-------------------
The Company has a profit sharing plan which covers substantially all
full-time employees. Contributions and costs are determined as a percent
of each covered employee's salary and are at the Board of Directors
discretion. Expenses for the profit sharing plan for the years ended June
30, 1997, 1996 and 1995 were $130,000, $99,000 and $76,000, respectively.
401(k) Plan
-----------
49
The Company offers a contributory 401(k) plan which is available to all
full-time salaried and hourly-paid employees who are regularly scheduled
to work 1,000 hours or more in a Plan year, have attained age 21, and
have completed one year of employment. Employees may contribute between
1% and 15% of their base compensation to which the Company will match 50%
up to the first 3% contributed. For the years ended June 30, 1997, 1996
and 1995, the Company contributed approximately $38,300, $36,800 and
$30,800, respectively.
Stock Option Plans
------------------
The Company adopted Stock Option Plans in 1987, 1989 and 1992. Both
"incentive stock options" and "nonqualified stock options" may be granted
pursuant to the Option Plans. Under the Option Plans, incentive stock
options may only be granted at the fair market value to employees of the
Company. In the case of nonqualified stock options, which may be granted
to employees and nonemployee directors, the difference between the
exercise price and the fair market value of the common stock on the date
of exercise will be a tax deductible expense to the Company. All options
granted under the Option Plans will be required to have an exercise price
per share equal to at least the fair market value of the share of common
stock on the date the option is granted. Options immediately vest upon
being granted. The options are exercisable for a maximum of ten years
after the options are granted in the case of all incentive stock options,
three years for nonqualified stock options in the 1987 plan and five
years for nonqualified stock options in the 1989 and 1992 plans.
In accordance with the Stock Option Plans, a total of 236,000 shares of
unissued common stock are reserved for issuance pursuant to incentive
stock options and 60,000 shares of unissued common stock are reserved for
issuance pursuant to nonqualified stock options.
A summary of option activity for the years ended June 30 follows. There
was no activity related to the non-qualified plan in 1997, 1996 and 1995,
nor were any such options outstanding:
1997 1996 1995
--------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- ------- --------- -------- ---------
Outstanding at beginning of year 93,000 $ 7.66 136,000 $ 7.05 95,000 $ 5.24
Granted 15,000 12.50 -- -- 45,000 11.25
Exercised (20,000) 5.17 (38,000) 5.00 -- --
Forfeited (1,000) 12.50 (5,000) 11.25 (4,000) 11.25
--------------------------------------------------------------------
Outstanding at end of year 87,000 $ 9.02 93,000 $ 7.66 136,000 $ 7.05
====================================================================
Options exercisable at year end 87,000 $ 9.02 93,000 $ 7.66 136,000 $ 7.05
50
The following table summarizes information about stock options
outstanding at June 30, 1997:
Options Outstanding
--------------------------------------------------------
Number Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices June 30, 1997 Contractual Life Exercise Price
---------------- -------------- ---------------- ----------------
$ 5.37 to $ 5.69 37,000 2.0 years $ 5.52
$11.25 to $13.63 50,000 8.0 11.62
------
$ 5.37 to $13.63 87,000 6.0 9.02
======
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which became effective on July 1, 1996 for the
Company. This Statement establishes a fair value based method of
accounting for stock-based compensation plans under which compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period.
The per share weighted average fair value of stock options granted during
1997 was $3.15 on the date of the grants using the Black Scholes
option-pricing model as a valuation technique with the following average
assumptions: expected dividend yield, 2.21%; risk-free interest rate,
6.45%; expected life, 8 years; and expected volatility, 10.84%.
Statement No. 123 allows the Company to continue to measure compensation
cost for such plans under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. Under APB Opinion No. 25,
no compensation cost is recorded if, at the grant date, the exercise
price of the options is equal to the fair market value of the Company's
common stock. The Company has elected to continue to follow the
accounting under APB Opinion No. 25 and, accordingly, no cost has been
recognized for its stock options in the financial statements. Had the
Company determined cost based on the fair value at the grant date for its
stock options under Statement No. 123, the Company's net income and
earnings per share for the year ended June 30, 1997 would have been
reduced to the pro forma amounts indicated below.
Earnings Per Share
Net --------------------------
Income Primary Fully Diluted
---------- ------- --------------
As reported $1,489,745 $ 0.89 $ 0.85
Pro forma $1,462,953 $ 0.87 $ 0.83
51
The pro forma amounts reflect only stock options granted in 1997.
Therefore, the full impact of calculating the cost for stock options
under Statement No. 123 is not reflected in the pro forma amounts
presented above because the cost for options granted prior to July 1,
1995 is not considered under the requirements of Statement No. 123.
Stock Purchase Plan
-------------------
The Company has a stock purchase plan which covers substantially all
full-time employees with one year of service. Offerings under the Plan
are made quarterly at the market value on the offering termination date.
The maximum number of shares which may be granted under the plan is
104,000 shares.
18. 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 supplemental 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:
1997 1996
---------- -----------
Commitments to originate loans:
Residential real estate mortgages $2,404,000 $ 5,286,000
Commercial real estate mortgages, including
multi-family residential real estate 2,773,000 4,091,000
Commercial business loans 1,068,000 1,565,000
-------------------------
6,245,000 10,942,000
Unused lines of credit 9,999,000 7,213,000
Standby letters of credit 491,000 357,000
Unadvanced portions of construction loans 1,077,000 2,244,000
52
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are issued to support private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Derivative Financial Instruments
--------------------------------
The Company has only limited involvement with derivative financial
instruments and they are used for trading purposes. The derivative
financial instruments used by the Company are covered call and put
contracts on its equity securities portfolio. Gains and losses from
entering into these types of contracts have been immaterial to the
results of operations of the Company. The total value of securities under
call and put contracts at any one time is immaterial to the Company's
financial position, liquidity, or results of operations.
Legal Proceedings
-----------------
The Company and its subsidiary are parties to litigation and claims
arising in the normal course of business. Management believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the Company's supplemental consolidated financial position.
Lease Obligations
-----------------
The Company leases certain properties and equipment used in operations
under terms of operating leases which include renewal options. Rental
expense under these leases approximated $246,000, $167,000 and $161,000
for the years ended June 30, 1997, 1996 and 1995, respectively.
Approximate minimum lease payments over the remaining terms of the leases
at June 30, 1997 are as follows:
1998 $ 322,000
1999 324,000
2000 162,000
53
2001 132,000
2002 132,000
2003 and after 612,000
----------
$1,684,000
==========
19. Condensed Parent Information
----------------------------
Condensed financial statements for Northeast Bancorp at June 30, 1997 and
1996 and for each of the years in the three year period ended June 30,
1997 are presented below.
Balance Sheets
--------------
June 30,
--------------------------
1997 1996
----------- -----------
Assets
------
Cash and due from banks $ 818,965 $ 1,235,116
Investment in subsidiary 21,029,151 18,768,390
Premises and equipment, net 376,012 625,632
Goodwill, net 815,793 917,766
Other assets 367,118 385,848
--------------------------
Total assets $23,407,039 $21,932,752
==========================
Liabilities and Stockholders' Equity
------------------------------------
Note payable $ 1,298,611 $ 1,500,000
Other liabilities 12,848 69,185
--------------------------
1,311,459 1,569,185
Stockholders' equity 22,095,580 20,363,567
--------------------------
Total liabilities and stockholders' equity $23,407,039 $21,932,752
==========================
Statements of Income
--------------------
54
Years Ended June 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Income:
Dividends from banking subsidiary $ -- $1,436,000 $ --
Management fees charged to subsidiary -- 2,119,992 1,673,179
Other income 16,232 25,100 30,083
--------------------------------------
Total income 16,232 3,581,092 1,703,262
Expenses:
Amortization expense 101,973 114,513 102,939
Interest on note payable 112,753 176,140 205,869
Salaries and benefits -- 1,326,271 1,318,246
Occupancy expense 65,257 140,065 125,289
Equipment expense -- 179,977 159,161
General and administrative expenses 86,457 422,411 383,980
--------------------------------------
Total expenses 366,440 2,359,377 2,295,484
--------------------------------------
Income (loss) before income tax benefit, and equity
in undistributed net income of subsidiary (350,208) 1,221,715 (592,222)
Income tax benefit 82,371 31,771 166,182
--------------------------------------
Income (loss) before equity in undistributed net
income of subsidiary (267,837) 1,253,486 (426,040)
Equity in undistributed net income of subsidiary 1,757,582 39,363 2,055,154
--------------------------------------
Net income $1,489,745 $1,292,849 $1,629,114
======================================
Statements of Cash Flows
------------------------
Years Ended June 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net income $1,489,745 $1,292,849 $1,629,114
55
Adjustments to reconcile net income to net cash provided
(used) by operations:
Depreciation and amortization 114,775 253,569 208,003
Treasury stock bonused 13,374 -- --
Undistributed earnings of subsidiary (1,757,582) (39,363) (2,055,154)
Decrease (increase) in other assets 17,467 (72,132) 24,182
(Decrease) increase in other liabilities (56,337) (70,375) 23,242
--------------------------------------
Net cash (used) provided by operating activities (178,558) 1,364,548 (170,613)
Cash flows from investing activities:
Proceeds from sale of premises and equipment to subsidiary 245,167 24,473 --
Purchase of premises and equipment (7,086) (167,217) (84,439)
--------------------------------------
Net cash provided (used) by investing activities 238,081 (142,744) (84,439)
Cash flows from financing activities:
Principal payments on note payable (201,389) (500,000) (500,000)
Stock options exercised 103,450 190,000 --
Proceeds from issuance of common stock 13,487 11,558 2,193
Treasury stock purchased (28,420) (52,277) --
Dividends paid to stockholders (537,802) (424,890) (315,175)
Warrants exercised 175,000 700,000 --
--------------------------------------
Net cash flow used by financing activities (475,674) (75,609) (812,982)
--------------------------------------
Net (decrease) increase in cash (416,151) 1,146,195 (1,068,034)
Cash and cash equivalents, beginning of year 1,235,116 88,921 1,156,955
--------------------------------------
Cash and cash equivalents, end of year $ 818,965 $1,235,116 $ 88,921
======================================
Supplemental schedule of cash flow information:
Interest paid $ 111,490 $ 157,959 $ 201,126
Income taxes paid 641,000 919,000 795,000
20. 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.
56
Trading Account Securities and Available for Sale Securities
------------------------------------------------------------
The fair value of investment securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. Fair values are calculated based on the value of one
unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. If these considerations
had been incorporated into the fair value estimates, the aggregate fair
value amounts could have changed.
Federal Home Loan Bank Stock
----------------------------
This financial instrument does not have a market nor is it practical to
estimate the fair value without incurring excessive costs.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimates of maturity are based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic conditions, lending conditions and the effects of
estimated prepayments.
Fair value for significant non-performing loans is based on estimated
cash flows and is discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows, and discount rates are judgmentally determined using
available market information and historical information.
The fair value of loans held for sale is estimated based on bid
quotations received from loan dealers.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many
of these financial instruments, management has no basis to determine
whether the fair value presented would be indicative of the value
negotiated in an actual sale.
Accrued Interest Receivable
---------------------------
The fair market 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
--------
57
The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings, NOW accounts and money
market accounts, is equal to the amount payable on demand. The fair
values of certificates of deposit are based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market. If that value was considered, the fair
value of the Company's net assets could increase.
Borrowed Funds, Notes Payable and Repurchase Agreements
-------------------------------------------------------
The fair value of the Company's borrowings with the Federal Home Loan
Bank is estimated by discounting the cash flows through maturity or the
next repricing date based on current rates available to the Company for
borrowings with similar maturities. The fair value of the notes payable
approximates the carrying value, as the interest rate approximates market
rates. The fair value of repurchase agreements approximates the carrying
value, as these financial instruments have a short maturity.
Commitments to Originate Loans
------------------------------
The Company has not estimated the fair value of commitments to originate
loans due to their short term nature and their relative immateriality.
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 other real estate owned.
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
The following table presents the estimated fair value of the Company's
significant financial instruments at June 30, 1997 and 1996:
58
June 30, 1997 June 30, 1996
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Non-Trading Instruments:
------------------------
Financial assets:
Cash and cash equivalents $ 18,774,000 $ 18,774,000 $ 13,874,000 $ 13,874,000
Available for sale securities 28,811,000 28,811,000 31,382,000 31,382,000
Loans held for sale 240,000 242,000 448,000 452,000
Loans 219,940,000 221,266,000 184,449,000 182,877,000
Interest receivable 1,640,000 1,640,000 1,514,000 1,514,000
Financial liabilities:
Deposits (with no stated maturity) 65,873,000 65,873,000 68,105,000 68,105,000
Time deposits 107,049,000 107,541,000 96,750,000 96,667,000
Borrowed funds 80,494,000 80,491,000 52,637,000 52,402,000
Notes payable 1,299,000 1,299,000 1,502,000 1,502,000
Repurchase agreements 5,099,000 5,099,000 3,763,000 3,763,000
Trading Instruments:
Financial assets:
Trading account securities 25,000 25,000 198,000 198,000
Item 8b - Supplementary Financial Data
Northeast Bancorp Consolidated
Distribution of Assets, Liabilities and Net Worth
Interest Rates and Interest Differential
Years Ending June 30, 1997, 1996 and 1995
June 30, 1997 June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------- ----------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------ ----------- ------- ------------ ----------- ------- ------------ ----------- -------
Assets:
Earning Assets:
Securities Held to
Maturity -- -- -- -- -- -- $ 1,125,696 $ 75,691 6.72%
59
Securities Available
for Sale 4,003,986 234,242 5.85% 3,313,219 193,275 5.83% 2,361,858 136,914 5.80%
Trading Securities 118,954 7,426 6.24% 162,430 5,474 3.37% 186,757 1,165 0.62%
Mortgage-backed
Securities 27,900,959 2,043,330 7.32% 16,187,360 1,166,148 7.20% 15,389,410 1,103,126 7.17%
FHLB Stock 3,531,428 227,360 6.44% 2,372,362 155,256 6.54% 2,572,716 198,006 7.70%
Loans (3) 203,933,997 18,973,560 9.30%(3) 187,117,813 17,854,789 9.54% 182,013,854 16,962,956 9.32%
FHLB Overnight
Deposits & Other 8,473,570 449,803 5.31% 13,024,645 730,197 5.61% 10,378,721 475,628 4.58%
---------------------------------------------------------------------------------------------------------
Total Earning Assets 247,962,894 21,935,721 8.85% 222,177,829 20,105,139 9.05% 214,029,012 18,953,486 8.86%
---------------------------------------------------------------------------------------------------------
Non-interest Earning
Assets:
Cash & Due from Banks 4,181,508 4,216,722 4,213,548
Premise & Equip Net 4,609,543 4,673,170 4,509,864
Other Assets 7,038,721 7,752,829 8,334,522
(Allowance for Loan
Loss) (2,769,141) (2,709,526) (2,843,496)
------------ ------------ ------------
Total Assets $261,023,525 $236,111,024 $228,243,450
============ ============ ============
Liabilities & Net Worth:
Interest Bearing
Liabilities:
Deposits
Now $ 14,813,590 216,437 1.46% $ 17,098,811 319,899 1.87% $ 16,660,804 302,281 1.81%
Money Market 15,902,113 536,623 3.37% 16,148,909 555,919 3.44% 17,386,158 590,110 3.39%
Savings 22,141,625 592,148 2.67% 23,848,926 642,216 2.69% 24,727,417 658,995 2.67%
Time 100,484,775 5,758,166 5.73% 99,501,845 5,830,168 5.86% 92,708,495 4,636,575 5.00%
---------------------------------------------------------------------------------------------------------
Total Deposits 153,342,103 7,103,374 4.63% 156,598,491 7,348,202 4.69% 151,482,874 6,187,961 4.08%
Repurchase Agreements 4,566,385 199,453 4.37% 3,516,283 166,210 4.73% 1,776,296 84,921 4.78%
Other Borrowed Funds 67,036,999 3,988,060 5.95% 41,341,004 2,572,497 6.22% 44,070,337 2,568,432 5.83%
---------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 224,945,487 11,290,887 5.02% 201,455,778 10,086,909 5.01% 197,329,507 8,841,314 4.48%
---------------------------------------------------------------------------------------------------------
Non-interest Bearing
Liabilities
Demand 13,380,027 11,774,973 10,417,538
Other 1,576,413 2,398,571 2,003,946
Net Worth 21,121,598 20,481,702 18,492,459
------------ ------------ ------------
Total Liabilities &
Net Worth $261,023,525 $236,111,024 $228,243,450
============ ============ ============
Net Interest Income $10,644,834 $10,018,230 $10,112,172
=========== =========== ===========
60
Interest Rate Spread (1) 3.83% 4.04% 4.38%
Net yield on Interest
Earning Assets (2) 4.29% 4.51% 4.72%
Equity to Assets Ratio (4) 8.09% 8.67% 8.10%
<1> Interest rate spread is the difference between the yield on earning
assets and the rates paid on interest-bearing liabilities.
<2> Net yield on interest earning assets is net interest income divided by
average earning assets.
<3> Non-accruing loans are included in the average of net loans.
<4> Average equity divided by average assets.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Changes in Net Interest Income
Years Ended June 30, 1997 and 1996
June 30, 1997 Compared to June 30, 1996 June 30, 1996 Compared to June 30, 1995
---------------------------------------------- ------------------------------------------------
Variance Variance Variance Variance Variance Variance
Due Due to Due to Total Due Due to Due to Total
to Rate Volume Rate/Volume Variance to Rate Volume Rate/Volume Variance
--------- ---------- ----------- ---------- ---------- ---------- ----------- -----------
Interest Earning Assets:
Securities Held to Maturity $ -- $ -- $ -- $ -- $ (75,691) $ (75,691) $ 75,691 $ (75,691)
Securities Available for Sale 556 40,296 115 40,967 864 55,149 348 56,361
Trading Securities 4,666 (1,465) (1,249) 1,952 5,129 (152) (668) 4,309
Mortgage-backed Securities 19,336 843,855 13,992 877,183 5,537 57,198 287 63,022
FHLB Stock (2,519) 75,853 (1,230) 72,104 (29,638) (15,420) 2,308 (42,750)
Loans (445,769) 1,604,601 (40,061) 1,118,771 404,813 475,668 11,352 891,833
FHLB Overnight Deposits & Other (38,811) (255,146) 13,562 (280,395) 106,231 121,255 27,083 254,569
---------------------------------------------- -----------------------------------------------
Total Income on Earning Assets (462,541) 2,307,994 (14,871) 1,830,582 417,245 618,007 116,401 1,151,653
---------------------------------------------- -----------------------------------------------
Interest Bearing Liabilities:
Deposits:
Now (70,073) (42,754) 9,365 (103,462) 9,423 7,947 248 17,618
Money Market (10,968) (8,496) 168 (19,296) 8,401 (41,994) (598) (34,191)
Savings (4,409) (45,975) 316 (50,068) 6,877 (23,412) (244) (16,779)
Time (128,327) 57,593 (1,267) (72,001) 795,546 339,752 58,295 1,193,593
---------------------------------------------- -----------------------------------------------
Total Deposits (213,777) (39,632) 8,582 (244,827) 820,247 282,293 57,701 1,160,241
61
Repurchase Agreements (12,624) 49,637 (3,770) 33,243 (958) 83,185 (938) 81,289
Borrowed funds (113,103) 1,598,966 (70,300) 1,415,563 173,901 (159,066) (10,770) 4,065
---------------------------------------------- -----------------------------------------------
Total Interest Expense (339,504) 1,608,971 (65,488) 1,203,979 993,190 206,412 45,993 1,245,595
---------------------------------------------- -----------------------------------------------
Change in Net interest Income $(123,037) $ 699,023 $50,617 $ 626,603 $(575,945) $ 411,595 $ 70,408 $ (93,942)
===============================================================================================
This table reflects changes in net interest income attributable to the
change in interest rates and the change in the volume of interest-bearing
assets and liabilities. Amounts attributable to the change in rate are
based upon the change in rate multiplied by the prior year's volume.
Amounts attributable to the change in volume are based upon the changes in
volume multiplied by the prior year's rate. The combined effect of
changes in both volume and rate are calculated by multiplying the change
in rate by the change in volume.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Maturities and Repricing of Loans
As of June 30, 1997
1 Year 1 to 5 5 to 10 Over 10 Total
or Less Years Years Years Loans
------------ ----------- ----------- ----------- ------------
Mortgages:
Residential $ 60,879,920 $13,231,647 $ 9,961,618 $55,333,687 $139,406,872
Commercial 28,682,046 12,950,681 3,345,370 1,462,888 46,440,985
Construction 2,521,648 75,000 -- -- 2,596,648
Non-Mortgage Loans:
Commercial 15,044,102 3,574,499 234,416 593,029 19,446,046
Consumer 2,062,073 5,589,156 2,385,080 4,755,274 14,791,583
---------------------------------------------------------------------
Total Loans $109,189,789 $35,420,983 $15,926,484 $62,144,878 $222,682,134
=====================================================================
Loans due after 1 year:
Fixed $ 87,734,288
Variable 25,758,057
------------
Total due after 1 year: $113,492,345
============
62
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.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Securities Available for Sale June 30, June 30, June 30,
As of June 30, 1997 1996 1995
- --------------------------------------- -------- -------- --------
Market Value (thousands)
U.S. Government and Agency Obligations $ 2,905 $ 2,871 $ 2,043
Mortgage-backed Securities 24,802 27,821 9,506
Other Bonds 253 250 288
Equity Securities 851 440 470
-------------------------------
Total Securities Available for Sale $28,811 $31,382 $12,307
===============================
This table sets forth the market value of securities available for sale at the
dates indicated.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Investment Maturity
Weighted
Securities Available for Sale Average Carrying
As of June 30, 1997 Rate Value
- -------------------------------------- -------- ---------
Due in one Year 5.31% $ 399
Due after one year through five years 6.10% 1,396
Due after five years through ten years 6.42% 399
63
Due after ten years 7.18% 964
Mortgage-backed securities maturing
September 2003 to January 2027 7.16% 24,802
-------------------
Total Securities Available for Sale 7.07% $27,960
===================
This table sets forth the anticipated maturities of debt securities available
for sale and the respective weighted average rates within these ranges.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Loan Portfolio
As of June 30,
June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Loan Portfolio (thousands)
Residential Mortgage $140,315 63.01% $117,670 62.86% $121,510 64.71% $114,570 65.22% $112,419 68.30%
Consumer & Other 14,792 6.64% 14,491 7.74% 16,400 8.73% 14,182 8.07% 12,210 7.42%
Commercial Mortgage 48,125 21.61% 38,288 20.45% 34,270 18.25% 32,312 18.39% 27,649 16.80%
Commercial 19,450 8.74% 16,761 8.95% 15,597 8.31% 14,623 8.32% 12,309 7.48%
-------------------------------------------------------------------------------------------------
Total Loans 222,682 100.00% 187,210 100.00% 187,777 100.00% 175,687 100.00% 164,587 100.00%
-------------------------------------------------------------------------------------------------
Less: Allowance for loan
losses 2,742 2,761 2,661 2,728 2,360
-------- -------- -------- -------- --------
Net Loans $219,940 $184,449 $185,116 $172,959 $162,227
======== ======== ======== ======== ========
This table shows the Company's loan distribution at the end of each of the last
five years.
Restated to include Cushnoc Bank & Trust financial information.
64
Northeast Bancorp Consolidated
Allowance for Loan Losses
As of June 30, 1997
June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Allowance for Loan Losses
(thousands)
Real Estate $ 308 63.01% $ 268 62.86% $ 658 64.71% $ 709 65.22% $1,357 68.30%
Commercial Mortgage 821 21.61% 799 20.45% 263 18.25% 279 18.39% 285 16.80%
Commercial 436 8.74% 501 8.95% 137 8.31% 143 8.32% 177 7.48%
Consumer 159 6.64% 152 7.74% 279 8.73% 272 8.07% 257 7.42%
Unallocated 1,018 0.00% 1,041 0.00% 1,324 0.00% 1,325 0.00% 284 0.00%
------------------------------------------------------------------------------------------------
Total $2,742 100.00% $2,761 100.00% $2,661 100.00% $2,728 100.00% $2,360 100.00%
================================================================================================
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 possible loan losses based on evaluations of collectibility
and prior loss experience. The evaluation takes into consideration
such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, specific problem loans, and current and
anticipated economic conditions that may affect the borrowers' ability
to pay. Management
also obtains appraisals when considered necessary.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Non-performing Ratios
As of June 30,
65
June 30, June 30, June 30, June 30, June 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Non-performing loans (thousands)
Mortgages $2,319 $2,786 $2,396 $2,186 $2,308
Other 562 396 261 676 182
--------------------------------------------------
Total non-performing loans 2,881 3,182 2,657 2,862 2,490
Other Real Estate Owned 563 585 1,169 1,994 2,418
--------------------------------------------------
Total non-performing assets $3,444 $3,767 $3,826 $4,856 $4,908
==================================================
Total non-performing loans to total
loans 1.29% 1.70% 1.42% 1.63% 1.51%
==================================================
Total non-performing assets to total
assets 1.21% 1.54% 1.65% 2.29% 2.48%
==================================================
This table sets forth certain information concerning non-performing loans and
assets and the ratios of non-performing loans to total loans and non-performing
assets to total assets at the dates indicated.
Non-performing loans are problem loan accounts for which the Company has
ceased accrual of interest because the loan is 90 days past due or because
collectability is doubtful, whichever is earlier.
Management believes that all loans that are considered potential problems are
disclosed in the current non-performing loans table above with the exception
of loans internally rated substandard. At June 30, 1997, the Company had
approximately $586,000 of loans classified as substandard that could
potentially become non-performing due to previous delinquencies or marginal
cash flows.
No loans greater than 90 days past due are on accrual status and there are no
troubled debt restructurings not disclosed above.
Refer to the financial statement footnotes #1 & #4 for further discussion of
the Company's non-performing loan policy and interest income recognition.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Summary of Loan Losses Experience (in thousands)
As of June 30,
66
June 30, June 30, June 30, June 30, June 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Average net loans outstanding,
During period $200,919 $183,947 $178,736 $167,942 $162,585
====================================================
Net loans outstanding,
End of period $219,940 $184,449 $185,116 $172,959 $162,227
====================================================
Allowance for loan losses,
Beginning of period $ 2,761 $ 2,661 $ 2,728 $ 2,360 $ 1,780
Loans charged off:
Residential Mortgage 319 151 162 230 234
Commercial Real Estate 128 236 296 122 26
Commercial 154 125 205 286 64
Installment 171 108 151 97 55
----------------------------------------------------
Total loans charged off 772 620 814 735 379
----------------------------------------------------
Recoveries on amounts previously charged off:
Residential Mortgage 43 10 7 25 1
Commercial Real Estate 49 34 1 -- 1
Commercial 13 12 16 6 9
Installment 34 25 32 27 24
----------------------------------------------------
Total Recoveries 139 81 56 58 35
----------------------------------------------------
Net loans charged off 633 539 758 677 344
Provision for loan losses 614 639 691 1,045 924
----------------------------------------------------
Allowance for loan losses,
End of period $ 2,742 $ 2,761 $ 2,661 $ 2,728 $ 2,360
====================================================
Net loans charged-off as a percentage of
average loans outstanding 0.32% 0.29% 0.42% 0.40% 0.21%
====================================================
Allowance for loan losses, as a percentage
of net loans outstanding at the end of
period 1.25% 1.50% 1.44% 1.58% 1.45%
====================================================
67
The reduction in the June 30, 1997 allowance for loan loss percentage to
net loans is primarily due to the purchase of $25,000,000 of residential
mortgages during fiscal year 1997.
This table summarizes loans outstanding at the end of each period indicated,
net of unearned income, at the end of each period indicated and the average
amount of loans outstanding, changes in the allowance for loan losses and
other selected statistics during each period indicated.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Average Deposits and Rates (thousands)
As of June 30,
June 30, 1997 June 30, 1996 June 30, 1995
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
Average Deposits:
Non-interest bearing demand deposits $ 13,380 0.00% $ 11,775 0.00% $ 10,418 0.00%
Regular savings 22,141 2.67% 23,849 2.69% 24,727 2.67%
NOW and Money Market 30,716 2.45% 33,247 2.63% 34,047 2.62%
Time deposits 100,485 5.73% 99,502 5.86% 92,708 5.00%
------------------------------------------------------
Total Average Deposits $166,722 4.26% $168,373 4.36% $161,900 3.82%
======================================================
This table shows the average daily amount of deposits and average rates paid
on such deposits for the periods indicated.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Maturities of Time Deposits $100,000 & Over
As of June 30, 1997
Balance
-------
Time Deposits $100,000 & Over (in thousands):
68
3 months or less $ 2,004
Over 3 through 6 months 2,596
Over 6 through 12 months 6,088
Over 12 months 8,020
-------
Total Time Deposits $100,000 & Over $18,708
=======
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Maturities and Repricing of Earning Assets & Interest-bearing Liabilities
As of June 30, 1997
(in thousands)
Less Than 1-5 Over 5 % of
1 Year Years Years Total Total
--------- ------- -------- -------- -------
EARNING ASSETS
Real Estate Loans:
Fixed $ 1,193 $ 3,059 $ 67,856 $ 72,108 26.85%
Variable 90,891 23,198 2,248 116,337 43.32%
---------------------------------------------------
Total Real Estate Loans 92,084 26,257 70,104 188,445 70.17%
---------------------------------------------------
Non-Real Estate Loans:
Fixed 2,041 8,852 7,967 18,860 7.02%
Variable 15,065 312 -- 15,377 5.73%
---------------------------------------------------
Total Non-Real Estate Loans 17,106 9,164 7,967 34,237 12.75%
---------------------------------------------------
Investment Securities & Other Earning Assets 13,326 1,396 31,137 45,859 17.08%
---------------------------------------------------
Total Earning Assets $122,516 $36,817 $109,208 $268,541 100.00%
===================================================
INTEREST-BEARING LIABILITIES
Deposits:
Regular savings, value, & club accounts $ 22,484 22,484 9.14%
NOW Accounts 14,368 14,368 5.84%
Money market accounts 15,236 15,236 6.19%
69
Certificates of deposit 77,821 29,218 10 107,049 43.51%
---------------------------------------------------
Total Deposits 129,909 29,218 10 159,137 64.68%
---------------------------------------------------
Repurchase Agreements 5,099 -- -- 5,099 2.07%
Borrowings & Notes Payable 55,764 21,315 4,714 81,793 33.25%
---------------------------------------------------
Total Interest-bearing Liabilities $190,772 $50,533 $ 4,724 $246,029 100.00%
===================================================
Excess(deficiency) of earning assets over
interest-bearing liabilities (68,256) (13,716) 104,484 22,512
=========================================
Cumulative excess (deficiency) of earning
assets over interest-bearing liabilities (68,256) (81,972) 22,512 22,512
=========================================
Cumulative excess (deficiency) of earning
assets over interest-bearing liabilities
as a % of total assets -24.03% -28.86% 7.92% 7.92%
=========================================
This table summarizes the anticipated maturities and repricing of the
Company's earning assets and interest-bearing liabilities at June 30,
1997.
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/liabilitiy 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 position to be as negative as presented in the
schedule above.
Restated to include Cushnoc Bank & Trust financial information.
Northeast Bancorp Consolidated
Quarterly Data
As of June 30, 1997
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1996 1996 1997 1997
---------- ---------- ---------- ----------
70
Interest Income
Interest on loans $4,443,413 $4,652,547 $4,824,158 $5,053,442
Interest & dividends on investments & available for
sale securities 770,896 748,268 727,258 715,739
-------------------------------------------------
Total Interest Income 5,214,309 5,400,815 5,551,416 5,769,181
-------------------------------------------------
Interest Expense
Interest on Deposits 1,739,594 1,727,321 1,766,509 1,869,951
Interest on Repurchase Agreements 38,269 54,686 50,744 55,754
Interest on Borrowings 863,412 938,321 1,088,090 1,098,237
-------------------------------------------------
Total Interest Expense 2,641,275 2,720,328 2,905,343 3,023,942
-------------------------------------------------
Net Interest Income 2,573,034 2,680,487 2,646,073 2,745,239
Provision for Loan Losses 153,814 153,443 153,452 153,718
-------------------------------------------------
Net Interest Income after Provision for Loan Losses 2,419,220 2,527,044 2,492,621 2,591,521
Securities Transactions 89,666 34,876 75,493 59,395
Other Operating Income 438,914 376,418 582,010 429,469
Other Operating Expense 2,638,627 2,126,897 2,456,126 2,496,687
-------------------------------------------------
Income Before Income Taxes 309,173 811,441 693,998 583,698
Income Tax Expense 117,932 300,894 273,364 216,375
-------------------------------------------------
Net Income $ 191,241 $ 510,547 $ 420,634 $ 367,323
=================================================
Net Income Per Common Share:
Primary earnings per share $ 0.10 $ 0.31 $ 0.26 $ 0.22
Fully diluted earnings per share $ 0.11 $ 0.29 $ 0.24 $ 0.21
Northeast Bancorp Consolidated
Quarterly Data
As of June 30, 1996
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Sept. 30 Dec. 31 Mar. 31 June 30
1995 1995 1996 1996
---------- ---------- ---------- ----------
Interest Income
Interest on loans $4,576,905 $4,538,422 $4,432,944 $4,306,518
Interest & dividends on investments & available for
sale securities 454,539 532,111 586,782 676,918
-------------------------------------------------
Total Interest Income 5,031,444 5,070,533 5,019,726 4,983,436
-------------------------------------------------
71
Interest Expense
Interest on Deposits 1,874,891 1,897,459 1,839,279 1,736,573
Interest on Repurchase Agreements 33,913 48,880 42,872 40,545
Interest on Borrowings 609,434 602,286 663,817 696,960
-------------------------------------------------
Total Interest Expense 2,518,238 2,548,625 2,545,968 2,474,078
-------------------------------------------------
Net Interest Income 2,513,206 2,521,908 2,473,758 2,509,358
Provision for Loan Losses 156,855 156,708 168,960 156,337
-------------------------------------------------
Net Interest Income after Provision for Loan Losses 2,356,351 2,365,200 2,304,798 2,353,021
Securities Transactions 120,593 92,797 35,280 30,225
Other Operating Income 515,895 489,300 438,785 464,718
Other Operating Expense 2,285,698 2,191,810 2,300,586 2,758,194
-------------------------------------------------
Income Before Income Taxes 707,141 755,487 478,277 89,770
Income Tax Expense 248,404 264,248 182,460 42,714
-------------------------------------------------
Net Income $ 458,737 $ 491,239 $ 295,817 $ 47,056
=================================================
Net Income Per Common Share:
Primary earnings per share $ 0.30 $ 0.31 $ 0.17 $ 0.01
Fully diluted earnings per share $ 0.28 $ 0.28 $ 0.17 $ 0.03
The decrease in net income for the quarter ending June 30, 1997 is
primarily due to the writedown of equity securities and the provision for
real estate held for investment.
The reduction of net income for the quarter ending September 30, 1996 is
primarily due to the FDIC-SAIF deposit assessment of $380,000.
The reduction of net income for the quarter ending June 30, 1996 is
primarily a result of increased operating expenses due to the Bank merger,
the writedown of equity securities and the provision for other real estate
owned.
Restated to include Cushnoc Bank & Trust financial information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Northeast Bancorp
---------------------------------------
(Registrant)
72
Date May 14, 1998
-----------------------------
/s/ JAMES D. DELAMATER
--------------------------------------
James D. Delamater
President and CEO
