SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1997
------------------
or
_____ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0 - 16123
_______________
Northeast Bancorp
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Maine 01 - 0425066
________________________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1
232 Center Street, Auburn, Maine 04210
________________________________________ ____________________________________
(Address of principal executive offices) (Zip Code)
(207) 777 - 5950
______________________________________________________________________________
Registrant's telephone number, including area code
Not Applicable
______________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares outstanding as of November 11, 1997: 1,481,734 of common stock, $1.00
par value per share.
_______________________________________________________________________________
NORTHEAST BANCORP AND SUBSIDIARIES
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
September 30, 1997 and June 30, 1997
Consolidated Statements of Income
Three Months ended September 30, 1997 and 1996
2
Consolidated Statements of Changes in Shareholders' Equity
Three Months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows
Three Months ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Part II. Other Information
Items 1 - 6.
Signature Page
Index to Exhibits
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, June 30,
1997 1997
_______________ _______________
Assets
Cash and due from banks $ 3,260,381 $ 5,152,222
Interest bearing deposits in other banks 442,377 443,021
Federal Home Loan Bank overnight deposits 10,256,000 10,066,000
Trading account securities at market 25,000 25,000
Available for sale securities 29,802,208 27,096,931
Federal Home Loan Bank stock 4,192,700 3,949,700
Loans held for sale 29,355 240,000
Loans 209,310,884 206,507,746
Less deferred loan origination fees 54,371 151,609
Less allowance for loan losses 2,560,000 2,517,000
_______________ _______________
Net loans 206,696,513 203,839,137
Bank premises and equipment, net 3,843,791 3,960,703
Real estate held for investment 290,918 361,654
Other real estate owned 456,641 492,411
Goodwill (net of accumulated amortization
of $1,310,528 at 9/30/97 and $1,236,434
at 6/30/97) 2,146,195 2,220,289
Other assets 3,999,629 3,952,638
_______________ _______________
Total Assets 265,441,708 261,799,706
3
=============== ===============
Liabilities and Shareholder's Equity
Liabilities
Deposits $ 154,262,801 $ 154,410,687
Repurchase Agreements 4,840,375 5,098,622
Advances from Federal Home Loan Bank 80,574,471 78,993,361
Notes payable 1,222,222 1,298,611
Due to Broker 1,999,375 --
Other Liabilities 2,077,804 2,097,812
_______________ _______________
Total Liabilities 244,977,048 241,899,093
Shareholders' Equity
Preferred stock, Series A, 45,454 shares
issued and outstanding 999,988 999,988
Preferred stock, Series B, 71,428 shares
issued and outstanding 999,992 999,992
Common stock, par value $1, 1,293,642 and
1,274,969 shares issued and outstanding at
9/30/97 and 6/30/97, respectively 1,293,642 1,274,969
Additional paid in capital 5,708,584 5,639,507
Retained earnings 11,734,802 11,320,332
_______________ _______________
20,737,008 20,234,788
Net unrealized loss on available for sale
securities (272,348) (334,175)
_______________ _______________
Total Shareholders' Equity 20,464,660 19,900,613
_______________ _______________
Total Liabilities and Shareholders' Equity $ 265,441,708 $ 261,799,706
=============== ===============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30,
1997 1996
_______________ _______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 113,638 $ 88,064
Interest on loans & loans held for sale 4,745,135 3,987,260
Interest on available for sale securities 465,281 590,010
Dividends on Federal Home Loan Bank stock 67,436 46,409
Other Interest Income 4,783 4,891
_______________ _______________
Total Interest Income 5,396,273 4,716,634
Interest Expense
4
Deposits 1,692,682 1,539,567
Repurchase agreements 48,438 38,269
Other borrowings 1,163,074 854,846
_______________ _______________
Total Interest Expense 2,904,194 2,432,682
_______________ _______________
Net Interest Income 2,492,079 2,283,952
Provision for loan losses 153,500 144,814
_______________ _______________
Net Interest Income after Provision
for Loan Losses 2,338,579 2,139,138
Other Income
Service charges 262,566 267,949
Available for sale securities gains (losses) 107,996 28,300
Gain (Loss) on trading account 1,797 61,366
Other 167,947 148,069
_______________ _______________
Total Other Income 540,306 505,684
Other Expenses
Salaries and employee benefits 1,028,363 1,024,525
Net occupancy expense 187,471 126,970
Equipment expense 194,630 177,028
Goodwill amortization 74,094 74,094
FDIC Insurance Assessment -- 380,000
Other 531,447 561,212
_______________ _______________
Total Other Expenses 2,016,005 2,343,829
_______________ _______________
Income Before Income Taxes 862,880 300,993
Income tax expense 310,039 116,732
_______________ _______________
Net Income $ 552,841 $ 184,261
=============== ===============
Earnings Per Share
Primary $ 0.38 $ 0.11
Fully Diluted $ 0.34 $ 0.11
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended September 30, 1997 and 1996
(Unaudited)
Net
Unrealized
Gains(Losses)
5
Additional on Available
Common Preferred Paid-In Retained for Sale Treasury
Stock Stock Capital Earnings Securities Stock Total
____________ ___________ ___________ ____________ _____________ ____________ ____________
Balance at June 30, 1996 1,234,010 1,999,980 5,455,852 10,351,031 (837,354) (52,277) 18,151,242
Net income for three months
ended September 30, 1996 -- -- -- 184,261 -- -- 184,261
Dividends paid on common
stock -- -- -- (98,503) -- -- (98,503)
Dividends paid on preferred
stock -- -- -- (34,999) -- -- (34,999)
Issuance of common stock 314 -- 3,343 -- -- 13,642 17,299
Net change in unrealized
losses on securities
available for sale -- -- -- -- (17,802) -- (17,802)
____________ ___________ ___________ ___________ _____________ ____________ ____________
Balance September 30, 1996 $ 1,234,324 $1,999,980 $5,459,195 $10,401,790 $ (855,156) $ (38,635) $18,201,498
============ =========== =========== ============ ============= ============ ============
Balance at June 30, 1997 1,274,969 1,999,980 5,639,507 11,320,332 (334,175) -- 19,900,613
Net income for three months
ended September 30, 1997 -- -- -- 552,841 -- -- 552,841
Dividends paid on common
stock -- -- -- (103,372) -- -- (103,372)
Dividends paid on preferred
stock -- -- -- (34,999) -- -- (34,999)
Issuance of common stock
through exercise of options 18,673 -- 69,077 -- -- -- 87,750
Net change in unrealized
losses on securities
available for sale -- -- -- -- 61,827 -- 61,827
____________ ___________ ___________ ____________ _____________ ____________ ____________
Balance September 30, 1997 $ 1,293,642 $1,999,980 $5,708,584 $11,734,802 $ (272,348) $ 0 $20,464,660
6
============ =========== =========== ============ ============= ============ ============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Three Months Ended
September 30,
1997 1996
_______________ _______________
Cash provided by operating activities $ 786,560 $ 542,157
Cash flows from investing activities:
FHLB stock purchased (243,000) (323,900)
Available for sale securities purchased (4,293,677) (8,763,065)
Available for sale securities principal
reductions 453,954 572,283
Available for sale securities matured 250,000 --
Available for sale securities sold 3,059,863 5,447,793
New loans, net of repayments & charge offs (2,859,463) (3,741,933)
Net capital expenditures (55,521) (60,543)
Real estate owned sold 87,038 126,608
Real estate held for investment sold 63,793 --
_______________ _______________
Net cash provided by (used in) investing
activities (3,537,013) (6,742,757)
Cash flows from financing activities:
Net change in deposits (147,886) 349,263
Net change in repurchase agreements (258,247) 111,845
Dividends paid (138,370) (133,502)
Proceeds from stock issuance 87,750 17,299
Net increase in advances from Federal Home
Loan Bank of Boston 1,581,110 7,155,835
Net change in notes payable (76,389) (126,111)
_______________ _______________
Net cash provided by financing activities 1,047,968 7,374,629
_______________ _______________
Net (decrease) increase in cash and
cash equivalents (1,702,485) 1,174,029
Cash and cash equivalents, beginning
of period 15,661,243 11,566,128
_______________ _______________
Cash and cash equivalents, end of period $ 13,958,758 $ 12,740,157
=============== ===============
Cash and cash equivalents include cash on
hand, amounts due from banks, interest
bearing deposits and federal funds sold
7
Supplemental schedule of noncash
investing activities:
Net increase (decrease) in valuation for
unrealized market value adjustments on
available for sale securities 61,827 (17,802)
Net transfer (to) from Loans to Other
Real Estate Owned 56,325 447,039
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds 5,000 --
Interest paid 2,888,326 2,391,111
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997
1. Basis of Presentation
_____________________
The accompanying unaudited condensed and consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1998. For further
information, refer to the audited consolidated financial statements and
footnotes thereto for the fiscal year ended June 30, 1997 included in the
Company's annual report on Form 10-K.
2. Securities
__________
Securities available for sale at cost and approximate market values are
summarized below.
September 30, 1997 June 30, 1997
__________________________ __________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Debt securities issued
by the U.S. Treasury
and other U.S.
Government corporations
and agencies $ 3,497,759 $ 3,434,907 $ 1,498,913 $ 1,455,788
8
Corporate bonds 149,705 146,085 149,694 142,750
Mortgage-backed
securities 25,683,969 25,393,948 25,057,910 24,647,811
Equity securities 883,424 827,268 896,739 850,582
____________ ____________ ____________ ____________
$ 30,214,857 $ 29,802,208 $ 27,603,256 $ 27,096,931
============ ============ ============ ============
September 30, 1997 June 30, 1997
__________________________ __________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Due in one year or less $ 248,384 $ 247,307 $ 248,913 $ 248,913
Due after one year
through five years 250,000 245,400 250,000 242,500
Due after five years
through ten years 149,705 146,085 149,694 142,750
Due after ten years 2,999,375 2,942,200 1,000,000 964,375
Mortgage-backed
securities (including
securities with interest
rates ranging from
5.15% to 8.5% maturing
September 2003 to
August 2027) 25,683,969 25,393,948 25,057,910 24,647,811
Equity securities 883,424 827,268 896,739 850,582
____________ ____________ ____________ ____________
$ 30,214,857 $ 29,802,208 $ 27,603,256 $ 27,096,931
============ ============ ============ ============
3. Allowance for Loan Losses
_________________________
The following is an analysis of transactions in the allowance for loan losses:
Three Months Ended
September 30,
1997 1996
____________ ____________
Balance at beginning of year $ 2,517,000 $ 2,549,000
Add provision charged to operations 153,500 144,814
Recoveries on loans previously charged off 72,742 21,431
____________ ____________
2,743,242 2,715,245
Less loans charged off 183,242 228,245
____________ ____________
Balance at end of period $ 2,560,000 $ 2,487,000
9
============ ============
4. Advances from Federal Home Loan Bank
____________________________________
A summary of borrowings from the Federal Home Loan Bank is as follows:
September 30, 1997
___________________________________________________
Principal Interest Maturity
Amounts Rates Dates
_______________ _______________ _______________
$ 57,257,126 4.97% - 6.39% 1998
14,500,000 5.64% - 5.96% 1999
3,000,000 6.27% 2000
1,626,435 6.21% - 6.49% 2001
2,190,910 6.36% - 6.67% 2003
2,000,000 6.65% 2005
_______________
$ 80,574,471
===============
June 30, 1997
___________________________________________________
Principal Interest Maturity
Amounts Rates Dates
_______________ _______________ _______________
$ 54,407,706 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
290,652 6.61% 2003
1,973,614 6.36% - 6.67% 2004
2,000,000 6.65% 2005
_______________
$ 78,993,361
===============
5. New Accounting Pronouncements
_____________________________
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128") will be effective for the Company's December 31, 1997 quarter
end financial statements. Statement 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS). It
replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS. Early application is not permitted.
10
If the Company had adopted the provisions of Statement 128 for the quarter end
September 30, 1997 basic earnings per share would be reported as $0.40 and
diluted earnings per share would be reported as $0.34.
NORTHEAST BANCORP AND SUBSIDIARY
Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
_______________________________________________________________________
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 subsidiary, Northeast Bank, FSB (the "Bank"),
which has branches located in Auburn, Bethel, Harrison, South Paris, Buckfield,
Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine.
Financial Condition
___________________
Total consolidated assets were $265,441,708 on September 30, 1997, which
represents an increase of $3,642,002 from June 30, 1997. Total loans,
securities available for sale and Federal Home Loan Bank ("FHLB") stock
increased by $2,857,376, $2,705,277 and $243,000, respectively, while cash
equivalents and loans held for sale decreased by $1,702,485 and $210,645,
respectively, during the same period. Total deposits and repurchase agreements
decreased by $406,133, while FHLB borrowings increased by $1,581,110, from June
30, 1997 to September 30, 1997.
The decrease in cash equivalents and the increase in FHLB advances were
utilized to support the increase in securities available for sale and the
increase in the loan portfolio from June 30, 1997 to September 30, 1997. FHLB
stock increased due to the increased levels of FHLB advances during the same
time period. The FHLB requires financial institutions to hold a certain level
of FHLB stock based on advances outstanding.
Total loans increased by $2,857,376 for the three months ended September 30,
1997. The loan portfolio growth was in consumer installment and commercial
loans. On August 31, 1997, the Bank purchased approximately $5,000,000 of 1-4
family mortgages. The purchase consisted of 1-4 family adjustable rate
mortgages secured by property located primarily in the state of Maine. The
Bank's local market, as well as the secondary market, continues to be very
competitive for loan origination volume. The local competitive environment and
customer response to favorable secondary market rates have affected the Bank's
ability to increase the loan portfolio. In the effort to increase loan volume,
the Bank's offering rates for its loan products have been reduced to compete in
the various markets, the Bank will experience some margin compression due to
decreased loan rates.
The loan portfolio contains elements of credit and interest rate risk. The
Bank primarily lends within its local market areas, which management believes
helps them to better evaluate credit risk. The Bank also maintains a well
collateralized position in real estate mortgages. Residential real estate
11
mortgages make up 65% of the total loan portfolio, in which 53% of the
residential loans are variable rate products, as compared to 69% and 47%,
respectively, at September 30, 1996. It is management's intent to increase the
volume in variable rate residential loans to reduce the interest rate risk in
this area.
Eighteen percent of the Bank's total loan portfolio balance is commercial real
estate mortgages. Similar to residential mortgages, the Bank tries to mitigate
credit risk by lending in its local market area as well as maintaining a well
collateralized position in real estate. Commercial real estate loans have
minimal interest rate risk as 88% of the portfolio consists of variable rate
products.
Commercial loans make up 8% of the total loan portfolio, of which 69% are
variable rate instruments. The credit loss exposure on commercial loans is
highly dependent on the cash flow of the customer's business. The Bank
attempts to mitigate losses in commercial loans through lending in accordance
with the Company's credit policies.
Consumer and other loans make up 8% of the loan portfolio. 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
measured risks, and lending to individuals in the Bank's known market areas.
Total deposits were $154,262,801 and securities sold under repurchase
agreements were $4,840,375 as of September 30, 1997. These amounts represent a
decrease of $147,886 and $258,247, respectively, compared to June 30, 1997.
The decrease in deposits and repurchase agreements was due to normal business
fluctuations. Brokered deposits represented $7,388,663 of the total deposits
at September 30, 1997. The Bank utilizes brokered deposits as alternative
sources of funds. Brokered deposits are similar to local deposits, in that
both are interest rate sensitive with respect to the Bank's ability to retain
the funds. Cross selling strategies are employed by the Bank to develop
deposit growth. Even though deposit interest rates increased during the first
three months in 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 base.
Total advances from the FHLB were $80,574,471 as of September 30, 1997, an
increase of $1,581,110 compared to June 30, 1997. The cash received from FHLB
advances was utilized for the increase in the loan portfolio. The Bank's
current advance availability, subject to the satisfaction of certain
conditions, is approximately $38,000,000 greater than the September 30, 1997
advances reported. Mortgages, free of liens, pledges and encumbrances are
required to be pledged to secure FHLB advances. The Bank utilizes FHLB
advances, as alternative sources of funds, when the interest rates of the
advances are less than market deposit interest rates and to fund short-term
liquidity demands for loan volume. With the borrowing capacity at the Federal
Home Loan Bank, the normal growth in bank deposits and repurchase agreements
and the immediate availability of the Bank's cash equivalents as well as
securities available for sale, management believes that the Company's available
liquidity resources are sufficient to support anticipated growth.
Total equity of the Company was $20,464,660 as of September 30, 1997 versus
$19,900,613 at June 30, 1997. Book value per common share was $14.27 as of
12
September 30, 1997 versus $14.04 at June 30, 1997. Total equity to total
assets of the Company as of September 30, 1997 was 7.71%.
At September 30, 1997, the Bank's regulatory capital 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 $ 18,384,000 6.99% $ 3,947,000 1.50% $ 14,437,000
Core capital $ 18,384,000 6.99% $ 7,894,000 3.00% $ 10,490,000
Leverage capital $ 18,384,000 6.99% $ 10,526,000 4.00% $ 7,858,000
Risk-based capital $ 19,534,000 12.21% $ 12,802,000 8.00% $ 6,732,000
The carrying value of securities available for sale by the Company was
$29,802,208, which is $412,649 less than the cost of the underlying securities,
at September 30, 1997. The difference between the carrying value and the cost
of the securities was primarily attributable to the decline in the market value
of mortgage-backed securities, which was due to the change in current market
prices from the prices at the time of purchase. The Company has primarily
invested in mortgage-backed securities. 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 decline when market interest rates increase
from the time of purchase. Since these mortgage-backed securities are backed
by the U.S. government, there is little or no risk in 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.
The Bank's allowance for loan losses was $2,560,000 as of September 30, 1997
versus $2,517,000 as of June 30, 1997, representing 1.22% of total loans for
both of the reported periods. The Bank had non-performing loans totaling
$2,273,000 at September 30, 1997 compared to $2,424,000 at June 30, 1997. Non-
performing commercial mortgages increased by 24% from June 30, 1997 to
September 30, 1997. This increase was due to the addition of a single loan and
in management's opinion does not indicate a trend. Non-performing loans
represented .86% and .93% of total assets at September 30, 1997 and June 30,
1997, respectively. The Bank's allowance for loan losses was equal to 113% and
104% of the total non-performing loans at September 30, 1997 and June 30, 1997,
respectively. At September 30, 1997, the Bank had approximately $774,000 of
loans classified substandard, exclusive of the non-performing loans stated
above, that could potentially become non-performing due to delinquencies or
marginal cash flows. These substandard loans have been reduced substantially in
the past twelve months. The decrease was attributed to the reclassification of
loans to lower risk classifications as a result of favorable changes in the
13
borrower's financial condition, indicating a decreased potential for these
loans becoming non-performing assets. Along with non-performing and delinquent
loans, management takes an aggressive posture in reviewing its loan portfolio
to classify loans substandard. The following table represents the Bank's non-
performing loans as of September 30, 1997 and June 30, 1997, respectively:
September 30, June 30,
Description 1997 1997
_______________________ ______________ ______________
1-4 Family Mortgages $ 625,000 $ 983,000
Commercial Mortgages 1,133,000 913,000
Commercial Installment 486,000 492,000
Consumer Installment 29,000 36,000
______________ ______________
Total non-performing $ 2,273,000 $ 2,424,000
============== ==============
Although the growth in non-performing, delinquent and substandard loans have
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
September 30, 1997 quarter. This decrease was largely due to improved
collection efforts and the increase in the Bank's loan portfolio.
The following table reflects the quarterly trend of total delinquencies 30
days or more past due, including non-performing loans, for the Bank as a
percentage of total loans:
12-31-96 3-31-97 6-30-97 9-30-97
1.24% 1.52% 1.60% 1.23%
At September 30, 1997, the Bank's total non-performing loans has approximately
$630,000 of loan balances that are current and paying as agreed. Taking these
current non-accrual loans into consideration, the Bank's total delinquencies 30
days or more past due, including delinquent non-performing loans, as a
percentage of total loans would be .93% as of September 30, 1997.
The level of the allowance for loan losses as a percentage of total loans has
remained constant and the level of allowance for loan losses as a percentage of
non-performing loans at September 30, 1997 increased from June 30,1997. Total
delinquencies as a percentage of total loans decreased during the quarter ended
September 30,1997. Based on reviewing the credit risk and collateral of
delinquent, non-performing and classified loans, management considers the
allowance for loan losses to be adequate.
On a regular and ongoing basis, management evaluates the adequacy of the
allowance for loan losses. The process to evaluate the allowance involves a
14
high degree of management judgement. 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.
While management uses its best judgement in recognizing loan losses in light of
available information, there can be no assurance that the Company will not have
to increase its provision for loan losses in the future as a result of changing
economic conditions, adverse markets for real estate or other factors. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance for loan
losses based on their judgements about information available to them at the
time of their examination. The Bank's most recent examination by the OTS was
on September 22, 1997. At the time of the exam the regulators proposed no
additions to the allowance for loan losses.
Results of Operations
_____________________
Net income for the quarter ended September 30, 1997 was $552,841.
Primary earnings per share was $.38 and fully diluted earnings per share was
$.34 for the quarter ended September 30, 1997. This compares to earnings of
$184,261 or primary and fully diluted earnings per share of $.11 for the
quarter ended September 30, 1996.
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 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. The net effect of the one time assessment decreased the Company's
primary earnings per share by $.19 and the fully diluted earnings per share
by $.16 for the quarter ended September 30, 1996. 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.
The Company's net interest income was $2,492,079 for the three months ended
September 30, 1997, versus $2,283,952 for the three months ended September 30,
1996, an increase of $208,127. Total interest income increased $679,639 during
the three months ended September 30, 1997 compared to the three months ended
September 30, 1996, resulting from the following items: (I) interest income on
loans and loans held for sale increased by $757,875 for the three months ended
September 30, 1997 resulting from a $835,194 increase due to an increase in the
volume of loans, which was offset by a decrease of $77,319 due to decreased
rates on loans; (II) interest income on investment securities decreased by
$124,729 resulting from a $91,017 decrease due to a decrease in volume as well
as a decrease of $33,712 due to decreased rates on investments; and (III)
interest income on short term liquid funds increased by $46,493 resulting from
15
a $43,758 increase due to an increase in volume as well as an increase of
$2,735 due to increased rates on FHLB overnight and other deposits.
The increase in total interest expense of $471,512 for the three months ended
September 30, 1997 resulted from the following items: (I) interest expense on
deposits increased by $153,115 for the three months ended September 30, 1997
resulting from a $134,777 increase due to an increase in the volume of deposits
as well as an increase of $18,338 due to increasing deposit rates; (II)
interest expense on repurchase agreements increased by $10,169 due to an
increase of $10,665 in the volume of repurchase agreements, which was offset by
a decrease of $496 due to a decrease in rates; and (III) interest expense on
borrowings increased by $308,228 for the three months ended September 30, 1997
resulting from an increase of $329,264 due to an increase in the volume of
borrowings offset by a decrease of $21,036 due to a 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 three months ended
September 30, 1997 versus September 30, 1996
Difference Due to
Volume Rate Total
____________ ____________ ____________
Investments $ (91,017) $ (33,712) $ (124,729)
Loans 835,194 (77,319) 757,875
FHLB & Other Deposits 43,758 2,735 46,493
____________ ____________ ____________
Total 787,935 (108,296) 679,639
Deposits 134,777 18,338 153,115
Repurchase Agreements 10,665 (496) 10,169
Borrowings 329,264 (21,036) 308,228
____________ ____________ ____________
Total 474,706 (3,194) 471,512
____________ ____________ ____________
Net Interest Income $ 313,229 $ (105,102) $ 208,127
============ ============ ============
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
16
loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as on approximately 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. The Company is experiencing and anticipates additional net
interest margin compression due to fluctuating rates. The impact on net
interest income will depend on, among other things, actual rates charged on the
Bank's loan portfolio, deposit and advance rates paid by the Bank and loan
volume.
Total non-interest income was $540,306 for the three months ended September 30,
1997 versus $505,684 for the three months ended September 30, 1996. Service
fee income was $262,566 for the three months ended September 30, 1997 versus
$267,949 for the three months ended September 30, 1996. The $5,383 service fee
decrease for the three months ended September 30, 1997 was primarily due to a
reduction in loan servicing and deposit fee income. Income from available for
sale securities gains was $107,996 for the three months ended September 30,
1997 versus $28,300 for the three months ended September 30, 1996. The Company
sold some of its available for sale securities during the three month period
ended September 30, 1997, taking advantage of the fluctuation in market prices
in the mortgage-backed security portfolio. Income from trading account
securities was $1,797 for the three month period ended September 30, 1997
versus $61,366 for the three month period ended September 30, 1996. Larger
gains on the trading account portfolio was attained in the three month period
ended September 30, 1996, due to the sale and appreciation in the market values
of the securities classified as trading in that time period.
Other income was $167,947 for the three months ended September 30, 1997, which
was an increase of $19,878 when compared to other income of $148,069 for the
three months ended September 30, 1996. The increase in other income in the
three months ended September 30,1997, was primarily due to income generated
from the Bank's trust department and revenue from the sale of investments to
customers through the Bank's relationship with Commonwealth Financial Services,
Inc..
Total operating expense, or non-interest expense, for the Company was
$2,016,005 for the three months ended September 30, 1997 versus $2,343,829 for
the three months ended September 30, 1996. The increase in occupancy and
equipment expense for the three months ended September 30, 1997 was due to
costs associated with the new branch opened in Auburn, Maine as well as normal
growth and maintenance. Other expenses decreased by $29,765 for the three
months ended September 30, 1997, compared to September 30, 1996. The decrease
in other expenses was primarily due to the reduction in deposit insurance and
loan expenses. As previously discussed above, the Company's operating
expenses, for the three months ended September 30, 1996, increased primarily
due to the FDIC-SAIF deposit insurance assessment of $380,000. Excluding the
deposit assessment, the Company's operating expenses were $1,963,829 for the
three months ended September 30, 1996.
Merger
______
On May 9, 1997 the Company entered into a definitive agreement to merge the
Bank with Cushnoc Bank and Trust Company (Cushnoc) of Augusta, Maine. The
agreement had been approved by the Company's and Cushnoc's Board of Directors
and was subject to approval by Cushnoc's shareholders. On August 29, 1997, the
17
Company received approval from OTS, subject to certain conditions, to merge the
Bank and Cushnoc. On October 14, 1997, a special shareholders meeting was held
by Cushnoc at which its shareholders voted to approve the merger of the Bank
and Cushnoc. The merger of the Bank and Cushnoc was completed on October 24,
1997. At September 30, 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 has 90,000 common shares outstanding. The acquisition will be
accounted for under the pooling of interest method.
Impact of Inflation
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, substantially all of the assets and virtually all of the
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
________________________________________________________
There have been no material changes in the Company's market risk from June 30,
1997. For information regarding the Company's market risk, refer to the Annual
Report on Form 10-K dated as of June 30, 1997.
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.
NORTHEAST BANCORP AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
_________________
18
Not Applicable.
Item 2. Changes in Securities
_____________________
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities
_______________________________
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
Not Applicable.
Item 5. Other Information
_________________
(a) Not applicable
Item 6. Exhibits and Reports on Form 8 - K
__________________________________
(a) Exhibits
________
2.1 Agreement and Plan of Merger dated as of May 9, 1997 by and among
Northeast Bancorp, Northeast Bank, FSB and Cushnoc Bank and Trust
Company incorporated by reference to Exhibit 2 to Northeast
Bancorp's Registration Statement on Form S-4 (No. 333-31797)
filed with the Securities and Exchange Commission.
11 Statement regarding computation of per share earnings.
27 Financial data schedule
(b) Reports on Form 8 - K
_____________________
No reports on Form 8 - K have been filed during the quarter ended
September 30, 1997.
NORTHEAST BANCORP AND SUBSIDIARIES
Signatures
19
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NORTHEAST BANCORP
_________________________
(Registrant)
/s/ James D. Delamater
_________________________
James D. Delamater
President and CEO
/s/ Richard Wyman
_________________________
Richard Wyman
Chief Financial Officer
Date: November 12, 1997
NORTHEAST BANCORP AND SUBSIDIARIES
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION
______________ _____________________________________________________
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
NORTHEAST BANCORP AND SUBSIDIARIES
Exhibit 11. Statement Regarding Computation of Per Share Earnings
20
EQUIVALENT SHARES:
Average Shares Outstanding 1,290,800 1,231,294
Total Equivalent Shares 1,290,800 1,231,294
Total Primary Shares 1,376,623 1,330,400
Total Fully Diluted Shares 1,623,733 1,565,531
Net Income $ 552,841 $ 184,261
Less Preferred Stock Dividend 34,999 34,999
__________________ _________________
Net Income after Preferred Dividend $ 517,842 $ 149,262
================== =================
Primary Earnings Per Share $ 0.38 $ 0.11
Fully Diluted Earnings Per Share $ 0.34 $ 0.11
9
1
3-MOS
JUN-30-1998
SEP-30-1997
3,260,381
10,698,377
0
25,000
29,802,208
0
0
209,256,513
2,560,000
265,441,708
154,262,801
62,403,057
4,077,179
24,234,011
0
1,999,980
1,293,642
17,171,038
265,441,708
4,745,135
465,281
185,857
5,396,273
1,692,682
2,904,194
2,492,079
153,500
109,793
2,016,005
862,880
862,880
0
0
552,841
0.38
0.34
3.924
2,273,000
0
216,655
774,000
2,517,000
183,242
72,742
2,560,000
419,474
0
2,140,526
