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, 1996
or
_____ Transition report persuant 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)
158 Court Street, Auburn, Maine 04210
________________________________________ ____________________________________
(Address of principal executive offices) (Zip Code)
(207) 777 - 5950
_______________________________________________________________________________
Registrant's telephone number, including area code
Bethel Bancorp
_______________________________________________________________________________
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 8, 1996: 1,231,547 of common stock, $1.00 par
value per share.
NORTHEAST BANCORP AND SUBSIDIARY
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
September 30, 1996 and June 30, 1996
Consolidated Statements of Income
Three Months ended September 30, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity
Three Months ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows
Three Months ended September 30, 1996 and 1995
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Part II. Other Information
Items 1 - 6.
Signature Page
Index to Exhibits
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, June 30,
1996 1996
_______________ _______________
Assets
Cash and due from banks $ 5,298,792 $ 3,386,263
Interest bearing deposits in other banks 560,365 650,430
Federal Home Loan Bank overnight deposits 6,881,000 7,529,435
Trading account securities at market 196,298 197,621
Available for sale securities 32,395,480 29,650,319
Federal Home Loan Bank stock 2,980,100 2,656,200
Loans held for sale 390,384 448,475
Loans 173,238,611 170,140,264
Less deferred loan origination fees 248,479 289,340
Less allowance for loan losses 2,487,000 2,549,000
_______________ _______________
Net loans 170,503,132 167,301,924
Bank premises and equipment, net 3,521,672 3,576,386
Real estate held for investment 458,748 459,820
Other real estate owned 772,739 513,831
Goodwill (net of accumulated amortization
of $1,014,153 at 9/30/96 and $940,059 at
6/30/96) 2,483,820 2,557,913
Other assets 3,455,774 3,360,998
_______________ _______________
Total Assets 229,898,304 222,289,615
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 145,544,632 $ 145,195,369
Repurchase Agreements 3,874,811 3,762,966
Advances from Federal Home Loan Bank 59,278,835 52,123,000
Notes payable 1,376,081 1,502,192
Other Liabilities 1,622,447 1,554,846
_______________ _______________
Total Liabilities 211,696,806 204,138,373
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 $1,1,234,010 shares
issued at 9/30/96 and 6/30/96. 1,231,294
and 1,229,910 shares outstanding at
9/30/96 and 6/30/96, respectively 1,234,010 1,234,010
Additional paid in capital 5,455,506 5,455,852
Retained earnings 10,401,790 10,351,031
_______________ _______________
19,091,286 19,040,873
Net unrealized loss on available for sale
securities (855,156) (837,354)
Treasury Stock at cost 2,716 shares at
9/30/96 and 4,100 shares at 6/30/96 (34,632) (52,277)
_______________ _______________
Total Shareholders' Equity 18,201,498 18,151,242
_______________ _______________
Total Liabilities and Shareholders' Equity $ 229,898,304 $ 222,289,615
=============== ===============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30,
1996 1995
______________ ______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 88,064 $ 181,565
Interest on loans & loans held for sale 3,987,260 4,098,163
Interest on investment securities &
available for sale securities 590,010 160,580
Dividends on Federal Home Loan Bank stock 46,409 36,850
Other Interest Income 4,891 5,498
______________ ______________
Total Interest Income 4,716,634 4,482,656
Interest Expense
Deposits 1,539,567 1,635,482
Repurchase agreements 38,269 33,913
Other borrowings 854,846 599,959
______________ ______________
Total Interest Expense 2,432,682 2,269,354
______________ ______________
Net Interest Income 2,283,952 2,213,302
Provision for loan losses 144,814 147,855
______________ ______________
Net Interest Income after Provision for
Loan Losses 2,139,138 2,065,447
Other Income
Service charges 267,949 281,609
Available for sale securities gains (losses) 28,300 120,593
Gain (Loss) on trading account 61,366 --
Other 148,069 212,091
______________ ______________
Total Other Income 505,684 614,293
Other Expenses
Salaries and employee benefits 1,024,525 1,043,248
Net occupancy expense 126,970 121,896
Equipment expense 177,028 168,288
Goodwill amortization 74,094 74,335
FDIC Insurance Assessment 380,000 --
Other 561,212 608,156
______________ ______________
Total Other Expenses 2,343,829 2,015,923
______________ ______________
Income Before Income Taxes 300,993 663,817
Income tax expense 116,732 242,180
______________ ______________
Net Income $ 184,261 $ 421,637
============== ==============
Earnings Per Share
Primary $ 0.11 $ 0.32
Fully Diluted $ 0.11 $ 0.29
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended September 30, 1996 and 1995
(Unaudited)
Net
Unrealized
Gains(Losses)
Additional on Available
Common Preferred Paid-In Retained for Sale Treasury
Stock Stock Capital Earnings Securities Stock Total
____________ ___________ ___________ _____________ ____________ _____________ ____________
Balance at June 30, 1995 $ 547,502 $1,999,980 $4,643,059 $ 10,180,244 $ (95,507) $ 0 $17,275,278
Net income for three months
ended September 30, 1995 -- -- -- 421,637 -- -- 421,637
Dividends paid on common
stock -- -- -- (43,810) -- -- (43,810)
Dividends paid on preferred
stock -- -- -- (35,000) -- -- (35,000)
Issuance of common stock 123 -- 2,521 -- -- -- 2,644
Common stock warrants
exercised 50,000 -- 650,000 -- -- -- 700,000
Net change in unrealized
losses on securities
available for sale -- -- -- -- (27,717) -- (27,717)
____________ ___________ ___________ _____________ ____________ _____________ ____________
Balance September 30, 1995 $ 597,625 $1,999,980 $5,295,580 $ 10,523,071 $ (123,224) $ 0 $18,293,032
============ =========== =========== ============= ============ ============= ============
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 -- -- (346) -- -- 17,645 17,299
Net change in unrealized
losses on securities
available for sale -- -- -- -- (17,802) -- (17,802)
____________ ___________ ___________ _____________ ____________ _____________ ____________
Balance September 30, 1996 $ 1,234,010 $1,999,980 $5,455,506 $ 10,401,790 $ (855,156) $ (34,632) $18,201,498
============ =========== =========== ============= ============ ============= ============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Three Months Ended
September 30,
1996 1995
______________ ______________
Cash provided by operating activities $ 542,157 $ 6,862
Cash flows from investing activities:
FHLB stock purchased (323,900) --
Available for sale securities purchased (8,763,065) (8,572,245)
Available for sale securities principal
reductions 572,283 154,533
Available for sale securities sold 5,447,793 8,467,522
New loans, net of repayments & charge offs (3,741,933) 2,146,169
Net capital expenditures (60,543) (107,654)
Real estate owned sold 126,608 8,157
Real estate held for investment purchased -- (56,096)
Real estate held for investment sold -- 30,000
______________ ______________
Net cash provided by (used in) investing
activities (6,742,757) 2,070,386
Cash flows from financing activities:
Net change in deposits 349,263 651,422
Net change in repurchase agreements 111,845 1,204,649
Dividends paid (133,502) (78,810)
Proceeds from stock issuance 17,299 702,645
Net (decrease) increase in advances from
Federal Home Loan Bank of Boston 7,155,835 (2,000,000)
Net change in notes payable (126,111) (127,683)
______________ ______________
Net cash provided by financing activities 7,374,629 352,223
______________ ______________
Net (decrease) increase in cash and cash
equivalents 1,174,029 2,429,471
Cash and cash equivalents, beginning of period 11,566,128 14,740,070
______________ ______________
Cash and cash equivalents, end of period $ 12,740,157 $ 17,169,541
============== ==============
Cash and cash equivalents include cash on hand,
amounts due from banks, interest bearing
deposits and federal funds sold
Supplemental schedule of noncash investing
activities:
Net increase (decrease) in valuation for
unrealized market value adjustments on
available for sale securities (17,802) (27,717)
Net transfer (to) from Loans to Other Real
Estate Owned 447,039 (251,771)
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds -- 1,500
Interest paid 2,391,111 2,278,724
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1996
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, 1996 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1997. For further
information, refer to the audited consolidated financial statements and
footnotes thereto for the fiscal year ended June 30, 1996 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, 1996 June 30, 1996
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Debt securities issued by
the U.S. Treasury and
other U.S. Government
corporations and agencies $ 1,250,000 $ 1,222,338 $ 1,497,111 $ 1,424,690
Corporate bonds 149,658 139,828 149,646 139,005
Mortgage-backed securities 31,666,203 30,475,543 28,810,113 27,646,294
Equity securities 625,310 557,771 462,167 440,330
____________ ____________ ____________ ____________
$33,691,171 $32,395,480 $30,919,037 $29,650,319
============ ============ ============ ============
September 30, 1996 June 30, 1996
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Due in one year or less -- -- $ 247,111 $ 246,790
Due after one year through
five years 250,000 239,525 250,000 237,900
Due after five years
through ten years 149,658 139,828 149,646 139,005
Due after ten years 1,000,000 982,813 1,000,000 940,000
Mortgage-backed securities
(including securities
with interest rates
ranging from 5.15% to
8.5% maturing September
2003 to August 2026) 31,666,203 30,475,543 28,810,113 27,646,294
Equity securities 625,310 557,771 462,167 440,330
____________ ____________ ____________ ____________
$33,691,171 $32,395,480 $30,919,037 $29,650,319
============ ============ ============ ============
3. Allowance for Loan Losses
The following is an analysis of transactions in the allowance for loan losses:
Three Months Ended
September 30,
1996 1995
____________ ____________
Balance at beginning of year $ 2,549,000 $ 2,396,000
Add provision charged to operations 144,814 147,855
Recoveries on loans previously charged off 21,431 6,842
____________ ____________
2,715,245 2,550,697
Less loans charged off 228,245 56,697
____________ ____________
Balance at end of period $ 2,487,000 $ 2,494,000
============ ============
4. Advances from Federal Home Loan Bank
A summary of borrowings from the Federal Home Loan Bank is as follows:
September 30, 1996
_______________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 30,100,000 5.17% - 6.87% 1997
10,243,800 4.97% - 6.39% 1998
14,500,000 5.64% - 5.96% 1999
1,965,953 6.21% - 6.49% 2001
2,469,082 6.36% - 6.67% 2003
______________
$ 59,278,835
==============
June 30, 1996
________________________________________________
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
325,000 6.61% 2003
________________ _______________ ____________
$ 52,123,000
================
5. New Accounting Pronouncements
On March 31, 1995, FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" ("Statement 121"). Statement 121 provides guidance
for recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill related both to assets to be held and
used and assets to be disposed of. Statement 121 requires entities to perform
separate calculations for assets to be held and used to determine whether
recognition of an impairment loss is required and, if so, to measure the
impairment. Statement 121 requires long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount or
fair value less cost to sell, except for assets covered by the provisions of
APB Opinion No. 31. Statement 121 is effective for financial statements issued
for fiscal years beginning after December 15, 1995. The Company adopted
Statement 121 on July 1, 1996; the effect of adopting the new rules did not
have a significant effect on the financial condition, liquidity, or results of
operations of the Company.
In May 1995, FASB issued Statement No. 122, Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65, ("Statement 122"). Statement
122 is effective for fiscal years beginning after December 15, 1995. The
Company adopted Statement 122 in its first quarter of fiscal year 1997.
Statement 122 requires that a mortgage banking enterprise recognize as separate
assets the rights to service mortgage loans for others. Statement 122 also
requires the assessment of capitalized mortgage servicing rights for impairment
to be based on the current fair value of those rights. This assessment
includes servicing rights capitalized prior to adoption of Statement 122. The
Adoption of Statement 122 was not material to the Company's financial position,
liquidity, or results of operations.
In October 1995, FASB issued Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), which became effective on July 1, 1996 for the
Company. Statement 123 established 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. However, the statement allows a 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. Statement 123 requires companies which elect to continue to
follow APB Opinion No. 25 to disclose in the notes to their annual financial
statements pro forma net income and earnings per share as if the value based
method of accounting had been applied.
NORTHEAST BANCORP AND SUBSIDIARY
Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
_______________________________________________________________________
of Operation
____________
Financial Condition
___________________
Total consolidated assets at September 30, 1996 were $229,898,304, which was an
increase of $7,608,689 from June 30, 1996. Total loans increased by
$3,201,208, while securities and cash equivalents increased by $3,067,738 and
$1,174,029, respectively during the same period. Total deposits increased by
$349,263, total repurchase agreements increased by $111,845, and total
borrowings from the Federal Home Loan Bank (FHLB) increased by $7,155,835 from
June 30, 1996 to September 30, 1996.
Cash and due from banks has increased by $1,912,529, from fiscal year end, due
to large cash items cleared through the Federal Reserve Bank and the Maine
clearing house on September 30, 1996. FHLB overnight deposits decreased by
$648,435 due to the use of cash to support the increase in the loan and
investment portfolios.
Total loans increased by $3,201,208 for the three months ended September 30,
1996. The loan portfolio growth was in 1-4 family mortgages and commercial
loans. The Company's local market as well as the secondary market has become
and continues to be very competitive for loan volume. The local competitive
environment and customers response to favorable secondary market rates have
affected the Company's ability to increase the loan portfolio. In an effort to
increase loan volume, the Company's offering rates for its loan products has
been reduced to compete in various markets. While the loan portfolio has
increased in the first quarter of this fiscal year, the Company will experience
some margin compression due to decreased loan rates.
The loan portfolio contains elements of credit and interest rate risk. The
Company primarily lends within its local market areas, which management
believes helps it to better evaluate credit risk. The Company also maintains a
well collateralized position in real estate mortgages. Residential real estate
mortgages make up 69% of the total loan portfolio, in which 47% of the
residential loans are variable rate products. It is management's intent to
increase the proportion of variable rate residential loans, by selling fixed
rate loans to the secondary market and maintaining portfolio variable rate
loans, to reduce the interest rate risk in this area.
Fifteen percent of the Company's total loan portfolio balance is commercial
real estate mortgages. Similar to the residential mortgages, the Company tries
to mitigate credit risk by lending in its local market area as well as
maintaining a well collateralized position in the real estate. The commercial
real estate loans have minimal interest rate risk as 87% of the portfolio
consists of variable rate products.
Commercial loans make up 9% of the total loan portfolio, in which 83% of its
balance are variable rate instruments. The credit loss exposure on commercial
loans is highly dependent on the cash flow of the customer's business. The
Company's subsidiary, Northeast Bank, FSB (the "Bank"), attempts to mitigate
losses in commercial loans through lending in accordance to the Company's
credit policy guidelines established by the Bank's Board of Directors.
Consumer and other loans make up 7% 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 Company's known market areas.
Other real estate owned has increased by $258,908 from June 30, 1996 to
September 30,1996. This increase was attributable to foreclosures on loan
collateral.
The Bank continues to attract new deposit relationships. Total deposits were
$145,544,632 and securities sold under repurchase agreements were $3,874,811 as
of September 30, 1996. These amounts represent increases of $349,263 and
$111,845, respectively, when compared to June 30, 1996. Brokered deposits
represented $4,859,868 of the total deposits for the quarter ended September
30, 1996 a decrease of $787,270 compared to June 30, 1996. The Company
utilizes, as alternative sources of funds, brokered CD's when the national
brokered CD interest rates are less than the interest rates on local market
deposits. Brokered deposits are similar to local deposits, in that both are
interest rate sensitive with the respect to the Company's ability to retain the
funds.
Total advances from the Federal Home Loan Bank were $59,278,835 as of September
30, 1996, an increase of $7,155,835 from June 30, 1996. The cash received
from FHLB advances was utilized for the increase in loans and investments.
The Company's current advance availability, subject to the satisfaction of
certain conditions, is approximately $41,200,000 over and above the September
30, 1996 advances reported. Mortgages, free of liens, pledges and encumbrances
are required to be pledged to secure FHLB advances. The Company utilizes
Federal Home Loan Bank advances to fund short-term liquidity demand for loan
volume and as an alternative sources of funds when the interest rates of the
advances are less than market deposit interest rates. With the borrowing
capacity at the Federal Home Loan Bank and the continued growth in bank
deposits and repurchase agreements, management believes that the Company's
available liquidity resources are sufficient to support future loan growth.
Total equity of the Company was at $18,201,498 as of September 30, 1996 versus
$18,151,242 at June 30, 1996. Book value per common share was $13.16 as of
September 30, 1996 versus $13.13 at June 30, 1996. Total equity to total
assets of the Company as of September 30, 1996 was 7.92%.
At September 30, 1996, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
Northeast
Bank, F.S.B.
_______________
Capital Requirements:
Tangible capital $ 3,417,000
Percent of tangible assets 1.50%
Core capital $ 6,835,000
Percent of adjusted tangible assets 3.00%
Leverage capital $ 9,113,000
Percent of adjusted leverage assets 4.00%
Risk-based capital $ 10,865,000
Percent of risk-weighted assets 8.00%
Actual:
Tangible capital $ 16,000,000
Percent of adjusted total assets 7.02%
Excess of requirement $ 6,535,000
Core capital $ 16,000,000
Percent of adjusted tangible assets 7.02%
Excess of requirement $ 9,165,000
Leverage capital $ 16,000,000
Percent of adjusted leverage assets 7.02%
Excess of requirement $ 6,887,000
Risk-based capital $ 17,094,000
Percent of risk-weighted assets 12.59%
Excess of requirement $ 6,229,000
The carrying value of securities available for sale of the Company was
$32,395,480, which is $1,295,691 less than the cost of the underlying
securities, at September 30, 1996. The difference from the cost and the
carrying value of the securities was primarily due to the decline in 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 it would be advantageous to hold these securities
until the market values recover and the that yields currently received on this
portfolio are satisfactory.
The Company increased its investment in FHLB stock by $323,900, compared to
June 30, 1996, due to the increase in FHLB borrowings. The FHLB requires
institutions to hold a certain level of FHLB stock based on advances
outstanding.
The Company's allowance for loan losses was $2,487,000 as of September 30, 1996
versus $2,549,000 as of June 30, 1996, representing 1.44% and 1.50% of total
loans, respectively. The Company had non-performing loans totaling $2,345,000
at September 30, 1996 compared to $2,603,000 at June 30, 1996. Non-performing
loans represented 1.02% and 1.17% of total assets at September 30 and June 30,
1996, respectively. The Company's allowance for loan losses was equal to 106%
and 98% of the total non-performing loans at September 30, 1996 and June 30,
1996, respectively. At September 30, 1996, the Company had approximately
$1,500,000 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. The loans classified substandard, as of
September 30, 1996, have decreased from the June 30, 1996 amount of $2,541,000.
This decrease was attributed to the reclassification of loans to lower risk
classifications as a result of favorable changes in the borrower's financial
condition, indicating a decreased potential for these loans becoming
non-performing assets. Even though substandard loans decreased, there is a
continuation of economic weakness in the Oxford county region served by the
Bank. 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 Company's non-performing loans
as of September 30 and June 30, 1996, respectively:
September 30, June 30,
Description 1996 1996
_______________________ _______________ _______________
1-4 Family Mortgages $ 1,224,000 $ 1,092,000
Commercial Mortgages 781,000 1,154,000
Commercial Installment 304,000 283,000
Consumer Installment 36,000 74,000
_______________ _______________
Total non-performing $ 2,345,000 $ 2,603,000
=============== ===============
The majority of the non-performing loans are seasoned loans located in the
Oxford county area. This geographic area continues to have a depressed economy
resulting in high unemployment and a soft real estate market. As a result,
management has allocated substantial resources to collections in an effort to
control the growth in non-performing, delinquent and substandard loans. The
Company has decreased its total delinquent accounts during the September 30,
1996 quarter. The reduction was largely due to collection efforts of the 30
and 60 day delinquent accounts as well as the transfer of non-performing loans
to real estate owned.
The following table reflects the quarterly trend of total delinquencies 30 days
or more past due, including non-performing loans, for the Company as a
percentage of total loans:
12-31-95 3-31-96 6-30-96 9-30-96
3.51% 2.82% 2.77% 1.53%
While the level of the allowance for loan losses as a percentage of total loans
at September 30, 1996 decreased from June 30, 1996, the level of the allowance
for loan losses as a percentage of non-performing loans and total delinquencies
as a percentage of total loans improved during the quarter ended September 30,
1996. Loans classified substandard decreased from June 30, 1996 to September
30, 1996. 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, Company management evaluates the adequacy of
the allowance for loan losses. The process to evaluate the allowance involves
a high degree of management judgement. The methods employed to evaluate the
allowance for loan losses are quantitative in nature and consider such factors
as the loan mix, the level of non-performing loans, delinquency trends, past
charge-off history, loan reviews and classifications, collateral, and the
current economic climate.
The state of Maine's economy, in which the Bank operates, including the south
central region of Cumberland, Androscoggin and Sagadahoc counties has
stabilized with moderate growth, although the economy in the western region of
Oxford county remains weak. Based on the different economic conditions in the
Bank's market areas, management of the Company continues to carefully monitor
the exposure to credit risk at the Bank.
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 Company's allowance for loan losses. Such
agencies may require the Company 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 Company'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.
Results of Operations
_____________________
Net income for the quarter ended September 30, 1996 was $184,261. The primary
and fully diluted earnings per share were $.11 for the quarter ended September
30, 1996. This compares to earnings of $421,637, or primary earnings per share
of $.32 and fully diluted earnings per share of $.29, for the quarter ended
September 30, 1995. The 1995 earnings per share have been restated as a result
of the Company's 100% stock dividend in December, 1995.
The reduction in net income for the quarter ended September 30, 1996, compared
to the quarter ended September 30, 1995 was due to the FDIC special insurance
assessment on thrift SAIF deposits. 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 Ration.
Institutions with SAIF deposits will be required to pay an up-front 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,
which resulted in a first quarter expense of $380,000 to the Company. This 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. At the Bank's current deposit level of former SAIF deposits, the
1997 annual assessment would be approximately $47,000. Commencing in 2000 and
continuing through 2017, banks will be required to pay a flat annual assessment
of 2.43 cents for every $100 of domestic deposits. If there are no additional
deposit insurance assessments in the future, it is anticipated that the Company
will save approximately $95,000 annually commencing in fiscal 1998.
The Company's net interest income was $2,283,952 for the quarter ended
September 30, 1996, versus $2,213,302 for the quarter ended September 30, 1995,
an increase of $70,650. Total interest income increased $233,978 during the
three months ended September 30, 1996 compared to the three months ended
September 30, 1995, resulting from the following items: (I) Interest income on
loans and loans held for sale decreased by $110,903 for the three months ended
September 30, 1996 resulting from a $19,374 increase due to an increase in the
volume of loans, which was more than offset by a decrease of $130,277 due to
decreased rates on loans. (II) Interest income on investment securities
increased by $438,989 resulting from a $402,776 increase due to an increase in
volume as well as an increase of $36,213 due to increased rates on investments.
(III) Interest income on short term liquid funds decreased by $94,108 resulting
from a $78,738 decrease due to a decrease in volume as well as a decrease of
$15,370 due to decreased rates on FHLB overnight deposits.
The increase in total interest expense of $163,328 for the three months ended
September 30, 1996 resulted from the following items: (I) Interest expense on
deposits decreased by $95,915 for the three months ended September 30, 1996
resulting from a $25,225 decrease due to a decrease in the volume of deposits
as well as a decrease of $70,690 due to decreasing deposit rates. (II)
Interest expense on repurchase agreements increased $4,356 due to an increase
in the volume of repurchase agreements offset by a decrease of $5,103 due to a
decrease in rates. (III) Interest expense on borrowings increased $254,887 for
the three months ended September 30, 1996 resulting from an increase of
$344,042 due to an increase in the volume of borrowings offset by a decrease
of $89,155 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, 1996 versus September 30, 1995
Difference Due to
Volume Rate Total
__________ __________ __________
Investments $ 402,776 $ 36,213 $ 438,989
Loans 19,374 (130,277) (110,903)
FHLB & Other Deposits (78,738) (15,370) (94,108)
__________________________________
Total 343,412 (109,434) 233,978
Deposits (25,225) (70,690) (95,915)
Repurchase Agreements 9,459 (5,103) 4,356
Borrowings 344,042 (89,155) 254,887
__________________________________
Total 328,276 (164,948) 163,328
__________________________________
Net Interest Income $ 15,136 $ 55,514 $ 70,650
==================================
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 20% of the Company's loan portfolio is comprised of
floating rate loans based on a prime rate index. Interest income on these
existing loans will increase as the prime rate increases, as well as on
approximately 32% of other loans in the Company'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 Federal Home Loan Bank
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 Company's loan portfolio, deposit and
advance rates paid by the Company and loan volume.
Total non-interest income was $505,684 for the three months ended September
30, 1996 versus $614,293 for the three months ended September 30, 1995.
Service fee income was $267,949 for the quarter ended September 30, 1996 versus
$281,609 for the quarter ended September 30, 1995. The $13,660 service fee
decrease was primarily due to the reduction in loan fee income. Income from
available for sale securities gains was $28,300 for the three months ended
September 30, 1996 versus $120,593 for the three months ended September 30,
1995. Gains from the sale of securities decreased in the September 30, 1996
quarter by $92,293 compared to the quarter ended September 30, 1995. The
Company sold some of its available for sale securities in the September 30,
1995 quarter, taking advantage of the fluctuation in market prices in the
mortgage-backed security portfolio. Income from trading account securities was
$61,366 and $0 for the three months ended September 30, 1996 and 1995,
respectively. The gain on trading account, in the September 30, 1996 quarter,
was due to the sale and appreciation in market value of the securities
classified as trading.
Other income was $148,069 for the three months ended September 30, 1996, which
was a $64,022 decrease from the September 30, 1995 $212,091 balance. The
reduction in other income was primarily due to the decrease in gains on the
sale of loans held for sale, which amounted to $19,879 for the three months
ended September 30, 1996 versus $82,815 for the three months ended September
30, 1995. The reduction in gains from the sale of loans was due to decreased
secondary market activity.
Total operating expense, or non-interest expense, for the Company was
$2,343,829 for the three months ended September 30, 1996 versus $2,015,923 for
the three months ended September 30, 1995. As previously discussed above, the
Company's operating expenses increased primarily due to the FDIC-SAIF deposit
insurance assessment of $380,000. Excluding the FDIC-SAIF deposit assessment,
the Company's total operating expense was $1,963,829 for the three months ended
September 30,1996, which was a decrease of $52,094 when compared to the three
months ended September 30, 1995.
Cash provided by operating activities increased by $535,295 for the three
months ended September 30, 1996. During the quarter ended September 30, 1995
there was a reduction in cash from operating activities due to the increase in
assets held for sale of $616,000.
On July 1, 1996 the Company adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 122 , Accounting for Mortgage
Servicing Rights, ("Statement 122"). Statement 122 requires that a mortgage
banking enterprise recognize as separate assets the rights to service mortgage
loans for others. Statement 122 also requires the assessment of capitalized
mortgage servicing rights for impairment to be based on the current fair value
of those rights. This assessment includes servicing rights capitalized prior
to adoption of Statement 122. The adoption of Statement 122 was not material
to the Company's financial position, liquidity, or results of operations.
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 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.
NORTHEAST BANCORP AND SUBSIDIARY
Part II - Other Information
Item 1. Legal Proceedings
_________________
Not Applicable.
Item 2. Changes in Securities
_____________________
Not Applicable.
Item 3. Defaults Upon Senior Securities
_______________________________
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
SUMMARY OF VOTING AT 10/23/96 ANNUAL SHAREHOLDERS' MEETING
__________________________________________________________
At the Annual Meeting of Shareholders held in Auburn, Maine on October 23,
1996, the following proposals were approved, each proposal receiving the vote
of the Company's outstanding common and preferred shares, voting as one class,
as follows:
Proposal 1 - Election of Directors:
Votes For Votes Against Votes Abstaining
___________ _____________ ________________
Joseph A. Aldred, Jr. 1,125,975 9,300 0
A. William Cannan 1,125,975 9,300 0
James D. Delamater 1,134,975 300 0
Normand R. Houde 1,120,413 14,862 0
Philip C. Jackson 1,135,075 200 0
Ronald C. Kendall 1,135,075 200 0
Robert Morrell 1,125,975 9,300 0
Mr. Aldred was elected to serve until the 1997 Annual Meeting. Mr. Cannan was
elected to serve until the 1998 Annual Meeting and Messrs. Delamater, Houde,
Jackson, Kendal and Morrell were elected to serve until the 1999 Annual
Meeting. The terms of the following Directors continued after the meeting: Ms.
Hayes and Messrs. Bouchard, Brown, Goguen, Trinward, Vachon, Wight, and
Wilson. There was no solicitation in opposition to management's nominees, and
all nominees were elected without contest.
Proposal 2 - Amendment to the Company's Articles of Incorporation to change its
name to Northeast Bancorp.
Votes For Votes Against Votes Abstaining Broker Non-Votes
___________ _______________ __________________ __________________
1,130,351 1,860 3,064 0
Proposal 3 - Appointment of Baker Newman & Noyes, Limited Liability Company as
auditors for fiscal year 1997.
Votes For Votes Against Votes Abstaining
___________ _______________ __________________
1,133,935 100 1,240
Item 5. Other Information
_________________
Not Applicable.
Item 6. Exhibits and Reports on Form 8 - K
__________________________________
(a) Exhibits
________
3.1 Conformed Articles of Incorporation of Northeast Bancorp as amended
October 23, 1996 are filed herewith as Exhibit 3.1.
11 Statement regarding computation of per share earnings is filed herewith as
Exhibit 11.
27 Financial data schedule is filed herewith as exhibit 27.
(b) Reports on Form 8 - K
Not Applicable.
NORTHEAST BANCORP AND SUBSIDIARY
Signatures
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NORTHEAST BANCORP
________________________
(Registrant)
/s/ James D. Delamater
________________________
James D. Delamater
President and CEO
/s/ Richard Wyman
________________________
Richard Wyman
Chief Financial Officer
Date: November 13, 1996
NORTHEAST BANCORP AND SUBSIDIARY
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1 Conformed Articles of Incoporation of Northeast Bancorp
as amended October 23, 1996
11 Statement regarding computation of per share earnings
27 Financial Data Schedule