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 December 31, 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)
232 Center Street, Auburn, Maine 04210
________________________________________ _____________________________________
(Address of principal executive offices) (Zip Code)
(207) 777 - 6411
_______________________________________________________________________________
Registrant's telephone number, including area code
Not Applicable
2
_______________________________________________________________________________
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 February 11, 1998: 2,234,638 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
December 31, 1997 and June 30, 1997
Consolidated Statements of Income
Three Months ended December 31, 1997 and 1996
Consolidated Statements of Income
Six Months ended December 31, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity
Six Months ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows
Six Months ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
3
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)
December 31, June 30,
1997 1997
--------------- ---------------
Assets
Cash and due from banks $ 5,354,321 $ 6,112,425
Interest bearing deposits in other banks 317,052 443,021
Federal Home Loan Bank overnight deposits 11,968,000 12,218,898
Trading account securities at market 25,000 25,000
Available for sale securities 18,875,202 28,810,624
Federal Home Loan Bank stock 4,364,000 4,121,000
Loans held for sale 370,749 240,000
Loans 228,544,431 222,885,954
Less deferred loan origination fees/cost (22,183) 203,819
Less allowance for loan losses 2,773,000 2,741,809
_______________ _______________
Net loans 225,793,614 219,940,326
Bank premises and equipment, net 4,561,119 4,774,561
Real estate held for investment 279,458 361,654
Other real estate owned (net of allowance
for losses of $0 at 12/31/97 and $50,839
at 6/30/97) 518,791 563,207
Goodwill (net of accumulated amortization
of $1,384,621 at 12/31/97 and $1,236,434
at 6/30/97) 2,072,102 2,220,289
Other assets 4,233,799 4,198,689
_______________ _______________
Total Assets 278,733,207 284,029,694
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 174,361,238 $ 172,921,286
Repurchase Agreements 5,737,121 5,098,622
Advances from Federal Home Loan Bank 72,563,725 80,494,471
4
Notes payable 1,145,833 1,298,611
Other Liabilities 1,891,611 2,121,123
_______________ _______________
Total Liabilities 255,699,528 261,934,113
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 $1,2,222,691 and
1,462,909 shares issued and outstanding at
12/31/97 and 6/30/97, respectively 2,222,691 1,462,909
Additional paid in capital 7,774,396 7,699,883
Retained earnings 11,174,839 11,266,984
_______________ _______________
23,171,906 22,429,756
Net unrealized losses on available for sale
securities (138,227) (334,175)
_______________ _______________
Total Shareholders' Equity 23,033,679 22,095,581
_______________ _______________
Total Liabilities and Shareholders' Equity $ 278,733,207 $ 284,029,694
=============== ===============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended
December 31,
1997 1996
_______________ _______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 121,584 $ 91,020
Interest on loans & loans held for sale 5,256,343 4,652,547
Interest on available for sale securities 437,952 597,753
Dividends on Federal Home Loan Bank stock 71,904 51,894
Other Interest Income 4,596 7,601
_______________ _______________
Total Interest Income 5,892,379 5,400,815
Interest Expense
Deposits 1,901,610 1,727,321
Repurchase agreements 54,618 54,686
Other borrowings 1,128,589 938,321
_______________ _______________
Total Interest Expense 3,084,817 2,720,328
_______________ _______________
Net Interest Income 2,807,562 2,680,487
Provision for loan losses 227,663 153,443
_______________ _______________
Net Interest Income after Provision for
5
Loan Losses 2,579,899 2,527,044
Other Income
Service charges 237,235 264,768
Available for sale securities gains (losses) 99,696 46,117
Gain (Loss) on trading account 0 (11,241)
Other 405,177 111,650
_______________ _______________
Total Other Income 742,108 411,294
Other Expenses
Salaries and employee benefits 1,272,952 1,121,180
Net occupancy expense 221,148 177,534
Equipment expense 234,410 209,382
Goodwill amortization 74,094 74,094
FDIC Insurance Assessment -- (83,140)
Other 963,019 627,847
_______________ _______________
Total Other Expenses 2,765,623 2,126,897
_______________ _______________
Income Before Income Taxes 556,384 811,441
Income tax expense 200,318 300,894
_______________ _______________
Net Income $ 356,066 $ 510,547
=============== ===============
Earnings Per Share
Basic $ 0.14 $ 0.22
Diluted $ 0.13 $ 0.20
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Six Months Ended
December 31,
1997 1996
_______________ _______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 263,677 $ 192,096
Interest on loans & loans held for sale 10,428,625 9,095,960
Interest on available for sale securities 926,435 1,207,023
Dividends on Federal Home Loan Bank stock 141,741 100,127
Other Interest Income 9,377 19,918
_______________ _______________
Total Interest Income 11,769,855 10,615,124
Interest Expense
Deposits 3,785,093 3,466,915
Repurchase agreements 103,056 92,956
Other borrowings 2,308,883 1,801,733
6
_______________ _______________
Total Interest Expense 6,197,032 5,361,604
_______________ _______________
Net Interest Income 5,572,823 5,253,520
Provision for loan losses 390,163 307,257
_______________ _______________
Net Interest Income after Provision
for Loan Losses 5,182,660 4,946,263
Other Income
Service charges 513,640 554,883
Available for sale securities gains (losses) 207,692 74,417
Gain (Loss) on trading account 1,797 50,124
Other 573,420 260,450
_______________ _______________
Total Other Income 1,296,549 939,874
Other Expenses
Salaries and employee benefits 2,436,566 2,295,733
Net occupancy expense 442,534 339,212
Equipment expense 454,096 411,651
Goodwill amortization 148,187 148,187
FDIC Insurance Assessment -- 296,860
Other 1,560,839 1,273,880
_______________ _______________
Total Other Expenses 5,042,222 4,765,523
_______________ _______________
Income Before Income Taxes 1,436,987 1,120,614
Income tax expense 510,356 418,826
_______________ _______________
Net Income $ 926,631 $ 701,788
=============== ===============
Earnings Per Share
Basic $ 0.39 $ 0.30
Diluted $ 0.35 $ 0.27
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended December 31, 1997 and 1996
(Unaudited)
Net Unrealized
(Gains(Losses)
Additional on Available
Common Preferred Paid-In Retained for Sale Treasury
7
Stock Stock Capital Earnings Securities Stock Total
____________ ___________ ___________ _________________________ _____________ ____________
Balance at June 30, 1996 1,421,950 1,999,980 7,516,228 10,315,043 (837,354) (52,277) 20,363,570
Net income for six months
ended December 31, 1996 -- -- -- 701,788 -- -- 701,788
Employee Stock Bonus -- -- (268) -- -- 13,642 13,374
Employee Stock Purchase 567 -- 6,647 -- -- -- 7,214
Dividends paid on common
Stock -- -- -- (197,027) -- -- (197,027)
Dividends paid on preferred
Stock -- -- -- (69,999) -- -- (69,999)
Net change in unrealized
losses on available for sale
securities -- -- -- -- 126,853 -- 126,853
____________ ___________ ___________ _________________________ _____________ ____________
Balance December 30, 1996 $ 1,422,517 $1,999,980 $7,522,607 $ 10,749,805 $ (710,501) $ (38,635) $20,945,773
============ =========== =========== ========================= ============= ============
Balance at June 30, 1997 1,462,909 1,999,980 7,699,883 11,266,984 (334,175) -- 22,095,581
Net income for six months
ended December 31, 1997 -- -- -- 926,631 -- -- 926,631
Employee Stock Bonus 180 -- 3,159 -- -- -- 3,339
Employee Stock Purchase 345 -- 5,341 -- -- -- 5,686
Stock Split in the form of a
dividend 740,807 -- -- (741,902) -- -- (1,095)
Dividends paid on common
stock -- -- -- (206,875) -- -- (206,875)
Dividends paid on preferred
stock -- -- -- (69,999) -- -- (69,999)
Stock Options Exercised 18,450 -- 66,013 -- -- 44,988 129,451
Treasury Stock Purchased -- -- -- -- -- (44,988) (44,988)
Net change in unrealized
losses on available for sale
securities -- -- -- -- 195,948 -- 195,948
8
____________ ___________ ___________ _________________________ _____________ ____________
Balance December 31, 1997 $ 2,222,691 $1,999,980 $7,774,396 $ 11,174,839 $ (138,227) $ 0 $23,033,679
============ =========== =========== ========================= ============= ============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Six Months Ended
December 31,
1997 1996
_______________ _______________
Cash provided by operating activities $ 654,801 $ 1,307,419
Cash flows from investing activities:
FHLB stock purchased (243,000) (777,000)
Available for sale securities purchased (14,775,583) (11,808,967)
Available for sale securities principal
reductions 750,117 1,030,230
Available for sale securities matured 749,497 650,000
Available for sale securities sold 23,662,251 11,059,818
New loans, net of repayments & charge offs (5,759,169) (18,686,790)
Net capital expenditures (141,207) (403,715)
Real estate owned sold 87,038 389,510
Real estate held for investment sold 68,743 --
_______________ _______________
Net cash provided by (used in) investing
activities 4,398,687 (18,546,914)
Cash flows from financing activities:
Net change in deposits 1,439,952 (3,897,640)
Net change in repurchase agreements 638,499 1,450,880
Dividends paid (276,874) (267,026)
Proceeds from stock issuance 93,488 20,588
Net decrease (increase) in advances from
Federal Home Loan Bank of Boston (7,930,746) 16,508,985
Net change in notes payable (152,778) (127,193)
_______________ _______________
Net cash used (provided) by financing
activities (6,188,459) 13,688,594
_______________ _______________
Net decrease in cash and cash equivalents (1,134,971) (3,550,901)
Cash and cash equivalents, beginning of
period 18,774,344 13,873,947
_______________ _______________
9
Cash and cash equivalents, end of period $ 17,639,373 $ 10,323,046
=============== ===============
Cash and cash equivalents include cash on
hand, amounts due from banks,interest bearing
deposits and federal funds sold
Supplemental schedule of noncash investing
activities:
Net decrease in valuation for unrealized
market value adjustments on available for
sale securities 195,947 126,853
Net transfer from Loans to Other Real
Estate Owned 56,325 600,014
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds 366,000 13,000
Interest paid 6,229,407 5,274,161
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 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 six month
period ended December 31, 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. Merger
______
On October 24, 1997, the Company completed the merger of Cushnoc Bank & Trust
Company (Cushnoc) into its wholly owned subsidiary Northeast Bank (the Bank).
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 business combination was accounted for under the pooling of interest method
and, accordingly, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results of
operations of Cushnoc.
The results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial
10
statements are summarized below.
Three months ended Six months ended
September 30, December 31,
1996 1997 1996
_______________ _______________ ________________
Interest Income
Northeast $ 4,716,634 $ 5,396,273 $ 9,634,223
Cushnoc 497,675 481,203 980,901
Combined 5,214,309 5,877,476 10,615,124
Net Income
Northeast $ 184,261 $ 552,841 $ 711,421
Cushnoc 6,980 17,724 (9,633)
Combined 191,241 570,565 701,788
At September 30, At December 31,
1996 1997 1996
_______________ _______________ ________________
Shareholders' Equity
Northeast $ 18,201,498 $ 20,464,660 $ 18,743,078
Cushnoc 2,218,058 2,212,693 2,202,695
Combined 20,419,556 22,677,353 20,945,773
No adjustments were necessary to conform Cushnoc's method of accounting to the
methods used by Northeast.
3. Securities
__________
Securities available for sale at cost and approximate market values are
summarized below.
December 31, 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 $ 5,197,349 $ 5,189,871 $ 2,948,525 $ 2,905,400
Corporate bonds 203,466 203,526 259,749 252,805
Mortgage-backed securities 12,432,055 12,465,680 25,211,936 24,801,837
Equity securities 1,251,767 1,016,125 896,739 850,582
____________ ____________ ____________ ____________
11
$19,084,637 $18,875,202 $29,316,949 $28,810,624
============ ============ ============ ============
December 31, 1997 June 30, 1997
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Due in one year or less $ 347,964 $ 346,714 $ 398,829 $ 398,829
Due after one year through
five years 703,748 702,813 1,403,991 1,396,491
Due after five years
through ten years 1,349,718 1,347,308 405,454 398,510
Due after ten years 2,999,385 2,996,562 1,000,000 964,375
Mortgage-backed securities
(including securities with
interest rates ranging
from 5.15% to 9.0% maturing
September 2003 to February
2026) 12,432,055 12,465,680 25,211,936 24,801,837
Equity securities 1,251,767 1,016,125 896,739 850,582
____________ ____________ ____________ ____________
$19,084,637 $18,875,202 $29,316,949 $28,810,624
============ ============ ============ ============
4. Allowance for Loan Losses
_________________________
The following is an analysis of transactions in the allowance for loan losses:
Six Months Ended
December 31,
1997 1996
____________ ____________
Balance at beginning of year $ 2,741,809 $ 2,767,883
Add provision charged to operations 390,163 307,257
Recoveries on loans previously charged off 90,350 33,075
____________ ____________
3,222,322 3,108,215
Less loans charged off 449,322 414,149
____________ ____________
Balance at end of period $ 2,773,000 $ 2,694,066
============ ============
5. Advances from Federal Home Loan Bank
____________________________________
A summary of borrowings from the Federal Home Loan Bank is as follows:
December 31, 1997
12
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 55,695,891 4.97% - 6.39% 1998
2,800,000 5.64% - 5.96% 1999
3,000,000 6.27% 2000
1,535,991 6.21% - 6.49% 2001
5,000,000 5.71% 2002
2,531,843 6.36% - 6.67% 2003
2,000,000 6.65% 2005
______________
$ 72,563,725
==============
June 30, 1997
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 55,458,706 4.97% - 6.40% 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
==============
6. Earnings Per Share.
___________________
On December 31, 1997, the Company adopted FASB Statement No. 128, "Earnings Per
Share". Earnings per share for prior periods have been restated in accordance
with the requirements of Statement No. 128.
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, Augusta, Bethel, Harrison, South Paris,
Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls, Maine.
13
Merger
______
On October 24, 1997, the Bank completed its merger with Cushnoc Bank & Trust
Company (Cushnoc). 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
___________________
Total consolidated assets were $278,733,207 on December 31, 1997, which
represents a decrease of $5,296,487 from June 30, 1997. Total net loans, loans
held for sale and Federal Home Loan Bank ("FHLB") stock increased by
$5,853,288, $130,749 and $243,000, respectively, while cash equivalents and
securities available for sale decreased by $1,134,971 and $9,935,422,
respectively, during the same period. Total deposits and repurchase agreements
increased by $2,078,451, while FHLB borrowings decreased by $7,930,746, from
June 30, 1997 to December 31, 1997.
The decrease in cash equivalents and the increase in Bank's deposits were
utilized to support the increase in the loan portfolio from June 30, 1997 to
December 31, 1997. FHLB stock increased due to previous levels of FHLB
advances during the period. The FHLB requires financial institutions to hold a
certain level of FHLB stock based on advances outstanding.
The decrease in securities available for sale was due to the Company
repositioning the fixed rate mortgage-backed securities portfolio, taking
advantage of price fluctuations in the current market. The sale of these
securities strengthens the Company's Asset/Liability (ALCO) position and helps
mitigate the Company's interest rate risk in an increasing rate environment.
At December 31, 1997, the carrying value of securities available for sale by
the Company was $18,875,202, which is $209,435 less than the cost of the
underlying securities. The difference between the carrying value and the cost
of the securities was primarily attributable to the decline in the market value
of equity securities from the prices at the time of purchase. Management
attributes the reduction in the market value of equity securities to the
decline of the stock market during the quarter, which had a greater affect on
the market values of the Company's investments in high-tech stocks. Management
reviews the portfolio of investments on an ongoing basis to determine if there
has been an other-than-temporary decline in value. Some of the considerations
management makes in the determination are market valuations of particular
securities and economic analysis of the securities' sustainable market values
based on the underlying companies profitability. Management believes that the
yields currently received on this portfolio are satisfactory and intends to
hold these securities for the foreseeable future.
Total loans increased by $5,658,477 for the six months ended December 31, 1997.
The loan portfolio growth was in consumer installment and commercial loans. The
Bank sold approximately $9,000,000 of 1-4 family fixed rate mortgages during
14
the second quarter. In December, 1997, the Bank replaced the loans sold by
purchasing approximately $9,000,000 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
mortgages make up 62% of the total loan portfolio, in which 59% of the
residential loans are variable rate products, as compared to 69% and 49%,
respectively, at December 31, 1996. It is management's intent to increase the
volume in variable rate residential loans to reduce the interest rate risk in
this area.
Twenty one 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 89% of the portfolio consists of variable
rate products.
Commercial loans make up 10% of the total loan portfolio, of which 70% 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 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 Bank's known market areas.
The Bank's allowance for loan losses was $2,773,000 as of December 31, 1997
versus $2,741,809 as of June 30, 1997, representing 1.21% and 1.23% of total
loans, respectively. The Bank had non-performing loans totaling $2,945,000 at
December 31, 1997 compared to $2,881,000 at June 30, 1997. Non-performing
commercial mortgages increased by 50% from June 30, 1997 to December 31, 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 1.06% and
1.01% of total assets at December 31, 1997 and June 30, 1997, respectively.
The Bank's allowance for loan losses was equal to 94% and 95% of the total
non-performing loans at December 31, 1997 and June 30, 1997, respectively. At
December 31, 1997, the Bank had approximately $534,000 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 borrower's
15
financial condition, indicating a decreased potential for these loans becoming
non-performing assets. The following table represents the Bank's
non-performing loans as of December 31, 1997 and June 30, 1997, respectively:
December 31, June 30,
Description 1997 1997
__________________________ _______________ _______________
1-4 Family Mortgages $ 780,000 $ 1,268,000
Commercial Mortgages 1,577,000 1,052,000
Commercial Installment 539,000 492,000
Consumer Installment 49,000 69,000
_______________ _______________
Total non-performing $ 2,945,000 $ 2,881,000
=============== ===============
The following table reflects the quarterly trend of total delinquencies 30
days or more past due, including non-performing loans, for the Bank as a
percentage of total loans:
3-31-97 6-30-97 9-30-97 12-31-97
2.16% 1.94% 1.64% 1.72%
At December 31, 1997, loans classified as non-performing included approximately
$888,000 of loan balances that are current and paying as agreed, but which the
Bank maintains as non-performing until the borrower has demonstrated a
sustainable period of performance. Excluding these loans, the Bank's total
delinquencies 30 days or more past due, as a percentage of total loans, would
be 1.34% as of December 31, 1997.
The level of the allowance for loan losses as a percentage of total loans has
remained constant as well as the level of allowance for loan losses as a
percentage of non-performing loans at December 30, 1997, when compared to June
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
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
16
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.
Total deposits were $174,361,238 and securities sold under repurchase
agreements were $5,737,121 as of December 31, 1997. These amounts represent an
increase of $1,439,952 and $638,499, respectively, compared to June 30, 1997.
The increase in deposits and repurchase agreements was due to normal business
growth. Brokered deposits represented $7,178,760 of the total deposits at
December 31, 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 are competitive in our local
markets, the rate of return remains 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 $72,563,725 as of December 31, 1997, a
decrease of $7,930,746 compared to June 30, 1997. The cash received from the
sale of securities was utilized to decrease FHLB advances. The Bank's current
advance availability, subject to the satisfaction of certain conditions, is
approximately $38,000,000 greater than the December 31, 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 the Company's needs.
Total equity of the Company was $23,033,679 as of December 31, 1997 versus
$22,095,581 at June 30, 1997. Book value per common share was $9.46 as of
December 31, 1997 versus $9.16 at June 30, 1997. Total equity to total assets
of the Company as of December 31, 1997 was 8.26%. On December 15, 1997, the
Company paid a 50% stock dividend to all shareholders. As a result of the stock
dividend, the Company's common shares outstanding increased by 740,807 shares.
The June 30, 1997 book value per common share and the December 31, 1996
earnings per share have been restated as a result of the stock dividend.
At December 31, 1997, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
Actual Capital Required Capital Excess Capital
Amount Ratio Amount Ratio Amount
____________ _______ ____________ _______ ______________
17
Tangible capital $ 20,927,000 7.58% $ 4,144,000 1.50% $ 16,783,000
Core capital $ 20,927,000 7.58% $ 8,288,000 3.00% $ 12,639,000
Leverage capital $ 20,927,000 7.58% $ 11,050,000 4.00% $ 9,877,000
Risk-based capital $ 22,131,000 12.34% $ 14,351,000 8.00% $ 7,780,000
Results of Operations
_____________________
Net income for the quarter ended December 31, 1997 was $356,066. Basic
earnings per share were $.14 and diluted earnings per share were $.13 for the
quarter ended December 31, 1997. This compares to earnings of $510,547 or
basic earnings per share of $.22 and diluted earnings per share of $.20 for the
quarter ended December 31, 1996. Net income for the six months ended December
31, 1997 was $926,631 versus $701,788 for the period ended December 31, 1996.
Basic earnings per share were $.39 and diluted earnings per share were $.35 for
the six months ended December 31, 1997 versus basic earnings per share of $.30
and diluted earnings per share of $.27 for the period ended December 31, 1996.
Net income and earnings per share have been restated to include the acquisition
of Cushnoc Bank under the pooling of interest method of accounting and the
effect of the Company's 50% stock dividend in December, 1997.
The Company completed the acquisition of Cushnoc in the quarter ended December
31, 1997. The one-time costs associated with the acquisition totaled
approximately $283,000 after tax of which $276,000 after tax was recognized in
the quarter ended December 31, 1997. The Company's net operating income, before
the aforementioned one-time charge, was $631,665, basic earnings per share were
$.27 and diluted earnings per share were $.23 for the three months ended
December 31, 1997, and $1,209,390, basic earnings per share were $.51 and
diluted earnings per share were $.45, for the six months ended December 31,
1997.
On December 31, 1997, the Company adopted FASB Statement No. 128, "Earnings Per
Share" and Statement No. 129 "Disclosure of Information about Capital
Structure". Earnings per share for prior periods have been restated in
accordance with the requirements of Statement No. 128.
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. During the December 31, 1996 quarter, Congress issued final
legislation which enabled certain qualifying institutions an ability 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
credit received from the FDIC increased the Company's basic and diluted
earnings per share by $.02 for the quarter ended December 31, 1996. The net
effect of the one time assessment was $296,860 and decreased the Company's
basic earnings per share by $.09 and the diluted earnings per share by $.08 for
the six months ended December 31, 1996. Commencing in 1997 and continuing
18
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 will 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 $5,572,823 for the six months ended
December 31, 1997, versus $5,253,520 for the six months ended December 31,
1996, an increase of $319,303. Total interest income increased $1,154,731
during the six months ended December 31, 1997 compared to the six months ended
December 31, 1996, resulting primarily from an increase in the volume of loans
offset in part by a decrease in rates. The increase in total interest expense
of $835,428 for the six months ended December 31, 1997 resulted primarily from
the increased volume of deposits and borrowings.
The changes in net interest income are presented in the schedule below.
Northeast Bancorp
Rate/Volume Analysis for the six months ended
December 31, 1997 versus December 31, 1996
Difference Due to
Volume Rate Total
______________ ______________ ______________
Investments $ (195,781) $ (50,619) $ (246,400)
Loans 1,529,451 (196,786) 1,332,665
FHLB & Other Deposits 70,786 (2,320) 68,466
______________ ______________ ______________
Total 1,404,456 (249,725) 1,154,731
Deposits 284,532 33,646 318,178
Repurchase Agreements 13,920 (3,820) 10,100
Borrowings 522,431 (15,281) 507,150
______________ ______________ ______________
Total 820,883 14,545 835,428
______________ ______________ ______________
Net Interest Income $ 583,573 $ (264,270) $ 319,303
============== ============== ==============
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.
19
Approximately 26% of the Bank's loan portfolio is comprised of floating rate
loans based on a prime rate index. Interest income on these existing loans
will increase as the prime rate increases, as well as on approximately 37% 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 $742,108 and $1,296,549 for the three and six
months ended December 31, 1997 versus $411,294 and $939,874 for the three and
six months ended December 31, 1996. Service fee income was $237,235 and
$513,640 for the three and six months ended December 31, 1997 versus $264,768
and $554,883 for the three and six months ended December 31, 1996. The $27,533
and $41,243 service fee decrease for the three and six months ended December
31, 1997, respectively, was primarily due to a reduction in loan servicing and
deposit fee income. Gains from available for sale securities were $99,696 and
$207,692 for the three and six months ended December 31, 1997 versus $46,117
and $74,417 for the three and six months ended December 31, 1996. The Company
sold some of its available for sale securities during the three and six month
period ended December 31, 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 six month period ended December 31, 1997 versus
$50,124 for the six month period ended December 31, 1996. Larger gains on the
trading account portfolio were attained in the six month period ended December
31, 1996, due to the appreciation in the market values of the securities
classified as trading in that time period.
Other income was $405,177 and $573,420 for the three and six months ended
December 31, 1997, which was an increase of $293,527 and $312,970 when compared
to other income of $111,650 and $260,450 for the three and six months ended
December 31, 1996, respectively. The increase in other income in the three and
six months ended December 31,1997, was primarily due to gains from the 1-4
family mortgage sale previously discussed as well as 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
$2,765,623 and $5,042,222 for the three and six months ended December 31, 1997
versus $2,126,897 and $4,765,523 for the three and six months ended December
31, 1996. The increase in compensation expense for the three and six month
period ended December 31, 1997 was primarily due to acquisition costs
associated with Cushnoc Bank. The increase in occupancy and equipment expense
for the three and six months ended December 31, 1997 was due to costs
associated with the new branch opened in Auburn, Maine as well as normal growth
and maintenance. Other expenses increased by $335,172 and $286,959 for the
three and six months ended December 31, 1997, compared to December 31, 1996.
The increase in other expenses was primarily due to the acquisition costs
associated with Cushnoc Bank. Excluding the previously discussed acquisition
costs, the Company's total operating expenses were $2,341,624 and $4,607,209
for the three and six months ended December 31, 1997. As previously discussed
above, the Company's operating expenses, for the six months ended December 31,
1996, increased primarily due to the FDIC-SAIF deposit insurance assessment of
$296,860. Excluding the deposit assessment, the Company's operating expenses
20
were $4,468,663 for the six months ended December 31, 1996.
Impact of Inflation
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, substantially all of the assets and virtually all of the
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Year 2000
_________
The Company is currently addressing the Year 2000 issue. Many existing computer
programs and hardware configurations use only two digits to identify a year in
the date field. Since these programs did not take into consideration the
upcoming change in the century, many computer applications could create
erroneous results by the year 2000 if not corrected. The Year 2000 issue will
affect this Company and it will affect virtually all companies and
organizations, including the Company's borrowers. The Company has organized a
Year 2000 committee to research, develop and implement a plan that will correct
this issue before the year 2000. The Office of Thrift Supervision (OTS) has
issued a formal regulation and comprehensive plan concerning the Year 2000
issue for financial institutions, for which the OTS has oversight. The Company
has adopted the regulatory comprehensive plan which has the following phases.
Awareness Phase
_______________
This phase consists of defining the Year 2000 problem; developing the resources
necessary to perform compliance work, establishing a Year 2000 program
committee and developing an overall strategy that encompasses in-house systems,
service bureaus for systems that are outsourced, vendors, auditors, customers,
and suppliers (including correspondents). This phase has been completed by the
Company's committee.
Assessment Phase
________________
This phase consists of assessing the size and complexity of the problem and
detailing the magnitude of the effort necessary to address the Year 2000 issue.
This phase must identify all hardware, software, networks, automated teller
machines, other various processing platforms, and customer and vendor
interdependencies affected by the Year 2000 date change. The assessment must go
beyond information systems and include environmental systems that are dependent
on embedded microchips, such as security systems, elevators and vaults. During
this phase management also must evaluate the Year 2000 effect on other
strategic business initiatives. The assessment should consider the potential
effect that mergers and acquisitions, major system development, corporate
alliances, and system interdependencies will have on existing systems and/or
the potential Year 2000 issues that may arise from acquired systems. The
financial institution or vendor should also identify resource needs, establish
time frames and sequencing of Year 2000 efforts. Resource needs include
21
appropriately skilled personnel, contractors, vendor support, budget
allocations, and hardware capacity. This phase should clearly identify
corporate accountability throughout the project, and policies should define
reporting, monitoring, and notification requirements. Finally, contingency
plans should be developed to cover unforeseen obstacles during the renovation
and validation phases and include plans to deal with lesser priority systems
that would be fixed later in the renovation phase.
The assessment phase has been materially completed, but is considered an
ongoing phase for the Company. The Company has instituted a comprehensive plan
to communicate with all its borrowers that the Company considers to be at risk
concerning the Year 2000 issue. The Company considers this plan necessary to
mitigate the risk associated with borrowers not having the ability to make loan
payments due to a Year 2000 issue. The company has currently estimated the
following costs associated with the Year 2000 issue, (1) computer hardware
replacement $470,000, (2) software replacement $20,000, (3) testing and
administrative costs $27,000, and (4) potential contingency costs $95,000.
These costs are under continuous review and will be revised as needed. As of
December 31, 1997, the Company's current computer hardware and software have
been substantially depreciated. Management anticipates the majority of these
costs will be incurred over two fiscal years and will not materially effect the
Company's results of operations, liquidity and capital resources.
Renovation Phase
________________
This phase includes code enhancements, hardware and software upgrades, system
replacements, vendor certification, and other associated changes. Work should
be prioritized based on information gathered during the assessment phase. For
institutions relying on outside servicers or third-party software providers,
ongoing discussions and monitoring of vendor progress are necessary. The
Company has limited out-side servicers and vendors. Each servicer and vendor
has been contacted and has or will provide information to the Company
concerning their efforts to comply with the Year 2000 issue. The Company
anticipates to have this phase completed by December 31, 1998.
Validation Phase
________________
Testing is a multifaceted process that is critical to the Year 2000 project and
inherent in each phase of the project management plan. This process includes
the testing of incremental changes to hardware and software components. In
addition to testing upgraded components, connections with other systems must be
verified, and all changes should be accepted by internal and external users.
Management will establish controls to assure the effective and timely
completion of all hardware and software testing prior to final implementation.
As with the renovation phase, the Company will be in ongoing discussions with
their vendors on the success of their validation efforts. The Company
anticipates to have this phase completed by March 31, 1999.
Implementation Phase
____________________
In this phase, systems should be certified as Year 2000 compliant and be
accepted by the business users. For any system failing certification, the
business effect must be assessed clearly and the organization's Year 2000
contingency plans should be implemented. Any potentially noncompliant mission-
22
critical system should be brought to the attention of executive management
immediately for resolution. In addition, this phase must ensure that any new
systems or subsequent changes to verified systems are compliant with Year 2000
requirements. The Company anticipates to have this phase completed by June 30,
1999.
In summary, the Company recognizes the Year 2000 as a global issue with
potentially catastrophic results if not addressed. The Company has and will
continue to undertake all the necessary steps to protect itself and its
customers concerning the Year 2000 issue. Management is confident that all the
instituted phases will be completed and in place prior to the year 2000.
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
_________________
Not Applicable.
Item 2. Changes in Securities
_____________________
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities
23
_______________________________
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
SUMMARY OF VOTING AT 11/12/97 ANNUAL SHAREHOLDERS' MEETING
__________________________________________________________
At the Annual Meeting of Shareholders held in Auburn, Maine on November 12,
1997, 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 - Amendment to the Company's Articles of Incorporation to change the
term for newly elected directors to one year.
Votes For Votes Against Votes Abstaining Broker Non-Votes
_________ _____________ ________________ ________________
1,078,654 39,160 2,330 290,380
Proposal 2 - Election of Directors
Votes For Votes Against Votes Abstaining
_________ _____________ ________________
Ronald J. Goguen 1,225,607 400 660
John W. Trinward, D.M.D. 1,225,607 400 660
John Rosmarin 1,225,607 400 660
Messrs. Goguen, Trinward and Rosmarin were elected to serve until the 1998
Annual Meeting. The terms of the following Directors continued after the
meeting: Ms. Hayes and Messrs. Bouchard, Cannan, Delamater, Jackson, Kendall,
Wight, and Wilson.
Proposal 3 - Appointment of Baker Newman & Noyes, Limited Liability Company as
auditors for fiscal year 1998.
Votes For Votes Against Votes Abstaining
_________ _____________ ________________
1,225,507 760 400
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.
3.1 Conformed Articles of Incorporation of Northeast Bancorp as amended
November 12, 1997.
11 Statement regarding computation of per share earnings.
27 Financial data schedule
24
(b) Reports on Form 8 - K
_____________________
On December 15, 1997, the Company filed a report on Form 8-K announcing a
50% stock dividend.
On January 14, 1998, the Company filed a report on Form 8 - K announcing
second quarter earnings which reflects combined earnings of Cushnoc Bank &
Trust and Northeast Bancorp.
NORTHEAST BANCORP AND SUBSIDIARIES
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: February 12, 1998
NORTHEAST BANCORP AND SUBSIDIARIES
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1 Conformed Articles of Incorporation of Northeast Bancorp as
amended November 12, 1997.
11 Statement regarding computation of per share earnings
27 Financial data schedule