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 March 31, 1999
_______________
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 1 - 14588
_________
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 (Zip Code)
offices)
(207) 777 - 6411
_______________________________________________________________________________
Registrant's telephone number, including area code
Not Applicable
_______________________________________________________________________________
Former name, former address and former fiscal year,if changed since last report
2
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate 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 May 13, 1999: 2,768,294 of common stock, $1.00 par
value per share.
_______________________________________________________________________________
NORTHEAST BANCORP
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
March 31, 1999 and June 30, 1998
Consolidated Statements of Income
Three Months ended March 31, 1999 and 1998
Consolidated Statements of Income
Nine Months ended March 31, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity
Nine Months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Nine Months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
March 31, June 30,
1999 1998
_______________ _______________
Assets
Cash and due from bank $ 5,340,718 $ 6,821,574
Interest bearing deposits in other banks 605,461 421,392
Federal Home Loan Bank overnight deposits 6,701,000 4,909,000
Trading account securities at market - 50,000
Available for sale securities 18,912,995 13,608,823
Federal Home Loan Bank stock 5,680,500 5,680,500
Loans held for sale 696,243 369,500
Loans 306,779,441 282,030,950
Less allowance for loan losses 2,929,000 2,978,000
_______________ _______________
Net loans 303,850,441 279,052,950
Bank premises and equipment, net 4,914,695 4,473,885
Assets acquired through foreclosure 197,754 381,288
Goodwill (net of accumulated amortization
of $1,755,089 at 03/31/99 and $1,532,808
at 6/30/98) 1,701,634 1,923,915
Other assets 5,353,845 4,839,767
_______________ _______________
Total Assets 353,955,286 322,532,594
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 212,710,281 $ 184,024,097
Repurchase Agreements 9,491,701 5,205,594
Advances from Federal Home Loan Bank 102,111,489 104,439,952
Notes payable 763,889 993,055
Other Liabilities 2,166,630 2,730,369
_______________ _______________
Total Liabilities 327,243,990 297,393,067
Shareholders' Equity
Preferred stock, Series A 0 999,988
Common stock, par value $1, 2,765,983 and
2,614,285 shares issued and outstanding
at 03/31/99 and 6/30/98, respectively 2,765,983 2,614,285
Additional paid in capital 10,189,906 9,258,107
Retained earnings 13,962,099 12,331,595
4
_______________ _______________
26,917,988 25,203,975
Accumulated other comprehensive income (loss) (206,692) (64,448)
_______________ _______________
Total Shareholders' Equity 26,711,296 25,139,527
_______________ _______________
Total Liabilities and Shareholders' Equity $ 353,955,286 $ 322,532,594
=============== ===============
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
1999 1998
_______________ _______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 89,478 $ 188,201
Interest on loans & loans held for sale 6,140,300 5,323,547
Interest on available for sale securities 283,269 281,251
Dividends on Federal Home Loan Bank stock 89,643 70,591
Other Interest Income 6,588 5,384
_______________ _______________
Total Interest Income 6,609,278 5,868,974
Interest Expense
Deposits 2,143,909 1,845,499
Repurchase agreements 95,483 51,244
Other borrowings 1,340,474 1,172,303
_______________ _______________
Total Interest Expense 3,579,866 3,069,046
_______________ _______________
Net Interest Income 3,029,412 2,799,928
Provision for loan losses 120,007 156,304
_______________ _______________
Net Interest Income after Provision for
Loan Losses 2,909,405 2,643,624
Other Income
Service charges 253,507 227,757
Net securities gains 11,035 37,439
Net gain on trading securities - 0
Other 468,666 330,163
_______________ _______________
Total Other Income 733,208 595,359
Other Expenses
Salaries and employee benefits 1,121,727 1,069,548
Net occupancy expense 290,583 232,617
Equipment expense 213,462 198,337
5
Goodwill amortization 74,094 74,094
Other 788,973 549,040
_______________ _______________
Total Other Expenses 2,488,839 2,123,636
_______________ _______________
Income Before Income Taxes 1,153,774 1,115,347
Income tax expense 410,268 382,986
_______________ _______________
Net Income $ 743,506 $ 732,361
=============== ===============
Earnings Per Share
Basic $ 0.27 $ 0.31
Diluted $ 0.27 $ 0.26
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Nine Months Ended
March 31,
1999 1998
_______________ _______________
Interest and Dividend Income
Interest on FHLB overnight deposits $ 279,571 $ 451,878
Interest on loans & loans held for sale 18,629,287 15,752,172
Interest on available for sale securities 654,708 1,207,686
Dividends on Federal Home Loan Bank stock 271,481 212,331
Other Interest Income 17,103 14,762
_______________ _______________
Total Interest Income 19,852,150 17,638,829
Interest Expense
Deposits 6,431,561 5,630,592
Repurchase agreements 234,758 154,300
Other borrowings 4,157,492 3,481,186
_______________ _______________
Total Interest Expense 10,823,811 9,266,078
_______________ _______________
Net Interest Income 9,028,339 8,372,751
Provision for loan losses 489,428 546,467
_______________ _______________
Net Interest Income after Provision
for Loan Losses 8,538,911 7,826,284
Other Income
Service charges 776,427 741,397
Net securities gains 69,525 245,131
Net gain on trading securities 10,732 1,797
Other 1,224,521 904,206
6
_______________ _______________
Total Other Income 2,081,205 1,892,531
Other Expenses
Salaries and employee benefits 3,509,956 3,506,114
Net occupancy expense 729,749 675,151
Equipment expense 606,425 652,433
Goodwill amortization 222,280 222,281
Other 2,308,172 2,110,501
_______________ _______________
Total Other Expenses 7,376,582 7,166,480
_______________ _______________
Income Before Income Taxes 3,243,534 2,552,335
Income tax expense 1,163,423 893,343
_______________ _______________
Net Income $ 2,080,111 $ 1,658,992
=============== ===============
Earnings Per Share
Basic $ 0.76 $ 0.70
Diluted $ 0.74 $ 0.62
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
Accumulated
Other
Common Additional Comprehensive
Preferred Stock at Paid in Retained Income Treasury
Stock $1.00 Par Capital Earnings (Loss) Stock Total
_____________ ___________ ___________ _____________ _____________ _____________ _____________
Balance at June 30, 1997 1,999,980 1,462,909 7,699,883 11,266,984 (334,175) -- 22,095,581
Net income for nine months
ended March 31, 1998 -- -- -- 1,658,992 -- -- 1,658,992
Other comprehensive income,
net of tax: Adjustment of
valuation reserve for
securities available for
sale -- -- -- -- 233,422 -- 233,422
7
Comprehensive income -- -- -- -- -- -- 1,892,414
Cash dividends declared on
common stock -- -- -- (341,003) -- -- (341,003)
Cash dividends declared on
preferred stock -- -- -- (104,998) -- -- (104,998)
Stock Split in the form of a
dividend -- 740,807 -- (741,902) -- -- (1,095)
Common stock issued in
connection with employee
benefit and stock option
plans -- 32,952 171,064 -- -- (44,988) 159,028
Treasury Stock Purchased -- -- -- -- -- 44,988 44,988
_____________ ___________ ___________ _____________ _____________ _____________ _____________
Balance March 31, 1998 $ 1,999,980 $2,236,668 $7,870,947 $ 11,738,073 $ (100,753) $ 0 $ 23,744,915
============= =========== =========== ============= ============= ============= =============
Balance at June 30, 1998 999,988 2,614,285 9,258,107 12,331,595 (64,448) -- 25,139,527
Net income for nine months
ended March 31, 1999 -- -- -- 2,080,111 -- -- 2,080,111
Other comprehensive income,
net of tax: Adjustment of
valuation reserve for
securities available for
sale -- -- -- -- (142,244) -- (142,244)
Comprehensive income -- -- -- -- -- -- 1,937,867
Cash dividends declared
on common stock -- -- -- (423,940) -- -- (423,940)
Cash dividends declared
on preferred stock -- -- -- (25,667) -- -- (25,667)
Preferred Stock Converted
to Common Stock (999,988) 136,362 863,626 -- -- -- 0
Common stock issued in
connection with employee
benefit and stock option
plans -- 15,336 68,173 -- -- -- 83,509
_____________ ___________ ___________ _____________ _____________ _____________ _____________
Balance March 31, 1999 $ 0 $2,765,983 $10,189,906 $ 13,962,099 $ (206,692) $ 0 $ 26,711,296
============= =========== =========== ============= ============= ============= =============
8
NORTHEAST BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Unaudited)
Nine Months Ended
March 31,
1999 1998
_______________ _______________
Cash provided by operating activities $ 950,817 $ 1,650,521
Cash flows from investing activities:
FHLB stock purchased -- (1,134,700)
Available for sale securities purchased (15,307,160) (15,331,083)
Available for sale securities matured 3,169,943 2,265,304
Available for sale securities sold 6,618,573 26,018,323
New loans, net of repayments & charge offs (24,476,252) (47,512,954)
Net capital expenditures (982,014) (174,369)
Assets acquired through foreclosure sold 422,742 161,896
Real estate held for investment sold 50,000 68,743
_______________ _______________
Net cash used in investing activities (30,504,168) (35,638,840)
Cash flows from financing activities:
Net change in deposits 28,686,185 1,049,815
Net change in repurchase agreements 4,286,107 (657,643)
Dividends paid (449,607) (446,001)
Proceeds from stock issuance 83,509 215,166
Net (decrease) increase in advances from
Federal Home Loan Bank of Boston (2,328,463) 24,619,182
Net change in notes payable (229,167) (229,167)
_______________ _______________
Net cash provided by financing activities 30,048,564 24,551,352
_______________ _______________
Net increase (decrease) in cash and
cash equivalents 495,213 (9,436,967)
Cash and cash equivalents, beginning of
period 12,151,966 18,774,344
_______________ _______________
Cash and cash equivalents, end of period $ 12,647,179 $ 9,337,377
=============== ===============
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 change in valuation for unrealized market
value adjustments on available for sale
9
securities (142,244) 233,422
Net transfer (to) from Loans to Other Real
Estate Owned 97,332 56,325
Supplemental disclosure of cash paid during
the period for:
Income taxes paid, net of refunds 1,105,000 434,000
Interest paid 10,801,119 9,209,376
NORTHEAST BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1999
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 nine month
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 1999. For further
information, refer to the audited consolidated financial statements and
footnotes thereto for the fiscal year ended June 30, 1998 included in the
Company's Annual Report on Form 10-K.
2. Reporting Comprehensive Income
______________________________
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. Such components of total comprehensive income for the
Company are net income and net unrealized gains (losses) on securities
available for sale, net of tax. The Company has adopted SFAS No. 130 effective
for the quarter ended September 30, 1998.
3. Securities
__________
Securities available for sale at cost and approximate market values are
summarized below.
March 31, 1999 June 30, 1998
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
10
Debt securities issued by
the U.S. Treasury and
other U.S. Government
corporations and agencies $ 597,080 $ 598,955 $ 4,696,659 $ 4,698,266
Corporate bonds 202,174 203,949 202,952 203,484
Mortgage-backed securities 17,075,798 16,924,258 7,723,843 7,714,332
Equity securities 1,351,112 1,185,833 1,083,018 992,741
____________ ____________ ____________ ____________
$19,226,164 $18,912,995 $13,706,472 $13,608,823
============ ============ ============ ============
March 31, 1999 June 30, 1998
_________________________ _________________________
Market Market
Cost Value Cost Value
____________ ____________ ____________ ____________
Due in one year or less $ 497,080 $ 497,080 $ 347,253 $ 347,253
Due after one year through
five years 202,174 203,949 452,952 450,984
Due after five years
through ten years 100,000 101,875 1,100,000 1,103,200
Due after ten years - - 2,999,406 3,000,313
Mortgage-backed securities
(including securities with
interest rates ranging
from 5.15% to 9.0%
maturing September 2003 to
March 2029) 17,075,798 16,924,258 7,723,843 7,714,332
Equity securities 1,351,112 1,185,833 1,083,018 992,741
____________ ____________ ____________ ____________
$19,226,164 $18,912,995 $13,706,472 $13,608,823
============ ============ ============ ============
4. Allowance for Loan Losses
_________________________
The following is an analysis of transactions in the allowance for loan losses:
Nine Months Ended
March 31,
1999 1998
____________ ____________
Balance at beginning of year $ 2,978,000 $ 2,741,809
Add provision charged to operations 489,428 546,467
Recoveries on loans previously charged off 136,296 249,202
____________ ____________
3,603,724 3,537,478
Less loans charged off 674,724 449,478
____________ ____________
Balance at end of period $ 2,929,000 $ 3,088,000
============ ============
11
5. Advances from Federal Home Loan Bank
____________________________________
A summary of borrowings from the Federal Home Loan Bank is as follows:
March 31, 1999
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 37,000,000 4.64% - 5.09% 2000
8,000,000 4.85% - 6.27% 2001
3,063,078 5.38% - 6.49% 2002
5,326,599 5.71% - 6.64% 2003
5,721,812 5.69% - 6.67% 2004
5,000,000 5.25% 2005
4,000,000 5.25% - 6.65% 2006
29,000,000 4.89% - 5.68% 2008
5,000,000 4.99% - 5.40% 2009
______________
$ 102,111,489
==============
June 30, 1998
_____________________________________________
Principal Interest Maturity
Amounts Rates Dates
______________ _______________ ____________
$ 43,745,440 5.55% - 6.00% 1999
4,000,000 5.88% - 6.27% 2000
1,212,676 5.56% - 6.40% 2001
1,138,627 6.21% - 6.49% 2002
9,631,854 5.69% - 6.64% 2003
1,711,355 6.36% - 6.67% 2004
9,000,000 5.25% - 6.65% 2005
34,000,000 4.89% - 5.68% 2008
______________
$ 104,439,952
Item 2. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operation
____________________
General
_______
This Management's Discussion and Analysis of Financial Condition and Results of
Operations presents a review of the material changes in the financial condition
of the Company from June 30, 1998 to March 31,1999, and the results of
operations for the three and nine months periods ended March 31, 1999 and 1998.
This discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company. Accordingly,
12
this section should be read in conjunction with the condensed consolidated
financial statements and the related notes contained herein.
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, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, year 2000
readiness, simulation of changes in interest rates, prospective results of
operations, capital spending and financing sources, and revenue sources.
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.
Such forward-looking statements reflect the current view of management and are
based on information currently available to them, and upon current
expectations, estimates, and projections regarding the Company and its
industry, management's belief with respect there to, and certain assumptions
made by management. These forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties, and other factors.
Accordingly, 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, changes in technology, changes in the securities markets, and the
availability of and the costs associated with sources of liquidity.
Description of Operations
_________________________
Northeast Bancorp (the "Company"), is a unitary savings and loan holding
company and is primarily regulated by the Office of Thrift Supervision ("OTS").
The Company has one wholly-owned subsidiary, Northeast Bank, FSB (the "Bank"),
which has branches located in Auburn, Lewiston, Augusta, Bethel, Harrison,
South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls,
Maine.
Financial Condition
___________________
Total consolidated assets were $353,955,286 on March 31, 1999, which represents
an increase of $31,422,693 from June 30, 1998. Total net loans increased by
$24,797,491, from June 30, 1998 to March 31, 1999. Cash equivalents and
securities increased by $495,213 and $5,254,172, respectively, during the same
period. Total deposits and repurchase agreements increased by $32,972,291,
while Federal Home Loan Bank ("FHLB") borrowings decreased by $2,328,463 from
June 30, 1998 to March 31, 1999.
The funds available from the increase in deposits and repurchase agreements
were utilized to support the increase in securities and total net loans as well
as repay FHLB borrowings from June 30, 1998 to March 31, 1999.
At March 31, 1999, the carrying value of securities available for sale by the
13
Bank was $18,912,995, which is $313,169 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
mortgage-backed and equity securities from the prices at the time of purchase.
The Bank's available for sale securities increased by $5,304,172 from June 30,
1998 to March 31, 1999. The increase was primarily due to purchases of
mortgage-backed securities as collateral for the growth in repurchase
agreements. The net unrealized loss on mortgage-backed securities was $151,540
at March 31, 1999. Substantially all of the mortgage-backed securities are
high grade government backed securities. As in any long term earning asset in
which the earning rate is fixed, the market value of mortgage-backed securities
will fluctuate based on changes in market interest rates from the time of
purchase. Since these mortgage-backed securities are backed by the U.S.
Government, there is virtually no risk of loss of principal. Management
believes that the yields currently received on this portfolio are satisfactory
and intends to hold these securities for the foreseeable future. Management
attributes the reduction of $165,279 in the market value of equity securities
to the decline on the market value of the Company's investments in small cap
technology 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.
Total loans increased by $24,748,491 for the nine months ended March 31, 1999.
The loan portfolio growth was in 1-4 family residential and commercial loans.
The Bank sold approximately $6,700,000 and $3,000,000 of indirect auto loans in
the December 1998 and March 1999 quarters, respectively. The Bank anticipates
holding approximately $15,000,000 to $20,000,000 of indirect auto loans in its
portfolio and currently holds approximately $12,500,000 as of March 31, 1999.
As the Bank continues to grow the indirect auto portfolio, it is the Bank's
intent to build relationships with other institutions for future sales of
indirect auto loans. The Bank purchased approximately $5,900,000 and
$22,000,000 of 1-4 family mortgages in the September 1998 and March 1999
quarters, respectively. The purchase consisted of 1-4 family fixed rate
mortgages secured by property located primarily in the State of North Carolina
and New York. The continued expansion into new markets diversifies the credit
risk and the potential economic risks of the credits held in the Bank's
purchased loan portfolio, such that the portfolio is not effected solely by the
local State of Maine economy. 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 an 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. As the Bank expands its purchase of
loans in other states, management researches the strength of the economy in the
respective state and underwrites every loan before purchase. These steps are
taken to better evaluate and minimize the credit risk of out-of-state
purchases. The Bank also maintains a well collateralized position in real
estate mortgages.
14
At March 31, 1999, residential real estate mortgages made up 61% of the total
loan portfolio, of which 42% of the residential loans are variable rate
products, as compared to 65% and 63%, respectively, at March 31, 1998.
Although the Bank has purchased fixed rate loans, it is management's intent,
where market opportunities arise, to increase the volume in variable rate
residential loans to reduce the interest rate risk in this area.
At March 31, 1999, 18% of the Bank's total loan portfolio balance is commercial
real estate mortgages. Commercial real estate loans have minimal interest rate
risk as 84% of the portfolio consists of variable rate products. At March 31,
1998, commercial real estate mortgages made up 18% of the total loan portfolio,
of which 88% of the commercial real estate loans were variable rate products.
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 loans make up 10% of the total loan portfolio, of which 46% are
variable rate instruments at March 31, 1999. At March 31, 1998 commercial
loans made up 9% of the total loan portfolio, of which 66% were variable rate
instruments. The credit loss exposure on commercial loans is highly dependent
on the cash flow of the customer's business. The Bank mitigates losses by
strictly adhering to the Company's underwriting and credit policies.
Consumer and other loans make up 11% of the loan portfolio as of March 31, 1999
as compared to 8% at March 31, 1998. Since these loans are primarily fixed
rate products, they have interest rate risk when market rates increase. These
loans also have credit risk with minimal security. The increase in consumer
loans was primarily due to the volume generated from the automobile dealer
finance department. This department underwrites all the automobile dealer
finance loans to protect credit quality. The Bank primarily pays a nominal one
time origination fee on the loans. The fees are deferred and amortized over
the life of the loans as a yield adjustment. Management attempts to mitigate
credit and interest rate risk by keeping the products offered short-term,
receiving a rate of return commensurate with the risk, and lending to
individuals in the Bank's known market areas.
As discussed above, there has been a shift in the mix of the loan portfolio
where the Bank is seeing an increase in fixed rate loans. The change in mix is
primarily due to market demand, products offered by local competitors and
current low economic rates.
The Bank's allowance for loan losses was $2,929,000 as of March 31, 1999 versus
$2,978,000 as of June 30, 1998, representing 0.95% and 1.06% of total loans,
respectively. The Bank had non-performing loans totaling $1,659,000 at March
31, 1999 compared to $2,248,000 at June 30, 1998. Non-performing loans
represented 0.47% and 0.70% of total assets at March 31, 1999 and June 30,
1998, respectively. The Bank's allowance for loan losses was equal to 177% and
132% of the total non-performing loans at March 31, 1999 and June 30, 1998,
respectively. At March 31, 1999, the Bank had approximately $646,000 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 increased by $546,000 when compared to the
$100,000 at June 30, 1998. The increase was attributed to management
downgrading certain loans during its internal review process.
The following table represents the Bank's non-performing loans as of March 31,
1999 and June 30, 1998, respectively:
15
March 31, June 30,
Description 1999 1998
_________________________ _____________ _____________
1-4 Family Mortgages $ 464,000 $ 783,000
Commercial Mortgages 1,033,000 956,000
Commercial Loans 0 509,000
Consumer Installment 162,000 0
_____________ _____________
Total non-performing $ 1,659,000 $ 2,248,000
============= =============
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:
06-30-98 09-30-98 12-31-98 03-31-99
___________ ___________ ___________ ___________
1.09% 0.89% 1.27% 1.09%
At March 31, 1999, loans classified as non-performing included approximately
$578,000 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 0.90% as of March 31, 1999. 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
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 November 30, 1998. At the time of the exam the regulators proposed no
16
additions to the allowance for loan losses.
In March of 1999 the Bank opened a new branch located on Lisbon Street in
Lewiston, Maine as well as a facility on Fundy Road in Falmouth, Maine, which
accepts loan applications and offers investment, insurance and financial
planning products.
The bank's premises and equipment increased by $440,810 from June 30, 1998 to
March 31, 1999. The increase was due to the purchase and replacement of the
Bank's mainframe and software as well as the opening of the new Lewiston branch
and Falmouth facility.
Other assets increased by $514,078 from June 30, 1998 to March 31, 1999. The
increase was primarily due to the increase in capitalized loan servicing
rights, accounts receivable and non-marketable investments.
Other liabilities was $2,166,630 as of March 31, 1999, which was a decrease of
$563,739 when compared to June 30, 1998. The decrease was primarily due to the
reduction in the Bank's escrow account for certified checks and a payable
account resulting from the settlement of a loan sale transaction in June of
1998.
Capital Resources and Liquidity
_______________________________
Cash provided by operating activities in the consolidated statements of cash
flow decreased by $699,704 from March 31, 1998 to March 31, 1999 as a result of
an increase in assets held for sale and a reduction in other liabilities due to
transaction timing differences.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered certificate of deposits
("C.D.s") when national deposit interest rates are less than the interest rates
on local market deposits. Brokered C.D.s are also used to supplement the
growth in earning assets. Brokered C.D.s carry the same risk as local deposit
C.D.s, in that both are interest rate sensitive with respect to the Bank's
ability to retain the funds. The Bank also utilizes FHLB advances, as
alternative sources of funds, when the interest rates of the advances are less
than market deposit interest rates. FHLB advances are also used to fund short-
term liquidity demands.
Total deposits were $212,710,281 and securities sold under repurchase
agreements were $9,491,701 as of March 31, 1999. These amounts represent an
increase of $28,686,184 and $4,286,107, respectively, compared to June 30,
1998. The increase in deposits was primarily due to the $9,700,000 increase in
NOW demand deposits and a $17,000,000 increase in time deposits. The increase
in NOW deposits was attributable to the development of a demand account where
the interest rate increases as deposit balances increase. The increase in time
deposits was primarily due to the offering of rate specials in local Bank
markets and increased broker deposits. Brokered deposits represented
$12,468,111 of the total deposits at March 31, 1999, which increased by
$4,893,401 compared to the $7,574,710 balance as of June 30, 1998. Cross
selling strategies are employed by the Bank to develop deposit growth. Even
though deposit interest rates have remained competitive, the rates of return
are much higher with 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 deposits.
17
Total advances from the FHLB were $102,111,489 as of March 31, 1999, a decrease
of $2,328,463 compared to June 30, 1998. The cash received from the increase
in the Bank's deposits was utilized to repay FHLB advances. The Bank has
unused borrowing capacity from the FHLB through its advances program. The
Bank's current advance availability, subject to the satisfaction of certain
conditions, is approximately $32,000,000 over and above the March 31, 1999
advances. Mortgages, free of liens, pledges and encumbrances are required to
be pledged to secure FHLB advances. The Bank's ability to access principal
sources of funds is immediate and 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 $26,711,296 as of March 31, 1999 versus
$25,139,527 at June 30, 1998. Book value per common share was $9.66 as of
March 31, 1999 versus $9.23 at June 30, 1998. The total equity to total assets
ratio of the Company was 7.55% as of March 31, 1999 and 7.79% as of June 30,
1998.
In November of 1998 Square Lake Holding Corporation converted its Series A
preferred stock into 136,362 shares of common stock. Square Lake Holding
Corporation is a Maine corporation and a subsidiary of a Canadian corporation
of which Ronald Goguen is a 95% shareholder and director. Mr. Goguen, also is
a director, and, through the ownership of his affiliates, a principal
shareholder of the Company.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
contains various provisions intended to capitalize the Bank Insurance Fund
("BIF") and also affects a number of regulatory reforms that impact all insured
depository institutions, regardless of the insurance fund in which they
participate. Among other things, FDICIA grants the OTS broader regulatory
authority to take prompt corrective action against insured institutions that do
not meet capital requirements, including placing undercapitalized institutions
into conservatorship or receivership. FDICIA also grants the OTS broader
regulatory authority to take corrective action against insured institutions
that are otherwise operating in an unsafe and unsound manner.
FDICIA defines specific capital categories based on an institution's capital
ratios. The OTS has issued regulations requiring a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, core capital of 3.0%, leverage
capital of 4.0% and a risk-based capital standard of 8.0%. The prompt
corrective action regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". As of
March 31, 1999, the most recent notification from the OTS categorized the Bank
as well capitalized. There are no conditions or events since that notification
that management believes has changed the institution's category.
At March 31, 1999, the Bank's regulatory capital was in compliance with
regulatory capital requirements as follows:
To Be "Well
18
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
_________ _______ _________ _______ _________ ________
(Dollars in Thousands)
As of March 31, 1999:
Tier 1 (Core) capital
(to risk weighted
assets) $ 25,037 10.60% $ 9,447 4.00% $ 14,170 6.00%
Tier 1 (Core) capital
(to total assets) $ 25,037 7.11% $ 14,094 4.00% $ 17,617 5.00%
Total Capital (to risk
weighted assets) $ 26,803 11.35% $ 18,893 8.00% $ 23,616 10.00%
Results of Operations
_____________________
Net income for the quarter ended March 31, 1999 was $743,506 or basic earnings
per share and diluted earnings per share of $0.27. This compares to earnings
of $732,361 or basic earnings per share of $0.31 and diluted earnings per share
of $0.26 for the quarter ended March 31, 1998. Net income for the nine months
ended March 31, 1999 was $2,080,111 versus $1,658,992 for the period ended
March 31, 1998. Basic earnings per share were $.76 and diluted earnings per
share were $.74 for the nine months ended March 31, 1999 versus basic earnings
per share of $.70 and diluted earnings per share of $.62 for the period ended
March 31, 1998.
The Company completed the acquisition of Cushnoc during the nine months ended
March 31, 1998. The one-time costs associated with the acquisition totaled
approximately $283,000 after tax during the nine months ended March 31, 1998.
The Company's net operating income, before the aforementioned one-time charge,
was $1,941,469, basic earnings per share were $.82 and diluted earnings per
share were $.72, for the nine months ended March 31, 1998.
On September 30, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Comparative financial information in the Statements of
Changes in Shareholders' Equity for earlier periods have been reclassified in
accordance with the requirement of Statement No. 130.
The Company's net interest income was $9,028,339 for the nine months ended
March 31, 1999, versus $8,372,751 for the nine months ended March 31, 1998, an
increase of $655,588. Total interest income increased $2,213,321 during the
nine months ended March 31, 1999 compared to the nine months ended March 31,
1998, 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
$1,557,733 for the nine months ended March 31, 1999 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 Nine months ended
March 31, 1999 versus March 31, 1998
19
Difference Due to
Volume Rate Total
_______________ _______________ _______________
Investments $ (382,918) $ (110,425) $ (493,343)
Loans 4,124,310 (1,247,195) 2,877,115
FHLB & Other Deposits (145,220) (25,231) (170,451)
_________________________________________________
Total 3,596,172 (1,382,851) 2,213,321
Deposits 725,835 75,134 800,969
Repurchase Agreements 81,851 (1,393) 80,458
Borrowings 844,249 (167,943) 676,306
_________________________________________________
Total 1,651,935 (94,202) 1,557,733
_________________________________________________
Net Interest Income $ 1,944,237 $ (1,288,649) $ 655,588
=================================================
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 categorizes its core deposits as long term liabilities which are
then matched to long term assets. As a result, the Bank 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 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 26% 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 Bank's
interest expense. Although the Bank has experienced some net interest margin
compression, the impact on net interest income will depend on, among other
things, actual rates charged on the Bank's loan portfolio, deposit and advance
rates paid by the Bank and loan volume. The net interest margin compression at
the Bank has been primarily due to the decrease in loan rates. Loan yields
have decreased due to the effect of the Federal Reserve easing the prime
lending rate in September and October of 1998 as well as loans within the Bank
refinancing to lower current market rates. As of March 31, 1999 the Bank's net
loan yields have decreased by 24 basis points when compared to net loan yields
at September 30,1998.
Total non-interest income was $733,208 and $2,081,205 for the three and nine
months ended March 31, 1999 versus $595,359 and $1,892,531 for the three and
nine months ended March 31, 1998. Service fee income was $253,507 and $776,427
for the three and nine months ended March 31, 1999 versus $227,757 and $741,397
for the three and nine months ended March 31, 1998. The $25,750 and $35,030
20
service fee increase for the three and nine months ended March 31, 1999,
respectively, was primarily due to an increase in loan servicing and deposit
fee income. Gains from available for sale securities were $11,035 and $69,525
for the three and nine months ended March 31, 1999 versus $37,439 and $245,131
for the three and nine months ended March 31, 1998. The Bank sold a larger
volume of its available for sale securities during the three and six month
period ended March 31, 1998, taking advantage of the fluctuation in market
prices in the mortgage-backed security portfolio.
Other income was $468,666 and $1,224,521 for the three and nine months ended
March 31, 1999, which was an increase of $138,503 and $320,315 when compared to
other income of $330,163 and $904,206 for the three and nine months ended March
31, 1998, respectively. The increase in other income in the three and nine
months ended March 31, 1999, was primarily due to gains from 1-4 family
mortgage and indirect auto loan sales.
Total non-interest expense for the Company was $2,488,839 and $7,376,582 for
the three and nine months ended March 31, 1999, which was an increase of
$365,203 and $210,102, respectively, when compared to total non-interest
expense of $2,123,636 and $7,166,480 for the three and nine months ended March
31, 1998. The increase in compensation expense for the three month period
ended March 31, 1999 was primarily due to the additional staffing for the new
branch opened in Lewiston, Maine and increased costs associated with the
Company's health insurance plan. The increase in occupancy expense for the
three and nine months ended March 31, 1999 was due to the additional lease
expense in opening the new Lewiston branch as well as the Company relocating
its benefit administration department and in doing so paid a one time lease
penalty to terminate the existing lease contract for that location.
Other expenses increased by $239,933 and $197,671 for the three and nine months
ended March 31, 1999, respectively when compared to the three and nine months
ended March 31, 1998. The increase in the March 31, 1999 quarter was primarily
due to the following: an increase in advertising of $19,000 and an increase in
supplies expense of $12,000 due to the opening of the new Lewiston branch; an
increase in loan servicing fees of $26,000 due to the fees paid for servicing
loans purchased; an increase in professional fees of $90,000 due to increased
legal services, courier services, trust consulting services and data operations
services; an increase in check item and data processing of $49,000 due to the
Company's growth; and an increase of $36,000 in postage, education and other
general expenses.
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
21
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 OTS, which primarily regulates thrifts,
savings and loan associations, and savings and loan holding companies, has
issued a formal regulation and comprehensive plan concerning the Year 2000
issue for such financial institutions. 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 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 is in the process of developing its
contingency plan and anticipates its completion by June 30, 1999. 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 estimated the following costs associated with the Year
2000 issue, (i) computer hardware replacement $40,000, (ii) software
replacement $42,000, (iii) testing and administrative costs $94,000, and (iv)
potential contingency costs $15,000. As of March 31, 1999, the Company has
22
incurred approximately $37,333 of capitalized purchases and $88,200 of
cumulative Year 2000 expenses. These costs are under continuous review and
will be revised as needed. There can be no assurance that actual costs will
not exceed the Company's estimates. As of March 31, 1999, the Company has
replaced its computer mainframe, software and data communication systems as
planned to accommodate the growth of the Company through merger and
acquisitions. The previous mainframe and software had been fully depreciated
through the normal course of its depreciable life and the costs associated with
the replacement of these items was in the Company's general business plan for
fiscal 1999. The anticipated Year 2000 hardware and software costs indicated
above are in addition to the Company's costs associated with the replacement of
the mainframe, software and data communication system.
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 services or third-party software providers,
ongoing discussions and monitoring of vendor progress are necessary. The
Company has limited out-side services 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 has
completed this phase. However, there can be no assurance that these services
or vendors will become Year 2000 compliant in a timely manner.
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 has
completed the testing all of its critical systems and has completed this phase.
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 non-compliant mission-
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 completion of this phase 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.
However, failure to meet the Year 2000 deadlines could have a material adverse
23
effect on the Company.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
_________________________________________________________
There have been no material changes in the Company's market risk from June 30,
1998. For information regarding the Company's market risk, refer to the
Company's Annual Report on Form 10-K dated as of June 30, 1998.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
_________________
None.
Item 2. Changes in Securities
_____________________
None.
Item 3. Defaults Upon Senior Securities
_______________________________
None.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
None.
Item 5. Other Information
_________________
None.
Item 6. Exhibits and Reports on Form 8 - K
__________________________________
(a) Exhibits
________
11 Statement regarding computation of per share earnings.
27 Financial data schedule
(b) Reports on Form 8 - K
_____________________
No reports on Form 8-K have been filed during the quarter ended March
31, 1999.
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.
Date: May 13, 1999 NORTHEAST BANCORP
By: /s/ James D. Delamater
_______________________________
James D. Delamater
24
President and CEO
By : /s/ Richard Wyman
______________________________
Richard Wyman
Chief Financial Officer
NORTHEAST BANCORP
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION
11 Statement regarding computation of per share earnings
27 Financial data schedule