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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended June 30, 2000
[ ] 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 offices) (Zip Code)
Registrant's telephone number, including area code: (207)777-6411
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $1.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of September 13, 2000, was $19,997,728 based on the last
reported sales price of the Company's common stock on the American Stock
Exchange as of the close of business on such date. Although directors and
executive officers of the registrant and its subsidiaries were assumed to
be "affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such status.
There were 2,678,579 shares of the registrant's common stock outstanding as
of September 13, 2000.
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
Document Form 10-K Part into Which the Document is
Incorporated
----------------------- ------------------------------------------
Proxy Statement for the III
2000 Annual Meeting of
Shareholders
PART I
Item 1. Business
_________________
General
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Northeast Bancorp (the "Company"), a Maine corporation chartered in April 1987,
is a unitary savings and loan holding company registered with the Office of
Thrift Supervision ("OTS") its primary regulator. Prior to 1996, the Company
operated under the name Bethel Bancorp. The Company's primary subsidiary and
principal asset is its wholly-owned banking subsidiary, Northeast Bank, FSB
(the "Bank"), which has branches located in Auburn, Augusta, Bethel, Harrison,
South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond, Lewiston, and
Lisbon Falls, Maine. The Bank also maintains a facility on Fundy Road in
Falmouth, Maine, from which loan applications are accepted and investment,
insurance and financial planning products and services are offered.
At the beginning of the fiscal year ended June 30, 2000, the Bank had two
separate branch offices in Augusta, Maine; the Western Avenue and the Bangor
Street branches. During the third quarter ending March 31, 2000, the Bank
consolidated its loan and deposit customers to the Western Avenue branch and
closed the Bangor Street location. The merging of these two branches allows the
Bank to continue to serve the Augusta, Maine community with greater efficiency
with little or no disruption. The Bangor street branch had been subject to a
lease agreement, which had expired during the recently completed fiscal year.
The relocation expenses were not material and the employees were absorbed into
other available positions within the Bank or decreased through attrition. The
closure of the branch did not have a material impact on the financial condition
or operations of the Company.
Northeast Bancorp through its subsidiary, Northeast Bank and the Bank's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western, midcoast and south-
central Maine. Although historically the Bank has been primarily a residential
mortgage lender, during the past few years the Bank has expanded its commercial
loan business, increased its line of financial products and services, and
expanded its market area. Management believes that this strategy will increase
core earnings in the long term by providing stronger interest margins,
additional non-interest income, and increased loan volume. The Bank believes
that the local character of its business and its "community bank" management
philosophy allows it to compete effectively in its market area. As of June 30,
2000, the Company, on a consolidated basis, had total assets of approximately
$434 million, total deposits of approximately $260 million, and stockholders'
equity of approximately $28 million. Unless the context otherwise requires,
references herein to the Company include the Company and its subsidiaries on a
consolidated basis.
The Bank (which was formerly known as Bethel Savings Bank F.S.B. ("Bethel")) is
a federally chartered savings bank, which was originally organized in 1872 as a
Maine-chartered mutual savings bank. The Bank received its federal charter in
1984. In 1987, Bethel converted to a stock form of ownership and in subsequent
years has engaged in a strategy of both geographic and product expansion. The
Bank has broad powers, including the power to engage in non-residential lending
activities. In connection with its conversion into a federal savings bank in
1983, the Bank retained its then-authorized powers as a Maine-chartered mutual
savings bank. Under applicable regulations, except as otherwise determined by
the OTS, the Bank retains the authority that it was permitted to exercise as a
mutual savings bank under the state law existing at the time of the conversion.
Historically, Maine-chartered savings banks have had certain lending,
investment, and other powers that have only recently been granted to federal
savings institutions, including commercial lending authority and the ability to
offer personal checking and negotiable order of withdrawal ("NOW") accounts.
Strategy
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Northeast Bancorp's corporate philosophy is to offer a wide array of financial
products and services with an emphasis on a high level of personalized service.
This strategy is designed to attract profitable long-term banking relationships
with its customers which will increase the Bank's core earnings by developing
strong interest margins, non-interest free income, and increasing the volume of
banking products and services as its market area expands. In keeping with this
strategy, the Bank is making a concerted effort to become an all-inclusive
financial center that is able to provide its customers with virtually any
financial product and service that will meet their needs. In this regard, the
Bank assists its clients in assessing their financial needs through its
personalized financial planning services. Once the customer's financial needs
have been identified, the Bank provides the customer with financial product or
service solutions designed to meet their needs. Management believes that the
ability to deliver such personalized service and advice will be one of the
primary competitive factors in the financial institutions industry in the
future. Accordingly, over the past few years the Bank has invested a
substantial amount of resources in developing its ability to offer a high level
of personalized service with an emphasis on financial planning and delivery of
financial advisory services that are responsive to a broad range of customer
needs.
To further support the corporate philosophy, the Bank has recently expanded the
scope of lending and other financial services that it provides to its
customers. In the past, the Bank has focused primarily on its residential
mortgage lending business. As a result, its business has historically
consisted of attracting deposits from the general public through its retail
banking offices and applying those funds principally to the origination,
retention, servicing, investing in and selling first mortgage loans on single
and multi-family residential real estate. However, during the past several
years, the Bank has expanded the scope of its services by placing additional
emphasis on:
* consumer lending and small business, home equity, and commercial loans;
* lending funds to retail banking customers by means or home equity and
installment loans;
* originating loans secured by commercial property and multi-family dwellings;
and
* generating indirect dealer consumer loans used for the purchase of mobile
homes and automobiles.
Northeast Bancorp also offers to its customers financial planning, investment
services and all lines of insurance products through the Bank's subsidiary,
Northeast Financial Services Corporation. Northeast Financial Services
Corporation, which is located at Northeast Bancorp's headquarters in Auburn,
Maine, offers customers access to investment, insurance and annuity products
through an arrangement with Commonwealth Equity Services, Inc., an
unaffiliated, fully licensed New York securities firm, which licenses the
brokers who sell such products and services. It also offers all lines of
insurance products to customers through its relationships with several
insurance agencies, including one owned by Mr. Kendall who is a director of the
Company.
Trust services and employee benefit products are provided to Northeast Bancorp
customers through Northeast Trust, a division of the Bank. Since 1993,
employee benefit products were provided to Northeast Bancorp's customers
through First New England Benefits, a division of the Bank ("FNEB"). During
fiscal 1999, Northeast Bancorp dissolved FNEB because it could not attain
sufficient growth revenue. These services are now provided to customers
through the Bank's trust department. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Results of
Operations."
The community banking strategy of Northeast Bancorp emphasizes the development
of long-term full banking relationships with customers at each branch location
by providing consistent, high quality service from:
* employees with local decision-making authority;
* employees who are familiar with the customers' needs, their business
environment and competitive demands; and
* employees who are able to develop and customize personalized financial
solutions that are tailored to the customer's needs.
With the goal of providing a full range of banking services to its customers
and in an effort to develop strong long-term primary banking relationships with
businesses and individuals, the Bank has expanded its commercial banking
operations by selectively making commercial loans to small and medium sized
companies. In this regard, the Bank's business development efforts have been
directed towards full service credit packages and financial services, as well
as competitively priced mortgage packages. At June 30, 2000, the Bank's loan
portfolio consisted of 52% residential real estate mortgages, 17% commercial
real estate mortgages, 11% commercial loans, and 20% consumer loans. At June
30, 2000, the Bank's lending limit was approximately $4.2 million. To the
extent that customer's credit needs exceed the bank's lending limits, the Bank
may seek participations in such loans with other banks. In addition, the Bank
invests in certain U.S. government and agency obligations and other investments
permitted by applicable law and regulations.
The Bank is subject to examination and comprehensive regulation by the OTS and
its deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC") to the extent permitted by law. The Bank also is a member of the
Federal Home Loan Bank ("FHLB") of Boston. Although the Bank's deposits are
primarily insured through the Bank Insurance Fund, deposits at the Brunswick
branch, which represent approximately 20% of the Bank's total deposits, are
insured through the Savings Association Insurance Fund.
The principal executive offices of Northeast Bancorp and the Bank are located
at 232 Center Street, Auburn, Maine, 04210, and their telephone number is
(207) 777-6411.
Market Area and Competition
- ---------------------------
The Bank is headquartered in Auburn, Maine with full service branches in
Augusta, Bethel, Harrison, South Paris, Buckfield, Mechanic Falls, Brunswick,
Richmond, Lewiston, and Lisbon Falls, Maine. In addition, the Company maintains
a facility in Falmouth, Maine from which it accepts loan applications and
offers investment services, insurance, and financial planning products and
services. As a result of its recent acquisitions and expansion, the Company's
market areas cover western, central and mid-coastal regions of the State of
Maine. The Bank's market area is characterized by a diverse economy that has
experienced moderate growth in recent years.
Market for Services and Competition
- -----------------------------------
Management believes that the Bank's principal markets are: (i) the residential
real estate market within its primary market areas, (ii) the commercial market
and small-to-medium sized businesses within its primary market areas; and (iii)
the growing consumer loan market, including indirect automobile dealer loans,
as well as a wide range of other consumer-oriented financial services and
products such as financial planning services, investments, insurance trust
services, college loans and other similar products.
Businesses are solicited through the personal efforts of the directors and
officers of both Northeast Bancorp and the Bank. Management believes a
locally-based independent bank is often perceived by the local business
community as possessing a clearer understanding of local commerce and its
needs. Consequently, Northeast Bancorp believes that it is able to make
prudent lending decisions quickly and more equitably than its competitors
without compromising asset quality or profitability.
In an effort to attract a broader base of long-term customer relationships and
diversity in its banking operations, Northeast Bancorp has recently expanded
its focus from primarily seeking residential loan customers to becoming a
"one-stop shopping" destination point for our customers' full financial needs.
Accordingly, during the past few years the Bank has significantly increased
the number and type of financial products, loans, and services that it makes
available to its customers.
Northeast Bancorp encounters strong competition in its market areas, both in
making loans and attracting deposits. The deregulation of the banking industry
and the widespread enactment of state laws which permit multi-bank holding
companies, as well as the availability of nationwide interstate banking, has
created a highly competitive environment for financial services providers. In
one or more aspects of its business, the Bank competes with other savings
banks, commercial banks, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, finance
companies, and other financial intermediaries operating in Maine and elsewhere.
Many of the Bank's primary competitors, some of which are affiliated with large
bank holding companies or other larger financial-based institutions, have
substantially greater resources and have higher lending limits.
The principal factors in competing for deposits are convenient office
locations, flexible hours, interest rates and services, while the principal
competitive factors relating to loans are interest rates, the range of lending
services offered and lending fees. Additionally, Northeast Bancorp believes
that an emphasis on personalized financial planning and advice tailored to
individual customer needs, together with the local character of the Bank's
business and its "community bank" management philosophy will enhance its
ability to compete successfully in its market areas. Further, Northeast
Bancorp now offers a wide range of financial services to its customers,
including not only basic loan and deposit services, but also investment
services, trust services, and insurance products. We believe that our ability
to provide such services and advice, and to provide the financial services and
products required by our customers, will be an attractive alternative to
consumers in our market area.
Subsidiaries
- ------------
On October 4, 1999, the Company formed NBN Capital Trust, a Delaware statutory
trust and a wholly-owned subsidiary of the Company (the "Trust"), for the
purpose of (i) issuing and selling its common securities to the Company and its
trust preferred securities to the public, and (ii) using the proceeds therefrom
to purchase 9.60% Junior Subordinated Deferrable Interest Debentures ("Junior
Subordinated Debentures") from the Company. Accordingly, the Junior
Subordinated Debentures are, and will be, the sole asset of the Trust. In the
quarter ended December 31, 1999, the Trust sold $7,172,998 of its trust-
preferred securities to the public and $221,851 of its common securities to the
Company. The Trust used the proceeds to purchase $7,394,849 in principal amount
of the Junior Subordinated Debentures issued by the Company. The Company will
pay interest on the Junior Subordinated Debentures at a rate of 9.60% to the
Trust at the end of each quarter, which is equal to the dividend rate payable
to the holders of the Trust's preferred securities. The cost of the issuance
of the preferred securities was approximately $491,000 and is treated as a
deferred asset and will be amortized over the life of the securities. Following
the offer and sale of the Trust's securities, the Company owned and currently
holds all of the outstanding common securities of the Trust, its only voting
securities, and as a result the Trust is a subsidiary of the Company. Through
the end of the fiscal year ending June 30, 2000, the Company had used the net
proceeds of the offering, approximately $6,700,000, for the following purposes:
(i) contributed $4,000,000 as additional capital for the Bank, (ii) allocated
$1,000,000 for the Company's stock buy-back program, (iii) paid off the
remaining principal balance of $535,000 on its note payable, and (iv) retained
the remaining $1,200,000 for general corporate requirements as they may arise
from time to time. Since January 1, 2000 through September 15, 2000, the
Company has utilized an additional $1,000,000 of the remaining funds for
general corporate needs.
The Company acquired a wholly-owned subsidiary, ASI Data Services, Inc. (ASI)
through two stock purchases during 1993-1994. ASI initially provided data
processing services to the Company and its subsidiaries. The Company's board of
directors voted to transfer the assets and operations of ASI to the Bank as of
July 1, 1996. ASI continues to exist as a separate legal entity, but is now
inactive.
Northeast Financial Services Corporation, a Maine Corporation, and a wholly-
owned subsidiary of the Bank was originally formed in 1982 as a vehicle through
which the Bank could participate in certain real estate development projects.
At June 30, 2000, investment in and loans to its subsidiary constituted 0.14%
of the Company's total assets. Generally, any proposed development project
will be examined for its profit potential and its ability to enhance the
communities served by the Bank. At the present time, there are no definitive
plans for additional real estate development projects. Northeast Financial also
supports the Bank's non-banking financial services through its relationship
with Commonwealth Financial Services, Inc., ("Commonwealth"), a fully licensed
New York securities firm, and a variety of insurance agencies, including
Kendall Insurance Agency, which allows the Bank to deliver insurance products
to its customers, and for which the Bank receives a flat fee from the various
relationships for referrals. Northeast Financial has not invested in any assets
in its business relationship with Commonwealth.
Employees
- ---------
As of June 30, 2000, the Company and the Bank together employed 132 full-time
and 26 part-time employees. The Company's employees are not represented by any
collective bargaining unit. The Company believes that its relations with its
employees are good.
SUPERVISION AND REGULATION
- --------------------------
General
- -------
Northeast Bancorp is a savings and loan holding company that is regulated and
subject to examination by the OTS. The Bank is a federally chartered savings
bank and is subject to the regulations, examinations, and reporting
requirements of the OTS. The Bank is a member of the Federal Home Loan Bank of
Boston and the Bank's deposits are insured by the FDIC. As the administrator of
the deposit insurance fund, the FDIC has certain regulatory and full
examination authority over OTS regulated savings associations.
The Bank also is subject to regulation by the Board of Governors of the Federal
Reserve System governing reserves to be maintained against deposits and certain
other matters. The Bank's relationship with its depositors and borrowers also
is regulated to a great extent by both federal and state laws. Any change in
applicable laws or regulations, or a change in the ways these laws and
regulations are interpreted by regulatory agencies or courts, may have a
material adverse impact on the business of Northeast Bancorp and the Bank.
The following information is a summary of some of the laws and regulations
applicable to Northeast Bancorp and the Bank. The applicable statutes and
regulations are summarized and do not purport to be complete, and are qualified
in their entirety by reference to the particular statutes and regulations.
Federal Regulation of Savings and Loan Holding Companies
- --------------------------------------------------------
General Limitations.
- --------------------
Northeast Bancorp is a unitary savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA") and is registered with
the OTS. Northeast Bancorp is subject to OTS regulations, examinations,
supervision and reporting requirements. Further, the OTS has enforcement
authority over Northeast Bancorp and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
As a unitary savings and loan holding company, Northeast Bancorp generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a qualified thrift
lender. See "Supervision and Regulation Federal Regulations of Savings
Associations Qualified Thrift Lender Test." Nevertheless, various activities
conducted by savings and loan holding companies require OTS authorization.
The HOLA prohibits a savings and loan holding company from directly or
indirectly acquiring control (including through an acquisition by merger,
consolidation or purchase of assets) of any savings association, or any other
savings and loan holding company, without prior OTS approval. In considering
whether to grant approval for any such transaction, the OTS will take into
consideration a number of factors, including:
* competitive effects of the transaction;
* financial and managerial resources;
* future prospects of the holding company and its bank or thrift subsidiaries
following the transaction;
* the effect of the acquisition on the risk to the insurance fund; and
* compliance history of such subsidiaries with the Community Reinvestment Act.
Further, a savings and loan holding company may not acquire more than 5% of the
voting shares of any savings association unless by merger, consolidation or
purchase of assets, each of which requires prior OTS approval. In addition,
under other provisions of HOLA, a savings and loan holding company may acquire
up to 15% of the voting shares of certain undercapitalized savings
associations.
Multiple Savings and Loan Holding Companies. At the present time, Northeast
Bancorp is a unitary savings and loan holding company. Upon acquisition by
Northeast Bancorp of a separate subsidiary savings association, Northeast
Bancorp would become a multiple savings and loan holding company and would be
subject to extensive limitations on the types of business activities in which
it could engage. A holding company that acquires another institution and
maintains it as a separate subsidiary or whose sole subsidiary fails to meet
the qualified thrift lender test will become subject to the activities
limitations applicable to multiple savings bank holding companies. In general,
a multiple savings bank holding company (or subsidiary thereof that is not an
insured institution) may not commence, or continue for more than a limited
period of time after becoming a multiple savings bank holding company (or a
subsidiary thereof), any business activity other than:
* furnishing or performing management services for a subsidiary insured
institution;
* conducting an insurance agency or an escrow business;
* holding, managing or liquidating assets owned by or acquired from a
subsidiary insured institution;
* holding or managing properties used or occupied by a subsidiary insured
institution;
* acting as trustee under deeds of trust;
* those activities previously directly authorized by the OTS by regulation as
of March 5, 1987 to be engaged in by multiple savings bank holding
companies; or
* subject to prior approval of the OTS, those activities authorized by the
Federal Reserve Board as permissible investments for bank holding companies.
These restrictions do not apply to a multiple savings bank holding company if
(a) all, or all but one, of its insured institution subsidiaries were acquired
in emergency thrift acquisitions or assisted acquisitions and (b) all of its
insured institution subsidiaries are qualified thrift lenders.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (a) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (b) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary with regard to the extent to which they permit interstate savings
and loan holding company acquisitions. Northeast Bancorp currently is not a
party to any discussions with any acquisition targets, which would make
Northeast Bancorp a multiple savings and loan holding company.
Safety and Soundness.
- ---------------------
Under federal law, the Director of the OTS is authorized to take action when it
determines that there is reasonable cause to believe that the continuation by a
savings bank holding company of any particular activity constitutes a serious
risk to the financial safety, soundness or stability of a savings bank holding
company's subsidiary savings institution. The Director of the OTS has
oversight authority for all holding company affiliates, not just the insured
institution. Specifically, the Director of the OTS may, as necessary:
* limit the payment of dividends by the savings institution to its parent
holding company;
* limit transactions between the savings institution, the holding company and
the subsidiaries or affiliates of either; or
* limit any activities of the savings institution that might create a serious
risk that the liabilities of the holding company and its affiliates may be
imposed on the savings institution.
Federal Regulation of Savings Institutions
- ------------------------------------------
Business Activities.
- --------------------
The activities of savings institutions are governed by the HOLA and, in certain
respects, the Federal Deposit Insurance Act and the rules and regulations
issued by the OTS and the FDIC pursuant to these acts. These laws and
regulations delineate the nature and extent of the activities in which savings
associations may engage.
Capital Requirements.
- ---------------------
The OTS capital regulations have three components: a leverage limit, a
tangible capital requirement, and a risk-based capital requirement. The OTS
has broad discretion to impose capital requirements in excess of minimum
applicable ratios.
The leverage limit requires that a savings association maintain core capital of
at least 3% of its adjusted total assets. For purposes of this requirement,
total assets are adjusted to exclude intangible assets and investments in
certain subsidiaries, and to include the assets of certain other subsidiaries,
certain intangibles arising from prior period supervisory transactions, and
permissible mortgage servicing rights. Core capital includes common
shareholders' equity and retained earnings, noncumulative perpetual preferred
stock and related surplus and minority interests in consolidated subsidiaries,
minus intangibles, plus certain mortgage servicing rights and certain goodwill
arising from prior regulatory accounting practices.
Certain mortgage servicing rights are not deducted in computing core and
tangible capital. Prior to August 10, 1998, generally, the lower of 90% of
the fair market value of readily marketable mortgage servicing rights, or the
current unamortized book value as determined under GAAP could be included in
core and tangible capital up to a maximum of 50% of core capital computed
before the deduction of any disallowed qualifying intangible assets. Effective
August 10, 1998, the OTS increased the maximum amount of mortgage servicing
rights that are includable in regulatory capital from 50% to 100% of core
capital.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks, which are generally
more limited than activities permissible for savings associations and their
subsidiaries, must be deducted. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association.
The tangible capital requirement mandates that a savings association maintain
tangible capital of at least 1.5% of adjusted total assets, provided, however,
that savings institutions may include up to 90% of the fair market value of
readily marketable purchased mortgage servicing rights included in core capital
as tangible capital (subject to certain conditions, including any limitations
imposed by the FDIC on the maximum percentage of the tangible capital
requirement that may be satisfied with such servicing rights). For purposes of
the tangible capital requirement, adjusted total assets are calculated on the
same basis as the leverage limit. As of June 30, 2000, the Bank was in
compliance with these requirements. The balances maintain the same manner as
core capital, except that all intangible assets must be deducted.
The risk-based requirement promulgated by the OTS pursuant to the HOLA, tracks
the standard applicable to national banks, except that the OTS may determine to
reflect interest rate and other risks not specifically included in the national
bank standard. However, such deviations from the national bank standard may
not result in a materially lower risk-based requirement for savings
associations than for national banks. The risk-based standard adopted by the
OTS is similar to the Office of the Comptroller of the Currency standard for
national banks. The risk-based standards of the OTS require maintenance of
core capital equal to at least 4% of risk-weighted assets and total capital
equal to at least 8% of risk-weighted assets. Total capital includes core
capital plus supplementary capital (to the extent it does not exceed core
capital). Supplementary capital includes (a) cumulative perpetual preferred
stock; (b) mutual capital certificates, income capital certificates and net
worth certificates; (c) nonwithdrawable accounts and pledged deposits to the
extent not included in core capital; (d) perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements; and (e) general loan and lease loss allowances, up to a maximum
of 1.25% of risk-weighted assets. See Item 8. "Financial Statements and
Supplementary Data - Footnote 10."
In determining the amount of risk-weighted assets, savings associations must
assign balance sheet assets to one of four risk-weight categories, reflecting
the relative credit risk inherent in the asset. Off-balance-sheet items are
assigned to one of the four risk-weight categories after a credit conversion
factor is applied.
OTS regulations add an interest rate risk component to the 8% risk-based
capital requirement discussed above. Only savings associations with more than
a normal level of interest rate risk are subject to these requirements.
Specifically, savings associations with interest rate risk exposure in excess
of 2% (measured in accordance with an OTS Model and Guidelines) must deduct an
interest rate risk component from total capital prior to calculating their
risk-based capital ratios. The interest rate risk component is calculated
as one-half of the difference between the institution's measured interest rate
risk and 2%, multiplied by the market value of the institution's assets. This
deduction will have the effect of requiring savings associations with interest
rate risk exposure of more than 2% to hold more capital than those with less
than 2% exposure. On August 21, 1995, the OTS adopted and approved an appeal
process, but delayed the interest rate risk capital deduction indefinitely.
Loans to One Borrower.
- ----------------------
Under the HOLA, savings institutions are generally subject to the national bank
limits on loans to a single or related group of borrowers. Generally, a
savings association may lend to a single borrower or group of related
borrowers, on an unsecured basis, in an amount not greater than 15% of its
unimpaired capital and unimpaired surplus. An additional amount, not greater
than 10% of the savings association's unimpaired capital and unimpaired
surplus, may be loaned if the loan is secured by readily marketable collateral,
which is defined to include certain financial instruments and bullion, but
generally does not include real estate. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. The OTS also may impose more stringent limits on an
association's loans to one borrower, if it determines that such limits are
necessary to protect the safety and soundness of the institution.
Qualified Thrift Lender Test.
- -----------------------------
All savings associations, including the Bank, are required to meet a qualified
thrift lender ("QTL") test for, among other things, future eligibility for FHLB
advances. A savings association that fails to satisfy the QTL test is subject
to substantial restrictions on its activities and to other significant
penalties. A savings association is a QTL if it meets either (a) has invested
at least 65% of its "portfolio assets" in qualified thrift investments and
maintains this level of "qualified thrift investments" on a monthly average
basis in the nine of every twelve months, or (b) the test for being a domestic
building and loan association, as that term is defined in Section 7701(a) (19)
of the Internal Revenue Code of 1986, as amended.
The term "portfolio assets" under the QTL test is defined as savings
institutions total assets less (i) intangibles, (ii) properties used to conduct
business, and (iii) liquid assets (up to 20% total assets). The following
asset may be included as "qualified thrift investments" without limit: (1)
domestic residential housing or manufactured housing loans, (2) home equity
loans and mortgage backed securities backed by residential housing and
manufactured housing loans, (3) FHLB stock, (4) certain obligations of the FDIC
and certain other related entities, and (5) education, small business, and
credit card loans. In addition, the following assets, which may be included
in the aggregate amount of up to 20% of portfolio assets, also constitute
qualified thrift investments: (i) 50% of originated residential mortgage loans
sold within 90 days of origination, (ii) investments in debt or equity of
service corporations that derive 80% of their gross revenues from
hosing-related activities, (iii) 200% of certain loans to, and investment in,
low cost one-to-four family housing, (iv) 200% of loans for residential real
property, churches, nursing homes, schools, and small businesses in areas where
the credit needs of low-and moderate- income families are not met, (v) other
loans for churches, schools, nursing homes and hospitals, and (vi) personal,
family, or household loans (other than education, small business, or credit
card loans).
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies. A savings association may
requalify the next time it meets the requirement in nine of the preceding
twelve months, but it may requalify only one time. If an institution that
fails the QTL test and has not yet requalified or converted to a national bank
charter, the savings institution is immediately ineligible to receive any new
FHLB advances, and is subject to national bank limits for payment of dividends.
Further, it may not establish a branch office at any location at which a
national bank located in the savings association's state could not establish a
branch. In addition, within one year of the loss of QTL status, the holding
company of the savings association that does not convert to a bank charter must
register as a bank holding company and will be subject to all statutes
applicable to bank holding companies.
These penalties do not apply to a federal savings association, such as the
Bank, which existed as a federal savings association on August 9, 1989 but was
chartered before October 15, 1982 as a savings bank under state law.
Limitation on Capital Distributions.
- ------------------------------------
OTS regulations impose limitations upon all capital distributions by savings
institutions, including:
* cash dividends;
* payments to repurchase or otherwise acquire its shares;
* payments to stockholders of another institution in a cash-out merger; and
* other distributions charged against capital.
OTS rules establish three tiers of institutions, which are based primarily on
an institution's capital level. An institution, such as the Bank, that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of: (i) 100% of its net earnings to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75% of its net earnings for the previous four quarters;
provided that the institution would not be undercapitalized, as the term is
defined in the OTS Prompt Corrective Action regulations, following the capital
distribution. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its fully
phased-in requirement or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity.
- ----------
The Bank is required to maintain an average daily balance of "liquid assets"
equal to a certain percentage of net withdrawable deposit accounts and
borrowings payable in one year or less. Liquid assets are cash, certain time
deposits, bankers' acceptances, highly rated corporate debt securities and
commercial paper, securities of certain government mutual funds, reserves
maintained pursuant to Federal Reserve Board requirements, and specified
government, state or federal agency obligations. The liquidity requirement may
vary from time to time, between 4% and 10%, depending on economic conditions
and savings flows of all savings associations. At June 30, 2000, OTS
regulations required savings associations, such as the Bank, to maintain liquid
assets equal to not less than 4% of its net withdrawable deposit accounts and
borrowing payable in one year or less.
Simply meeting the minimum liquidity requirement does not automatically mean a
thrift institution has sufficient liquidity for safe and sound operation. OTS
rules include a separate additional requirement that each thrift must maintain
sufficient liquidity to ensure its safe and sound operation. Adequate
liquidity may vary from institution to institution depending on thrift's
asset/liability structure, market conditions, the activities of financial
service competitors and the requirements of its own deposit and loan customers.
At June 30, 2000, the Bank was in compliance with the liquidity ratio
regulatory requirements.
Community Reinvestment Act and Fair Lending Laws.
- -------------------------------------------------
Savings associations have a responsibility under the Community Reinvestment
Act and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. A savings institution's failure to comply with
the provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities. Failure of a savings association to
comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the OTS, as well as other federal regulatory
agencies and the Department of Justice. The Bank received a satisfactory
Community Reinvestment Act rating under the current regulations in its most
recent federal examination by the OTS.
The Bank Secrecy Act and Money Laundering Laws.
- -----------------------------------------------
The Bank Secrecy Act was enacted by Congress in 1970. This act requires every
financial institution within the United States to file a Currency Transaction
Report with the Internal Revenue Service for each transaction in currency of
more than $10,000 not exempted by the United States Treasury Department.
The Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's checks,
traveler's checks, or money orders involving $3,000 or more in cash.
Institutions also must verify and record the identity of the originator and
beneficiary of certain funds transfers.
Branching.
- ----------
Subject to certain statutory restrictions in the HOLA and the Federal Deposit
Insurance Act, the Bank is authorized to branch on a nationwide basis.
Branching by savings associations also is subject to other regulatory
requirements, including compliance with the Community Reinvestment Act and its
implementing regulations.
Transactions with Related Parties.
- ----------------------------------
The Bank's authority to engage in transactions with related parties or
"affiliates" (i.e., any company that controls or is under common control with
the Bank, including Northeast Bancorp and any non-savings institution
subsidiaries) or to make loans to certain insiders of the Bank or Northeast
Bancorp, is limited by Sections 23A and 23B of the Federal Reserve Act.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from affiliates
is generally prohibited. Section 23B provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
Loans to Officers, Directors, and Principal Stockholders.
- ---------------------------------------------------------
Sections 22(g) and 22(h) of the Federal Reserve Act and the rules and
regulations issued under that act are applicable to loans from a savings
association to any of the following persons:
* an executive officer of a savings association;
* a director of a savings association;
* a principal stockholder of a savings association (i.e., any person who
directly or indirectly, or acting through or in concert with one or more
persons, owns, controls, or has power to vote more than 10% of any class of
voting securities of a savings association);
* any company controlled by an executive officer, director or principal
stockholder of a savings association; and
* any political or campaign committee which is controlled by, or which will
benefit any executive officer, director or principal stockholder.
Among other things, such loans must be made on terms substantially the same as
those prevailing on comparable transactions made to unaffiliated individuals,
and may not involve more than the normal risk of repayment or present other
unfavorable features. Certain extensions of credit to such persons must first
be approved in advance by a disinterested majority of a savings association's
entire board of directors. Section 22(h) of the Federal Reserve Act prohibits
loans to any such individuals where the aggregate amount exceeds an amount
equal to 15% of an insured institution's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus in the case of loans that
are fully secured by readily marketable collateral, or when the aggregate
amount on all such extensions of credit outstanding to all such persons would
exceed the Bank's unimpaired capital and unimpaired surplus. Section 22(g)
establishes additional limitations on loans to executive officers.
Changes in Directors and Senior Executive Officers.
- ---------------------------------------------------
Section 32 of the Federal Deposit Insurance Act, as amended by the 1996 Act,
requires a depository institution or holding company of a depository
institution to give 30 days prior written notice to its primary federal
regulator of any proposed appointment of a director or senior executive officer
if the institution is not in compliance with the minimum capital requirements
or otherwise is in a troubled condition. The regulator then has the opportunity
to disapprove the proposed appointment.
Permissible Loans and Investments.
- ----------------------------------
Federally chartered savings banks, such as the Bank, are authorized to
originate, invest in, sell, purchase, service, participate, and otherwise deal
in: (1) loans made on the security of residential and nonresidential real
estate, (2) commercial loans (up to 20% of assets, the last 10% of which must
be small business loans), (3) consumer loans (subject to certain percentage of
asset limitations), and (4) credit card loans. The lending authority of
federally chartered associations is subject to various OTS requirements,
including, as applicable, requirements governing loan-to-value ratio,
percentage-of-assets limits, and loans to one borrower limits. In September
1996, the OTS substantially revised its investment and lending regulations
eliminating many of their specific requirements in favor of a more general
standard of safety and soundness.
Federally chartered savings associations may invest, without limitation, in the
following assets: (1) obligations of the United States government or certain
agencies thereof; (2) stock issued or loans made by FHLB or the FNMA; (3)
obligations issued or guaranteed by the FNMA, the Student Loan Marketing
Association, the GNMA, or any agency of the United States Government; (4)
certain mortgages, obligations, or other securities that have been sold by the
FHLMC; (5) stock issued by a national housing partnership corporation; (6)
demand, time, or savings deposits, shares, or accounts of any insured
depository institution; (7) certain "liquidity" investments approved by the OTS
to meet liquidity requirements; (8) shares of registered investment companies,
the portfolios of which are limited to investments that a federal association
is otherwise authorized to make; (9) certain MBS; (10) general obligations of
any state of the United States or any political subdivision or municipality
thereof, provided that not more than 10% of a savings association's capital may
be invested in the general obligations of any one issuer; (11) loans secured by
residential real property; (12) credit card loans; and (13) educational loans.
Federally chartered savings associations may invest in secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, up to 20%
of assets, provided that the last 10% is invested in small business loans. The
HOLA also limits a federal savings association's aggregate nonresidential real
property loans to 400% of the savings association's capital as determined
pursuant to the OTS's capital requirements. See "Supervision and Regulation
Federal Regulation of Savings Associations Capital Requirements." The OTS may
allow a savings association to exceed the aggregate limitation, if the OTS
determines that exceeding the limitation would pose no significant risk to the
safe and sound operations of the association and would be consistent with
prudent operating practices. Federally chartered savings associations also
are authorized by the HOLA to make investments in consumer loans, business
development credit corporations, certain commercial paper and corporate debt
securities, service corporations, and small business investment companies. All
of these types of investments are subject to percentage-of-assets and various
other limitations.
Service Corporations.
- ---------------------
The HOLA authorizes fderally chartered savings associations, such as the Bank,
to invest in the capital stock, obligations, or other securities of service
corporations. The HOLA authorizes a savings association to invest up to a
total of 3% of its assets in service corporations. The last 1% of the 3%
statutory investment limit applicable to service corporations must be primarily
invested in community development investments drawn from a broad list of
permissible investments that include, among other things: (1) government
guaranteed loans, (2) loans for investment in small businesses, (3) investments
in revitalization, and rehabilitation projects, and (4) investments in low- and
moderate-income housing developments.
Service corporations are authorized to engage in a variety of preapproved
activities, some of which (e.g., securities brokerage and real estate
development) are ineligible activities for the parent savings association.
The OTS regulations implementing the service corporation authority contained in
the HOLA also provide that activities reasonably related to the activities of a
federally chartered savings association may be approved on a case-by-case basis
by the Director of the OTS.
Operating Subsidiaries.
- -----------------------
All federal savings associations are authorized to establish or acquire one or
more operating subsidiaries. Operating subsidiaries are subject to examination
and supervision by the OTS to the same extent as the parent thrift. An
operating subsidiary is a corporation that meets all of the following
requirements: (1) it engages only in activities that a federal savings
association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total
assets, OTS regulations do not limit the amount that a parent savings
association may invest in its operating subsidiaries. Operating subsidiaries
may be incorporated and operated in any geographical location where its parent
may operate. An operating subsidiary that is a depository institution may
accept deposits in any location, provided that the subsidiary has federal
deposit insurance.
Enforcement.
- ------------
Under the Federal Deposit Insurance Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless
disregard is made, in which case penalties may be as high as $1 million per
day. Under the act, the FDIC has the authority to recommend to the Director of
OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority
to take such actions under certain circumstances.
Standards for Safety and Soundness.
- -----------------------------------
The Federal Deposit Insurance Act requires each federal banking agency to
prescribe for all insured depository institutions standards relating to, among
other things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
and compensation fees and benefits and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness to implement the safety and soundness standards required
under the act. These guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. Further, the
guidelines address (a) internal controls and information systems; (b) internal
audit system; (c) credit underwriting; (d) loan documentation; (e) interest
rate risk exposure; (f) asset growth; and (g) compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by these guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the Federal Deposit Insurance Act. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Prompt Corrective Regulatory Action.
- ------------------------------------
Under the OTS Prompt Corrective Action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 core capital ratio that is less than 3.0% is
considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 1.5% is deemed to be "critically
undercapitalized."
Subject to a narrow exception, the OTS is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notices that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors. As
of June 30, 2000, the Bank was considered to be well-capitalized.
Insurance of Deposit Accounts and Assessments.
- ----------------------------------------------
The Bank's deposits are insured by the FDIC through the bank insurance fund
("BIF") and the savings association insurance fund ("SAIF") for up to $100,000
for each insured account holder, the maximum amount currently permitted by law.
The FDIC establishes premium assessment rates for BIF and SAIF deposit
insurance. There is no statutory limit on the maximum assessment and the
percent of increase in the assessment that the FDIC may impose in any one year,
provided, however, that the FDIC may not collect more than is necessary to
reach or maintain the BIF's and SAIF's designated reserve ration and must
rebate any excess collected. Under the FDIC's risk-based insurance system, BIF
and SAIF-assessable deposits are now subject to premiums of between 0 to 27
cents per $100 of deposits, depending upon the institution's capital position
and other supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC places
the institution in one of nine risk categories using a two-step process based
first on capital ratios and then on relevant supervisory information. Each
institution is assigned to one of three groups (well-capitalized, adequately
capitalized, or undercapitalized) based on its capital ratios. A
well-capitalized institution is one that has at least a 10% total risk-based
capital ratio (the ratio of total capital to risk-weighted assets), a 6% tier 1
risk-based capital ratio (the ratio of tier 1 core capital to risk-weighted
assets), and a 5% leverage capital ratio (the ratio of core capital to adjusted
total assets). An adequately capitalized institution has at least an 8% total
risk-based capital ratio, a 4% tier 1 core risk-based capital ratio, and a 4%
leverage capital ratio. An undercapitalized institution is one that does not
meet either the definition of well-capitalized or adequately capitalized.
The FDIC also assigns each institution to one of three supervisory subgroups
based on an evaluation of the risk posed by the institution. These supervisory
evaluations modify premium rates within each of the three capital groups. The
nine risk categories and the corresponding SAIF assessment rates are as
follows:
Supervisory Subgroup
--------------------
Meets numerical standards for: A B C
- - -
Well-capitalized 0 3 17
Adequately capitalized 3 10 24
Undercapitalized 10 24 27
For purposes of assessments of FDIC insurance premiums, the Bank is a
well-capitalized institution as of June 30, 2000. FDIC regulations prohibit
disclosure of the supervisory subgroup to which an insured institution is
assigned.
Brokered Deposits.
- ------------------
Only a well-capitalized depository institution may accept brokered deposits
without prior regulatory approval. Under implementing regulations,
well-capitalized banks may accept brokered deposits without restriction,
adequately capitalized banks may accept brokered deposits without a waiver from
the FDIC (subject to certain restrictions on payments of rates), while
undercapitalized banks may not accept brokered deposits.
Federal Home Loan Bank System.
- ------------------------------
The Bank is a member of the Federal Home Loan Bank System, which consists of 12
regional banks. FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Boston, is required to
acquire and hold shares of capital stock in that institution in an amount at
least equal to 1% of the aggregate principal amount of the Bank's unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB of Boston, whichever is greater.
Federal Reserve System.
- -----------------------
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transactions (primarily NOW and
regular checking accounts). As of June 30, 2000, the Bank was in compliance
with these requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
Federal Securities Laws.
- ------------------------
Northeast Bancorp's common stock is registered with the SEC under the
Securities Exchange Act of 1934. Accordingly, Northeast Bancorp is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act.
Maine Law.
- ----------
Northeast Bancorp and the Bank are headquartered in, and qualified to do
business in the State of Maine. Accordingly, the Maine Bureau of Banking has
the authority to impose certain regulations and the power to examine both the
Bank and Northeast Bancorp. In addition to approvals from federal regulatory
agencies, Northeast Bancorp may be required to seek approval of the Maine
Bureau of Banking prior to engaging in certain extraordinary transactions.
Legislation.
- ------------
Federal legislation and regulation have significantly affected the operations
of federally insured savings associations, such as the Bank, and other
federally regulated financial institutions in the past several years and have
increased competition among savings associations, commercial banks, and other
financial institutions. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Bank cannot determine
whether, or in what form, such legislation may eventually be enacted, and there
can be no assurance of the effect that any legislation that is enacted would
have on Northeast Bancorp, the Bank, and its affiliates. The operations of
regulated depository institutions will continue to be subject to changes in
applicable statutes and regulations from time to time and could adversely
affect Northeast Bancorp, the Bank, and its affiliates.
Statistical Disclosure.
- -----------------------
The additional statistical disclosure describing the business of the Company
and the Banks required by Industry Guide 3 under the Securities Exchange Act of
1934, as amended, is provided in Item 8b.
Forward-Looking Statements.
- ---------------------------
This Annual Report on Form 10-K (including the Exhibits hereto) contains
certain statements that 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, simulation of
changes in interest rates, prospective results of operations, capital spending
and financing sources, and revenue sources. These statements relate to
expectations concerning matters that are not historical facts. 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 "believe",
"expect", "estimate", "anticipate", "continue", "plan", "approximately",
"intend", or other similar terms or variations on those terms, or the future or
conditional verbs such as "will", "may", "should", "could", and "would". 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. In addition, the Company may from
time to time make such written or oral "forward-looking statements" in future
filings with the Securities and Exchange Commission (including exhibits
thereto), in its reports to shareholders, and in other communications made by
or with the approval of the Company.
These forward-looking statements reflect the current views of the Company at
the time they are made and are based on information currently available to the
management of the Company and upon current expectations, estimates, and
projections regarding the Company and its industry, management's beliefs with
respect thereto, 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 (many of which are outside
the control of the Company), which could cause actual results to differ
materially from those expressed or implied by such forward-looking statements.
Potential risks, uncertainties, and other factors which could cause the
Company's financial performance or results of operations to differ materially
from current expectations or such forward-looking statements include, but are
not limited to:
(a)general economic conditions becoming less favorable than expected, either
nationally or in the markets where the Company or its subsidiaries offer
their financial products or services, resulting in, among other things, a
deterioration of credit quality or in a decreased demand for the
Company's products or services;
(b)competitive pressure in the banking and financial services industry
increasing significantly and, more particularly, competition in the
Company's market areas as described under "Business Market for Services
and Competition";
(c)changes in the interest rate environment which reduces margins, including
those described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations "Financial Condition" and may also
have a negative impact on the Company's interest rate exchange agreements;
(d)the adequacy of the allowance for loan losses and the Bank's asset
quality, including those matters described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations Financial
Conditions," and "Results of Operations" as well as the federal income
tax impact for recapture of pre-1988 tax bad debt reserve in the event
the Bank's assets exceed $500 million;
(e)changes in political conditions or changes occurring in the legislative
or regulatory environment, including the impact of any changes in laws
and regulations relating to banking, securities, taxes, and insurance;
(f)the ability to increase market share and to control expenses, and changes
in consumer spending, borrowing, and saving habits;
(g)changes in trade, tax, monetary, or fiscal policies, including the
interest rate policies of the FRB;
(h)money market and monetary fluctuations, and changes in inflation or in
the securities markets;
(i)future acquisitions and the integration of acquired businesses and
assets;
(j)changes in the Company's organizational structure and in its compensation
and benefit plans, including those necessitated by pressures in the labor
market for attracting and retaining qualified personnel;
(k)the effect of changes in accounting policies and practices, as may be
adopted by regulatory agencies as well as the Financial Accounting
Standards Board;
(l)unanticipated litigation, regulatory, or other judicial proceedings;
(m)the success of the Company at managing the risks involved in the
foregoing;
(n)other one-time events, risks and uncertainties detailed from time to time
in the filings of the Company with the Securities and Exchange
Commission.
Such forward-looking statements speak only to the date that such statements are
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
The Company's results are strongly influenced by general economic conditions in
its market areas in the western, central, and mid-coastal regions of the State
of Maine. A deterioration in these conditions could have a material adverse
effect on the quality of the Bank's loan portfolio and the demand for its
products and services. In particular, changes in the real estate or service
industries, or a slow-down in population growth may adversely impact the
Company's performance. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
All forward-looking statements presume a continuation of the existing
regulatory environment and monetary policy. The banking industry is subject
to extensive state and federal regulation, and significant new laws or
regulations, or changes in or repeals of existing laws or regulations may cause
results of the Company to differ materially. Further federal monetary policy,
particularly as implemented by the FRB, significantly affect credit conditions
for the Bank and its customers. Such changes could adversely impact the
Company's financial results. See "Item 1. Business Supervision and
Regulation."
A significant source of risks arise from the possibility that losses will be
sustained because borrowers, guarantors, and related parties fail to perform in
accordance with the terms of their loans. The Bank has adopted underwriting
and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that management
believes are appropriate to minimize the risks in assessing the likelihood of
nonperformance, tracking loan performance, and diversifying the Bank's loan
portfolio. However, such policies may not prevent unexpected losses that could
adversely affect the Company's results and the allowance for loan losses may
not be adequate in all instances. Further, certain types of lending
relationships carry greater risks of nonperformance and collectability, such as
commercial and consumer loans. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations Financial Condition,"
"Results of Operations," and "Market Risk."
Item 2. Properties
- -------------------
The principal executive and administrative offices of the Company and the Bank
are located at 232 Center Street, Auburn, Maine and consist of two floors,
containing a lobby, executive and customer service offices, teller stations,
and vault operations. These office facilities are subject to a lease, which
expires in 2007, with an option to renew the lease for 2 additional 10-year
terms. The lease requires rental payments of $96,072 per year.
The Bank has 11 branching locations, including the banking facility located at
its executive offices. The branches located in Bethel, Harrison, Buckfield,
Mechanic Falls, Brunswick, Augusta (Western Avenue), and Lisbon, Maine, are
owned by the Bank in fee simple. In addition to the Auburn facilities, the
branches located in South Paris and Lewiston, Maine are leased by the Bank.
The Bank also owns in fee simple certain real property and improvements located
in Auburn and Falmouth, Maine at which various loan and non-banking services as
well as accounting and operations functions of the Company and the Bank are
performed. The facilities owned or occupied under lease by the Bank and its
subsidiaries are considered by management to be adequate.
Item 3. Legal Proceedings
- --------------------------
There are no pending legal proceedings to which the Company is a party or any
of its property is the subject. There are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of banking, to which the Bank is a party or of which any of the Bank's property
is the subject. There are no material pending legal proceedings to which any
director, officer or affiliate of the Company, any owner of record beneficially
of more than five percent of the common stock of the Company, or any associate
of any such director, officer, affiliate of the Company or any security holder
is a party adverse to the Company or has a material interest adverse to the
Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of the Company's securities-holders
during the fourth quarter of the fiscal year ended June 30, 2000.
Item 4a. Executive Officers of the Registrant
- -----------------------------------------------
Pursuant to the Instructions of Form 10-K and Item 401(b) of Regulation S-K,
the name, age, and position of each executive officer of the Company and the
Bank are set forth below along with such officer's business experience during
the past five years. Officers are elected annually by the respective Boards of
Directors of the Company and the Bank to hold office until the earlier of their
death, resignation, or removal.
Name Age Position with Company and/or Bank
---- --- ---------------------------------
James D. Delamater 48 President and Chief Executive Officer(1)
A. William Cannan 58 Executive Vice President and Chief Operating
Officer (1)
Philip C. Jackson 56 Senior Vice President of Bank Trust Operations
Richard E. Wyman, Jr. 44 Chief Financial Officer (1)
Gary Berlucchi 54 Senior Vice President of Bank - Operations
A. Daniel Keneborus 59 Senior Vice President of Bank - Commercial Lending
Marcel Blais 41 Senior Vice President of the Bank - Sales Manager
Suzanne Carney 33 Clerk
________________
(1) Each of these individuals serves both the Company and the Bank in the same
capacities as indicated above.
James D. Delamater has been President, Chief Executive Officer, and a director
of the Company and the Bank since 1987.
A. William Cannan has been Executive Vice President and Chief Operating Officer
of the Company and the Bank since 1993, and a director of the Company and the
Bank since 1996. From 1991 to 1993 Mr. Cannan served as President of Casco
Northern Bank, N.A., located in Portland, Maine.
Philip C. Jackson has been a director of the Company and the Bank since 1987.
Mr. Jackson also has served as the Senior Vice President of the Bank's Trust
Operations since 1997. From 1991 to 1994, Mr. Jackson served as President of
Bethel Savings, the predecessor to the Bank.
Richard E. Wyman, Jr. has been the Chief Financial Officer of the Company and
the Bank since 1992.
Gary Berlucchi has been the Senior Vice President of the Bank - Operations
since January 1999. From 1972 to 1995, Mr. Berlucchi was a Vice President of
Casco Northern Bank, N.A., in operations and credit policy. Previous to
joining Northeast Bank, Mr. Berlucchi was self-employed as a financial
consultant.
A. Daniel Keneborus has been the Senior Vice President of the Bank - Commercial
Lending since October 1998. Mr. Keneborus served as Vice President, Casco
Northern Bank from 1976 to 1990, Vice President Commercial Lending of Peoples
Heritage from 1990 to 1992, and Vice President Commercial Lending for Shawmut
Bank from 1993 to 1997.
Marcel Blais has been the Senior Vice President of the Bank - Retail Lending
since 1998. Mr. Blais joined the Company in 1997 as the Vice President of the
Bank - Branch Administration. Prior to joining the Company he served as Vice
President of Atlantic Bank from 1995 to 1997, and as Vice President - Branch
Manager of Casco Bank from 1977 until 1995.
Suzanne Carney has been Clerk of the Bank since March 1999 and has been with
the company since 1994 in the Accounting Division.
Part II
Item 5. Market Prices of Common Stock and Dividends Paid
________________________________________________
The Common Stock of Northeast Bancorp trades on the American
Stock Exchange ("AMEX") under the symbol NBN. As of the close of
business on September 14, 2000, there was approximately 2,682,527
of shares of common stock outstanding held by approximately 470
stockholders of record.
The following table sets forth the high and low closing sales
prices of the Company's Common Stock as reported on AMEX, and
dividends paid during each quarter for fiscal years ending June
30, 2000 and 1999.
1999 - 00 High Low Div Pd
______________ _____________________ __________
Jul 1 - Sep 30 10.13 8.00 .053
Oct 1 - Dec 31 9.81 7.00 .053
Jan 1 - Mar 31 9.50 7.88 .063
Apr 1 - Jun 30 9.13 8.00 .063
1998 - 99 High Low Div Pd
______________ _____________________ __________
Jul 1 - Sep 30 16.13 9.75 .053
Oct 1 - Dec 31 11.25 8.00 .053
Jan 1 - Mar 31 11.50 9.88 .053
Apr 1 - Jun 30 11.00 9.50 .053
The amount and timing of future dividends payable on the
Company's Common Stock will depend on, among other things, the
financial condition of the Company, regulatory considerations,
and other factors, including the ability of the Bank to pay
dividends to the Company, the amount of cash on hand, and any
obligations to pay dividends to holders of its preferred stock.
Item 6. Selected Financial Data
_______________________
At or for the Year Ended June 30,
________________________________________________
2000 1999 1998 1997 1996
________ ________ ________ ________ ________
(Dollars in thousands except for Per Share Data)
Selected Operations Data:
Interest income $ 32,406 $ 26,857 $ 24,283 $ 21,936 $ 20,105
Interest expense 18,352 14,550 12,810 11,291 10,087
Net interest income 14,054 12,307 11,473 10,645 10,018
Provision for loan losses 1,072 610 706 614 639
Other operating income (1) 2,451 2,621 2,384 1,827 1,909
Net securities gains 84 95 288 259 279
Other operating expenses (2) 10,543 10,570 9,732 9,718 9,536
________ ________ ________ ________ ________
Income before income taxes 4,974 3,843 3,707 2,399 2,031
Income tax expense 1,764 1,433 1,303 909 738
________ ________ ________ ________ ________
Net income $ 3,210 $ 2,410 $ 2,404 $ 1,490 $ 1,293
Consolidated Per Share Data(3):
Net income:
Basic $ 1.17 $ 0.88 $ 1.00 $ 0.63 $ 0.56
Diluted $ 1.17 $ 0.86 $ 0.86 $ 0.56 $ 0.50
Cash dividends $ 0.23 $ 0.21 $ 0.21 $ 0.21 $ 0.16
Selected Balance Sheet Data:
Total assets $433,852 $364,383 $322,533 $284,077 $244,782
Loans receivable 381,824 318,986 282,031 222,682 187,210
Deposits 259,982 219,364 184,024 172,921 164,855
Borrowings 129,801 104,569 105,433 81,793 54,140
Total stockholders' equity 28,126 26,683 25,140 22,096 20,364
Other Ratios:
Return on average assets 0.79% 0.71% 0.83% 0.57% 0.55%
Return on average equity 11.59% 9.18% 10.35% 7.05% 6.31%
Average equity to average
total assets 6.85% 7.73% 7.99% 8.09% 8.67%
Common dividend payout
ratio (3) 19.66% 24.42% 24.42% 37.50% 32.00%
(1) Includes fees for services to customers and sale of loans.
(2) Includes salaries, employee benefits, occupancy, equipment and other
expenses .
(3) Per share data include restatement to reflect (a) a 50% stock dividend paid
in 1997 and (b) adoption of FASB No. 128 "Earnings Per Share" and its
retroactive application to periods prior to and including 1997. The
selected financial data for the years 1997 and 1996 have been restated to
include Cushnoc Bank's financial information in accordance with the pooling
of interests accounting method due to a merger.
Item 7. Management's Discussion of Financial Condition and Results of
_____________________________________________________________
Operations
__________
Management's Discussion and Analysis
____________________________________
DESCRIPTION OF OPERATIONS
_________________________
Northeast Bancorp (the "Company") is a unitary savings and loan holding
company registered with the Office of Thrift Supervision ("OTS") its primary
regulator. The Company's principal asset is its wholly-owned banking
subsidiary, Northeast Bank, FSB (the "Bank"), which has branches located in
Auburn, Augusta, Bethel, Harrison, South Paris, Buckfield, Mechanic Falls,
Brunswick, Richmond, Lewiston, and Lisbon Falls, Maine. The Bank also
maintains a facility on Fundy Road in Falmouth, Maine, from which loan
applications are accepted and investment, insurance and financial planning
products and services are offered. The Bank's deposits are primarily BIF-
insured. Deposits at the Brunswick branch are SAIF-insured and represent
approximately 20% of the Bank's total deposits at June 30, 2000.
Northeast Bancorp through its subsidiary, Northeast Bank and the Bank's
subsidiary Northeast Financial Services, Inc., provide a broad range of
financial services to individuals and companies in western, midcoast and
south-central Maine. Although historically the Bank has been primarily a
residential mortgage lender, during the past few years the Bank has expanded
its commercial loan business, increased its line of financial products and
services, and expanded its market area. Management believes that this
strategy will increase core earnings in the long term by providing stronger
interest margins, additional non-interest income, and increased loan volume.
Substantially all of the Bank's current income and services are derived from
banking products and services in Maine.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations presents a review of the financial condition of the Company for
the years ended June 30, 1999 and June 30, 2000, and the results of operations
for the fiscal years ended June 30, 2000, 1999, and 1998. This discussion and
analysis is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. Accordingly, this section
should be read in conjunction with the consolidated financial statements and
the related notes and other statistical information 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, simulation of
changes in interest rates, prospective results of operations, capital
spending and financing sources, and revenue sources. These statements relate
to expectations concerning matters that are not historical facts.
Forwardlooking 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 "believe", "expect", "estimate", "anticipate", "continue", "plan",
"approximately", "intend", or other similar terms or variations on those
terms, or the future or conditional verbs such as "will", "may", "should",
"could", and "would". 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.
FINANCIAL CONDITION
___________________
The overall strategy of the Company is to increase the core earnings of the
Bank by the development of strong net interest margins and noninterest fee
income, by increasing deposit and loan volume through a larger market area as
well as increasing sales in the Company's financial service departments.
The state of Maine's economy, in which the Company operates, including the
south central and mid-coast region of Cumberland, Androscoggin and Sagadahoc
counties, has experienced moderate growth over the previous three years. The
banking business has become increasingly competitive over the past several
years. The Bank's major competitors for deposits and loans consist primarily
of other Maine-based banks, regional and money center banks, and non-bank
financial institutions. Many of the Bank's competitors are larger in size
and, consequently, possess greater financial resources. The principal factors
in competing for deposits are convenient office locations, flexible hours,
interest rates and services, while those relating to loans are interest
rates, the range of lending services offered and lending fees. The Bank
believes that the local character of its business and its "community bank"
management philosophy enhances its ability to compete in its market areas.
The Company has continuously enhanced its product lines and now provides a
wide range of financial services such as loans and deposits, investments
through its relationship with Commonwealth Financial Services, Inc., employee
retirement benefits and trust services through the Bank's trust department,
and provides insurance products through its affiliation with local insurance
agencies. The Company believes that its level of capital is adequate and with
its current capital plan will support future growth and development. As of June
30, 2000, the Company's total equity represents 6.48% of its total assets.
The Company's assets totaled $433,852,446 as of June 30, 2000; an increase of
$69,469,541 from June 30, 1999, primarily due to loan growth. Loan volume was
enhanced during the 2000 fiscal year due to an increase in real estate
mortgage loans; indirect mobile home and automobile dealer finance loans, and
commercial loans. The increase in loans was primarily funded with increased
deposits, securities sold under repurchase agreements and Federal Home Loan
Bank ("FHLB") advances. The Company has focused its business development
efforts on full service credit packages and financial services, as well as
competitively priced mortgage packages.
The Bank's loan portfolio had a balance of $381,824,101 as of June 30, 2000,
which represents an increase of $62,837,854 compared to June 30, 1999. From
June 30, 1999 to June 30, 2000, the loan portfolio increased by $24,635,226
in real estate mortgage loans, $31,315,452 in consumer and other loans, and
by $6,887,176 in commercial loans. During fiscal 2000, the Bank purchased
approximately $3,200,000 of residential whole loans on the secondary market.
The purchase consisted of 1-4 family adjustable rate mortgages secured by
property located primarily in the State of Tennessee. The Bank continues to
grow the indirect auto loan portfolio and it is the Bank's intent to build
relationships with other institutions for future sales of indirect auto
loans. The growth in indirect automobile and mobile home loans has resulted
in a shift of the Bank's loan portfolio mix and as a result residential real
estate mortgages have decreased, and consumer and other loans have increased,
as a percentage of the Bank's total loan portfolio. The Bank's local market,
as well as the secondary market, continues to be very competitive for loan
volume. The local competitive environment and customer response to favorable
secondary market rates will have an adverse affect on the Bank's ability to
increase the loan portfolio. In an effort to increase loan volume, the
Bank's interest rates for its loan products have been reduced to compete in
the various markets. The Bank has experienced margin compression due to
decreased loan rates as well as increased rates on its cost of funds. The Bank
anticipates that the margin compression will continue for the foreseeable
future until loan volume increases in the current rising interest rate
environment.
The loan portfolio contains elements of credit and interest rate risk. The
Bank historically has loaned within its local market areas, which management
believes helps it 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.
At June 30, 2000, residential real estate mortgages made up 52% of the total
loan portfolio, of which 37% of the residential loans are variable rate
products. At June 30, 1999, residential real estate mortgages made up 58% of
the total loan portfolio, of which 40% of the residential loans were variable
rate products. Variable rate residential loans have decreased during fiscal
2000, when compared to 1999, due to the increased market demand for fixed
rate loans. It has traditionally been management's intent to increase the
proportion of variable rate residential real estate loans during a rising
rate environment to reduce the interest rate risk in this area. The Bank has
historically purchased adjustable rate residential loans and sold fixed rate
residential loans. However, during fiscal 1999, the Bank purchased fixed rate
residential loans. This purchase improved the Company's asset/liability
management position during the declining rate environment earlier in the 1999
fiscal year. Interest rates began to rise late in the 1999 fiscal year and into
the current fiscal 2000 year. Due to the changing interest rate environment,
management will again pursue its strategy of increasing the percentage of
variable rate loans as a percentage of the total loan portfolio to help manage
interest rate risk.
At June 30, 2000, 17% of the Bank's total loan portfolio is commercial real
estate mortgages. Commercial real estate loans have minimal interest rate
risk as 89% of the portfolio consists of variable rate products. At June 30,
1999, commercial real estate mortgages made up 17% of the total loan
portfolio, in which 84% of the commercial real estate loans were variable
rate products. The Bank tries to mitigate credit risk by lending in its local
market areas as well as maintaining a wellcollateralized position in real
estate.
Commercial loans made up 11% of the total loan portfolio at June 30, 2000.
Variable rate loans comprise 43% of this loan portfolio at June 30, 2000. At
June 30, 1999 commercial loans made up 11% of the total loan portfolio, of
which 43% of the balance was variable rate instruments. The credit loss
exposure on commercial loans is highly dependent on the cash flow of the
customers' business. The Bank mitigates losses by strictly adhering to the
Company's underwriting and credit policies.
Consumer and other loans make up 20% of the total loan portfolio as of June
30, 2000, which compares to 14% at June 30, 1999. Since these loans are
primarily fixed rate products, they have interest rate risk when market rates
increase. These loans also have credit risk. The increase in consumer loans
was primarily due to increased volume in indirect automobile and mobile home
loans, which together comprise approximately 87% of the total consumer loans.
The consumer loan department underwrites all the automobile dealer finance
and mobile home loans to protect credit quality. The Bank typically 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.
The Bank's allowance for loan losses was $3,498,000 as of June 30, 2000
versus $2,924,000 as of June 30, 1999, representing 0.92% and 0.93% of total
loans, respectively. The Bank had non-performing loans totaling
$1,178,000 and $1,144,000 at June 30, 2000 and 1999, which was 0.31% and
0.36% of total loans, respectively. Non-performing loans and assets acquired
through foreclosure represented 0.34% and 0.37% of total assets at June 30,
2000 and 1999, respectively. Non-performing loans are generally loans ninety
days delinquent or greater for which the Bank does not accrue interest
income. The Bank's allowance for loan losses was equal to 297% and 256% of
total non-performing loans at June 30, 2000 and 1999, respectively. The
following table represents the Bank's non-performing loans as of June 30,
2000 and 1999:
Description June 30, 2000 June 30,1999
_____________________ _________________ _________________
1-4 Family Mortgages $ 191,000 $ 293,000
Commercial Mortgages 650,000 654,000
Commercial Loans 152,000 197,000
Consumer and Other 185,000 0
_________________ _________________
Total non-performing $ 1,178,000 $ 1,144,000
================= =================
At June 30, 2000, the Bank had approximately $2,426,000 of loans classified
substandard, exclusive of the non-performing loans stated above, that could
potentially become non-performing due to delinquencies or marginal cash
flows. As of June 30, 2000, the amount of such loans has increased from the
June 30, 1999 amount by $1,685,000. The increase was primarily due to
management downgrading a single commercial real estate loan with an
outstanding principal balance of approximately $1,500,000 during its internal
review process. The commercial real estate loan is well collaterallized and
management does not anticipate any financial loss on this loan. The Bank's
delinquent loans, as a percentage of total loans, increased slightly during
the 2000 fiscal year and in an effort to control the amount of such loans
management continues to allocate substantial resources to the collection
area. The increase in delinquencies was primarily in the 30-day delinquent
category. Although delinquencies and non-performing loans increased during
the fiscal year, management does not consider this to be a potential trend at
this time.
The following table reflects the annual trend of total delinquencies 30 days
or more past due, including nonperforming loans, for the Bank as a percentage
of total loans:
06/30/00 06/30/99 06/30/98 06/30/97
________ ________ ________ ________
0.85% 0.76% 1.09% 1.93%
At June 30, 2000, loans classified as non-performing included $71,919 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 0.83% as of June 30,
2000.
The level of the allowance for loan losses as a percentage of total
loans remained essentially the same at June 30, 2000 compared to June 30,
1999 and the level of the allowance for loan losses as a percentage of total
non-performing loans increased at June 30, 2000 compared to June 30, 1999. The
Company has experienced good loan growth during fiscal 2000 particularly in
the commercial and consumer loan portfolio. However, these types of loans have
additional credit risk as compared to real estate mortgage loans. Due to the
increase in these types of loans, the Bank increased its provision for loan
losses during fiscal 2000. Management believes that the increases in the
provision for loan losses during fiscal 2000 were prudent due to the growth in
commercial and consumer loans as well as the general growth of the total loan
portfolio. Classified loans are also considered in management's analysis of the
adequacy of the allowance for loan losses. Based on reviewing the credit risk
and collateral of classified loans, management has considered the risks of the
classified portfolio and believes the allowance for loan losses is adequate.
Net charge-offs for the Bank were $497,949, $664,017, and $469,909, for the
years ended June 30, 2000, June 30, 1999, and June 30, 1998, respectively.
At June 30, 2000, total impaired loans were $1,164,349, of which $81,341 had
related allowances of $30,000. This compares to total impaired loans of
$612,867, of which $241,420 had related allowances of $77,200, at June 30,
1999. During the year ended June 30, 2000, the income recognized related to
impaired loans was $22,648 and the average balance of outstanding impaired
loans was $914,493. This compares to income recognized related to impaired
loans of $66,030 and the average balance of impaired loans of $1,229,987 at
June 30, 1999. The Bank recognizes interest on impaired loans on a cash basis
when the ability to collect the principal balance is not in doubt; otherwise,
cash received is applied to the principal balance of the loan.
On a regular and ongoing basis, management actively monitors the Bank's asset
quality to evaluate the adequacy of the allowance for loan losses and, when
appropriate, to charge-off loans against the allowance for loan losses,
provide specific loss allowances when necessary, and change the level of loan
loss allowance. The process of evaluating the allowance involves a high
degree of management judgment. The methods employed to evaluate the allowance
for loan losses are quantitative in nature and consider such factors as the
loan mix, the level of non-performing loans, delinquency trends, past charge-
off history, loan reviews and classifications, collateral, and the current
economic climate.
Management believes that the allowance for loan losses is adequate
considering the level of risk in the loan portfolio. While management
believes that it uses the best information available to make its
determinations with respect to the allowance, there can be no assurance that
the Company will not have to increase its provision for loan losses in the
future as a result of changing economic conditions, adverse markets for real
estate or other factors. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance for loan losses based on their judgments about
information available to them at the time of their examination. The Bank's
most recent examination by the Office of Thrift Supervision was on March 7,
2000. At the time of the exam the regulators proposed no additions to the
allowance for loan losses.
At June 30, 2000, the Bank had a total of $278,010 in acquired assets as
compared to $193,850 as of June 30, 1999. The Bank has an allowance for losses
that was established to provide for declines in values and to consider
estimated selling costs. The allowance for losses on acquired assets totaled
$28,455 at June 30, 2000 versus $27,725 at June 30, 1999. The Company provided
for this allowance through a charge against earnings of $24,000 and $47,000 for
the years ended June 30, 2000 and 1999, respectively. In 2000 and 1999,
write-downs of acquired assets totaled $23,270 and $24,375, respectively.
Management periodically receives independent appraisals to assist in its
valuation of other real estate owned properties. As a result of its review of
the independent appraisals and the other real estate owned portfolio, the
Company believes the allowance for losses on other real estate owned is
adequate to state the portfolio at lower of cost, or fair value less estimated
selling costs.
At June 30, 2000 and 1999, the Company's investment portfolio totaled
$23,159,039 and $18,054,317, respectively. The investment portfolio consists
of federal agency securities, mortgage-backed securities, bonds, and equity
securities. Funds retained by the Bank as a result of increases in deposits
or decreases in loans, which are not immediately used by the Bank, are
invested in securities held in its investment portfolio. The investment
portfolio is used as a source of liquidity for the Bank. The investment
portfolio is structured so that it provides for an ongoing source of funds
for meeting loan and deposit demands and for reinvestment opportunities to
take advantage of changes in the interest rate environment. Equity securities
and debt securities, which may be sold prior to maturity, are classified as
available for sale and are carried at market value.
The Company's investment portfolio is primarily classified as available for
sale at June 30, 2000 and 1999. Equity securities, and debt securities which
may be sold prior to maturity, are classified as available for sale and are
carried at market value. Changes in market value, net of applicable income
taxes, are reported as a separate component of stockholders' equity. Gains
and losses on the sale of securities are recognized at the time of the sale
using the specific identification method. The amortized cost and market value
of available for sale securities at June 30, 2000 was $24,335,060 and
$23,159,039, respectively. The increase of $5,104,722 in securities available
for sale, from June 30, 1999 to June 30, 2000, was primarily due to the
Company purchasing mortgage-backed securities for collateral for the
increased volume of securities sold under repurchase agreements and to take
advantage of the higher yields on these investments during the current
increasing rate environment. The difference between the carrying value and
the cost of the securities of $1,176,021 was primarily attributable to the
decline in the market value of mortgage-backed securities due to rising
interest rates. The net unrealized loss on mortgage-backed securities was
$904,688 at June 30, 2000. Substantially all of the mortgage-backed
securities are high-grade government backed securities. As in any long term
earning asset in which the earnings 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 $262,263 in the
market value of equity securities to the decline on the market value of the
Company's investments in preferred equity securities. Management reviews the
portfolio of investments on an ongoing basis to determine if there has been an
other-than-temporary decline in value. Some of the considerations management
makes in the determination are market valuations of particular securities and
economic analysis of the securities' sustainable market values based on the
underlying companies' profitability. Based on management's assessment of the
securities portfolio in fiscal 2000, 1999 and 1998, there have been other than
temporary declines in values of individual equity securities in the amounts of
$60,000, $95,728, and $172,235, respectively. Such securities have been written
down through an adjustment against earnings and are included in other expenses
in the statements of income.
The Company's premises and equipment decreased by $639,258 during fiscal 2000
when compared to 1999. The decrease was due to normal depreciation.
The Bank increased its investment in FHLB stock by $964,000, compared to June
30, 1999, due to the increase in FHLB borrowings. The Bank increased FHLB
borrowings to fund loan growth. The FHLB requires institutions to hold a
certain level of FHLB stock based on advances outstanding.
Other assets increased by $1,098,604 from June 30, 1999 to June 30, 2000. The
increase was primarily due to the increase in deferred tax assets, the
purchase of non-marketable investments and the deferred costs associated with
the issuance of the Company's trust preferred security offering.
The Bank continues to attract new local deposit relationships. The Bank
utilizes, as alternative sources of funds, brokered C.D.'s when national
deposit interest rates are less than the interest rates on local market
deposits. 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 $259,981,812 and securities sold under repurchase
agreements were $13,110,165 as of June 30, 2000. These amounts represent an
increase of $40,617,777 and $1,242,326, respectively, as compared to June 30,
1999. The increase in deposits was primarily due to the increase in time
deposits. Time deposits increased due to various special offerings as well as
normal growth from the branch market areas. The Bank has devoted additional
staffing to increase its balances in repurchase agreements. Repurchase
agreements enhance the Bank's ability to attain additional municipal and
commercial deposits, improving the Bank's overall liquidity position in a
cost-effective manner. Brokered CD's represented $37,505,141 of total
deposits at June 30, 2000, which increased by $24,046,884 compared to June
30, 1999's $13,458,257 balance. During the June 30, 2000 quarter, the Bank
issued two structured brokered CD's at $10 million each. The first CD
offering was for a ten-year term with a one-year call option at a fixed rate
of 7.75%. The Bank then entered into an interest rate exchange agreement with a
third party to receive a fixed rate of interest at 7.75% and pay a variable
rate at the one-month Libor rate. The second CD offering was for a five year
six month term with a one-year call option at a fixed rate of 7.50%. The Bank
then entered into an interest rate exchange agreement with a third party to
receive a fixed rate of interest at 7.50% and pay a variable rate at the
three-month Libor rate. The Bank entered into these transactions as an
alternative to short-term borrowings at the FHLB. These brokered CD's were
utilized to fund loan growth as well as decrease FHLB short term advances.
Total borrowings from the FHLB were $122,627,805 as of June 30, 2000, for an
increase of $18,746,089 compared to June 30, 1999. The cash received from the
increase in FHLB advances were utilized to fund loan growth. Certain mortgage
loans, free of liens, pledges and encumbrances, investment securities not
otherwise pledged, FHLB overnight deposits and the Company's FHLB stock have
been pledged under a blanket agreement to secure these borrowings.
At the beginning of fiscal 2000, the Company had a note payable for $687,500.
The note payable was a loan from an unrelated financial institution. This
note payable was paid off in fiscal 2000.
The Bank served its Augusta, Maine location with two branch offices. In the
March 31, 2000 quarter, the Bank consolidated its loan and deposit
customers to the Western Avenue branch and closed the Bangor Street location.
The merging of these two branches allows the Bank to continue to serve the
Augusta, Maine community with greater efficiency with little or no
disruption. The Bangor Street branch was under a lease agreement, which had
expired. The relocation expenses were not material and the employees were
absorbed into other available positions within the Bank or decreased through
attrition. The closure of the branch did not have a material impact on the
financial condition or operations of the Company.
Other liabilities were $2,833,188 as of June 30, 2000, which was an increase
of $934,488 when compared to June 30, 1999. The increase in other liabilities
was due to higher escrow account balances and accrued interest and other
operating expenses.
CAPITAL RESOURCES & LIQUIDITY
_____________________________
Liquidity is defined as the ability of the Bank to generate sufficient cash
to fund current loan demand, deposit withdrawals, other cash demands and
disbursement needs, and otherwise operate on an ongoing basis. The Bank's
primary sources of funds are its interest bearing deposits, cash and due from
banks, deposits with the FHLB, certificates of deposit, loan payments and
prepayments and other investments maturing in less than two years as well as
securities available for sale. In addition, the Bank has unused borrowing
capacity from the FHLB through its advances program. The Bank's current
advance availability, subject to the satisfaction of certain conditions, is
$20,740,000 over and above the 2000 end-of-year advances. The Company's
ability to access the principal sources of liquid funds listed above is
immediate and adequate to support the Company's needs.
Cross selling strategies are employed by the Bank to develop deposit growth.
Even though deposit interest rates increased during fiscal 2000, the rate of
return was still higher 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 equity of the Company was $28,126,478 at June 30, 2000 compared to
$26,683,115 at June 30, 1999. During the quarter ended December 31, 1999, the
Company generated additional liquidity and funding through the issuance of
certain debt instruments. In this regard, on October 4, 1999, the Company
formed NBN Capital Trust, a Delaware statutory trust and a wholly-owned
subsidiary of the Company (the "Trust"), for the purpose of (i) issuing and
selling its common securities to the Company and its trust preferred
securities to the public, and (ii) using the proceeds therefrom to purchase
9.60% Junior Subordinated Deferrable Interest Debentures ("Junior
Subordinated Debentures") from the Company. Accordingly, the Junior
Subordinated Debentures are, and will be, the sole asset of the Trust. In
the quarter ended December 31, 1999, the Trust sold $7,172,998 of its
trust-preferred securities to the public and $221,851 of its common securities
to the Company. The Trust used the proceeds to purchase $7,394,849 in
principal amount of the Junior Subordinated Debentures issued by the Company.
The Company will pay interest on the Junior Subordinated Debentures at a rate
of 9.60% to the Trust at the end of each quarter, which is equal to the
dividend rate payable to the holders of the Trust's preferred securities. The
cost of the issuance of the preferred securities was approximately $491,000
and is treated as a deferred asset and will be amortized over the life of the
securities. Following the offer and sale of the Trust's securities, the
Company owned and currently holds all of the outstanding common securities of
the Trust, its only voting securities, and as a result the Trust is a
subsidiary of the Company. The Company used the net proceeds of the offering,
approximately $6,700,000, for the following purposes: (i) contributed
$4,000,000 as additional capital for the Bank, (ii) allocated $1,000,000 for
the Company's stock buy-back program, (iii) paid off the remaining principal
balance of $535,000 on its note payable, and (iv) retained the remaining
$1,200,000 for general corporate requirements as they may arise from time to
time.
The Company made an equity contribution of $4,000,000 of the funds received
from the Junior Subordinated Debentures to the Bank. The funds are allowed
under the Office of Thrift Supervision regulations to be used as capital at
the Bank. These funds have increased the regulatory capital position at the
Bank. The increase in regulatory capital will allow the Bank to fund loan
growth for the immediate future.
In December 1999, the Board of Directors of Northeast Bancorp approved a plan
to repurchase up to $2,000,000 of its common stock. Under the common stock
repurchase plan, Northeast Bancorp may purchase shares of its common stock
from time to time in the open market at prevailing prices. Repurchased shares
will be held in treasury and may be used in connection with employee benefits
and other general corporate purposes. The Company does not believe that the
current market price for its common stock adequately reflects full value and
believes that the purchase of its common stock from time to time in the
market is a good investment and use of its funds. As of June 30, 2000, the
Company has repurchased $871,826 of its common stock.
In November 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% stockholder and director. Mr. Goguen, also is
a director, and, through the ownership of his affiliates, a principal
stockholder of the Company