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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 [FEE REQUIRED]
For fiscal year ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
Commission file number (0-16123)
Bethel Bancorp
(Exact name of registrant as specified in its charter)
Maine 01-0425066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
158 Court Street, Auburn, Maine 04210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 777-5950
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of September 19, 1996, was $7,370,214. 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.
As of September 19, 1996, 1,231,294 shares of the registrant's common stock
were issued and outstanding.
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 Part
-------- ----
Proxy Statement for the III
1996 Annual Meeting of
Shareholders
PART I
Item 1. Business
_________________
(a) General Development of Business
___________________________________
The Registrant, Bethel Bancorp, which does business under the name Northeast
Bancorp (the "Company"), is a Maine Corporation chartered in April 1987 for the
purpose of becoming a savings and loan holding company. The Office of Thrift
Supervision ("OTS") is the Company's primary regulator. The board of directors
of Bethel Bancorp voted to assume the name of Northeast Bancorp as of July 1,
1996, pending shareholder approval for the name change of the Company. On July
1, 1996 the Company's two wholly-owned banking subsidiaries, Bethel Savings
Bank, F.S.B. ("Bethel"), a federally - chartered savings bank with its
principal place of business in Bethel, Maine and Brunswick Federal Savings,
F.A. ("Brunswick"), a federally - chartered savings association with its
principal place of business in Brunswick, Maine merged following receipt of
regulatory approval. The merged banking subsidiary, which changed its name to
Northeast Bank, FSB (the "Bank"), has branches located in Bethel, Harrison,
South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls,
Maine.
In May of 1992, the Company entered into a Stock Purchase Agreement with
Square Lake Holding Corporation ("Square Lake") and, on February 9, 1994,
following receipt of regulatory and shareholder approval, the Company issued
71,428 shares of a newly designated Series B convertible preferred stock to
Square Lake at an aggregate price of approximately $1 million, or $14.00 per
share. As part of the transaction, the Company also issued Square Lake a
warrant with a term of seven years to purchase 116,882 shares of the Company's
common stock at a price of $14.00 per share. As a result of the exercise of
certain of such warrants and the application of anti-dilution provisions
pursuant to which such warrants were issued, 133,764 shares remain subject to
such warrants at a purchase price of $7.00 per share. The Series B Preferred
Stock is convertible into shares of the Company's common stock on a two-for-one
basis and carries a dividend rate equal to 2% below the prime rate of The First
National Bank of Boston, not to be less than 7%.
In fiscal year 1993, the Company moved its headquarters from Bethel, Maine
to Portland, Maine. The Company also acquired a controlling interest in ASI
Data Services, Inc. ("ASI"), an existing company which provided sales and
service of computer related hardware and software, as well as a full line of
data processing support systems. On July 1, 1996, the operations of ASI, which
consist primarily of providing data processing support to the Bank and the
Company, were transferred to the Bank.
During fiscal 1995 the Company acquired four branches from Key Bank of
Maine, located in Buckfield, Mechanic Falls, Richmond and Lisbon Falls, Maine.
The total deposits and repurchase agreements acquired from the four branches
were approximately $27,749,000. The premium paid to Key Bank of Maine for
these deposits was $1,590,228. The cost of the real estate, buildings and
equipment purchased from Key Bank of Maine was $498,500.
In fiscal year 1996, the Company relocated its headquarters from Portland to
158 Court Street, Auburn, Maine and intends to open a new retail banking
facility in Auburn during the 1997 fiscal year. During fiscal 1996, there were
no bankruptcy, receivership or similar proceedings with respect to the Company
or the Bank.
(b) Financial Information About Industry Segments
__________________________________________________
Not applicable.
(c) Narrative Description of Business
______________________________________
General
_______
The Company is a savings and loan holding company whose primary asset is its
subsidiary, the Bank.
The Bank (which was formerly known as Bethel Savings Bank, F.S.B.), is a
federally-chartered stock savings bank which was organized in 1872 as a
Maine-chartered mutual savings bank and received its federal charter in 1984
and is the successor by merger to Brunswick Federal Savings, F.A., a
federally-chartered savings association formed in 1988.
In connection with its conversion to a federal stock savings bank in 1984,
the Bank retained its then-authorized powers as a Maine-chartered mutual
savings bank. Under applicable federal regulations, the Bank may exercise any
authority it was allowed to exercise as a mutual savings bank under state law
and regulation at the time of its conversion to a federal savings bank. In
exercising such "grandfathered" powers, the Bank may continue to comply with
applicable state laws and regulations in effect at the time of its conversion
to federal charter except as otherwise determined by the Office of Thrift
Supervision (the "OTS"). The Bank, however, may not use its grandfathered
powers to engage in activities to a greater degree than would be allowed under
the most liberal construction of either state or federal law or regulations.
Historically, Maine-chartered savings banks have had certain lending,
investment and other powers only recently authorized for federal institutions,
including commercial lending authority and the ability to offer personal
checking and negotiable order of withdrawal (NOW) accounts. The Bank also has
broader securities investment authority than other federal thrift institutions
(i.e. savings banks and savings and loan associations) as a result of its
retention of state powers.
The Bank's primary business has historically consisted of attracting savings
deposits from the general public and applying these funds primarily to the
origination and retention of first mortgage loans on residential real estate.
Over the past several years, the Bank has concentrated its lending efforts on
the origination of loans that are shorter-term or interest rate sensitive. Of
the Bank's loan portfolio at June 30, 1996, 83% was invested in real estate
loans (including residential, construction and commercial mortgage loans), 8%
in commercial loans and 9% in consumer loans.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation, primarily through the Bank Insurance Fund. Deposits at the
Brunswick branch are insured through the Savings Association Insurance Fund and
represent 41% of the Bank's total deposits at June 30, 1996. The Bank is a
member of the Federal Home Loan Bank of Boston (the "FHLB").
At June 30, 1996, the legal lending limit of Bank was approximately
$2,600,000. When, on occasion, customers' credit needs exceed the Bank's
lending limits, the Bank may seek participations of such loans with other
banks.
Market Area and Competition
___________________________
The Bank is headquartered in Bethel, Maine with full service branches in
Harrison, South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond and
Lisbon Falls, Maine. The western Maine region of Oxford county is characterized
by a diversified economy and a strong emphasis on the tourist industry. The
south-central region of Cumberland, Androscoggin and Sagadahoc counties also
has a diversified economy with a strong emphasis on the tourist industry.
The banking business in the Bank's market areas has become increasingly
competitive over the past several years. The Bank's major competitors in
attracting deposits and lending funds consist principally of other Maine-based
banks, and regional and money center banks, and nonbank financial institutions.
Many of the Banks' competitors are larger in size and 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. Additionally, the Bank believes that the local character of its business
and its "community bank" management philosophy will improve its ability to
compete successfully in its market areas.
Regional Economic Environment
____________________________
The state of Maine's economy, including Cumberland, Androscoggin and
Sagadahoc counties where the Brunswick, Richmond and Lisbon Falls branches are
located, has stabilized with moderate to flat growth, although the state of
economy in Oxford county, the location of the Bethel, Harrison, South Paris,
Buckfield and Mechanic Falls branches continues to remain weak due to high
unemployment and a soft real estate market. The amount of the Company's
non-performing loans at June 30, 1996 was $2,603,000. Other real estate owned
at June 30, 1996 was $513,831. At June 30, 1996, the Company's ratio of
non-performing loans to total loans was 1.53%. At June 30, 1996, the Company's
allowance for loan losses was $2,549,000, which represented 98% of
non-performing loans at the same date. Based on reviewing the credit risk and
collateral of the classified, non-performing and total loan portfolio,
management believes the allowance for loan losses is adequate. While
management uses its best judgement in recognizing loan losses in light of
available information, there can be no assurance that the Company will 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.
Subsidiaries
____________
The Company acquired a wholly-owned subsidiary, ASI Data Services, Inc.
("ASI") through two stock purchases during 1993-1994 for an aggregate purchase
price of $465,840. ASI initially provided data processing services to the
Company and its subsidiaries. The Company's board of directors voted to
transfer the operations of ASI to the Bank as of July 1, 1996. ASI continues
to exist as a separate legal entity, but is now inactive.
The Bank has one wholly-owned subsidiary, Northeast Service Corporation,
which was organized in 1982. Through Northeast Service Corporation, the Bank
has participated in certain real estate development projects. While the Bank
does not actively pursue such projects, several projects of varying sizes have
been undertaken in the past few years. Any proposed development project is
examined for its profit potential and its ability to enhance the communities
served by the Bank. There are no definitive plans for additional real estate
development projects at the present time. At June 30, 1996, investment in and
loans to its subsidiary constituted 0.5% of the Company's total assets. The
service corporation also supports the Bank's non-banking financial services
through its relationship with Independent Financial Marketing Group, a fully
licensed New York securities firm.
Northeast Service Corporation invested $375,000 of capital and owns
62.5% of First New England Benefits, Inc. First New England is an employee
benefits consulting firm which specializes in the design and administration of
qualified retirement and 401(k) plans.
Employees
_________
As of June 30, 1996, the Company and its consolidated subsidiaries had 108
full-time and 20 part-time employees. The Company's employees are not
represented by any collective bargaining unit. Relations between the Company
and its employees are considered good.
Regulation
__________
General
_______
Savings banks and savings and loan holding companies are subject to
extensive supervision and regulation. The Bank is subject to regulation and
supervision by the OTS.
The Company, as a savings and loan holding company, is subject to
regulation, examination and supervision by the OTS under the Home Owners Loan
Act. The Company is also deemed a Maine financial institution holding company.
As such, the Company is registered with the Maine Superintendent of Banking
(the "Superintendent") and will be subject to periodic examinations and
reporting requirements of the Superintendent.
Recent Developments in Savings Institution Regulation
_____________________________________________________
Federal Deposit Insurance Corporation Improvement Act of 1991
_____________________________________________________________
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which was enacted on December 19, 1991, contains various provisions
intended to recapitalize the Bank Insurance Fund ("BIF") and also effects a
number of regulatory reforms that will impact all insured depository
institutions, regardless of the insurance fund in which they participate.
Among other things, FDICIA grants the OTS broader regulatory authority to take
prompt corrective action against insured institutions that do not meet capital
requirements, including placing undercapitalized institutions into
conservatorship or receivership. FDICIA also grants the OTS broader regulatory
authority to take corrective action against insured institutions that are
otherwise operating in an unsafe and unsound manner. Since the Bank exceeded
all capital requirements at June 30, 1996, these new provisions are not
expected to have any significant impact on its operations. Other provisions of
FDICIA increase the premiums to be paid by the Bank for deposit insurance and
make the Bank subject to special assessments to maintain the insurance fund.
See "Savings Institution Regulation -- Insurance of Deposits."
Financial Institutions Reform, Recovery and Enforcement Act of 1989
___________________________________________________________________
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (the
"FIRRE Act"), which was enacted on August 9, 1989, abolished the Federal Home
Loan Bank Board (the "FHLBB") and the Federal Savings and Loan Insurance
Corporation (the "FSLIC") and significantly changed the federal regulatory
framework for savings institutions and their holding companies. The FHLBB's
regulatory responsibilities over savings institutions and their holding
companies were transferred to the Director of the OTS, and a new insurance
fund, the Savings Association Insurance Fund (the "SAIF"), was established to
insure the deposit accounts of savings institutions. All savings institutions
that were insured by the FSLIC immediately prior to the enactment of the FIRRE
Act automatically became members of SAIF upon enactment of the FIRRE Act.
The SAIF is administered by the FDIC, which also administers BIF, the
separate insurance pool for banks. The Bank's deposits are insured under BIF,
except for the Brunswick's branch deposits, which are insured under SAIF. The
FDIC, in its capacity as administrator of SAIF, has the authority generally to
regulate savings institutions to the extent necessary to ensure the safety and
soundness of SAIF. The Director of the OTS serves as a member of the FDIC's
Board of Directors. The FIRRE Act provides that all orders, resolutions,
determinations and regulations issued by the FHLBB or the FSLIC and in effect
on the date of enactment of the FIRRE Act will continue in effect and be
enforceable by the appropriate successor-in-interest to the FHLBB or the FSLIC
under the FIRRE Act, until modified, terminated, set aside or superseded in
accordance with applicable law.
The Federal Home Loan ("FHL") Banks continue to serve as central credit
facilities for member savings institutions and the Bank is a member of the FHL
Bank of Boston. However, the FHL Banks no longer have any supervisory or
regulatory authority over savings institutions.
Upon dissolution of the FSLIC, all of the assets and liabilities of the
FSLIC were transferred to the FSLIC Resolution Fund ("FRF"), which is managed
by the FDIC but maintained separate and apart from SAIF and BIF. The
FRF will be dissolved upon satisfaction of all its debts and liabilities and
sale of all assets acquired in connection with resolutions of savings
institutions that failed prior to January 1, 1989. The FIRRE Act also provides
for the creation of the Resolution Funding Corporation ("REFCORP"), which
issues debt obligations, the proceeds of which are used to fund the case
resolution activities of the Resolution Trust Corporation (the "RTC"). The RTC
is primarily responsible for the disposition of savings institutions that fail
after January 1, 1989 but prior to the third anniversary of the FIRRE Act.
Funds for the operations of REFCORP and repayment of the principal amount of
REFCORP obligations are provided, in the first instance, by contributions from
the FHL Banks. The FHL Banks continue to be obligated to make contributions to
the Financing Corporation ("FICO"), the entity previously created under the
Competitive Equality Banking Act of 1987 ("CEBA"), as the vehicle to
recapitalize the FSLIC, to cover the operating expenses of FICO and repayment
of FICO obligations.
In addition to restructuring the federal regulatory system for savings
institutions, the FIRRE Act included provisions which, among other things,
increased the deposit insurance premiums payable by savings institutions,
authorized the Director of the OTS to make assessments against savings
institutions to cover the operating expenses of the OTS, significantly raised
the regulatory capital requirements for savings institutions, and altered the
investments and activities permitted for savings institutions. These
provisions of the FIRRE Act may increase the cost of doing business for savings
institutions. Additionally, the contributions which the FHL Banks were
required by the FIRRE Act to make to REFCORP and to FICO will reduce the amount
of dividends paid on FHL Bank stock and may increase the costs charged member
savings institutions for FHL Bank services, thereby further increasing savings
institutions' cost of doing business. Implementing regulations were required
to be adopted within various time periods after the effective date of the FIRRE
Act.
Savings and Loan Holding Company Regulation
___________________________________________
General.
________
Under the Home Owners Loan Act, as amended by the FIRRE Act (the "HOLA"),
the Director of the OTS has succeeded to the jurisdiction of the FHLBB, as
operating head of the FSLIC, over savings and loan holding companies. Thus,
the Company, as a savings and loan holding company within the meaning of the
HOLA, is now subject to regulation, supervision and examination by, and the
reporting requirements of, the Director of the OTS.
The HOLA prohibits a savings and loan holding company such as the Company,
directly or indirectly, or through one or more subsidiaries, from (i)
acquiring control of, or acquiring by merger with or purchase of the assets of,
another savings institution or a savings and loan holding company without the
prior written approval of the Director of the OTS; (ii) acquiring more than 5%
of the issued and outstanding shares of voting stock of another savings
institution or savings and loan holding company, except as part of an
acquisition of control approved by the Director of the OTS, as part of an
acquisition of stock issued by an undercapitalized savings institution or its
holding company approved by the Director of the OTS or except under certain
specified conditions (such as an acquisition of stock in a fiduciary capacity)
which negate a finding of control; or (iii) acquiring or retaining control of a
financial institution that does not have SAIF or BIF insurance of accounts.
The HOLA also allows the Director of the OTS to approve transactions resulting
in the creation of multiple savings and loan holding companies controlling
savings institutions located in more than one state in both supervisory and
nonsupervisory transactions, subject to the requirement that, in nonsupervisory
transactions, the law of the state in which the savings institution to be
acquired is located must specifically authorize the proposed acquisition, by
language to that effect and not merely by implication. As a result, the
Company may, with the prior approval of the Director of the OTS, acquire
control of a savings institution located in a state other than Maine if the
acquisition is expressly permitted by the laws of the state in which the
savings institution to be acquired is located. No director, officer, or
controlling shareholder of the Company may, except with the prior approval of
the Director of the OTS, acquire control of any savings institution which is
not a subsidiary of the Company. Restrictions relating to service as an
officer or director of an unaffiliated holding company or savings institution
are applicable to the directors and officers of the Company and its savings
institution subsidiaries under the Depository Institution Management Interlocks
Act.
Pursuant to amendments to the HOLA enacted as part of the FIRRE Act,
transactions engaged in by a savings association or one of its subsidiaries
with affiliates of the savings association generally are subject to the
affiliate transaction restrictions contained in Sections 23A and 23B of the
Federal Reserve Act in the same manner and to the same extent as such
restrictions now apply to transactions engaged in by a member bank or one of
its subsidiaries with affiliates of the member bank. Section 23A of the
Federal Reserve Act imposes both quantitative and qualitative restrictions on
transactions engaged in by a member bank or one of its subsidiaries with an
affiliate, while Section 23B of the Federal Reserve Act requires, among other
things, that all transactions with affiliates be on terms substantially the
same, and at least as favorable to the member bank or its subsidiary, as the
terms that would apply to, or would be offered in, a comparable transaction
with an unaffiliated party. Exemptions from, and waivers, of, the provisions
of Sections 23A and 23B of the Federal Reserve Act may be granted only by the
Federal Reserve Board, but the FIRRE Act authorizes the Director of the OTS
to impose additional restrictions on transactions with affiliates if the
Director determines such restrictions are necessary to ensure the safety and
soundness of any savings institution.
Restrictions on Activities of Savings and Loan Holding Companies
_________________________________________________________________________
The Company is a savings and loan holding company by virtue of its control
of the Bank. Under applicable federal regulations, savings and loan holding
companies and their noninsured subsidiaries are prohibited from engaging in any
activities other than (i) furnishing or providing management services for the
savings association; (ii) conducting an insurance agency or escrow business;
(iii) holding, managing or liquidating assets owned or acquired from the
savings association; (iv) holding or managing properties used or occupied by
the savings association; (v) acting as trustee under deeds of trust; (vi)
engaging in any other activity in which savings and loan holding companies were
authorized by regulation to engage as of March 5, 1987; and (vii) engaging in
any activity which the Board of Governors of the Federal Reserve System has
permitted for bank holding companies under its regulations (unless the Director
of the OTS, by regulation, prohibits or limits any such activity for savings
and loan holding companies). The activities in which savings and loan holding
companies were authorized by regulation to engage as of March 5, 1987 consist
of activities similar to those permitted for service corporations of federally
chartered savings institutions and include, among other things, various types
of lending activities, furnishing or performing clerical, accounting and
internal audit services primarily for affiliates, certain real estate
development and leasing activities, underwriting credit life or credit health
and accident insurance in connection with extension of credit by savings
institutions or their affiliates and the performance of a range of other
services primarily for their affiliates, their savings association subsidiaries
and service corporation subsidiaries thereof. The activities which the Board
of Governors of the Federal Reserve System by regulation has permitted for bank
holding companies generally consist of those activities that the Board of
Governors of the Federal Reserve System has found to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto,
and include, among other things, various lending activities, certain real and
personal property leasing activities, certain securities brokerage activities,
acting as an investment or financial advisor subject to certain conditions, and
providing management consulting to depository institutions, subject to certain
conditions. OTS regulations do not limit the extent to which savings and loan
holding companies and their nonsavings institution subsidiaries may engage in
activities permitted for bank holding companies pursuant to the regulations
adopted by the Governors of the Federal Reserve System, although prior OTS
approval is required to commence such activity whether de novo or by an
acquisition (in whole or part) of a going concern.
The Company could be prohibited from engaging in any activity (including
those otherwise permitted under the HOLA) not allowed for bank holding
companies if the Bank fails to constitute a qualified thrift lender. See
"Regulation -- Savings Institution Regulation -- Qualified Thrift Lender
Requirement."
Savings Institution Regulation
______________________________
General.
________
As a federally chartered institution, the Bank is subject to supervision
and regulation by the Director of the OTS, the FHLBB's successor under the
FIRRE Act. As a result of its conversion to a federal mutual savings bank
in 1984, the Bank retains the then-authorized powers of a Maine-chartered
mutual savings bank. Under OTS regulations, the Bank is required to obtain
audits by independent accountants and to be examined periodically by the
Director of the OTS. These examinations must be conducted no less frequently
than every twelve (12) months. The Bank is subject to assessments by the OTS
and the FDIC to cover the costs of such examinations. The OTS may revalue
assets of the Bank, based upon appraisals, and require the establishment of
specific reserves in amounts equal to the difference between such revaluation
and the book value of the assets. The Director of the OTS is also authorized
to promulgate regulations to ensure the safe and sound operations of savings
institutions and may impose various requirements and restrictions on the
activities of savings institutions. The FIRRE Act requires that all
regulations and policies of the Director of the OTS for the safe and sound
operations of savings institutions be no less stringent than those established
by the Office of the Comptroller of the Currency (the "OCC") for national
banks. In November 1993, the OTS, as well as the Office of the Comptroller of
the Currency and the FDIC, acting under FDICIA, issued a notice of proposed
rulemaking in which it requested public comment on proposed safety and
soundness regulations. These regulations relate to (i) internal controls,
information systems, and internal audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate exposure; (v) asset growth; and
(vi) compensation and benefit standards for officers, directors, employees and
principal shareholders. No final action has been taken. The Bank is also
subject to regulation and supervision by the FDIC, in its capacity as insurer
of deposits in the Bank, to ensure the safety and soundness of the BIF and
the SAIF. See "Regulation -- Savings Institution Regulation -- Insurance of
Deposits."
Capital Requirements.
_____________________
As required by amendments of the HOLA enacted as part of the FIRRE Act, the
Director of the OTS has adopted capital standards which require savings
institutions to maintain (i) "core capital" in an amount of not less than 3% of
total assets, (ii) "tangible capital" in an amount not less than 1.5% of total
assets and (iii) a level of risk-based capital equal to 8.0% of risk-weighted
assets. The capital standards established for savings institutions must
generally be no less stringent than those applicable to national banks and must
use all relevant substantive definitions used in the capital standards for
national banks. Under the OTS regulations, the term "core capital" includes
common stockholders equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries, less intangible assets, other than certain amounts of supervisory
goodwill, and up to 90% of the fair market value of readily marketable
purchased mortgage servicing rights ("PMSRs") (subject to certain conditions).
The term "tangible capital," for purposes of the HOLA, is defined as core
capital minus intangible assets (as defined by the OCC for national banks),
provided, however, that savings institutions may include up to 90% of the
fair market value of readily marketable PMSRs 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). In determining compliance with capital standards,
a savings institution must deduct from capital its entire investment in and
loans to any subsidiary engaged as principal in activities not permissible for
a national bank, other than subsidiaries (i) engaged in such nonpermissible
activities solely as agent for their customers; (ii) engaged in mortgage
banking activities, or (iii) that are themselves savings institutions, or
companies the only investment of which is another savings institution, acquired
prior to May 1, 1989. With respect to investments in and loans to subsidiaries
engaged as of April 12, 1989 in activities not permitted for national banks,
the required deduction from capital was to be phased-in over a period ending
June 30, 1995.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of
each such item by a credit conversion factor ranging from 0% to 100% (depending
upon the nature of the asset), (ii) the credit equivalent amount of each
off-balance sheet asset and the book value of each on-balance sheet asset must
be multiplied by a risk factor ranging from 0% to 100% (again depending upon
the nature of the asset) and (iii) the resulting amounts are added together and
constitute total risk-weighted assets. Total capital, for purposes of the
risk-based capital requirement, equals the sum of core capital plus
supplementary capital (which, as defined, includes, among other items,
perpetual preferred stock, not counted as core capital, limited life preferred
stock, subordinated debt, and general loan and lease loss allowances up to
1.25% of risk-weighted assets), less certain deductions. The amount of
supplementary capital that may be counted towards satisfaction of the total
capital requirement may not exceed 100% of core capital, and OTS regulations
require the maintenance of a minimum ratio of core capital to total risk-
weighted assets of at least 4.0%.
In August 1993, the OTS issued a final ruling adding an interest rate risk
component for purposes of risk-based capital requirements. The interest rate
risk component now takes into account, for risk-based capital purposes, the
effect that a change in interest rates would have on the value of a savings
institution's portfolio. The final rule and amendments became effective July
1, 1994.
Any insured depository institution which falls below the minimum capital
standards must submit a capital restoration plan. In general, undercapitalized
institutions will be precluded from increasing their assets, acquiring other
institutions, establishing additional branches, or engaging in new lines of
business without an approved capital plan and an agency determination that such
actions are consistent with the plan. Savings institutions that are
significantly undercapitalized or critically undercapitalized are subject to
additional restrictions and may be required to (i) raise additional capital;
(ii) limit asset growth; (iii) limit the amount of interest paid on deposits to
the prevailing rate of interest in the region where the institution is located;
(iv) divest or liquidate any subsidiary which the OTS determines poses a
significant risk; (v) order a new election for members of the board of
directors; (vi) require the dismissal of a director or senior executive
officer, or (vii) take such other action as the OTS determines is appropriate.
Under FDICIA, the OTS is required to appoint a conservator or receiver for
a critically undercapitalized institution no later than 9 months after the
institution becomes critically undercapitalized, subject to a limited exception
for institutions which are in compliance with an approved capital plan and
which the OTS and the FDIC certify are not likely to fail.
FDICIA prohibits any depository institution that is not well capitalized
from accepting deposits through a deposit broker. Previously, only troubled
institutions were prohibited from accepting brokered deposits. The FDIC may
allow adequately capitalized institutions to accept brokered deposits for
successive periods of up to 90 days. FDICIA also prohibits undercapitalized
institutions from offering rates of interest on insured deposits that
significantly exceed the prevailing rate in their normal market area or the
area in which the deposits would otherwise be accepted.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. Individual minimum capital requirements may
be appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns.
Qualified Thrift Lender Requirement.
____________________________________
In order for the Bank to exercise the powers granted to federally chartered
savings institutions, and maintain full access to FHL Bank advances, it must
constitute a "qualified thrift lender" ("QTL"). Pursuant to recent amendment
effected by FDICIA, a savings institution will constitute a QTL if the
institution's qualified thrift investments continue to equal or exceed 65% of
the savings association's portfolio assets on a monthly average basis in 9 out
of every 12 months. As amended by FDICIA, qualified thrift investments
generally consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile
home loans, home equity loans and mortgage-backed securities), (ii) certain
obligations of the FSLIC, the FDIC, the FSLIC Resolution fund and the RTC (for
limited periods of time), and (iii) shares of stock issued by any Federal Home
Loan Bank, the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association. In addition, the following assets may be categorized as
qualified thrift investments in an amount not to exceed 20% in the aggregate of
portfolio assets: (i) 50% of the dollar amount of residential mortgage loans
originated and sold within 90 days of origination; (ii) investments in
securities of a service corporation that derives at least 80% of its income
from residential housing finance; (iii) 200% of loans and investments made to
acquire, develop or construct starter homes or homes in credit needy areas
(subject to certain conditions); (iv) loans for the purchase or construction of
churches, schools, nursing homes and hospitals; and (v) consumer loans (in an
amount up to 20% of portfolio assets). For purposes of the QTL test, as
amended by FDICIA, the term "portfolio assets" means the savings institution's
total assets minus goodwill and other intangible assets, the value of property
used by the savings institution to conduct its business, and liquid assets
held by the savings institution in an amount up to 20% of its total assets.
OTS regulations provide that any savings institution that fails to meet the
new QTL test must either convert to a national bank charter or limit its future
investments and activities (including branching and payments of dividends) to
those permitted for both savings institutions and national banks. Additionally,
any such savings institution that does not convert to a bank charter will be
ineligible to receive further FHL Bank advances and, beginning three years
after the loss of QTL status, will be required to repay all outstanding FHL
Bank advances and dispose of or discontinue any pre-existing investments and
activities not permitted for both savings institutions and national banks.
Further, within one year of the loss of QTL status, the holding company of a
savings institution 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.
Liquidity.
__________
Under OTS regulations, savings institutions are required to maintain an
average daily balance of liquid assets (including cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly
rated commercial paper, securities of certain mutual funds and specified United
States government, state or federal agency obligations) equal to a monthly
average of not less than a specified percentage of the average daily balance of
the savings institution's net withdrawable deposits plus short-term borrowings.
Under the HOLA, this liquidity requirement may be changed from time to time by
the Director of the OTS to any amount within the range of 4% to 10%, depending
upon economic conditions and the deposit flows of member institutions, and the
required ratio currently is 5%. OTS regulations also require each savings
institution to maintain an average daily balance of short term liquid assets at
a specified percentage (currently 1%) of the total of the average daily balance
of its net withdrawable deposits and short-term borrowings.
Loans to One Borrower Limitations.
__________________________________
The HOLA, as amended by the FIRRE Act, generally requires savings
institutions to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may not make loans to a single
borrower in excess of 15% to 25% of their unimpaired capital and unimpaired
surplus (depending upon the type of loans and the collateral therefor). The
HOLA, as amended by the FIRRE Act, provides exceptions from the generally
applicable national bank limits, under which a savings institution may make
loans to one borrower in excess of such limits under one of the following
circumstances: (i) for any purpose, in an amount not to exceed $500,000; (ii)
to develop domestic residential housing units, in an amount not to exceed the
lesser of $30 million or 30% of the savings institution's unimpaired capital
and unimpaired surplus, provided other conditions are satisfied; or (iii) to
finance the sale of real property which it owns as a result of foreclosure, in
an amount not to exceed 50% of the savings institution's unimpaired capital and
unimpaired surplus. In addition, further restrictions on a savings
institution's loans to one borrower may be imposed by the Director of the OTS
if necessary to protect the safety and soundness of the savings institution.
The new loans to one borrower limits apply prospectively to loan commitments
issued after the date of enactment of the FIRRE Act, and legally binding loan
commitments issued prior to that date in compliance with the pre-FIRRE Act
limits may be funded even if the amount of the loan would cause the institution
to exceed the FIRRE Act limits.
Pursuant to its authority to impose more stringent requirements on savings
associations to protect safety and soundness, however, the OTS has promulgated
a rule limiting loans to one borrower to finance the sale of real property
acquired in satisfaction of debts to 15% of unimpaired capital and surplus. The
rule provides that purchase money mortgages received by a savings association
to finance the sale of such real property do not constitute "loans" (provided
that the savings association is not placed in a more detrimental position
holding the note than holding the real estate) and, therefore, are not subject
to the loan-to-one-borrower limitations.
Commercial Real Property Loans.
_______________________________
Another of the FIRRE Act amendments to the HOLA limits the aggregate amount
of commercial real estate loans that a federal savings institution may make to
an amount not in excess of 400% of the savings institution's capital (as
compared with the 40% of assets limitation in effect prior to the enactment of
the FIRRE Act). However, the new limit does not require the divestiture of
loans made prior to enactment of the FIRRE Act. The OTS has the authority
to grant exceptions to the limit if the additional amount will not pose a
significant risk to the safe or sound operation of the savings institution
involved, and is consistent with prudent operating practices.
Regulatory Restrictions on the Payment of Dividends by Savings Institutions.
____________________________________________________________________________
OTS regulations establish uniform treatment for all capital distributions by
savings associations (including dividends, stock repurchases and cash-out
mergers). Under the rules, a savings association is classified as a tier 1
institution, a tier 2 institution or a tier 3 institution, depending on its
level of regulatory capital both before and after giving effect to a proposed
capital distribution. A tier 1 institution (i.e., one that both before and
after a proposed capital distribution has net capital equal to or in excess of
its fully phased-in regulatory capital requirement) is allowed, subject to any
otherwise applicable statutory or regulatory requirements or agreements entered
into with regulators, to make capital distributions in any calendar year up to
100% of its net income to date during the capital year plus the amount that
would reduce by one-half its surplus capital ratio (i.e., the percentage by
which (x) its ratio of capital to assets exceeds (y) the ratio of its fully
phased-in capital requirement to assets) as of the beginning of the calendar
year, adjusted to reflect current earnings. No regulatory approval of the
capital distribution is required, but prior notice has to be given to the OTS.
A tier 2 institution (i.e., one that both before and after a proposed capital
distribution has net capital equal to its then-applicable minimum capital
requirement but would fail to meet its fully phased-in capital requirement
either before or after the distribution) may make only limited capital
distributions without prior regulatory approval. A tier 3 institution (i.e.,
one that either before or after a proposed capital distribution fails to meet
its then-applicable minimum capital requirement) may not make any capital
distributions without prior OTS approval. In addition, the OTS may prohibit a
proposed capital distribution, which otherwise would be permitted by the
regulation, if the OTS determines that such a distribution would constitute an
unsafe or unsound practice. Also, an institution meeting the tier 1 criteria
which has been notified that it needs more than normal supervision will be
treated as a tier 2 or tier 3 institution, unless the OTS deems otherwise.
Activities of Subsidiaries.
___________________________
The FIRRE Act requires a savings institution seeking to establish a new
subsidiary, acquire control of an existing company (after which it would be a
subsidiary), or conduct a new activity through a subsidiary, to provide 30 days
prior notice to the FDIC and the Director of the OTS and conduct any activities
of the subsidiary in accordance with regulations and orders of the Director of
the OTS. The Director of the OTS has the power to require a savings
institution to divest any subsidiary or terminate any activity conducted by a
subsidiary that the Director of the OTS determines is a serious threat to the
financial safety, soundness or stability of such savings institution or is
otherwise inconsistent with sound banking practices.
Insurance of Deposits.
______________________
Federal deposit insurance is required for all federal savings institutions.
Federal savings institutions' deposits are insured to a maximum of $100,000 for
each insured depositor by BIF or SAIF. As a FDIC-insured institution, the Bank
is subject to regulation and supervision by the FDIC, to the extent deemed
necessary by the FDIC to ensure the safety and soundness of BIF and SAIF. The
FDIC is entitled to have access to reports of examination of the Banks made by
the Director of the OTS and all reports of condition filed by the Bank with the
Director of the OTS, and may require the Bank to file such additional reports
as the FDIC determines to be advisable for insurance purposes. The FDIC may
determine by regulation or order that any specific activity poses a serious
threat to BIF or SAIF and that no BIF or SAIF member may engage in the activity
directly. The FDIC is also authorized to issue and enforce such regulations or
orders as it deems necessary to prevent actions of savings institutions that
pose a serious threat to BIF or SAIF.
SAIF insurance premiums were increased commencing January 1, 1991 to 0.23%
of the assessment base. The FDIC has the authority to further increase
premiums in order to cover expenses and to recapitalize the deposit insurance
funds. The current FDIC proposal for SAIF insurance premiums is discussed in
the management discussion and analysis section, provided in Item 7, under the
heading Regulatory Matters. On September 5, 1995, the FDIC announced that
BIF was fully recapitalized at the end of May 1995. As a result, the premium
rates for the healthiest banks (1A category) has decreased from 0.23% to 0.04%
of the assessment base. During fiscal 1996, premium rates for the healthiest
banks (1A category) has been decreased from 0.04% to an annual fee of $2,000.
The Bank is 1A category bank. All of the Bank's deposits, except for the
Brunswick's branch deposits, which represented 41% of the Bank's total deposits
at June 30, 1996, are BIF insured.
As required by the FDICIA, the FDIC adopted a final rule on a permanent
system of risk-based premiums effective January 1, 1994. Under the risk-based
assessment system, the FDIC will be required to calculate a savings
institution's semiannual assessment based on (i) the probability that the
insurance fund will incur a loss with respect to the institution (taking into
account the institution's asset and liability concentration), (ii) the
potential magnitude of any such loss, and (iii) the revenue and reserve needs
of the insurance fund. Until December 31, 1997, the minimum semiannual
assessments for SAIF members under the risk-based assessment system must equal
or exceed the assessments that would have applied prior to enactment of the
FDICIA. The semiannual assessments imposed on an institution may be higher
depending on SAIF revenue and expense levels, and the risk classification
applied to the institution. Effective January 1, 1998, the FDIC is required to
set SAIF semiannual assessments rates in an amount sufficient to increase the
reserve ratio of the SAIF to 1.25% of insured deposits over no more than a
15-year period. The FDICIA also gives the FDIC the authority to establish a
higher reserve ratio.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon finding by the FDIC that the savings institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings institution,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
Under the Federal Deposit Insurance Act, as amended by the FIRRE Act, a
savings institution may be held liable to the FDIC for any loss incurred by the
FDIC in connection with the default of a commonly controlled savings
institution or in connection with the provision of assistance by the FDIC to a
commonly controlled savings institution in danger of default. Thereafter, if
a receiver, conservator or other legal custodian is appointed for one of the
institutions, or if the FDIC is required to provide financial assistance to the
institution, the institution could be held liable to the FDIC for any loss
incurred in connection with such appointment or assistance.
Effective December 19, 1992, FDICIA requires any company that controls an
undercapitalized savings institution, in connection with the submission of a
capital restoration plan by the savings institution, to guarantee that the
institution will comply with the plan and to provide appropriate assurances of
performance. The aggregate liability of any such controlling company under such
guaranty is limited to the lesser of (i) 5% of the savings institution's assets
at the time it became undercapitalized; or (ii) the amount necessary to bring
the savings institution into capital compliance as of the time the institution
fails to comply with the terms of its capital plan.
Federal Home Loan Bank System
_____________________________
The Federal Home Loan Bank System consists of 12 regional FHL Banks, each
subject to supervision and regulation by the Federal Housing Finance Board (the
"FHFB"), a new agency established pursuant to the FIRRE Act. The FHL Banks
provide a central credit facility for member savings institutions. The Bank,
as a member of the FHL Bank of Boston, is required to own shares of capital
stock in that FHL Bank in an amount at least equal to 1% of the aggregate
principal amount of their unpaid residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 1/20 of
their advances (borrowings) from the FHL Bank, whichever is greater. The Bank
is in compliance with this requirement. The maximum amount which the FHL Bank
of Boston will advance fluctuates from time to time in accordance with changes
in policies of the FHFB and the FHL Bank of Boston, and the maximum amount
generally is reduced by borrowings from any other source. In addition, the
amount of FHL Bank advances that a savings institution may obtain will be
restricted in the event the institution fails to constitute a QTL. See
"Regulation -- Savings Institution Regulation -- Qualified Thrift Lender
Requirement."
Federal Reserve Board
_____________________
Pursuant to the Depository Institutions Deregulation and Monetary Control
Act of 1980 (the "Deregulation Act"), Federal Reserve Board regulations require
savings institutions to maintain reserves against their net transaction
accounts (primarily NOW accounts), subject to certain exemptions. 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.
Because required reserves must be maintained in the form of vault cash or a
non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the institution's interest-earning assets.
The Deregulation Act also gives savings institutions authority to borrow
from the appropriate Federal Reserve Bank's "discount window." Current Federal
Reserve regulations require savings institutions to exhaust all FHLB sources
before borrowing from the Federal Reserve Bank. The FDICIA places limitations
upon a Federal Reserve Bank's ability to extend advances to undercapitalized
and critically undercapitalized depository institutions. The FDICIA provides
that a Federal Reserve bank generally may not have advances outstanding to an
undercapitalized institution for more than 60 days in any 120-day period.
Maine Law
_________
Under Maine law, a Maine financial institution holding company such as the
Company may not engage in any activity other than managing or controlling
financial institutions, or other activities deemed permissible by the
Superintendent. The Superintendent has by regulation determined that, with the
prior approval of the Superintendent, a financial institution holding company
may engage in those activities deemed closely related pursuant to Section 408
of the National Housing Act, unless that activity is prohibited by the Maine
Banking Code or regulations.
Securities and Exchange Commission
__________________________________
The Company has registered its common stock with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of
1934, as amended. As a result of such registration, the proxy and tender offer
rules, periodic reporting requirements, insider trading restrictions and
reporting requirements, as well as certain other requirements, of such Act are
applicable.
Restrictions on the Payment of Dividends
________________________________________
The Maine Business Corporation Act (the "Business Corporation Act") permits
the Company to pay dividends on its capital stock only from its unreserved and
unrestricted earned surplus or from its net profits for the current fiscal year
and the next preceding fiscal year taken as a single period.
Applicable rules further prohibit the payment of a cash dividend by the
Company if the effect thereof would cause its net worth to be reduced below
either the amount required for the liquidation account or the net worth
requirements imposed by federal laws or regulations. The Company is prohibited
from paying dividends on their capital stock if it is in default in the payment
of any assessment to the FDIC.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the current income tax rates on the amount used.
Restrictions on the Acquisition of the Company
______________________________________________
The savings and loan holding company provisions of the HOLA (the "Holding
Company Provisions") provide that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions, may acquire "control" of an insured savings
institution at any time without the prior approval of the OTS. In addition,
any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination and regulation under the Holding
Company Provisions and the regulations promulgated thereunder. "Control" in
this context means ownership, control of, or holding proxies representing more
than 25% of the voting shares of, an insured institution, the power to control
in any manner the election of a majority of the directors of such institution
or the power to exercise a controlling influence over the management or
policies of the institution.
In addition, the Change in Bank Control Act (the "Control Act") provides
that no "person," acting directly or indirectly or through or in concert with
one or more other persons, may acquire "control" of an insured institution
unless at least 60 days' prior written notice has been given to the OTS and the
OTS has not objected to the proposed acquisition. "Control" is defined for
this purpose as the power, directly or indirectly, to direct the management or
policies of an insured institution or to vote 25% or more of any class of
voting securities of an insured institution. Under both the Holding Company
Provisions and the Control Act (as well as the regulations referred to below)
the term "insured institutions" includes state and federally chartered
SAIF-insured institutions, federally chartered savings banks insured under the
BIF and holding companies thereof.
OTS regulations establish a uniform set of regulations under both the
Control Act and the Holding Company Provisions. Under these regulations, prior
to obtaining control of an insured institution, a person (under the Control
Act) must give 60 days notice to the OTS and have received no OTS objection to
such acquisition of control, and a company (under the Holding Company
Provisions) must apply for and receive OTS approval of the acquisition.
"Control," for purposes of the regulations, means the acquisition of 25% or
more of the voting stock (or irrevocable proxies for 25% of more of the voting
stock) of the institution, control in any manner of the election of a majority
of the institution's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of eight "control factors," constitutes a rebuttable determination
of control under the new regulations. The determination of control may be
rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstance giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings.
The regulations provide that persons or companies which acquire beneficial
ownership exceeding 10% or more of any class of an insured institution's stock
after the effective date of the regulations must file with the OTS a
certification that the holder is not in control of such institution, is not
subject to a rebuttable determination of control and will take no action which
would result in a determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable.
Other Regulations
_________________
The policies of regulatory authorities, including the Federal Reserve Board,
the OTS, and the FDIC, have had a significant effect on the operating results
of financial institutions in the past and are expected to do so in the future.
Policies of these agencies may be influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and fiscal policies of the United States government.
Supervision, regulation or examination of the Company and the Bank by such
regulatory agencies is not intended for the protection of the Company's
shareholders.
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 8 b.
(d) Financial Information About Foreign and Domestic
Operations and Export Sales
_____________________________________________________
Not applicable.
Item 2. Properties
__________
The only real property which the Company owns is the real estate in Auburn,
Maine on which various operational functions are performed for the Bank. It
utilizes the premises and equipment of the Bank with no payment of any rental
fee to the Bank.
The Bank owns its branch offices in Bethel, Harrison, Buckfield, Mechanic
Falls, Brunswick, Richmond and Lisbon Falls, Maine. The branch office in South
Paris, Maine is leased.
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
___________________________________________________
Not applicable
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
_____________________________________________________________________
The common stock of the Company trades on The Nasdaq Stock Exchange under the
symbol NEBC. The number of shares of common stock outstanding as of June 30,
1996 was 1,229,910. The number of stockholders of record, as of September 13,
1996 was approximately 415.
The following table sets forth the high and low sales prices of the Company's
common shares and dividends paid during each quarter for fiscal years ending
June 30, 1995 and 1996.
1995-1996 High Low Div. Pd.
_________________ _________ _________ _________
July 1 - Sept.30 11.38* 10.75* .04*
Oct.1 - Dec.31 12.00* 10.75* .04*
Jan.1 - March 31 13.25 11.00 .08
April 1 - June 30 13.25 12.50 .08
1994 - 1995 High Low Div. Pd.
_________________ _________ _________ _________
July 1 - Sept.30 11.75* 10.75* .04*
Oct.1 - Dec.31 11.00* 10.50* .04*
Jan.1 - March 31 11.50* 10.50* .04*
April 1 - June 30 11.25* 10.75* .04*
* Adjusted to reflect 100% stock dividend paid on 12/15/95.
Bethel Bancorp has 45,454 shares of Series A preferred stock outstanding. The
Series A preferred stock is convertible into common stock on a two-for-one
basis and carries a dividend rate of two percent below the prime rate of the
First National Bank of Boston, but in no event to be less than 7% per annum.
There is no trading market for the Series A preferred stock.
Bethel Bancorp has 71,428 shares of Series B preferred stock outstanding. The
Series A preferred stock is convertible into common stock on a two-for-one
basis and carries a dividend rate of two percent below the prime rate of the
First National Bank of Boston, but in no event to be less than 7% per annum.
There is no trading market for the Series B preferred stock.
Item 6. Selected Financial Data
_______________________
Years Ended
June 30,
________________________________________________
1996 1995 1994 1993 1992
________ ________ ________ ________ ________
(Dollars in thousands)
Interest income $ 17,994 $ 16,923 $ 14,036 $ 14,359 $ 13,987
Interest expense 9,128 8,053 6,479 7,155 8,208
________ ________ ________ ________ ________
Net interest income 8,866 8,870 7,557 7,204 5,779
Provision for loan losses 603 641 1,021 852 733
Other operating income 1 1,818 1,697 2,111 1,342 694
Net securities gains 279 419 347 108 183
Other operating expenses 2 8,355 7,988 7,011 5,734 4,192
Writedowns on equity and debt
securities 93 0 84 61 11
________ ________ ________ ________ ________
Income before income taxes 1,912 2,358 1,899 2,008 1,720
Income tax expense 719 869 698 786 655
Cumulative effect of change in
accounting principle - - 260 - -
________ ________ ________ ________ ________
Net income $ 1,193 $ 1,489 $ 1,461 $ 1,222 $ 1,065
======== ======== ======== ======== ========
Primary earnings per share 3 $ 0.83 $ 1.10 $ 1.13 $ 1.07 $ 0.91
Fully diluted earnings per
share 3 $ 0.79 $ 1.02 $ 1.08 $ 1.07 $ 0.91
Cash dividends per common
share $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32
Common dividend payout ratio 40.51% 15.69% 14.81% 15.02% 17.58%
At June 30,
________________________________________________
1996 1995 1994 1993 1992
________ ________ ________ ________ ________
Total assets $222,290 $207,509 $190,600 $178,914 $164,165
Total loans 169,851 170,140 158,461 150,756 141,431
Total deposits 145,195 147,120 124,306 122,497 121,517
Total borrowings 53,625 37,710 48,420 40,500 29,079
Total stockholders' equity 18,151 17,275 15,756 14,067 12,840
Return on assets
(net income/average assets) 0.56% 0.73% 0.80% 0.72% 0.69%
Return on equity
(net income/average net worth) 6.52% 9.08% 9.72% 9.01% 8.49%
Average equity/average assets 8.62% 8.02% 8.23% 7.85% 8.30%
1 Includes fees for services to customers and gains on sale of loans.
2 Includes salaries, employee benefits and occupancy.
3 Per share data for the years prior to 1996 have been retroactively restated
as a result of the stock split in December 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
DESCRIPTION OF OPERATIONS
_________________________
Bethel Bancorp, which does business under the name Northeast Bancorp (the
"Company"), is a savings and loan holding company with the Office of Thrift
Supervision ("OTS") as its primary regulator. The board of directors of Bethel
Bancorp voted to assume the name of Northeast Bancorp as of July 1, 1996,
pending shareholder approval for the name change of the Company. On July 1,
1996 the Company's two wholly-owned banking subsidiaries, Bethel Savings Bank,
F.S.B. and Brunswick Federal Savings, F.A. merged following receipt of
regulatory approval. The merged banking subsidiary, which changed its name to
Northeast Bank, FSB (the "Bank"), has branches located in Bethel, Harrison,
South Paris, Buckfield, Mechanic Falls, Brunswick, Richmond and Lisbon Falls,
Maine.
The Bank's deposits are primarily BIF-insured. Deposits at the Brunswick
branch are SAIF-insured and represent 41% of the Bank's total deposits at June
30, 1996.
The Company relocated its corporate headquarters to 158 Court Street, Auburn,
Maine, in July of 1996 and intends to open a new retail banking facility in the
Lewiston/Auburn area during the 1997 fiscal year.
The Company's board of directors voted to transfer the operations of ASI Data
Services to the Bank as of July 1, 1996. ASI Data Services, Inc. continues to
exist as a separate legal entity and is a wholly - owned subsidiary of the
Company. ASI Data Services performed data and item processing for the Company
and its subsidiaries during fiscal 1996, but is now inactive.
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, non-interest fee
income, and by increasing volume through a larger market area.
The banking business in the Bank's market areas of western and south central
Maine 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. Additionally, the Bank
believes that the local character of its business and its "community bank"
management philosophy will improve its ability to compete in its market areas.
The Company has enhanced its product lines and now provides a range of
financial services such as loans, deposits and investments through its
relationship with the Independent Financial Group, trust services through the
Bank's Trust department, employee retirement benefits through the Company's
affiliate First New England Benefits and leasing services through its
relationship with LGIC Leasing.
The state of Maine's economy, in which the Bank operates, including the south
central region of Cumberland, Androscoggin and Sagadahoc counties has
stabilized with moderate growth, although the economy in the western region of
Oxford county remains weak. Based on the different economic conditions in the
Bank's market areas, management of the Company continues to carefully monitor
the exposure to credit risk at the Bank.
The Company believes that it has adequate capital, as total equity represents
8.17% of total assets and that its capital position will support future growth
and development as well as allow for additional provisions to the allowance for
loan losses, if needed, without significant impairment of the financial
stability of the Company.
On October 28, 1994 the Company acquired four Key Bank branches, located in
Buckfield, Mechanic Falls, Richmond and Lisbon Falls, Maine. The total
deposits and repurchase agreements acquired from the four branches were
approximately $27,749,000. The premium paid to Key Bank for these deposits was
$1,590,228. The cost of the real estate, building, and equipment purchased from
Key Bank was $498,500. The growth in assets and deposits in fiscal 1995 was
greatly enhanced by the acquisition of the four Key Bank branches.
The Company's assets totaled $222,289,615 as of June 30, 1996, an increase of
$14,780,478 compared to June 30, 1995. Loan volume was flat during the fiscal
year due to unusually high principal reductions, loans refinancing to the
secondary market, and a higher level of competition from financial institutions
and mortgage companies. The Bank has focused its business development efforts
towards full service credit packages and financial services, as well as
competitively priced mortgage packages.
Cash and cash equivalents decreased by $3,173,943 at June 30, 1996 compared to
June 30, 1995. The reduction in cash equivalents was primarily the result of
securities purchased during fiscal 1996.
The Company's loan portfolio had a balance of $169,850,924 as of June 30, 1996,
which represents a decrease of $288,980 compared to June 30, 1995. From June
30, 1995 to June 30, 1996, the loan portfolio decreased by $352,000 in real
estate mortgage loans, $1,758,000 in consumer loans, and increased by
$1,808,000 in commercial loans. The loan portfolio contains elements of credit
and interest rate risk. The Company primarily lends within its local market
areas, which management believes helps it to better evaluate credit risk. The
Company also maintains a well collateralized position in real estate mortgages.
Residential real estate mortgages make up 68% of the total loan portfolio, in
which 48% of the residential loans are variable rate products. It is
management's intent to increase the proportion of variable rate residential
real estate loans to reduce the interest rate risk in this area.
Fifteen percent of the Company's total loan portfolio balance is commercial
real estate mortgages. Similar to the residential mortgages, the Company tries
to mitigate credit risk by lending in its local market areas as well as
maintaining a well collateralized position in real estate. The commercial real
estate loans have minimal interest rate risk as 83% of the portfolio consists
of variable rate products.
Commercial loans make up 8% of the total loan portfolio in which 87% of the
balance are variable rate instruments. The credit loss exposure on commercial
loans is highly dependent on the cash flow of the customers' business. The Bank
attempts to mitigate losses through lending in accordance with the Company's
credit policies.
Consumer loans make up 9% of the total loan portfolio. Since these loans are
primarily fixed rate products, they have interest rate risk when market rates
increase. These loans also have credit risk with, at times, minimal collateral
security. Management attempts to mitigate these risks by keeping the products
offered short-term, receiving a rate of return commensurate with the risk, and
lending to individuals in the Company's known market areas.
The Company's allowance for loan losses was $2,549,000 as of June 30, 1996
versus $2,396,000 as of June 30, 1995, representing 1.50% and 1.41% of total
loans, respectively. The Company had non-performing loans totaling $2,603,000
and $2,570,000 at June 30, 1996 and 1995, which was 1.53% and 1.51% of total
loans, respectively. Non-performing loans represented 1.17% and 1.24% of total
assets at June 30, 1996 and 1995, respectively. The Company's allowance for
loan losses was equal to 98% and 93% of the total non-performing loans at June
30, 1996 and 1995, respectively. At June 30, 1996, the Company had
approximately $2,541,000 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, 1996, the amount of
such loans has decreased from the June 30, 1995 amount by $1,082,000. This
decrease was primarily due to substandard loans being classified as
non-performing or being liquidated through the sale of foreclosed assets.
Management takes an aggressive posture in reviewing its loan portfolio to
classify certain loans substandard. The following table represents the
Company's current non-performing loans:
Description Total
_______________________ ___________
1-4 Family Mortgages $1,092,000
Commercial Mortgages 1,154,000
Commercial Installment 283,000
Consumer Installment 74,000
_______________________ ___________
Total non-performing $2,603,000
The majority of the non-performing loans are seasoned loans located in the
Oxford county area. This geographic area continues to have a depressed
economy resulting in high unemployment and a soft real estate market. As a
result, management has allocated substantial resources to the collection area
in an effort to control the growth in non-performing, delinquent and
substandard loans. The Company's delinquent accounts has increased slightly
during the 1996 fiscal year. This increase was largely due to higher
delinquencies in the western Maine market and the reduction of the Bank's loan
balances.
The following table reflects the annual trend of total delinquencies 30 days or
more past due, including non-performing loans, for the Company as a percentage
of total loans:
6/30/93 6/30/94 6/30/95 6/30/96
4.42% 2.64% 2.60% 2.77%
The level of the allowance for loan losses as a percentage of total loans and
non-performing loans represented an increase at June 30, 1996 compared to June
30, 1995. Loans classified substandard decreased in the 1996 fiscal year, when
compared to the 1995 fiscal year. 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 these 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 Company
were $449,860, $707,634, and $680,795, for the three years ended June 30, 1996,
June 30, 1995, and June 30, 1994, respectively.
On a regular and ongoing basis, management evaluates the adequacy of the Bank's
allowance for loan losses. 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 uses its best
judgement in recognizing loan losses in light of available information, there
can be no assurance that the Company will not have to increase its provision
for loan losses in the future as a result of changing economic conditions,
adverse markets for real estate or other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance for loan losses
based on their judgments about information available to them at the time of
their examination.
At June 30, 1996, the Company had a total of $513,831 in other real estate
owned versus $1,068,454 as of June 30, 1995. The decrease in other real estate
owned of $554,623 was due to sales of properties and an increase in the
allowance for losses on other real estate owned. The Company has an allowance
for losses on other real estate owned that was established to provide for
declines in real estate values and to consider estimated selling costs. The
allowance for losses on other real estate owned totaled $100,000 at June 30,
1996 versus $5,289 at June 30, 1995. The Company provided for this allowance
through a charge against earnings of $94,711 and $107,173 for the years ended
June 30, 1996 and 1995, respectively. In 1996 and 1995, write downs of other
real estate owned totaled $-0- and $151,289, respectively. The Company
increased the June 30, 1996 allowance for losses on other real estate owned to
provide for additional losses due to its plan to aggressively sell the other
real estate owned property. Management periodically receives independent
appraisals to assist in its valuation of the other real estate owned portfolio.
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.
On July 1, 1995 the Company adopted the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards Nos. 114 and 118
("Statements 114 and 118"). The adoption resulted in the reclassification, as
of June 30, 1995, of in-substance foreclosure loans to non-performing loans.
Statements 114 and 118, taken together, require the Company to identify
impaired loans and generally value them at the lower of (I) the present value
of expected future cash flows discounted at the loan's original effective
interest rate or (II) the loan's observable market price or (III) fair value of
the loan's collateral, if the loan is collateral dependent. The two
statements, in connection with recent regulatory guidance, require the Company
to reclassify its in-substance foreclosures to loans and disclose them as
impaired loans. At June 30, 1996, total impaired loans were $1,530,650, of
which $1,063,720 had related allowances of $499,200. During the year ended
June 30, 1996, the income recognized related to impaired loans was $87,128 and
the average balance of outstanding impaired loans was $1,799,087. The Company
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.
As of June 30, 1996, trading account securities had increased by $196,246
compared to the balance of such assets at June 30, 1995. This increase was
attributed to the purchase of securities in which management intends to trade
for net securities gains.
Proceeds from increased Federal Home Loan Bank ("FHLB") borrowings as well as
funds obtained from the reduction of FHLB overnight deposits were utilized to
purchase mortgage-backed securities, thereby increasing the Company's earning
assets. The Company restructured its investment portfolio during the quarter
ended December 31, 1995 to improve the yield on the securities portfolio. This
was accomplished by selling mortgage-backed securities with lower coupon rates
and purchasing additional mortgage-backed securities with better yields. The
Company took advantage of the fluctuating market rates and prices and purchased
$16,751,113 of additional mortgage-backed securities in the March 31, 1996
quarter and $2,750,955 in the June 30,1996 quarter, increasing securities
available for sale by $19,502,068 compared to June 30, 1995. The additional
securities currently have a net earnings yield benefit of 200 basis points,
when factoring in the average yield on FHLB overnight deposits and the average
cost on FHLB advances. At June 30, 1996, the Company's total investment
portfolio was classified as available for sale. The amortized cost and market
value of available for sale securities at June 30, 1996 was $30,919,037 and
$29,650,319, respectively. The reduction in carrying value from the cost was
primarily attributable to the decline in market value of mortgage-backed
securities, which was due to the change in current market prices from the price
at the time of purchase. The Company has primarily invested in mortgage-backed
securities. Substantially all of the mortgage-backed securities are high grade
government backed securities. As in any long term earning asset in which the
earning rate is fixed, the market value of mortgage-backed securities will
decline when market interest rates increase from the time of purchase. Since
these mortgage-backed securities are backed by the U.S. government, there is
little or no risk of loss of principal. Management believes that the yields
currently received on this portfolio are satisfactory.
During 1995, the Company purchased $12,399,000 in securities it classified as
held to maturity. At the time of acquiring these securities, the Company had
the intention and the ability to hold such securities to maturity. In the last
quarter of fiscal 1995, as a result of its planning process and changes in
market conditions, Company management determined that it no longer possessed
the intent to hold such securities to maturity. The investment portfolio is an
integral piece of the Company's asset/liability ("ALCO") management program.
The Company's ALCO committee meets on a regular basis to analyze the Company's
risk during a rising or falling interest rate environment. In management's
efforts to maintain the proper asset/liability mix for the Company, management
determined that the investment portfolio needs to be managed aggressively and
consistently. Consequently, the Company transferred its entire held to
maturity portfolio, with an aggregate cost of $18,775,000 and an aggregate
market value of $18,822,000 (including unrealized gains and losses of $191,000
and $144,000, respectively) to available for sale. The Company subsequently
sold selected securities with an aggregate cost of $11,900,000 and realized
gains of $273,000 and realized losses of $225,000. The Company's decision not
to hold these securities to maturity does not satisfy the limited criteria of
FASB Statement of Financial Accounting Standards No. 115, which specifies
circumstances in which it is permissible to sell or transfer held to maturity
securities. Consequently, the Company will, for the foreseeable future,
classify its securities portfolio as available for sale, or trading.
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 1996, 1995 and
1994, there have been other than temporary declines in values of individual
equity securities in the amounts of $93,819, $-0-, and $84,419, respectively.
Such securities have been written down to market value through an adjustment
against current earnings.
The Company increased its investment in FHLB stock by $506,200, compared to
June 30, 1995, due to the increase in FHLB borrowings. The FHLB requires
institutions to hold a certain level of FHLB stock based on advances
outstanding.
The Company has used off-balance-sheet risk financial instruments in the normal
course of business to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. The Company
uses the same credit policies in making commitments as it does for on-balance-
sheet instruments. Hence, these instruments have the same elements of credit
and interest rate risk. The Company limits its involvement in derivative
financial instruments to covered call and put contracts. Gains and losses from
entering into these contracts were immaterial to the results of operations of
the Company in fiscal 1996, 1995 and 1994. The total value of securities under
call and put contracts at any one time is immaterial to the Company's financial
position, liquidity, or results of operations. Off-balance-sheet risk financial
instruments are more fully described in footnote 19 to the financial
statements.
The Company's premises and equipment decreased by a net of $296,892 during
fiscal 1996 due to normal depreciation. The Company's premises and equipment
increased, during fiscal 1995, by a net of $828,487. The 1995 increase was
primarily due to the acquisition of the Key Bank branches, explained above, as
well as the capitalized costs associated with the relocation of the Bank's
Mechanic Falls branch to a new facility.
The increase in accrued interest receivable on investments of $150,391 during
fiscal 1996 was primarily due to the increase in the mortgage-backed securities
portfolio. The Company's goodwill decreased by $308,913 during fiscal 1996 due
to normal amortization. Goodwill increased by $1,414,566 during the 1995
fiscal year due to the premium paid to acquire the deposits of the Key Bank
branches, explained above, less the 1995 amortization of $235,098. The
increase in other assets during fiscal 1996 of $153,188 was primarily due to
the increase in deferred tax assets, caused by a reversal of temporary
differences between the Company's financial statements and its tax returns. Due
from broker decreased by $941,407 due to the purchase of a mortgage-backed
security at June 30, 1995 which settled in fiscal 1996.
The Bank continues to attract new local deposit relationships. The Company
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 carry the same risk as local deposit C.D.'s, in that
both are interest rate sensitive with respect to the Company's ability to
retain the funds. The Company also utilizes FHLB advances, as alternative
sources of funds, when the interest rates of the advances are less than market
deposit interest rates as well as to fund short-term liquidity demands.
Total deposits were $145,195,369 and securities sold under repurchase
agreements were $3,762,966 as of June 30, 1996. These amounts represent a
decrease of $1,924,501 and an increase of $1,177,579, respectively, compared to
June 30, 1995. Broker deposits represented $5,647,138 of total deposits at
June 30, 1996, which decreased by $3,140,563 compared to June 30, 1995's
$8,787,701 balance. Based on the normal growth of local deposits and
attractive FHLB advance rates, management has chosen to reduce its level of
brokered deposits. Management will be reviewing an additional $1,000,000 of
brokered deposits maturing in the next quarter. Total borrowings from the FHLB
were $52,123,000 as of June 30, 1996, for an increase of $16,423,000 compared
to June 30, 1995. Mortgages, free of liens, pledges and encumbrances are
required to be pledged to secure FHLB advances. The increase in repurchase
agreements and FHLB advances were utilized to fund investment securities
growth.
Notes payable decreased by $507,899 during the 1996 fiscal year due to the
scheduled principal payments on the Fleet Bank of Maine loan incurred to
finance, in part, the Brunswick Federal Savings, F.A. acquisition. In August
1996, the Company refinanced the remaining balance of the note payable of
$1,375,000. The new note is payable in eighteen quarterly principal payments
of $76,389. Interest is payable monthly at an 8% fixed rate. Due to broker
decreased by $989,062 at June 30, 1996 due to the purchase of a GNMA security
on June 30, 1995 that settled in fiscal 1996. Other liabilities decreased by
$274,603 compared to June 30, 1995, due primarily to the decrease in accrued
tax liabilities, deferred gain on loan sales, and escrow accounts.
CAPITAL RESOURCES & LIQUIDITY
_____________________________
Liquidity is defined as the ability to meet unexpected deposit withdrawals and
increased loan demand of a short-term nature with a minimum loss of principal.
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
approximately $45,000,000 over and above the 1996 end-of-year advances
reported. The Company's ability to access the principal sources of liquid funds
listed above is immediate and adequate to support the Company's budgeted
growth.
Cross selling strategies are employed by the Bank to develop deposit growth.
Even though deposit interest rates increased during fiscal 1996, the rate of
return was much stronger in other financial instruments such as mutual funds
and annuities. Like other companies in the banking industry, the Bank will be
challenged to maintain and or increase its core deposit liquidity base.
Total equity of the Company was $18,151,242 as of June 30, 1996 versus
$17,275,278 at June 30, 1995. On September 8, 1995 Square Lake Holding
Corporation exercised 50,000 warrants at an aggregate price of $700,000. These
proceeds were utilized as general working capital. The exercise of these
warrants contributed to the growth of the Company's total equity. Warrants
outstanding were 133,764 as of June 30, 1996. The Company paid a 100% stock
dividend to all shareholders on December 15, 1995. Based in part on this
dividend, the current common shares outstanding increased to 1,229,910 shares
on June 30, 1996. The Company repurchased 4,100 treasury shares at a cost of
$52,277. These treasury shares are to be utilized for the employee stock bonus
and options plans. The Company continued to pay an annualized dividend of $.32
per share following the stock dividend, resulting in an increase in yield to
shareholders. The effect of increasing the dividend payout to common stock
shareholders will not have a significant effect on the financial position,
liquidity, or results of operations of the Company. The total equity to total
assets ratio of the Company was 8.17% as of June 30, 1996 and 8.33% at June 30,
1995. The reduction in the equity to assets ratio from fiscal 1996 compared to
fiscal 1995 was primarily due to the Company leveraging the Bank in the
purchase of mortgage-backed securities through the increased use of FHLB
advances. Book value per common share was $13.13 as of June 30, 1996 versus
$13.95 at June 30, 1995, when restated for the 100% stock dividend.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
which was enacted on December 19, 1991, contains various provisions intended to
recapitalize the Bank Insurance Fund ("BIF") and also effects a number of
regulatory reforms that impact all insured depository institutions, regardless
of the insurance fund in which they participate. Among other things, FDICIA
grants OTS broader regulatory authority to take prompt corrective action
against insured institutions that do not meet capital requirements, including
placing undercapitalized institutions into conservatorship or receivership.
FDICIA also grants OTS broader regulatory authority to take corrective action
against insured institutions that are otherwise operating in an unsafe and
unsound manner.
Regulations implementing the prompt corrective action provisions of FDICIA
became effective December 19, 1992 and defined specific capital categories
based on an institution's capital ratios. OTS has issued regulations requiring
a minimum regulatory tangible capital equal to 1.5% of adjusted total assets,
core capital of 3.0%, leverage capital of 4.0% and a risk-based capital
standard of 8.0%. Regulatory capital requirements are also discussed in
footnote 12 of the financial statements. At June 30, 1996, the Bank was in
compliance with regulatory capital requirements as follows:
Northeast
Bank F.S.B.
_____________
Tangible capital $ 15,386,000
Percent of adjusted total assets 7.00%
Excess over requirement $ 12,095,000
Core capital $ 15,386,000
Percent of adjusted total assets 7.00%
Excess over requirement $ 8,804,000
Leverage capital $ 15,386,000
Percent of adjusted total assets 7.00%
Excess over requirement $ 6,610,000
Risk-based capital $ 16,349,000
Percent of total risk-weighted assets 12.60%
Excess over requirement $ 5,987,000
RESULTS OF OPERATIONS
_____________________
Net income for the year ended June 30, 1996 was $1,193,420 versus $1,489,381
for the year ended June 30, 1995 and $1,460,559 for the year ended June 30,
1994. Primary earnings per share was $.83 and fully diluted earnings per share
was $.79 for the period ended June 30, 1996. Primary and fully diluted earnings
per share were $1.10 and $1.02, respectively, for the year ended June 30, 1995
and $1.13 and $1.08 for the year ended June 30, 1994. The weighted average
number of shares outstanding in fiscal 1995 and 1994, as well as the reported
earnings per share for these two years, have been restated as a result of the
Company's 100% stock dividend in December, 1995. Also included in the
Company's income statement for fiscal 1994 was $260,000 for the cumulative
effect of a change in the method of accounting for income taxes, FASB Statement
of Financial Accounting Standard No. 109. This one time adjustment is more
fully described in footnote 16 to the financial statements. This one time
adjustment increased the Company's primary earnings per share by $.22 and the
fully diluted earnings per share by $.19 for the year ended June 30, 1994. The
Company's overall return on assets ("ROA") was .55% for the year ended June 30,
1996, .72% for the year ended June 30, 1995, and .77% for the year ended June
30, 1994. Due to the decreased net income as well as the increase in assets
due to the purchase of securities in the last four months of fiscal 1996, the
Company's ROA decreased compared to fiscal 1995.
The Company experienced a reduction in net income in fiscal year 1996, when
compared to fiscal 1995, primarily due to the expenses attributed to the merger
and name change of the subsidiary banks, the costs associated with the
acquisition of the Key Bank branches, and the general growth in infrastructure
expenses of the Company. These expenses are discussed below.
The Company's net interest income for the years ended June 30, 1996, June 30,
1995 and June 30, 1994 was $8,866,458, $8,870,005 and $7,556,529, respectively.
Net interest income for fiscal 1996 decreased $3,547, or .04%, compared to the
amount at June 30, 1995. Total interest and dividend income increased
$1,071,937 for the year ended June 30, 1996 compared to the year ended June 30,
1995, resulting from the following items: (I) interest income on loans
increased by $925,547 resulting from an increase of $518,349 due to an increase
in the volume of loans and an increase of $407,198 due to increased interest
rates on loans, (II) interest and dividend income on investment securities
decreased by $22,088 resulting from a $11,381 increase due to increased volume,
which was more than offset by the decrease of $33,469 due to decreased interest
rates on investments, and (III) interest income on short term liquid funds
increased by $168,478 resulting from a $154,590 increase due to increased
volume and an increase of $13,888 due to increased interest rates on deposits
at the FHLB and other institutions.
The increase in total interest expense of $1,075,484 for fiscal 1996 compared
to 1995 resulted from the following items: (I) interest expense on deposits
increased by $983,069 resulting from a $328,965 increase due to increased
deposits and an increase of $654,104 due to higher deposit interest rates, (II)
interest expense on repurchase agreements increased by $81,289 resulting from
an $82,258 increase due to increased volume offset, in part, by a decrease of
$969 due to decreasing interest rates, and (III) interest expense on borrowings
increased $11,126 resulting from a decrease of $161,857 due to a decrease in
volume which was more than offset by the increase of $172,983 due to the change
in the mix of interest rates on borrowings. The changes in net interest income,
as explained above, are also presented in the schedule below.
NORTHEAST BANCORP
Rate/Volume Analysis for the Year ended
June 30, 1996 Versus June 30, 1995
Difference Due to
Volume Rate Total
___________ ___________ ___________
Investments $ 11,381 $ (33,469) $ (22,088)
Loans 518,349 407,198 925,547
FHLB & Other Deposits 154,590 13,888 168,478
___________ ___________ ___________
Total Interest Earning
Assets 684,320 387,617 1,071,937
Deposits 328,965 654,104 983,069
Repurchase Agreements 82,258 (969) 81,289
Borrowings (161,857) 172,983 11,126
___________ ___________ ___________
Total Interest-Bearing
Liabilities 249,366 826,118 1,075,484
___________ ___________ ___________
Net Interest Income $ 434,954 $ (438,501) $ (3,547)
___________ ___________ ___________
Rate/Volume amounts spread proportionately between Volume and Rate.
Net interest income for fiscal 1995 increased $1,313,476, or 17.38%, over 1994.
Total interest and dividend income increased $2,886,684 for fiscal 1995
compared to 1994, resulting from the following items: (I) interest income on
loans increased by $1,923,203 resulting from a $747,297 increase due to an
increase in the volume of loans and $1,175,906 due to increased interest rates
on loans, (II) interest and dividend income on investment securities increased
by $793,417 resulting from a $721,372 increase due to an increase in volume and
$72,045 due to increased interest rates on investments, and (III) interest
income on short term liquid funds increased by $170,064 resulting from a
$14,926 increase due to an increase in volume and $155,138 due to increased
interest rates on deposits at the FHLB and other institutions.
The increase in total interest expense of $1,573,208 for fiscal 1995 as
compared to 1994 resulted from the following items: (I) interest expense on
deposits increased by $976,328 resulting from a $557,015 increase due to an
increase in the volume of deposits and $419,313 due to increased deposit
interest rates, (II) interest expense on repurchase agreements increased by
$84,921 as fiscal 1995 was the first year this product was offered, and (III)
interest expense on borrowings increased $511,959 resulting from an increase of
$274,607 due to an increase in the volume of borrowings and $237,352 due to the
change in the mix of interest rates on borrowings. The changes in net interest
income, as explained above, are also presented in the schedule below.
NORTHEAST BANCORP
Rate/Volume Analysis for the Year ended
June 30, 1995 Versus June 30, 1994
Difference Due to
Volume Rate Total
___________ ___________ ___________
Investments $ 721,372 $ 72,045 $ 793,417
Loans 747,297 1,175,906 1,923,203
FHLB & Other Deposits 14,926 155,138 170,064
___________ ___________ ___________
Total Interest Earning
Assets 1,483,595 1,403,089 2,886,684
Deposits 557,015 419,313 976,328
Repurchase Agreements 84,921 -0- 84,921
Borrowings 274,607 237,352 511,959
___________ ___________ ___________
Total Interest-Bearing
Liabilities 916,543 656,665 1,573,208
___________ ___________ ___________
Net Interest Income $ 567,052 $ 746,424 $1,313,476
___________ ___________ ___________
Rate/Volume amounts spread proportionately between Volume and Rate.
The majority of the Company's income is generated from the Bank. Management
believes that the Bank is slightly asset sensitive based on its own internal
analysis which considers its core deposits long term liabilities that are
matched to long term assets; therefore, it will generally experience a
contraction in its net interest margins during a period of falling rates.
Management believes that the maintenance of a slight asset sensitive position
is appropriate since historically interest rates tend to rise faster than they
decline.
Since October 1993, actions by the Federal Reserve Board have resulted in
increases in prime lending rates. Approximately 20% of the Bank's loan
portfolio is comprised of floating rate loans based on a prime rate index.
Interest income on these existing loans will increase as the prime rate
increases, as well as approximately 27% of other loans in the Bank's portfolio
that are based on short-term rate indices such as the one-year treasury bill.
An increase in short-term interest rates will also increase deposit and FHLB
advance rates, increasing the Company's interest expense. Although the Company
has experienced some net interest margin compression, the impact on net
interest income will depend on, among other things, actual rates charged on the
Bank's loan portfolio, deposit and advance rates paid by the Bank, and loan
volume.
The provision for loan losses was $602,860 for fiscal 1996 compared to $640,634
and $1,020,795 for 1995 and 1994, respectively. Net charge-offs amounted to
$449,860 during fiscal 1996 versus $707,634 and $680,795 for 1995 and 1994,
respectively. Due to the weak economy in some of the Bank's market areas, loan
charge-offs have been high in the reported fiscal years. The Bank intends to
continue to aggressively manage the non-performing assets, through sales,
work-outs and charge-offs, to reduce the amount of non-performing assets.
Non-interest income was $2,097,191 for the year ended June 30, 1996, $2,116,442
for June 30, 1995 and $2,458,485 for June 30, 1994. Generally, the Bank
continues to generate an increasing level of non-interest income through
service charges and fees for other services. This component totaled $737,229
for the year ended June 30, 1996, $679,495 for the year ended June 30, 1995 and
$579,322 for June 30, 1994. The increase in 1996 was primarily due to growth in
the deposit accounts and other branch services.
Net securities gains were $278,895, $419,313, and $347,032 for fiscal 1996,
1995 and 1994, respectively. The major reason for the increase in 1995 was that
the Company sold some of its available for sale and trading securities, taking
advantage of the fluctuation in market prices.
Gains on the sale of loans amounted to $251,597 for fiscal 1996 and was an
increase of $90,615 compared to $160,982 for fiscal 1995. Gains on the sale of
loans decreased $273,228 in fiscal 1995 compared to the 1994 balance. Gains on
the sale of loans in fiscal 1996 increased due to increased volume in
underwriting Freddie Mac and Fannie Mae loans. The decrease in 1995, compared
to 1994, was primarily due to the Bank's reduced volume in underwriting and
selling Freddie Mac and SBA guaranteed commercial loans. The Company's loan
sales activity is dependent on market interest rates as well as local
competition. The Company receives income from servicing mortgage loans for
others that the Bank originated and sold. The outstanding balance of such loans
increased from approximately $32,560,000 at June 30, 1995 to $39,940,000 during
1996. In addition to loans originated and sold by the Company, during 1993 the
Company purchased loan servicing rights from another institution. The balance
of the loans serviced under this agreement was approximately $9,676,000 and
$12,983,000 at June 30, 1996 and 1995, respectively. Fees for servicing loans
was $302,261 for the year ended June 30, 1996 versus $306,220 and $267,697 for
the years ended June 30, 1995 and 1994, respectively.
Other income was $527,209, $550,432, $830,224 for fiscal 1996, 1995 and 1994,
respectively. The decrease of $279,792 in fiscal 1995 compared to fiscal 1994
was primarily due to the reduction in gross sales at ASI Data Services. ASI
Data Services' operations were transferred to the Bank as of July 1, 1996. ASI
will not be offering services to third parties for the near future, although
it remains a separate legal entity.
Total non-interest expense for the Company was $8,448,757 for fiscal 1996,
$7,987,877 for fiscal 1995, and $7,095,664 for fiscal 1994. The increase in
non-interest expense of $460,880 for fiscal 1996 compared to 1995 was due, in
part, to the following items: (I) compensation expenses increased by $175,360
as the result of the additional employees from the Key Bank branch acquisition,
general growth in the Company, as well as annual salary increases and other
benefits expenses, (II) occupancy expense increased by $100,647 due to the
expense associated with the branches acquired from Key Bank and general
maintenance on existing locations, and (III) equipment expense increased by
$69,957 due to depreciation on new assets, as well as increased maintenance
costs from new assets acquired and the equipment acquired from Key Bank.
Other operating expenses increased by $114,916 in fiscal 1996 compared to 1995
due to the following: an increase of $58,000 in computer servicing expense due
to the merger of the two subsidiary banks and increased ATM services, an
increase of $54,000 in collection expense due to non-performing loans, an
increase of $25,000 in postage expense due to additional customer mailings
concerning the merger of the two subsidiary banks, an increase of $74,000 in
goodwill expense due to a full years recognition of goodwill from the
acquisition of the Key Bank branches, an increase of $94,000 due to the
write-down on equity securities to current market values, a one time expense of
$166,000 due to direct expenses associated with the merger and name change of
the two subsidiary banks, and increases due to normal business growth. These
increases in other expenses were offset by the following reductions: a decrease
of $169,000 in deposit insurance expense due to the FDIC reducing its BIF
deposit insurance assessment from $.23 per $100 of deposits to an annual fee of
$2,000, a decrease of $38,000 in supplies expense due to savings from bulk
orders, a decrease of $53,000 in telephone expense due to the Company's new
telephone network system, and a $93,000 decrease in the Company's other general
business expenses.
The increase in non-interest expense of $892,213 for fiscal 1995 compared to
1994 was due, in part, to the following items: Operating expenses increased
primarily due to the Key Bank branch acquisition and the general growth of the
Company; Compensation expenses increased by $699,682 as the result of the
additional employees from the four new branches, additional employees in sales
and operations due to the new branch locations and general Company growth, as
well as increases in annual salaries and other benefits; occupancy expense
increased $125,952 due to the four new branches acquired from Key Bank and
general maintenance on the Company's existing locations; and equipment expense
increased $62,544 primarily due to depreciation on assets acquired from the Key
Bank acquisition. Other Operating expenses increased by $4,035 in fiscal 1995
compared to 1994 primarily due to the increase in other operational expenses at
the Banks from the Key Bank branch acquisition. This increase was offset by the
reduction of ASI's 1995 cost of goods sold, resulting from hardware sales to
third parties.
In February 1992, the FASB issued Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("Statement 109"), which changed the
method of accounting for income taxes to the asset and liability method from
the deferred method previously required by APB opinion 11. Effective July 1,
1993, the Company adopted Statement 109 and has reported the cumulative effect
of the change in the method of accounting for income taxes in the 1994
consolidated statement of income. The cumulative effect of this change in
accounting for income taxes of $260,000 was determined as of July 1, 1993, and
is reported separately in the consolidated statement of income for the year
ended June 30, 1994.
REGULATORY MATTERS
__________________
The FDIC has announced various proposals to recapitalize SAIF. Under one
proposal, the FDIC would charge a one time assessment on all SAIF insured
deposits in a range of $.85 to $.90 per $100 of domestic deposits. This one
time assessment is intended to recapitalize SAIF to the required level of 1.25%
of insured deposits and could be payable in 1996 or early 1997. If the
assessment is made at the proposed rates, the effect on the Company would be an
after tax charge of approximately $320,000 (assuming an income tax rate of
36%). The one time charge assumes a .85% charge on the Brunswick branch
deposits of approximately $60,000,000. Subsequent to the proposed payment of
the one time assessment, the ongoing risk based assessment schedule for the
newly capitalized SAIF would be similar to the schedule of BIF. The current
FDIC BIF insurance rates range from an annual assessment fee of $2,000 to 31
basis points. The Company anticipates that it would be assessed at the lowest
BIF rate as it currently is assessed at the lowest SAIF rate due to its
regulatory standing. The Company would have future after tax annual savings of
approximately $86,000 due to the Brunswick branch deposits described above
(assuming an income tax rate of 36%). The annual savings assumes an annual flat
fee of $2,000 for an insurance premium charge compared to the current .23%
insurance premium paid on the Brunswick branch's deposit base of $60,000,000.
IMPACT OF INFLATION
___________________
The consolidated financial statements and related notes herein have been
presented in terms of historic dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
RECENT ACCOUNTING DEVELOPMENTS
______________________________
On March 31, 1995, FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("S