2019 ANNUAL REPORT
We are very proud of our accomplishments in fiscal 2019
and are well positioned to expand on our foundation built
with hard work over many years.
Richard Wayne, President & Chief Executive Officer
TO OUR SHAREHOLDERS,
Fiscal 2019 was a consequential and successful year
for Northeast Bank (the “Bank”), as we completed
a corporate reorganization, which streamlined our
organization by eliminating the Bank’s holding company.
The Bank grew its national real estate lending business
through the purchase and origination of high quality,
high yielding loans, and, excluding non-recurring
reorganization costs, generated record operating
earnings of $20.3 million. We invested in our people,
recognizing that our ability to hire and retain talented,
committed professionals is central to our success.
REORGANIZATION
In the fourth fiscal quarter, Northeast Bancorp merged
into the Bank with the Bank continuing as the surviving
entity. This reorganization resulted in a number of benefits,
including the replacement of commitments made to the
Federal Reserve in 2010 with internal standards designed
to ensure the continued safe and sound operation of
the Bank. The removal of these commitments allows
us to manage our business more efficiently with greater
flexibility in asset and funding diversification. Significant
benefits of the reorganization included:
NATIONAL LENDING
We set out to grow our loan portfolio by originating
and purchasing high quality, high yielding assets.
Underwriting for both originated and purchased loans
is done in-house by specialized teams, including real
estate valuation, credit underwriting, and legal. Our loan
portfolio is serviced with a “high touch” approach by our
in-house asset managers with the goal of providing a
high level of service to our borrowers and sharp attention
to each and every credit.
Throughout fiscal 2019, we continued to invest in
marketing and business development, including
expanding our team of business development officers
and providing them with the marketing support to grow
our national lending business. We also invested in
technology both to better manage our loan portfolio and
track our business development activities. Our Loan
Acquisition and Servicing Group (“LASG”) continued to
build our national commercial loan portfolio, generating
$407.0 million in purchases and originations in fiscal
2019, thereby achieving net growth in our LASG portfolio
of $131.7 million, or 19.1%.
Total Loan Portfolio ($ in millions)
• Increase in the limit of purchased loans to total
loans from 40% to 60%, allowing us to take greater
advantage of purchasing opportunities as they arise;
• Increase in the limit of loans to core deposits from
100% to 125%, allowing us to reduce excess deposits
and lower interest expense;
• Increase in the limit of investor commercial real estate
loans from 300% to 500% of total capital; and
• Elimination of approximately $1.1 million of annual
interest expense through the redemption of Trust
Preferred Securities.
1,200
1,000
800
600
400
200
0
2015
2016
2017
2018
2019
As of June 30,
LASG Loan Portfolio ($ in millions)
Operating Return on
Average Equity (%)
900
800
700
600
500
400
300
200
100
0
2015
2016
2017
2018
2019
16
14
12
10
8
6
4
2
0
2015
2016
2017
2018
2019
As of June 30,
Fiscal Year Ended June 30,
EARNINGS
We had a record year in terms of loan growth and operating
earnings. We recorded net operating earnings1 of $20.3
million, representing an increase of 25.3% over the prior
year, and achieved an operating return on average equity of
13.74% and an operating return on average assets of 1.69%.
This is the fifth consecutive year of increased operating
earnings and operating return on average equity. The increase
in our net operating earnings is largely attributable to growth
in our higher yielding LASG originated and purchased loan
portfolio. For fiscal 2019, the purchased portfolio generated
a return of 10.57% and the originated portfolio generated a
return of 7.67%.
MAINE BANKING
We originate residential and small business loans and
provide deposit services through our ten branch network.
We have adopted a CRA Strategic Plan with the goal of
providing meaningful support to our local communities. As
part of our on-going efforts in community engagement, we
provide both monetary contributions as well as volunteer
resources to local non-profit organizations. We are proud
to provide every employee with two paid days annually to
volunteer for the causes they are passionate about.
We are very proud of our accomplishments in fiscal 2019
and are well positioned to expand on our foundation built with
hard work over many years. Of course, none of this could
Our loan portfolio grew by $103.3 million during fiscal 2019,
have been accomplished without our dedicated team of
resulting in an increase in net interest income of $9.0 million
professionals that come to work every day with enthusiasm,
over the prior year. During the same period, operating
noninterest expense increased by $3.1 million2, demonstrating
the operating leverage in the Bank.
commitment and focus. We also benefit from the guidance of
our first-rate Board and the much-appreciated support of our
shareholders. I look forward to reporting to you next year on
our accomplishments for fiscal 2020.
Net Operating Earnings ($ in millions)
Sincerely,
25
20
15
10
5
0
Richard Wayne
President and Chief Executive Officer
2015
2016
2017
2018
2019
Fiscal Year Ended June 30,
1 Net operating earnings, operating return on average equity and operating return
on average assets remove the non-recurring expenses (after tax) of $6.4 million
related to the corporate reorganization.
2 Operating noninterest expense amounted to $38.8 million, after removing the
effects of the corporate reorganization, which totaled $8.7 million for fiscal 2019.
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
FDIC Certificate No. 19690
NORTHEAST BANK
(Exact name of registrant as specified in its charter)
Maine
(State or other jurisdiction of
incorporation or organization)
500 Canal Street, Lewiston, Maine
(Address of principal executive offices)
01-0029040
(I.R.S. Employer
Identification No.)
04240
(Zip Code)
(207) 786-3245
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Voting Common Stock, $1.00 par value
(Title of each class)
NBN
(Trading Symbol)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated filer
Accelerated filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates, computed by reference to the last reported sales price of the registrant’s
voting common stock on the NASDAQ Global Market on December 31, 2018 was approximately $150,351,615
As of September 7, 2019, the registrant had outstanding 8,997,557 shares of voting common stock, $1.00 par value per share, and 44,783 shares of non-voting common stock,
$1.00 par value per share.
Portions of the registrant’s proxy statement for the 2019 Annual Meeting of Shareholders to be held on November 12, 2019 are incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III of this Annual Report on Form 10-K. The registrant intends to file such proxy statement with the Federal Deposit Insurance Corporation no later than 120 days
after the end of its fiscal year ended June 30, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
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Table of Contents
Part I
Part II
Item 1.
Business ........................................................................................................................................................
4
Item 1A.
Risk Factors ..................................................................................................................................................
16
Item 1B.
Unresolved Staff Comments .........................................................................................................................
24
Item 2.
Properties ......................................................................................................................................................
24
Item 3.
Legal Proceedings .........................................................................................................................................
24
Item 4.
Mine Safety Disclosures ...............................................................................................................................
25
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities ......................................................................................................................................................
26
Item 6.
Selected Financial Data ................................................................................................................................
27
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................
28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................................................................
46
Item 8.
Financial Statements and Supplementary Data .............................................................................................
47
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................
85
Item 9A.
Controls and Procedures ...............................................................................................................................
85
Item 9B.
Other Information .........................................................................................................................................
87
Part III
Part IV
Item 10. Directors, Executive Officers and Corporate Governance ............................................................................
87
Item 11. Executive Compensation ..............................................................................................................................
87
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .....
87
Item 13. Certain Relationships and Related Transactions, and Director Independence ..............................................
87
Item 14. Principal Accounting Fees and Services .......................................................................................................
87
Item 15. Exhibits, Financial Statement Schedules .....................................................................................................
88
Item 16. Form 10-K Summary ...................................................................................................................................
89
A Note About Forward-Looking Statements
This report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to the financial condition,
prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy,
simulation of changes in interest rates, capital spending, finance sources and revenue sources of Northeast Bank ("we," "our," "us,"
"Northeast" or the "Bank"). These statements relate to expectations concerning matters that are not historical facts. Accordingly,
statements that are based on management's projections, estimates, assumptions, and judgments constitute forward-looking statements.
These forward looking statements, which are based on various assumptions (some of which are beyond the Bank's control), may be
identified by reference to a future period or periods, or by the use of forward-looking terminology such as "believe", "expect",
"estimate", "anticipate", "continue", "plan", "approximately", "intend", "objective", "goal", "project", or other similar terms or
variations on those terms, or the future or conditional verbs such as "will", "may", "should", "could", and "would".
Such forward-looking statements reflect the Bank’s current views and expectations based largely on information currently available to
the Bank’s management, and on the Bank’s current expectations, assumptions, plans, estimates, judgments, and projections about the
Bank’s business and industry, and they involve inherent risks and uncertainties. Although the Bank believes that these forward-
looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject
to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Bank cannot give you any assurance
that its expectations will in fact occur or that its estimates or assumptions will be correct. The Bank cautions you that actual results
could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, the
factors referenced in this report under Item 1A. "Risk Factors”; changes in interest rates and real estate values; competitive pressures
from other financial institutions; the effects of weakness in general economic conditions on a national basis or in the local markets in
which the Bank operates, including changes which adversely affect borrowers’ ability to service and repay our loans; changes in loan
defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels
necessitating increased borrowing to fund loans and investments; changing government regulation; operational risks including, but not
limited to, cybersecurity, fraud and natural disasters; the risk that the Bank may not be successful in the implementation of its business
strategy; the risk that intangibles recorded in the Bank’s financial statements will become impaired; and changes in assumptions used
in making such forward-looking statements. These forward-looking statements speak only as of the date of this report and the Bank
does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances
occurring after the date of this report.
Non-GAAP Financial Measures and Reconciliation To GAAP
In addition to evaluating the Bank’s results of operations in accordance with GAAP, management supplements this evaluation with an
analysis of certain non-GAAP financial measures, such as net operating earnings and net operating earnings per share. These non-
GAAP financial measures are utilized for purposes of measuring performance against the Bank's peer group and other financial
institutions, as well as for analyzing its internal performance. The Bank also believes these non-GAAP financial measures help
investors better understand the Bank's operating performance and trends and allows for better performance comparisons to other
banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Bank’s
underlying performance. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily
comparable to non-GAAP performance measures that may be presented by other financial institutions.
Item 1.
Overview
Business
PART I
Northeast Bank (the "Bank"), a Maine state-chartered bank originally organized in 1872, is a Maine-based full-service financial
institution.
On May 15, 2019, Northeast Bancorp (the “Company”), the Bank’s former bank holding company merged with and into the Bank,
with the Bank continuing as the surviving entity (the “Reorganization”). As a result of the Reorganization, the bank holding company
structure was eliminated and the Bank became the top-level company in the organization. Additionally, the commitments made by
Northeast Bancorp to the Federal Reserve in 2010 in connection with the merger of Northeast Bancorp and FHB Formation LLC are
no longer applicable, and the Bank replaced the commitments with standards, as further outlined below, relating to its capital levels
and asset portfolio composition, which have been incorporated into its policies and procedures.
As a result of the Reorganization, the Bank incorporated the following standards into its policies and procedures:
• Maintain a Tier 1 leverage ratio of at least 10%, which is unchanged from the requirement in the commitments to the
Federal Reserve;
• Maintain a Total capital ratio of at least 13.5% (as opposed to 15%);
• Limit purchased loans to 60% of total loans (as opposed to 40%);
• Maintain a ratio of the Bank’s loans to core deposits of not more than 125% (as opposed to 100%); and
• Hold commercial real estate loans (excluding owner-occupied commercial real estate) to within 500% of Total
capital (as opposed to 300%).
These newly established standards are designed to help ensure the Bank will continue to operate in a safe and sound manner, while
permitting further growth in the Bank’s loan portfolio as compared to operating under the existing commitments. The Maine Bureau
of Financial Institutions’ (the “Bureau”) order approving FHB Formation LLC’s acquisition of Northeast Bancorp in December of
2010 requires the Bank to maintain a Tier 1 leverage ratio of not less than 8.5% and a Total capital ratio of not less than 13.5%. These
conditions continue to apply to the Bank.
As of June 30, 2019, the Bank had total assets of $1.2 billion, total deposits of $942.4 million, and shareholders' equity of $153.6
million. We gather retail deposits through our ten full-service branches in Maine and through our online deposit program,
ableBanking; originate loans through the Community Banking Division; purchase and originate commercial loans, typically secured
by real estate, on a nationwide basis through our Loan Acquisition and Servicing Group ("LASG"); and originate Small Business
Administration and United States Department of Agriculture (“SBA”) loans on a nationwide basis through our national SBA group
("SBA Division").
Strategy
The Bank's goal is to prudently grow its franchise, while maintaining sound operations and risk management, by means of the
following strategies:
Continuing to grow the LASG’s national originated and purchased loan business. We purchase primarily commercial real estate loans
nationally, at prices that on average have produced yields significantly higher than those available on our originated loan portfolio. We
also originate loans nationally, taking advantage of our core expertise in underwriting and servicing national credits.
Growing our national SBA origination business. We originate loans on a national basis to small businesses, primarily through the
SBA 7(a) program, which provides the partial guarantee of the SBA.
Continuing our community banking tradition. With a history that dates back to 1872, our Community Banking Division maintains its
focus on sales and service, with the goal of attracting and retaining deposits, and serving the lending needs of retail and commercial
customers within our core markets.
4
Generating deposits to fund our business. We offer a full line of deposit products through our ten-branch network located in the
Community Banking Division’s market. ableBanking is a direct savings platform providing an additional channel to raise core
deposits to fund our asset strategy.
Market Area and Competition
The LASG and SBA Division activities are nationwide. The LASG competes primarily with community banks, regional banks and
private equity funds operating nationwide in its bid to acquire primarily commercial real estate loans. We believe that we often have a
competitive advantage in bidding against private equity funds on performing loans because those funds generally have higher funding
costs and, therefore, higher expectations for return on investment than we do. Furthermore, private equity funds typically do not
compete for small balance commercial loans and typically pursue larger, bulk transactions. Due to improving credit quality over the
past several years and the low interest rate environment, the supply of loans available for purchase has declined, competition has
increased, and spreads have tightened. Despite these trends, we believe that the LASG continues to have a competitive advantage in
bidding against other banks because we have a specialized group with experience in purchasing commercial real estate loans.
Additionally, most banks we compete against are community banks looking to acquire loans in their market; these banks usually have
specific criteria for their acquisition activities and do not pursue pools with collateral or geographic diversity.
The SBA Division competes primarily with community banks, regional banks, national/global banks, and non-bank licensed lenders
on a nationwide basis. Capitalizing on our LASG origination loan infrastructure, the SBA Division is in a position to review and act
quickly on a variety of lending opportunities. Risk management, approvals, underwriting and other due diligence for these loans is
similar to that for the LASG loans. We believe that the SBA Division has an advantage in originating commercial real estate loans
because of its ability to utilize in-house staff to quickly and accurately screen loan opportunities, which accelerates the underwriting
process.
The Community Banking Division’s market area includes the six New England states, with the majority of its activities centered in the
western and south-central regions of the State of Maine. We encounter significant competition in the Community Banking Division
market area in originating loans, attracting deposits, and selling other customer products and services. Our competitors include savings
banks, commercial banks, credit unions, mutual funds, insurance companies, brokerage and investment banking companies, finance
companies, and other financial intermediaries. Many of our primary competitors there have substantially greater resources, larger
established customer bases, higher lending limits, extensive branch networks, numerous ATMs and greater advertising and marketing
budgets. They may also offer services that we do not currently provide. ableBanking has a nationwide scope in its deposit gathering
activities and competes with banks and credit unions, as well as other, larger, online direct banks having a national reach.
Lending Activities
General
We conduct our loan-related activities through three primary channels: the LASG, the SBA Division, and the Community Banking
Division. The LASG purchases primarily performing commercial real estate loans, on a nationwide basis, typically at a discount from
their unpaid principal balances, producing yields higher than those normally achieved on our originated loan portfolio. The LASG also
originates commercial real estate and commercial and industrial loans on a nationwide basis. The SBA Division originates loans to
small businesses, primarily through the SBA 7(a) program, which provides the partial guarantee of the SBA. The Community Banking
Division originates loans directly to consumers and businesses located in its market area. At June 30, 2019, our total loan portfolio
(excluding loans held for sale) was $975.1 million, of which $820.1 million, or 84.1%, was purchased or originated by the LASG,
$63.1 million, or 6.5%, was originated by the SBA Division, and $91.9 million, or 9.4%, was originated by the Community Banking
Division.
5
The following table sets forth certain information concerning our portfolio loan purchases and originations for the periods indicated
(including loans held for sale):
Loans, including loans held for sale, beginning of year
Additions:
$
LASG purchases and originations:
Originations
Purchases
Subtotal
SBA Division funded originations
Community Bank originations:
Residential mortgages held for sale
Residential mortgages held for investment
Home equity
Commercial real estate
Commercial and industrial
Consumer
Subtotal
Total originations and purchases
Reductions:
Sales of residential loans held for sale
Sales of SBA and portfolio loans
Charge-offs
Pay-downs and amortization, net
Total reductions
Loans, including loans held for sale, end of year
$
Annual percentage increase in loans
Years Ended June 30,
2019
2018
(Dollars in thousands)
878,957
$
783,894
271,179
135,848
407,027
45,763
40,714
-
460
1,045
1,440
101
43,760
496,550
(41,181)
(39,012)
(510)
(315,834)
(396,537)
978,970
11.38%
$
224,546
124,111
348,657
42,368
63,321
1,094
315
209
1,670
72
66,681
457,706
(63,005)
(32,088)
(347)
(267,203)
(362,643)
878,957
12.13%
We individually underwrite all loans that we originate and purchase. Our loan underwriting policies are reviewed and approved
annually by our Board of Directors (the “Board”). Each loan, regardless of whether it is originated or purchased, must meet
underwriting criteria set forth in our lending policies and the requirements of applicable federal and state regulations. All loans are
subject to approval procedures and amount limitations, and the Board approves loan relationships exceeding certain prescribed dollar
limits. We supplement our own supervision of the loan underwriting and approval process with periodic loan audits by internal
personnel and outside professionals experienced in loan review. As of June 30, 2019, the Bank’s legal lending limit was $35.1 million.
We typically retain servicing rights for all loans that we originate or purchase, except for residential loans that we originate and sell
servicing released in the secondary market.
LASG Purchases and Originations
General. Loans originated or purchased by the LASG were $820.1 million as of June 30, 2019, which consisted of $586.1 million of
commercial real estate loans, $218.6 million of commercial and industrial loans, and $15.4 million of one- to four-family residential
loans. The following table summarizes the LASG loan portfolio as of June 30, 2019:
Purchased
Originated
(Dollars in thousands)
Total
Non-owner occupied commercial real estate
Owner-occupied commercial real estate
Commercial and industrial
1-4 family residential
Total
$
$
190,110
126,725
628
9,177
326,640
$
$
190,365
78,946
217,919
6,183
493,413
$
$
380,475
205,671
218,547
15,360
820,053
Since the inception of the LASG through June 30, 2019, we have purchased loans with an aggregate investment of $858.8 million, of
which $135.8 million was purchased during fiscal 2019. We have also originated LASG loans totaling $1.1 billion, of which $271.2
million was originated in fiscal 2019. As of June 30, 2019, the unpaid principal balance of loans purchased or originated by the LASG
ranged from $1 thousand to $15 million and have an average balance of $401 thousand. The real estate loans were secured principally
by retail, industrial, hospitality, multi-family and office properties in 42 states.
6
The following table shows the LASG loan portfolio stratified by book value as of June 30, 2019, excluding deferred fees and costs:
Range
Amount
Percent of Total
(Dollars in thousands)
$0 - $1,000
$1,00 - $3,000
$3,000 - $6,000
$6,000 - $9,000
Greater than $9,000
Total
$
$
209,237
288,267
163,617
101,611
56,310
819,042
25.55%
35.20%
19.98%
12.40%
6.87%
100.00%
The following tables show the LASG loan portfolio by location and type of collateral as of June 30, 2019, excluding deferred fees and
costs:
Collateral Type
Portfolio Finance
Retail
Industrial
Office
Multifamily
Hospitality
Other CRE
Mixed Use
All Other
Total
Amount
(Dollars in thousands)
215,954
$
107,749
81,008
67,304
115,581
73,120
61,321
48,731
48,274
819,042
$
Percent of Total
State
26.37%
13.16%
9.89%
8.22%
14.11%
8.93%
7.49%
5.95%
5.88%
100.00%
NY
CA
TX
FL
NJ
IL
AZ
Non-real estate
All other states
Total
Amount
(Dollars in thousands)
$
170,042
150,986
41,269
39,117
28,442
18,416
25,399
175,924
169,447
819,042
$
Percent of Total
20.76%
18.43%
5.04%
4.78%
3.47%
2.25%
3.10%
21.48%
20.69%
100.00%
Loan Purchase Strategies. The LASG's loan purchasing strategy involves the acquisition of commercial loans, typically secured by
real estate or other business assets located throughout the United States.
We acquire commercial loans typically at a discount to their unpaid principal balances. While we acquire loans on a nationwide basis,
we seek to avoid significant concentration in any geographic region or in any one collateral type. We do not seek acquisition
opportunities for which the primary collateral is land, construction, or one- to four-family residential property, although in a very
limited number of cases, loans secured by such collateral may be included in a pool of otherwise desirable loans. Purchased loans are
sourced on a nationwide basis from banks, insurance companies, investment funds and government agencies, either directly or
indirectly through advisors.
We focus on servicing released, whole loan or lead participation transactions so that we can control the management of the portfolio
through our experienced asset management professionals. Purchased loans can be acquired as a single relationship or combined with
other borrowers in a larger pool. Loans are bid to a minimal acceptable yield to maturity based on the overall risk of the loan,
including expected repayment terms and the underlying collateral value. Updated loan-to-value ratios and loan terms both influence
the amount of discount the Bank requires in determining whether a loan meets the Bank's guidelines. We often achieve actual results
in excess of our minimal acceptable yield to maturity when a loan is prepaid.
At June 30, 2019, purchased loans had an unpaid principal balance of $360.5 million and a book value of $326.6 million, representing
a total discount of 9.4%.
The following table shows the purchased loan portfolio as of June 30, 2019 by original purchase price percentage:
Initial Investment as a % of
Unpaid Principal Balance
Amount
Percent of Total
(Dollars in thousands)
0% - 60%
60% - 70%
70% - 80%
80% - 90%
> 90%
Total
$
$
4,033
3,477
16,845
79,054
223,231
326,640
1.23%
1.06%
5.16%
24.20%
68.35%
100.00%
Secondary Market for Commercial Loans. Commercial whole loans are typically sold either directly by sellers or through loan sale
advisors. Because a central database for commercial whole loan transactions does not exist, we attempt to compile our own statistics
by both polling major loan sale advisors to obtain their aggregate trading volume and tracking the deal flow that we see directly via a
proprietary database. This data reflects only a portion of the total market, as commercial whole loans that are sold in private direct
7
sales or through other loan sale advisors are not included in our surveys. In recent years, the ratio of performing loans to total loans in
the market has increased, in part, because sellers have worked through their most troubled, non-performing loans or are looking to
minimize the discount they would receive in a secondary market transaction. While the 2008-2010 economic crisis led to a high level
of trading volume, we also expect the market to remain active in times of economic prosperity, as sellers tend to have additional
reserve capacity to sell their unwanted assets. Furthermore, we believe that the continued consolidation of the banking industry will
create secondary market activity as acquirers often sell non-strategic borrowing relationships or assets that create excess loan
concentrations.
Underwriting of Purchased Loans. We review many loan purchase opportunities and commence underwriting on a relatively small
percentage of loans. Purchased loans are underwritten by a team of in-house, seasoned analysts before being considered for approval.
Prior to commencing underwriting, loans are analyzed for performance characteristics, loan terms, collateral quality, and price
expectations. We also consider whether the loans would make our total purchased loan portfolio more or less diverse with respect to
geography, loan type and collateral type. The opportunity is underwritten once it has been identified as fitting our investment
parameters. While the extent of underwriting may vary based on investment size, procedures generally include the following:
• A loan analyst reviews and analyzes the seller credit file and our own internal and third party research in order to assess
credit risk;
• With the assistance of local counsel, where appropriate, an in-house attorney makes a determination regarding the quality of
loan documentation and enforceability of loan terms;
• An in-house real estate specialist performs real estate collateral evaluations, which includes conducting original market
research for trends and sale and lease comparables, and develops a valuation based on current data reflecting what we believe
are recent trends;
• An environmental assessment is performed on real estate collateral where appropriate;
• A property inspection is generally performed on all real estate collateral securing a loan, focusing on several characteristics,
including, among other things, the physical quality of the property, current occupancy, general quality and occupancy within
the neighborhood, market position and nearby property listings; and
• An underwriting package containing the analysis and results is reviewed and submitted for approval by the LASG Credit
Committee.
Collateral Valuation. The estimated value of the real property collateralizing the loan is determined by the LASG's in-house real estate
group, which considers, among other factors, the type of property, its condition, location and its highest and best use in its
marketplace. An inspection is conducted for the real property securing all loans bid upon. For loans that exceed a certain dollar
threshold as prescribed in our credit policy, members of the LASG typically conduct an in-person site inspection.
We generally view cash flow from operations as the primary source of repayment on purchased loans. The LASG analyzes the current
and likely future cash flows generated by the collateral to repay the loan. Also considered are minimum debt service coverage ratios,
consisting of the ratio of net operating income to total scheduled principal and interest payments. Consideration of the debt service
coverage ratio is critical to the pricing and rating of purchased and originated loans, and is analyzed carefully. For purchased loans,
care is taken to ensure that, unless significantly offset by other factors in the credit, the purchase price results in an adjusted debt
service coverage ratio that is within the Bank’s lending limits. Moreover, if the debt service coverage ratio based on the contractual
payments, regardless of the Bank’s exposure, is significantly below 1.0x, then steps are taken to document alternative sources of
repayment or develop a realistic plan to ensure continued performance of the loan.
Loan Pricing. In determining the amount that we are willing to bid to acquire individual loans or loan pools, the LASG considers the
following:
• Collateral securing the loan;
• Geographic location;
•
Financial resources of the borrower or guarantors, if any;
• Recourse nature of the loan;
8
• Age and performance of the loan;
• Length of time during which the loan has performed in accordance with its repayment term;
• Yield expected to be earned; and
•
Servicing restrictions, if any.
In addition to the factors listed above and despite the fact that purchased loans are typically performing loans, the LASG also
estimates the amount that we may realize through collection efforts or foreclosure and sale of the collateral, net of expenses, and the
length of time and costs required to complete the collection or foreclosure process in the event a loan becomes non-performing or is
non-performing at the time of purchase.
Loan Originations. In addition to purchasing loans, the LASG also originates commercial loans on a nationwide basis. Capitalizing on
our purchased loan infrastructure, the LASG is in a position to review and act quickly on a variety of lending opportunities. Risk
management, approvals, underwriting and other due diligence for these loans is similar to that for purchased loans, other than the
appraisal and documentation process, which mirrors the Community Banking Division’s practice of employing local attorneys and
real estate appraisers to assist in the process. We believe that the LASG has an advantage in originating commercial loans because of
its ability to utilize in-house staff to quickly and accurately screen loan opportunities and accelerate the underwriting process.
Loan Servicing. We conduct all loan servicing for purchased and originated loans with an in-house team of experienced asset
managers who actively manage the loan portfolio. Asset managers initiate and maintain regular borrower contact, and ensure that the
loan credit analysis is accurate. Collateral valuations, property inspections, and other collateral characteristics are updated
periodically. All asset management activity and analysis is contained within a central database.
SBA Division
General. The SBA Division originates loans to small businesses nationwide, most often through the SBA's 7(a) program, which
provides a partial government guarantee. Our loans are typically secured by liens on business assets and mortgages on commercial
properties, and also benefit from SBA guarantees. We seek to build a loan portfolio that is diverse with respect to geography, loan
type and collateral type.
The following table summarizes the SBA Division loan portfolio as of June 30, 2019:
Non-owner occupied commercial real estate
Owner-occupied commercial real estate
Commercial and industrial
Total
SBA Division
(Dollars in thousands)
36,048
$
21,218
5,787
63,053
$
The Bank's SBA loan portfolio includes owner and non-owner-occupied loans as defined under regulatory Call Report instructions.
The regulatory Call Report instructions consider the primary source of repayment on the loan for this determination. However, these
loans meet the SBA requirements to be considered owner occupied as the owner or controlling entity are actively involved in the daily
operations of the underlying core business.
In addition to the loans held in the SBA Division loan portfolio, as of June 30, 2019, $731 thousand in the loans held for sale portfolio
were attributable to the SBA Division, consisting of the guaranteed portion of the SBA Division loans are available-for-sale in the
secondary market as of this date.
Secondary Market for SBA Guarantees. We typically sell the SBA-guaranteed portion of our variable-rate originations (generally 75%
of the principal balance) at a premium in the secondary market. We generally retain a 25% unguaranteed interest and the
accompanying servicing rights to the entire loan. We hold most fixed-rate SBA loan originations in portfolio.
Underwriting of SBA Division Loans. Our loan policies and procedures establish guidelines governing our SBA lending program.
Generally, these guidelines address the types of loans that we seek, target markets, underwriting and collateral requirements, terms,
interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval
9
procedures and amount limitations. Our policies are reviewed and approved at least annually by our Board to ensure that we are
following SBA underwriting guidelines.
Loan Servicing. We conduct all loan servicing for SBA Division loans with an in-house team of experienced asset managers who
actively manage the loan portfolio. Asset managers initiate and maintain regular borrower contact, and ensure that the loan credit
analysis is accurate. Collateral valuations, property inspections, and other collateral characteristics are updated periodically. All asset
management activity and analysis is contained within a central database.
Community Banking Division Originations
Loan Portfolio
• Residential Mortgage Loans. We originate residential mortgage loans secured by one- to four-family properties primarily in
Maine. Such loans may be originated for sale in the secondary market or to be held on the Bank's balance sheet. We also offer
home equity loans and home equity lines of credit, which are secured by first or second mortgages on one- to four-family owner-
occupied properties and are held on our balance sheet. At June 30, 2019, the Community Banking Division’s portfolio residential
and home equity loans totaled $55.9 million, or 5.7% of total loans. Of the residential loans we held for investment at June 30,
2019, approximately 44.2% were adjustable rate. Included in residential loans are home equity lines of credit and other second
mortgage loans aggregating approximately $10.5 million.
• Commercial Real Estate Loans. We originate multi-family and other commercial real estate loans secured by property primarily
in Maine. At June 30, 2019, the Community Banking Division’s commercial real estate loans outstanding were $25.1 million, or
2.6% of total loans. Although the largest commercial real estate loan originated by the Community Banking Division had a
principal balance of $1.6 million at June 30, 2019, the majority of the commercial real estate loans originated by the Community
Banking Division had principal balances less than $500 thousand.
• Commercial and industrial Loans. We originate commercial and industrial loans, including term loans, lines of credit and
equipment and receivables financing to businesses located primarily in Maine. At June 30, 2019, commercial and industrial loans
outstanding were $8.5 million, or 0.9% of total loans. At June 30, 2019, there were 79 commercial and industrial loans
outstanding with an average principal balance of $107 thousand. The largest of these commercial and industrial loans had a
principal balance of $1.8 million at June 30, 2019.
• Consumer Loans. We originate, on a direct basis, automobile, boat and recreational vehicle loans. At June 30, 2019, consumer
loans outstanding were $2.5 million, or 0.3% of total loans.
Underwriting of Loans. Most residential loans, including those held for investment, are originated in accordance with the standards of
the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Federal Housing Authority, or other
third-party correspondent lenders. Our underwriting process for all other loans originated by the Community Banking Division is as
follows:
• Most of our Community Banking Division originated loans are sourced through relationships between loan officers and third-
party referral sources or current or previous customers.
• After a loan officer has taken basic information from the borrower, the request is submitted to the Community Banking Division's
loan production department. The loan production department obtains comprehensive information from the borrower and third
parties, and conducts verification and analysis of the borrower information, which is assembled into a single underwriting
package that is submitted for final approval.
Investment Activities
Our securities portfolio and short-term investments provide and maintain liquidity, assist in managing the interest rate sensitivity of
our balance sheet, and serve as collateral for certain of our obligations. Individual investment decisions are made based on the credit
quality of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our asset/liability
management objectives.
10
Sources of Funds
Deposits have traditionally been the primary source of the Bank's funds for lending and other investment purposes. In addition to
deposits, the Bank obtains funds from the amortization and prepayment of loans and mortgage-backed securities, the sale, call or
maturity of securities, advances from the Federal Home Loan Bank of Boston (the "FHLBB"), other term borrowings and cash flows
generated by operations.
Deposits
We offer a full line of deposit products to customers in western and south-central Maine through our ten-branch network. Our deposit
products consist of demand deposit, NOW, money market, savings and certificate of deposit accounts. Our customers access their
funds through ATMs, MasterCard® Debit Cards, Automated Clearing House funds (electronic transfers) and checks. We also offer
telephone banking, online banking and bill payment, mobile banking and remote deposit capture services. Interest rates on our
deposits are based upon factors that include prevailing loan demand, deposit maturities, alternative costs of funds, interest rates
offered by competing financial institutions and other financial service firms, and general economic conditions. At June 30, 2019, core
deposits totaled $941.9 million, representing 99.9% of total deposits. We define core deposits as non-maturity deposits and non-
brokered insured time deposits.
Our online deposit program, ableBanking, provides an additional channel through which to obtain core deposits to support our growth.
ableBanking, which was launched in late fiscal 2012 as a division of Northeast Bank, had $300.8 million in money market and time
deposits as of June 30, 2019. We also use deposit listing services to gather deposits in support of our liquidity and asset/liability
management objectives. At June 30, 2019, listing service deposits totaled $221.4 million, bearing a weighted-average remaining term
of 0.87 years.
Borrowings
While we currently consider core deposits (defined as non-maturity deposits and non-brokered insured time deposits) as our primary
source of funding to support asset growth, advances from the FHLBB and other sources of wholesale funding remain an important
part of our liquidity contingency planning. Northeast Bank may borrow up to 50% of its total assets from the FHLBB, and borrowings
are typically collateralized by mortgage loans and securities pledged to the FHLBB. At June 30, 2019, we had $174.1 million of
available borrowing capacity based on pledged collateral.
The availability of FHLBB advances and other sources of wholesale funding remain an important part of our liquidity contingency
planning.
Employees
As of June 30, 2019, the Bank employed 167 full-time and 16 part-time employees. The Bank's employees are not represented by any
collective bargaining unit. The Bank believes that its relations with its employees are good.
Other Subsidiaries
As of June 30, 2019, the Bank had three wholly-owned non-bank subsidiaries:
• 200 Elm Realty, LLC, which was established to hold commercial real estate acquired as a result of loan workouts.
• 500 Pine Realty, LLC, which was established to hold residential real estate acquired as a result of loan workouts.
• 17 Dogwood Realty, LLC, which was established to hold commercial real estate acquired as a result of loan workouts.
11
Supervision and Regulation
General
The following discussion addresses elements of the regulatory framework applicable to a bank. This regulatory framework is intended
primarily to protect the safety and soundness of depository institutions, the federal deposit insurance fund, and depositors, rather than
the shareholders of a bank such as the Bank. This summary is not a comprehensive analysis of all applicable laws, and is qualified by
reference to the applicable statutes and regulations.
Regulation of the Bank
As a Maine-chartered bank, the Bank is subject to supervision, regulation and examination by the Maine Bureau of Financial
Institutions (the “Bureau”) and the Federal Deposit Insurance Corporation (the “FDIC”). The enforcement powers available to federal
and state banking regulators include, among other things, the ability to issue cease and desist or removal orders, to terminate insurance
of deposits, to assess civil money penalties, to issue directives to increase capital, to place banks into receivership, and to initiate
injunctive actions against banking organizations and institution-affiliated parties.
Limitations on Acquisitions of Bank Common Stock. The Change in Bank Control Act prohibits a person or group of persons from
acquiring “control” of an insured depository institution unless the FDIC has been notified and has not objected to the transaction.
Deposit Insurance. The deposit obligations of the Bank are insured up to applicable limits by the FDIC’s Deposit Insurance Fund
(“DIF”) and are subject to deposit insurance assessments to maintain the DIF. The Dodd-Frank Act permanently increased the FDIC
deposit insurance limit to $250,000 per depositor for deposits maintained in the same right and capacity at a particular-insured
depository institution. On March 15, 2016, the FDIC’s Board of Directors approved a final rule to increase the DIF’s reserve ratio to
the statutorily required minimum ratio of 1.35% of estimated insured deposits. Small banks, which are generally those banks with
under $10 billion in assets, will receive credits to offset the portion of their assessments that help to raise the reserve ratio from 1.15%
to 1.35%. After the reserve ratio reaches 1.38%, the FDIC will automatically apply a small bank’s credits to reduce its regular
assessment up to the entire amount of the assessment.
Deposit insurance assessments are based on assets. To determine its deposit insurance assessment, the Bank computes the base amount
of its average assets less its average tangible equity (defined as the amount of Tier 1 capital) and the applicable assessment rate. On
April 26, 2016, the FDIC’s Board of Directors adopted a final rule that changed the manner in which deposit insurance assessment
rates are calculated for established small banks, generally those banks with less than $10 billion of assets that have been insured for at
least five years. Under the final rule, beginning the first assessment period after June 30, 2016, assessments for established small
banks with a CAMELS rating of 1 or 2 will range from 1.5 to 16 basis points, after adjustments, while assessment rates for established
small institutions with a CAMELS composite rating of 4 or 5 may range from 11 to 30 basis points, after adjustments. Assessments for
established banks with a CAMELS rating of 3 will range from 3 to 30 basis points.
The FDIC has the authority to adjust deposit insurance assessment rates at any time. In addition, under the Federal Deposit Insurance
Act (the “FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices; is in an unsafe or unsound condition to continue operations; or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. For the year ended June 30, 2019, the FDIC insurance expense for the Bank was $320 thousand.
Acquisitions and Branching. Prior approval from the Bureau and the FDIC is required in order for the Bank to acquire another bank or
establish a new branch office. Well-capitalized and well-managed banks may acquire other banks in any state, subject to certain
deposit concentration limits and other conditions, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, as amended by the Dodd-Frank Act. In addition, the Dodd-Frank Act authorizes a state-chartered bank, such as the Bank, to
establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches.
Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA generally limits the types of equity investment
an FDIC-insured state-chartered bank, such as the Bank, may make and the kinds of activities in which such a bank may engage, as a
principal, to those that are permissible for national banks. Further, the Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits national
banks and state banks, to the extent permitted under state law, to engage—via financial subsidiaries—in certain activities that are
permissible for subsidiaries of a financial holding company. In order to form a financial subsidiary, a state-chartered bank must be
well capitalized, and such banks would be subject to certain capital deduction, risk management and affiliate transaction rules, among
other things.
12 Lending Restrictions. Federal law limits a bank’s authority to extend credit to its directors, executive officers and persons or
companies that own, control or have power to vote more than 10% of any class of securities of a bank or an affiliate of a bank, as well
as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons. The terms of such extensions of credit may not involve more than the normal risk of repayment
or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. The Dodd-Frank Act explicitly
provides that an extension of credit to an insider includes credit exposure arising from a derivatives transaction, repurchase agreement,
reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Additionally, the Dodd-Frank Act
requires that asset sale transactions with insiders must be on market terms, and if the transaction represents more than 10% of the
capital and surplus of the bank, approved by a majority of the disinterested directors of the bank.
Brokered Deposits. Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to
accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s
approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total deposits be subject to
increased FDIC deposit insurance assessments. However, for institutions that are well capitalized and have a CAMELS composite
rating of 1 or 2, reciprocal deposits are deducted from brokered deposits. Section 202 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (the “Growth Act”), which was enacted on May 24, 2018, amends Section 29 of the FDIA to exempt a
capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. Specifically, the
Growth Act provides that reciprocal deposits received by an agent depository institution that places deposits (other than those obtained
by or through a deposit broker) with a deposit placement network are not considered to be funds obtained by or through a deposit
broker to the extent the total amount of such reciprocal deposits does not exceed the lesser of $5 billion or 20% of the depository
institution’s total liabilities. However, a depository institution that is less than well capitalized may not accept or roll over such
excluded reciprocal deposits at a rate of interest that is significantly higher than the prevailing rate in its market area or a national rate
cap established by the FDIC.
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the FDIC to evaluate the Bank’s performance in
helping to meet the credit needs of the entire communities it serves, including low- and moderate-income neighborhoods, consistent
with its safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The
FDIC’s CRA regulations are generally based upon objective criteria of the performance of institutions under three key assessment
tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the
institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate
income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches,
ATMs, and other offices. The Bank’s most recent performance evaluation from the FDIC was an “outstanding” rating.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements. The FDIC has issued risk-based and leverage capital rules applicable to an insured depository
institution, such as the Bank. These rules are intended to reflect the relationship between the institution’s capital and the degree of risk
associated with its operations based on transactions recorded on-balance sheet, as well as off-balance sheet. The FDIC may from time
to time require that an institution maintain capital above the minimum levels discussed below, due to its financial condition or actual
or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets
that depository institutions are required to maintain. Common equity Tier 1 capital for banks consists of common shareholders’ equity
and related surplus. Tier 1 capital for banks generally consists of the sum of common shareholders’ equity, non-cumulative perpetual
preferred stock, and related surplus and, in certain cases and subject to limitations, minority interest in consolidated subsidiaries, less
goodwill, other non-qualifying intangible assets and certain other deductions. Tier 2 capital generally consists of hybrid capital
instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt
and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital, less
certain required deductions, represents qualifying total capital. Under rules that became effective January 1, 2016, accumulated other
comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, the Bank was permitted to make a one-time,
permanent election to continue to exclude accumulated other comprehensive income from capital. The Bank has made this election.
Under the FDIC’s capital rules applicable to the Bank, the Bank is required to maintain a minimum common equity Tier 1 capital to
risk-weighted assets ratio of 4.5%, a minimum total Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to
risk-weighted assets ratio of 8.0% and a minimum leverage ratio of 4.0%. Additionally, subject to a transition schedule, these rules
require an institution to establish a capital conservation buffer of common equity Tier 1 capital above the minimum risk-based capital
13
requirements for “adequately capitalized” institutions that is greater than 2.5% of total risk weighted assets, or face restrictions on the
ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.
Under the FDIC’s rules, an FDIC supervised institution, such as the Bank, is considered “well capitalized” if it (i) has a total capital
ratio of 10.0% or greater; (ii) a Tier 1 capital ratio of 8.0% or greater; (iii) a common equity Tier 1 capital ratio of at least 6.5% or
greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or
prompt corrective action directive to meet and maintain a specific capital level for any capital measure.
Generally, a bank, upon being notified that it is not adequately capitalized (i.e., that it is “undercapitalized”), becomes subject to the
prompt corrective action provisions of Section 38 of the FDIA that, for example, (i) restrict payment of capital distributions and
management fees, (ii) require that its federal bank regulatory agency, which is the FDIC in the case of the Bank, monitor the condition
of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the
institution’s assets and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital
restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is “critically
undercapitalized” (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further
restrictions, and generally will be placed in conservatorship or receivership within 90 days.
Section 201 of the Growth Act directs the federal bank regulatory agencies to establish a community bank leverage ratio of tangible
capital to average total consolidated assets of not less than 8% or more than 10%. The legislation provides that a qualifying
community bank, which the legislation defines as a depository institution or depository institution holding company with total
consolidated assets of less than $10 billion, that exceeds the community bank leverage ratio shall be considered to have met the
generally applicable leverage capital requirements and the generally applicable risk-based capital requirements. In addition, a
depository institution that exceeds the community bank leverage ratio will be regarded as having met the capital ratio requirements
that are required in order to be considered well capitalized under Section 38 of the FDIA. The federal banking agencies may exclude
institutions from availing themselves of this relief based on the institution’s risk profile, taking into account off-balance sheet
exposures, trading assets and liabilities, total notional derivatives exposures, and such other factors as the federal banking agencies
determine appropriate. The federal banking agencies have proposed, but not yet adopted, a community bank leverage ratio of 9%,
which means that qualifying institutions with a community bank leverage ratio exceeding 9% would be eligible for the relief provided
by Section 201 of the Growth Act. The federal banking agencies have also proposed, but not yet adopted, a rule excluding from this
relief institutions with levels of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets and deferred tax
assets exceeding certain levels as well as all advanced approaches banking organizations.
The Bank is currently considered “well capitalized” under all regulatory definitions.
Safety and Soundness Standard. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other
operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies
establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, these guidelines require, among
other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal
shareholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an
institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect
to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action”
provisions of FDIA. See “—Regulatory Capital Requirements” above. If an institution fails to comply with such an order, the agency
may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Dividend Restrictions
Restrictions on Bank Dividends. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends
if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of
dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Maine law
requires the approval of the Bureau for any dividend that would reduce a bank’s capital below prescribed limits. In addition, the ability
of shareholders to participate in any distribution of the assets or earnings of the Bank through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors).
14 Consumer Protection Regulation
The Bank is subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business
practices. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, Home Ownership Protection Act, the Fair
Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”), GLBA, the Truth in
Lending Act (“TILA”), CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood
Insurance Act, the Electronic Funds Transfer Act, the Truth-in-Savings Act, the Secure and Fair Enforcement Act, the Expedited
Funds Availability Act, and various state law counterparts. These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans
and providing other services. Further, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which
has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and
services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to
require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and
regulations can subject financial institutions to enforcement actions, fines and other penalties. The FDIC examines the Bank for
compliance with CFPB rules and enforces CFPB rules with respect to the Bank.
Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential
mortgage loan, including verifying a borrower’s ability to repay such mortgage loan. The Dodd-Frank Act also allows borrowers to
assert violations of certain provisions of the TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment
penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection
with a residential mortgage loan or home equity line of credit. The Dodd-Frank Act requires mortgage lenders to make additional
disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable-rate
mortgages. Additionally, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of
residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is
received from a consumer. The Growth Act included provisions that ease certain requirements related to mortgage transactions for
certain small institutions, which are generally those with less than $10 billion in consolidated assets.
Privacy and Customer Information Security. GLBA requires financial institutions to implement policies and procedures regarding the
disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Bank must provide its
customers with an initial and annual disclosure that explains its policies and procedures regarding the disclosure of such nonpublic
personal information and, except as otherwise required or permitted by law, the Bank is prohibited from disclosing such information,
except as provided in such policies and procedures. However, as a result of amendments made by the Fixing America’s Surface
Transportation Act, a financial institution is not required to send an annual privacy notice if the institution only discloses nonpublic
personal information in accordance with certain exceptions from GLBA that do not require an opt-out to be provided and if the
institution has not changed its policies and practices since the most recent privacy disclosure provided to consumers. GLBA also
requires that the Bank develop, implement and maintain a comprehensive written information security program designed to ensure the
security and confidentiality of customer information (as defined under GLBA), to protect against anticipated threats or hazards to the
security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in
substantial harm or inconvenience to any customer. The Bank is also required to send a notice to customers whose “sensitive
information” has been compromised if unauthorized use of this information has occurred or is “reasonably possible.” Most states,
including Maine, have enacted legislation concerning breaches of data security and the duties of the Bank in response to a data breach.
Congress continues to consider federal legislation that would require consumer notice of data security breaches. Pursuant to the FACT
Act, the Bank must also develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity
theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair
Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for
marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple
method to opt out of the making of such solicitations.
Anti-Money Laundering
The Bank Secrecy Act. Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect
certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the United
States Treasury any cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious
activity reports for transactions that involve at least $5,000 and which the financial institution knows, suspects or has reason to suspect
involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”),
which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system.
The USA PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of
money. The USA PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, has caused
financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with
15 respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer
identity verification and customer risk analysis. In evaluating an application under the Bank Merger Act to merge banks or affect a
purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-
money laundering compliance record of both the applicant and the target.
OFAC. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and
others. These sanctions, which are administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), take
many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or
investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country
and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-
related advice or assistance to, a sanctioned country; (ii) a blocking of assets in which the government or specially designated
nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including
property in the possession or control of U.S. persons); and (iii) restrictions on transactions with or involving certain persons or entities.
Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a
license from OFAC.
Available Information
The Bank’s Investor Relations information can be obtained through our Internet address, investor.northeastbank.com. The Bank
makes available on or through its Investor Relations page, without charge, its annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and amendments to those reports filed with, or furnished to, the FDIC as soon as reasonably
practicable after such reports have been filed or furnished to the FDIC. The Bank’s reports filed with, or furnished to, the FDIC are
also available at the FDIC’s website at www.FDIC.gov. In addition, the Bank makes available, free of charge, its press releases and
Code of Ethics through the Bank’s Investor Relations page. Information on our website is not incorporated by reference into this
document and should not be considered part of this report.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties,
together with all other information in this report, including our financial statements and related notes, before investing in our common
stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
If any of these known or unknown risks or uncertainties actually occur, our business, financial condition and results of operations
could be impaired. In that event, the market price for our common stock could decline and you may lose your investment. Certain
statements below are forward-looking statements. See "A Note About Forward-Looking Statements."
Risks Associated With Our Business
A significant portion of loans held in our loan portfolio were originated by third parties, and such loans may not have been subject
to the same level of due diligence that the Bank would have conducted had it originated the loans.
At June 30, 2019, 33.5% of the loans held in our loan portfolio were originated by third parties, and therefore may not have been
subject to the same level of due diligence that the Bank would have conducted had it originated the loans. Although the LASG
conducts a comprehensive review of all loans that it purchases, loans originated by third parties may lack current financial information
and may have incomplete legal documentation and outdated appraisals. As a result, the LASG may not have information with respect
to an acquired loan which, if known at the time of acquisition, would have caused it to reduce its bid price or not bid for the loan at all.
This may adversely affect our yield on loans or cause us to increase our allowance for loan losses.
Our experience with loans held in our loan portfolio that were originated by third parties is limited.
At June 30, 2019, the loans held in our loan portfolio that were originated by third parties had been held by us for approximately
2.0 years, calculated on a weighted average basis. Consequently, we have had only a relatively short period of time to evaluate the
performance of those loans and the price at which we purchased them. Further experience with these loans may provide us with
information that could cause us to increase our allowance for loan losses.
16 Our loan portfolio includes commercial real estate and commercial and industrial loans, which are generally riskier than other
types of loans.
At June 30, 2019, our commercial real estate mortgage and commercial and industrial loan portfolios comprised 92.4% of total loans.
Commercial loans generally carry larger loan balances and involve a higher risk of nonpayment or late payment than residential
mortgage loans. These loans, and purchased loans in particular, may lack standardized terms and may include a balloon payment
feature. The ability of a borrower to make or refinance a balloon payment may be affected by numerous factors, including the
financial condition of the borrower, prevailing economic conditions and prevailing interest rates. Repayment of these loans is
generally more dependent on the economy and the successful operation of a business. Because of the risks associated with commercial
loans, we may experience higher rates of default than if the portfolio were more heavily weighted toward residential mortgage loans.
Higher rates of default could have an adverse effect on our financial condition and results of operations.
If our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance, our
financial condition and results of operations could be adversely affected.
We are exposed to the risk that our borrowers may default on their obligations. A borrower's default on its obligations under one or
more loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of
management time and resources to the collection and work-out of the loan. In certain situations, where collection efforts are
unsuccessful or acceptable work-out arrangements cannot be reached, we may have to write off the loan in whole or in part. In such
situations, we may acquire real estate or other assets, if any, that secure the loan through foreclosure or other similar available
remedies, and often the amount owed under the defaulted loan exceeds the fair value of the assets acquired.
We periodically make a determination of an allowance for loan losses based on available information, including, but not limited to,
our historical loss experience, the quality of the loan portfolio, certain economic conditions, the value of the underlying collateral,
expected cash flows from purchased loans, and the level of non-accruing and criticized loans. We rely on our loan quality reviews, our
experience and our evaluation of economic conditions, among other factors, in determining the amount of provision required for the
allowance for loan losses. Provisions to this allowance result in an expense for the period. If, as a result of general economic
conditions, previously incorrect assumptions, or an increase in defaulted loans, we determine that additional increases in the allowance
for loan losses are necessary, we will incur additional expenses.
Determining the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant
estimates of current credit risks and future trends, all of which may undergo material changes. At any time, there are likely to be loans
in our portfolio that will result in losses, but that have not been identified as nonperforming or potential problem credits. We cannot be
sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit
losses on those loans that are identified. We have in the past been, and in the future may be, required to increase our allowance for
loan losses for any of several reasons. State and federal regulators, in reviewing our loan portfolio as part of a regulatory examination,
may request that we increase our allowance for loan losses. Changes in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may
require an increase in our allowance for loan losses. In addition, if charge-offs in future periods exceed those estimated in the
determination of our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in
our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and could have an adverse effect on
our financial condition and results of operations.
Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans we have originated or purchased that are in
default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these
properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense or
we may be held liable to a government entity or to third parties for property damage, personal injury, investigation and cleanup costs
incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or
toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could
substantially exceed the value of the affected properties. We may not have adequate remedies against the prior owner or other
responsible parties and could find it difficult or impossible to sell the affected properties. If we become subject to significant
environmental liabilities, our business, financial condition and results of operations could be adversely affected.
The performance of our securities portfolio in difficult market conditions could have adverse effects on our results of operations.
We maintain a diversified securities portfolio, which includes obligations of U.S. government agencies and government-sponsored
enterprises, including mortgage-backed securities. Under applicable accounting standards, we are required to review our securities
17 portfolio periodically for the presence of other-than-temporary impairment, taking into consideration current market conditions, the
extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, our
ability and intent to hold securities until a recovery of fair value, as well as other factors. Adverse developments with respect to one or
more of the foregoing factors may require us to deem particular securities to be other-than-temporarily impaired, with the credit
related portion of the reduction in the fair value recognized as a charge to the results of operations in the period in which the
impairment occurs. Market volatility may make it difficult to value certain securities. Subsequent valuations, in light of factors
prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could
require us to recognize further impairments in the value of our securities portfolio, which may have an adverse effect on our results of
operations in future periods.
Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a low-cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding
costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their
deposits into higher-cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net
interest margin, net interest income and net income.
We are subject to liquidity risk.
Liquidity is the ability to meet cash-flow needs on a timely basis by converting assets into cash or cash equivalents and by increasing
liabilities at a reasonable cost. Liquidity sources include the amount of unencumbered or “free” investment portfolio securities that we
own, borrowings, cash flow from loan and investment principal payments and pre-payments and residential mortgage loan sales. Our
liquidity is used principally to originate or purchase loans, to repay deposit liabilities and other liabilities when they come due, and to
fund operating costs. We also require funds for dividends to shareholders, repurchases of shares, and for general corporate purposes.
Customer demand for non-maturity deposits can be difficult to predict. Changes in market interest rates, increased competition within
our markets, and other factors may make deposit gathering more difficult. Disruptions in the capital markets or interest rate changes
may make the terms of wholesale funding sources, which include Federal Home Loan Bank advances, less favorable and may make it
difficult to sell securities when needed to provide additional liquidity. As a result, there is a risk that the cost of funding will increase
or that we will not have sufficient funds to meet our obligations when they come due.
We may not be able to attract and retain qualified key employees, which could adversely affect our business prospects, including
our competitive position and results of operations.
Our success is dependent upon our ability to attract and retain highly-skilled individuals. There is significant competition for those
individuals with the experience and skills required to conduct many of our business activities. We may not be able to hire or retain the
key personnel that we depend upon for success. The unexpected loss of services of one or more of these or other key personnel could
have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of
industry experience and the difficulty of promptly finding qualified replacement personnel.
We face continuing and growing security risks to our information base, including the information we maintain relating to our
customers.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store
sensitive data, including financial information regarding customers. Our electronic communications and information systems
infrastructure could be susceptible to cyberattacks, hacking, identity theft or terrorist activity. We have implemented and regularly
review and update extensive systems of internal controls and procedures as well as corporate governance policies and procedures
intended to protect our business operations, including the security and privacy of all confidential customer information. In addition,
we rely on the services of a variety of vendors to meet our data processing and communication needs. No matter how well designed or
implemented our controls are, we cannot provide an absolute guarantee to protect our business operations from every type of problem
in every situation. A failure or circumvention of these controls could have a material adverse effect on our business operations and
financial condition.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially
escalating. As a result, cybersecurity and the continued enhancement of our controls and processes to protect our systems, data and
networks from attacks, unauthorized access or significant damage remain a priority. Accordingly, we may be required to expend
additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or
exposures. Any breach of our system security could result in disruption of our operations, unauthorized access to confidential
customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or
losses could exceed the amount of available insurance coverage, if any, and would adversely affect our earnings. Also, any failure to
18 prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence,
damaging our reputation and undermining our ability to attract and keep customers.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect
our business operations and profitability.
We invest significant resources in information technology system enhancements in order to provide functionality and security at an
appropriate level. We may not be able to successfully implement and integrate future system enhancements, which could adversely
impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which
could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among
others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which
could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely
impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective
components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and
after systems implementations, and any such costs may continue for an extended period of time.
We rely on other companies to provide key components of our business infrastructure.
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core
application processing. While we have selected these third-party vendors carefully, we do not control their actions. Any problems
caused by these third parties, including as a result of their not providing us their services for any reason or their performing their
services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business
efficiently and effectively. Replacing these third-party vendors could also entail significant delay and expense.
Natural disasters, acts of terrorism and other external events could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our
loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations
and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material
adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may
occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole.
While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material
adverse effect on our business, operations and financial condition.
Damage to our reputation could significantly harm our business, including our competitive position and business prospects.
We are dependent on our reputation as a trusted and responsible financial company, for all aspects of our relationships with customers,
employees, vendors, third-party service providers, and others, with whom we conduct business or potential future business. Our ability
to attract and retain customers and employees could be adversely affected if our reputation is damaged. Our actual or perceived failure
to address various issues, including our ability to (a) identify and address potential conflicts of interest, ethical issues, money-
laundering, or privacy issues; (b) meet legal and regulatory requirements; (c) maintain the privacy of customer and accompanying
personal information; (d) maintain adequate record keeping; (e) engage in proper sales and trading practices; and (f) identify the legal,
reputational, credit, liquidity and market risks inherent in our products, could give rise to reputational risk that could cause harm to us
and our business prospects. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions
and legal risks, which could, among other consequences, increase the size and number of litigation claims and damages asserted or
subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Furthermore, any damage to
our reputation could affect our ability to retain and develop the business relationships necessary to conduct business, which in turn
could negatively impact our financial condition, results of operations, and the market price of our common stock.
Internal controls may fail or be circumvented.
Effective controls over financial reporting are necessary to help ensure reliable financial reporting and prevent fraud. Management is
responsible for maintaining an effective system of internal control and assessing system effectiveness. Any system of controls,
however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the system of internal control could have an adverse effect
19 on our business, profitability, financial condition and operations, and could further result in regulatory actions and loss of investor
confidence.
Our future growth, if any, may require us to raise additional capital, but that capital may not be available when we need it.
In conjunction with the regulatory approvals received by the Bureau, we committed to maintain a Tier 1 leverage ratio of at least 8.5%
and a total capital ratio of at least 13.5%. We may need to raise additional capital in the future to provide us with sufficient capital
resources and liquidity to support our operations or our growth. Our ability to raise additional capital will depend, in part, on
conditions in the capital markets at that time, which are outside of our control, and our financial performance. Accordingly, we may be
unable to raise additional capital, if and when needed, on acceptable terms, or at all. If we cannot raise additional capital when needed,
our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we
decide to raise additional equity capital, investors' interests could be diluted. Our failure to meet any applicable regulatory guideline
related to our lending activities or any capital requirement otherwise imposed upon us or to satisfy any other regulatory requirement
could subject us to certain activity restrictions or to a variety of enforcement remedies available to the regulatory authorities, including
limitations on our ability to pay dividends or pursue acquisitions, the issuance by regulatory authorities of a capital directive to
increase capital and the termination of deposit insurance by the FDIC.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the
financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other
financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the
financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions
and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition,
our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to
recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially
and adversely affect our results of operations.
Weakness or deterioration in economic conditions, both in our market area and more generally, could adversely affect our
financial condition and results of operations.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding
loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where we
operate and in the United States as a whole. Our Community Banking Division primarily serves individuals and businesses located in
western and south-central Maine. As a result, a significant portion of the Community Banking Division’s earnings are closely tied to
the economy of Maine. In addition, our loan portfolio includes commercial loans acquired or originated by the LASG and the SBA
Division that are secured by assets located nationwide. Deterioration in the economic conditions of the Community Banking
Division's market area in western and south-central Maine, and deterioration of the economy nationally could result in the following
consequences:
• Loan delinquencies may increase;
• Problem assets and foreclosures may increase;
• Demand for our products and services may decline;
• Collateral for our loans may decline in value, in turn reducing a customer's borrowing power and reducing the value of
collateral securing a loan; and
• The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
We are subject to claims and litigation.
From time to time, customers, vendors or other parties may make claims and take legal action against us. We maintain reserves for
certain claims when deemed appropriate based upon our assessment that a loss is probable, estimable, and consistent with applicable
accounting guidance. At any given time, we have a variety of legal actions asserted against us in various stages of litigation.
20
Resolution of a legal action can often take years. We are also involved, from time to time, in other reviews, investigations and
proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other
things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions
or other relief. The number and risk of these investigations and proceedings has increased in recent years with regard to many firms in
the financial services industry due to legal changes to the consumer protection laws provided for by the Dodd-Frank Act. There have
also been numerous highly publicized legal claims against financial institutions involving fraud or misconduct by employees, and we
run the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct, and the
precautions we take to prevent and detect this activity may not be effective in all cases.
Risks Associated With the Industry
Competition in the financial services industry is intense and could result in us losing business or experiencing reduced margins.
We compete with community, regional, national and global banks, non-bank licensed lenders and private equity funds in purchasing
or originating loans, attracting deposits, and selling other customer products and services. Many of our primary competitors there have
substantially greater resources, larger established customer bases, higher lending limits, extensive branch networks, numerous
ATMs and greater advertising and marketing budgets. They may also offer services that we do not currently provide. Additionally,
due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products
and services, as well as better pricing for those products and services than we can. Technology has lowered barriers to entry and made
it possible for non-banks to offer products and services traditionally provided by banks, such as automated transfer and automatic
payment systems. Our long-term success depends on the ability of the Bank to compete successfully with other financial institutions in
the Bank’s service areas.
Changes in interest rates could adversely affect our net interest income and profitability.
The majority of our assets and liabilities are monetary in nature. As a result, our earnings and growth are significantly affected by
interest rates, which are subject to the influence of economic conditions generally, both domestic and foreign, to events in the capital
markets and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The nature
and timing of any changes in such policies or general economic conditions and their effect on us cannot be controlled and are
extremely difficult to predict. Changes in interest rates can affect our net interest income as well as the value of our assets and
liabilities. Net interest income is the difference between (i) interest income on interest-earning assets, such as loans and securities, and
(ii) interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in market interest rates, changes in the
relationships between short-term and long-term market interest rates, or the yield curve, or changes in the relationships between
different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, and therefore
reduce our net interest income. Further, declines in market interest rates may trigger loan prepayments, which in many cases are
within our customers' discretion, and which in turn may serve to reduce our net interest income if we are unable to lend those funds to
other borrowers or invest the funds at the same or higher interest rates.
We operate in a highly regulated industry, and laws and regulations, or changes in them, could limit or restrict our activities and
could have an adverse impact in our operations.
We are subject to regulation and supervision by the FDIC and the Bureau. Federal and state laws and regulations govern numerous
matters, including changes in the ownership or control of banks, maintenance of adequate capital and the financial condition of a
financial institution, permissible types, amounts and terms of extensions of credit and investments, the level of reserves against
deposits and restrictions on dividend payments. The FDIC and the Bureau have the power to issue cease and desist orders to prevent
or remedy unsafe or unsound practices or violations of law by banks subject to their regulation. These and other restrictions limit the
manner in which we and the Bank may conduct business and obtain financing.
Because our business is highly regulated, the laws, rules, regulations, and supervisory guidance and policies applicable to us are
subject to regular modification and change. Such changes may, among other things, increase the cost of doing business, limit
permissible activities, or affect the competitive balance between banks and other financial institutions. Failure to comply with laws,
regulations, or policies could result in enforcement and other legal actions by federal and state authorities, including criminal and civil
penalties, the loss of FDIC insurance, revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties,
and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations.
See "Supervision and Regulation" in Item 1, "Business."
21 We are subject to capital and liquidity standards that require banks to maintain more and higher quality capital and greater
liquidity than has historically been the case.
We became subject to new capital requirements in 2015 that were fully phased-in on January 1, 2019, which will force banks to
maintain substantially higher levels of capital as a percentage of their assets, with a greater emphasis on common equity as opposed to
other components of capital. The need to maintain more and higher quality capital, as well as greater liquidity, and generally increased
regulatory scrutiny with respect to capital levels, may at some point limit our business activities, including lending, and our ability to
expand. It could also result in our being required to take steps to increase our regulatory capital and may dilute shareholder value or
limit our ability to pay dividends or otherwise return capital to our investors through stock repurchases.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending
laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and
regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The CFPB, the
Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory
challenge to an institution’s performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing
Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties,
injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines.
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action
litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or
unintentional violations.
We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some
legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was
inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance.
For example, we are subject to regulations issued by the OFAC that prohibit financial institutions from participating in the transfer of
property belonging to the governments of certain foreign countries and designated nationals of those countries and certain other
persons or entities whose interest in property is blocked by OFAC-administered sanctions. OFAC may impose penalties for
inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. There may be other negative
consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage
our reputation as described below and could restrict the ability of institutional investment managers to invest in our securities.
The FDIC's assessment rates could adversely affect our financial condition and results of operations.
The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to applicable limits. As a result of recent
economic conditions, the FDIC has decreased deposit insurance assessment rates. If these decreases are insufficient for the deposit
insurance fund of the FDIC to meet its funding requirements, there may need to be further special assessments or increases in deposit
insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If
there is an increase in bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently
increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially
adversely affect results of operations, including by reducing our profitability or limiting our ability to pursue certain business
opportunities.
Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition and
results of operations.
In 2017, the United Kingdom’s Financial Conduct Authority, or “FCA”, a regulator of financial services firms and financial markets
in the United Kingdom, stated that it will plan for a phase out of regulatory oversight of LIBOR interest rate indices. The FCA has
indicated that they will support the LIBOR indices through 2021 to allow for an orderly transition to alternative reference rates. Other
financial services regulators and industry groups, including the International Swaps and Derivatives Association, or “ISDA”, are
evaluating the possible phase-out of LIBOR and the development of alternate interest rate indices or reference rates. Accordingly,
uncertainty as to the nature of such changes may adversely affect the market for or value of LIBOR-based loans, derivatives,
investment securities and other financial obligations held by or due to the banks, and could adversely impact our financial condition or
results of operations.
22 Changes in accounting standards can materially impact our financial statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.
From time to time, the Financial Accounting Standards Board (“FASB”) or regulatory authorities change the financial accounting and
reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially
impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new
or revised standard retroactively, resulting in our restating prior period financial statements.
Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our
financial statements.
Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we
have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the
timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a
material adverse effect on our results.
Risks Associated With Our Common Stock
Market volatility has affected and may continue to affect the value of our common stock.
The price of our common stock can fluctuate widely in response to a variety of factors. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock
will not fluctuate or decline significantly. Some of the factors that could cause fluctuations or declines in the price of our common
stock include, but are not limited to, actual or anticipated variations in reported operating results, recommendations by securities
analysts, the level of trading activity in our common stock, new services or delivery systems offered by competitors, business
combinations involving our competitors, operating and stock price performance of companies that investors deem to be comparable to
the Bank, news reports relating to trends or developments in the credit, mortgage and housing markets as well as the financial services
industry, and changes in government regulations.
Our common stock trading volume may not provide adequate liquidity for investors.
Our voting common stock is listed on the NASDAQ Global Market. The average daily trading volume for Northeast voting common
stock is less than the corresponding trading volume for larger financial institutions. Due to this relatively low trading volume,
significant sales of Northeast voting common stock, or the expectation of these sales, may place significant downward pressure on the
market price of Northeast voting common stock. No assurance can be given that a more active trading market in our common stock
will develop in the foreseeable future or can be maintained. There can also be no assurance that the offering will result in a material
increase in the "float" for our common stock, which we define as the aggregate market value of our voting common stock held by
shareholders who are not affiliates of Northeast, because our affiliates may purchase shares of voting common stock in the offering.
There is a limited market for and restrictions on the transferability of our non-voting common stock.
Our non-voting common stock is not and will not be listed on any exchange. Additionally, the non-voting common stock can only be
transferred in certain limited circumstances set forth in our articles of incorporation. Accordingly, holders of our non-voting common
stock may be required to bear the economic consequences of holding such non-voting common stock for an indefinite period of time.
If we defer payments of interest on our outstanding subordinated debt securities or if certain defaults relating to those debt
securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation
payments with respect to, our common stock.
As of June 30, 2019, we had outstanding $15.05 million in aggregate principal amount of 6.75% fixed-to-floating subordinated notes
due in 2026. If we were to be in default with respect to payment of any obligation under the notes, we would be prohibited from
declaring or paying any dividends. We would also be prohibited from paying any distributions on, redeeming, purchasing, acquiring,
or making a liquidation payment with respect to any of our capital stock, which would likely have a material adverse effect on the
market value of our common stock.
23 We may not be able to pay dividends and, if we pay dividends, we cannot guarantee the amount and frequency of such dividends.
The continued payment of dividends on shares of our common stock will depend upon our debt and equity structure, earnings and
financial condition, need for capital in connection with possible future acquisitions, growth and other factors, including economic
conditions, regulatory restrictions, and tax considerations. We cannot guarantee that we will pay dividends or, if we pay dividends, the
amount and frequency of these dividends.
We may issue additional shares of common or preferred stock in the future, which could dilute a shareholder's ownership of
common stock.
Our articles of incorporation authorize our Board, generally without shareholder approval, to, among other things, issue additional
shares of common or preferred stock. The issuance of any additional shares of common or preferred stock could be dilutive to a
shareholder's ownership of our common stock. To the extent that we issue options or warrants to purchase common stock in the future
and the options or warrants are exercised, our shareholders may experience further dilution. Holders of shares of our common stock
have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series. Future
offerings could reduce the value of shares of our common stock and dilute a shareholder's interest in the Bank.
Our common stock is not insured by any governmental entity.
Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental
entity.
Anti-takeover provisions could negatively impact our shareholders.
Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over Northeast.
Provisions of Maine law and provisions of our articles of incorporation and by-laws could make it more difficult for a third party to
acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We have a classified
Board, meaning that approximately one-third of our directors are elected annually. Additionally, our articles of organization authorize
our Board to issue preferred stock without shareholder approval and such preferred stock could be issued as a defensive measure in
response to a takeover proposal. Other provisions that could make it more difficult for a third party to acquire us even if an acquisition
might be in the best interest of our shareholders include supermajority voting requirements to remove a director from office without
cause; restrictions on shareholders calling a special meeting; a requirement that only directors may fill a Board vacancy; and
provisions regarding the timing and content of shareholder proposals and nominations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At June 30, 2019, the Bank conducted its business from its headquarters in Lewiston, Maine, an office in Boston, Massachusetts, and
an office in Portland, Maine. The Bank also conducts business from its ten full-service bank branches in Maine. The Bank believes
that all of its facilities are well maintained and suitable for the purpose for which they are used.
In addition to its Lewiston, Maine, Boston, Massachusetts and Portland, Maine offices, the Bank leases two of its other locations. For
information regarding the Bank's lease commitments, please refer to "Lease Obligations" under Note 14 of the Notes to the Financial
Statements in Item 8 of this Annual Report.
Item 3. Legal Proceedings
From time to time, the Bank is subject to certain legal proceedings and claims in the ordinary course of business. Management
presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not be material to the Bank
or its financial position. The Bank establishes reserves for specific legal matters when it determines that the likelihood of an
unfavorable outcome is probable and the loss is reasonably estimable. Legal proceedings are subject to inherent uncertainties, and
unfavorable rulings could occur that could cause the Bank to establish litigation reserves or could have, individually or in the
aggregate, a material adverse effect on its business, financial condition, or operating results.
24 Item 4. Mine Safety Disclosures
Not applicable.
25 PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Bank's voting common stock currently trades on the NASDAQ under the symbol "NBN." There is no established public trading
market for the Bank's non-voting common stock. As of the close of business on September 7, 2019, there were approximately 248
registered shareholders of record.
Holders of the Bank's voting and non-voting common stock are entitled to receive dividends when and if declared by the Board out of
funds legally available. The Bank currently pays a quarterly cash dividend in the amount of $0.01 per share of the Bank's voting and
non-voting common stock. While the Bank expects comparable cash dividends will be paid in the future, the amount and timing of
future dividends will depend on, among other things, the financial condition of the Bank, regulatory considerations, and other factors.
See "Item 1. Business—Supervision and Regulation."
The information required with respect to our equity compensation plans shall be included in the Proxy Statement and is incorporated
herein by reference.
26
Item 6. Selected Financial Data
The following table sets forth our selected financial and operating data on a historical basis. The data set forth below does not purport
to be complete. It should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the
Bank’s Financial Statements and related notes, appearing elsewhere herein.
2019
2018
2017
2016
2015
(Dollars in thousands, except per share data)
As of and for the Twelve Months Ended June 30,
Selected operating data:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Reorganization expense
Other noninterest expense
Income before income taxes
Income tax expense
Net income
$
$
81,830
19,509
62,321
1,309
6,116
8,695
38,818
19,615
5,731
13,884
Reconciliation of Net Income (GAAP) to Net Operating Earnings (non-GAAP):
Reorganization expense, net of tax
Net operating earnings (non-GAAP)
6,373
20,257
$
$
$
$
Per share data:
Earnings per common share:
Basic
Diluted
Operating earnings per common share(1):
Basic
Diluted
Cash dividends
Book value
Selected balance sheet data:
Total assets
Loans
Deposits
Borrowings and capital lease obligations
Total shareholders’ equity
Other ratios:
Return on average assets
Return on average equity
Efficiency ratio (2)
Average equity to average total assets
Operating return on average assets(1)
Operating return on average equity(1)
Operating efficiency ratio(1)(2)
Common dividend payout ratio
Operating common dividend payout ratio(1)
Tier 1 leverage capital ratio
Total capital ratio
1.54
1.52
2.24
2.20
0.04
16.98
1,153,858
975,060
942,371
30,152
153,580
1.16%
9.42%
69.43%
12.31%
1.69%
13.74%
56.72%
2.63%
1.82%
12.86%
18.01%
$
$
$
$
$
$
$
$
$
$
$
$
65,893
12,584
53,309
1,410
7,028
-
35,730
23,197
7,031
16,166
-
16,166
1.81
1.77
1.81
1.77
0.04
15.49
1,157,736
871,802
954,940
39,563
138,430
1.49%
12.47%
59.22%
11.94%
1.49%
12.47%
59.22%
2.26%
2.26%
13.12%
19.28%
$
$
$
$
$
57,921
10,096
47,825
1,594
9,696
-
35,789
20,138
7,779
12,359
$ 47,235
7,855
39,380
1,618
7,773
-
33,812
11,723
4,104
$ 7,619
-
12,359
-
$ 7,619
1.39
1.38
1.39
1.38
0.04
13.90
1,076,874
779,195
889,850
44,504
122,797
1.22%
10.62%
62.22%
11.52%
1.22%
10.62%
62.22%
2.90%
2.90%
12.81%
19.48%
$ 0.80
0.80
$ 0.80
0.80
0.04
12.51
$
$
986,153
692,436
800,432
54,534
116,591
0.85%
6.66%
71.71%
12.71%
0.85%
6.66%
71.71%
5.00%
5.00%
13.27%
20.39%
44,588
7,220
37,368
717
7,089
-
32,604
11,136
3,995
7,141
-
7,141
0.72
0.72
0.72
0.72
0.04
11.77
850,718
612,137
674,759
52,568
112,727
0.89%
6.35%
73.34%
14.00%
0.89%
6.35%
73.34%
5.56%
5.56%
14.49%
20.14%
(1) Operating earnings per common share, operating return on average assets, operating return on average equity, operating efficiency ratio, and operating common dividend payout ratio
utilize net operating earnings (non-GAAP).
(2) The efficiency ratio represents noninterest expense divided by the sum of net interest income (before the loan loss provision) plus noninterest income.
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, presents a review of the
operating results of the Bank for the fiscal year ended June 30, 2019 ("fiscal 2019") and the fiscal year ended June 30, 2018 ("fiscal
2018"). This discussion and analysis is intended to assist you in understanding the results of our operations and financial condition.
You should read this discussion together with your review of the Bank's Financial Statements and related notes and other statistical
information included in this report.
Overview
The Bank’s financial and strategic highlights for fiscal 2019 include the following:
• Completed the Reorganization in May 2019, removing the Federal Reserve commitments, which, in turn, will allow the Bank
to release excess cash and deposits and save interest expense on cash, as well as interest expense on the Trust Preferred
Securities, as they were paid off at the time of Reorganization.
• Net income for the year ended June 30, 2019 was $13.9 million, or $1.54 per diluted common share, compared to $16.2
million, or $1.77 per diluted common share, for the year ended June 30, 2018. However, after excluding the effects of the
Reorganization, net operating earnings for the year ended June 30, 2019 were $20.3 million, or $2.20 per diluted common
share, compared to $16.2 million, or $1.77 per diluted common share, for the year ended June 30, 2018.
• Generated loans of $498.6 million, growing the portfolio on a net basis by $103.3 million, or 11.8%.
• LASG purchased loans totaling $135.8 million and originated loans totaling $271.2 million, earning average portfolio yields
of 10.4% and 7.7%, respectively. The purchased loan yield of 10.4% includes regularly scheduled interest and accretion, and
accelerated accretion and fees recognized on loan payoffs. The Bank also monitors the "total return" on its purchased loan
portfolio, a measure that includes gains on asset sales, gains on real estate owned, as well as interest, scheduled accretion and
accelerated accretion and fees. On this basis, the purchased loan portfolio earned a total return of 10.6% for fiscal 2019.
Loans purchased or originated during the period:
Unpaid principal balance
Net investment basis
Loan returns during the period:
Yield
Total Return on Purchased Loans (1)
Total loans as of period end:
Unpaid principal balance
Net investment basis
Purchased
2019
Originated
LASG Portfolio
Year Ended June 30,
Total LASG
Purchased
(Dollars in thousands)
2018
Originated
Total LASG
$
144,372
135,848
$
271,179
271,179
$
415,551
407,027
$
137,249
124,111
$
224,546
224,546
$
361,795
348,657
10.38%
10.57%
7.67%
7.67%
8.80%
8.88%
11.35%
11.73%
6.80%
6.80%
8.66%
8.82%
$
360,472
326,640
$
493,413
493,413
$
853,885
820,053
$
326,855
290,972
$
397,363
397,363
$
724,218
688,335
(1) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, gains on real estate owned and other noninterest income recorded during the
period divided by the average invested balance, which includes purchased loans held for sale, on an annualized basis. The total return on purchased loans does not include the effect of
purchased loan charge-offs or recoveries during the period. Total return on purchased loans is considered a non-GAAP financial measure. See reconciliation in below table entitled “Total
Return on Purchased Loans.”
• Originated $47.2 million in SBA guaranteed loans in fiscal 2019, and sold $35.5 million of loans, for a gain on sale of $2.6
million.
28
Results of Operations
General
Net income for the year ended June 30, 2019 decreased by $2.3 million to $13.9 million, or $1.54 per diluted common share,
compared to $16.2 million, or $1.77 per diluted common share, for the year ended June 30, 2018.The current year’s results included
$6.4 million of non-recurring expenses (after tax) related to the Bank’s recently completed corporate reorganization. Excluding these
non-recurring expenses, the Bank’s net operating earnings (non-GAAP) increased $4.1 million to $20.3 million, or $2.20 per diluted
common share, for the year ended June 30, 2019, compared to $16.2 million, or $1.77 per diluted common share, for the year ended
June 30, 2018. We refer to the results excluding these non-recurring items as “net operating earnings.”
Reported net income, non-recurring expenses, and net operating earnings for the years ended June 30, 2019 and 2018, respectively, are
set forth below:
Reconciliation of Net Income Available to Common Shareholders (GAAP) to Net
Operating Earnings (non-GAAP)1
Year Ended June 30,
Net income (GAAP)
Items excluded from net operating earnings, net of tax:
Write-off of fair value adjustment on trust preferred
securities
Termination of interest rate swaps and caps
Related legal and professional fees
Total after-tax items
Net operating earnings (non-GAAP)
Weighted average common shares outstanding -diluted
Reported diluted earnings per share (GAAP)
Items excluded from net operating earnings2
Net operating earnings per share (non-GAAP) -diluted2
$
$
$
$
2019
2018
(Dollars in thousands, except share and per share data)
13,884
$
16,166
5,057
793
523
6,373
20,257
9,156,233
1.52
0.68
2.20
$
$
$
-
-
-
-
16,166
9,129,152
1.77
-
1.77
1 Management believes operating earnings, which exclude non-recurring items related to the Reorganization, provide a more meaningful representation of the Bank's
performance.
2 The calculation of net operating earnings per share (non-GAAP) -diluted includes dilutive shares of 166,466 for the year ended June 30, 2019.
Items of significance affecting the Bank's earnings included:
• An increase in net interest and dividend income before provision for loan losses, which grew to $62.3 million as compared to
$53.3 million for the year ended June 30, 2018. The increase was primarily due to higher average balances in the LASG
originated portfolio, partially offset by higher rates paid on deposits and higher average balances in the deposit portfolio.
The following table summarizes interest income and related yields recognized on the Bank's loans:
Interest Income and Yield on Loans
Year Ended June 30,
Average
Balance (1)
$
$
107,685
70,016
434,570
312,213
746,783
924,484
2019
Interest
Income
$
$
5,590
5,285
33,348
32,404
65,752
76,627
Average
Balance (1)
Yield
(Dollars in thousands)
5.19%
7.55%
7.67%
10.38%
8.80%
8.29%
$
139,239
53,030
350,427
242,652
593,079
785,348
$
2018
Interest
Income
$
$
6,871
3,888
23,834
27,553
51,387
62,146
Yield
4.93%
7.33%
6.80%
11.35%
8.66%
7.91%
Community Banking
SBA
LASG:
Originated
Purchased
Total LASG
Total
(1)
Includes loans held for sale.
29
The yield on purchased loans is affected by unscheduled loan payoffs, which result in immediate recognition of the prepaid loans’
discount in interest income. The following table details the “total return” on purchased loans, which includes total transactional
income of $9.1 million for the year ended June 30, 2019, a decrease of $582 thousand from the year ended June 30, 2018. The
following table summarizes the total return recognized on the purchased loan portfolio:
Regularly scheduled interest and accretion
Transactional income:
Gain on loan sales
Gain on sale of real estate owned
Other noninterest income
Accelerated accretion and loan fees
Total transactional income
Total
$
Total Return on Purchased Loans
Year Ended June 30,
2019
2018
Income
Return (1)
Income
Return (1)
(Dollars in thousands)
$
23,849
7.64%
$
18,752
7.73%
582
-
-
8,555
9,137
32,986
0.19%
0.00%
0.00%
2.74%
2.93%
10.57%
918
-
-
8,801
9,719
28,471
$
0.38%
0.00%
0.00%
3.62%
4.00%
11.73%
(1) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, gains on real estate owned and other
noninterest income recorded during the period divided by the average invested balance, which includes purchased loans held for sale, on an annualized
basis. The total return does not include the effect of purchased loan charge-offs or recoveries in the quarter. Total return is considered a non-GAAP
financial measure.
• A decrease of $912 thousand in noninterest income, principally due to the following:
• A decrease in gain on sale of SBA loans of $367 thousand, due to lower premiums on SBA loans sold in the year;
• A decrease in gain on sale of other loans of $336 thousand, due to lower volume of other loans sold; and
• A decrease in gain on sale of residential loans held for sale of $320 thousand, due to lower volume of residential loans
sold and originated in the year; partially offset by
• An increase in net unrealized gain on equity securities of $151 thousand, due to the gain recognized on the equity
security held.
• An increase of $11.8 million in noninterest expense, primarily due to the following:
• An increase in pre-tax reorganization expense of $8.7 million, which included the write-off of the fair value adjustment
recorded as a result of the FHB Formation in 2010 on trust preferred securities of $7.1 million, the loss associated with
the termination of related interest rate swaps and caps of $1.1 million and the related legal and other professional costs of
$523 thousand;
• An increase in salaries and employee benefits of $1.8 million, primarily due to an increase in incentive compensation and
stock compensation expense, along with lower deferred salary and benefit amounts; and
• An increase in data processing fees of $1.3 million, primarily due to increased IT outsourcing costs; partially offset by,
• A decrease in occupancy and equipment of $935 thousand, primarily due to a decrease in equipment repairs and
maintenance expense.
30
Net Interest Income
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated:
Average
Balance
2019
Interest
Income/
Expense
$
$
1,684
76,627
95
3,424
81,830
246
5,383
56
11,083
16,768
479
2,238
24
19,509
Assets:
Interest-earning assets:
Investment securities
Loans (1) (2) (3)
Federal Home Loan Bank stock
Short-term investments (4)
Total interest-earning assets
Cash and due from banks
Other non-interest earning assets
Total assets
Liabilities & Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts
Money market accounts
Savings accounts
Time deposits
Total interest-bearing deposits
Federal Home Loan Bank advances
Subordinated debt
Capital lease obligations
Total interest-bearing liabilities
Non-interest bearing liabilities:
Demand deposits and escrow accounts
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Net interest income (5)
Interest rate spread
Net interest margin (6)
$
$
$
$
85,232
924,484
1,475
153,609
1,164,800
2,542
30,968
1,198,310
70,822
344,631
35,619
471,777
922,849
15,000
22,885
455
961,189
80,848
8,814
1,050,851
147,459
1,198,310
Year Ended June 30,
Average
Yield/
Rate
1.98%
8.29%
6.44%
2.23%
7.03%
0.35%
1.56%
0.16%
2.35%
1.82%
3.19%
9.78%
5.27%
2.03%
Average
Balance
2018
Interest
Income/
Expense
$
$
1,111
62,156
89
2,547
65,903
210
5,145
57
4,485
9,897
547
2,102
38
12,584
$
$
$
$
92,599
785,348
1,803
171,360
1,051,110
2,889
31,550
1,085,549
70,486
407,680
37,514
311,544
827,224
16,947
23,787
730
868,688
79,767
7,472
955,927
129,622
1,085,549
Average
Yield/
Rate
1.20%
7.91%
4.94%
1.49%
6.27%
0.30%
1.26%
0.15%
1.44%
1.20%
3.23%
8.84%
5.21%
1.45%
4.82%
5.07%
$
62,321
$
53,319
5.00%
5.35%
(1) Interest income and yield are stated on a fully tax-equivalent basis using the statutory tax rate.
(2) Includes loans held for sale.
(3) Nonaccrual loans are included in the computation of average, but unpaid interest has not been included for purposes of determining interest income.
(4) Short-term investments include FHLB overnight deposits and other interest-bearing deposits.
(5) Includes tax-exempt interest income of $10 thousand for the year ended June 30, 2018.
(6) Net interest margin is calculated as net interest income divided by total interest-earning assets.
31
The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest-bearing
liabilities have affected the Bank’s interest income and interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes
attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) changes attributable to a combination of
changes in rate and volume (change in rates multiplied by the changes in volume). Changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended June 30, 2019
Compared to the Year Ended June 30, 2018
Change Due to Volume
Change Due to Rate
(Dollars in thousands)
Total Change
$
Interest earning assets:
Investment securities
Loans
FHLBB stock
Short-term investments
Total increase in interest income
Interest-bearing liabilities:
Interest-bearing deposits
Short-term borrowings
Subordinated debt
Capital lease obligations
Total increase in interest expense
Total increase in net interest and dividend income
$
(94)
11,422
(18)
(287)
11,023
1,850
(62)
(82)
(15)
1,691
9,332
$
$
667
3,049
24
1,164
4,904
5,021
(6)
218
1
5,234
(330)
$
$
573
14,471
6
877
15,927
6,871
(68)
136
(14)
6,925
9,002
For the year ended June 30, 2019, the $9.3 million volume-related change in net interest income was mainly the result of the
significant increase in loans, which grew by $139.1 million on average compared to fiscal 2018. The rate-related change in fiscal 2019
compared to fiscal 2018 was principally due to the increase in rates offered on deposits, offset by the increase in yields on the
originated loan portfolio. For fiscal 2019, the net interest margin earned of 5.35% was 28 basis points higher than that earned for fiscal
2018, primarily due to higher average balances and rates in the LASG purchased and originated portfolios, partially offset by higher
rates paid on deposits and higher average balances in the deposit portfolio.
The Bank’s total cost of funds increased to 1.87% in fiscal 2019, from 1.33% in fiscal 2018, due to higher rates paid on deposits and
higher volume in the deposit portfolio.
Provision for Loan Losses
Quarterly, the Bank determines the amount of its allowance for loan losses adequate to provide for losses inherent in the Bank's loan
portfolios, with the provision for loan losses determined by the net periodic change in the allowance for loan losses. For acquired
loans accounted for under ASC 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC
310-30"), a provision for loan loss is recorded when estimates of future cash flows decrease due to credit deterioration.
The provision for loan losses has been recorded based on estimates of inherent losses in newly originated loans and for incremental
reserves required for pre-merger loans based on estimates of deteriorated credit quality post-merger.
The provision for loan losses for the fiscal year ended June 30, 2019 was $1.3 million, a decrease from the provision for loan losses of
$1.4 million for the year ended June 30, 2018. At June 30, 2019 and 2018, the allowance for loan losses was $5.7 million and $4.8
million, respectively, and the ratio of allowance for loan losses to total loans was 0.58% and 0.55%, respectively.
Net charge-offs for fiscal 2019 totaled $414 thousand, representing approximately 0.04% of the Bank's average portfolio loan balance
during the fiscal year. This compares to $268 thousand, or 0.04%, in fiscal 2018, representing an increase of $146 thousand in fiscal
2019.
For additional information on the allowance for loan losses, see "Asset Quality."
32
Noninterest Income
Noninterest income for fiscal 2019 totaled $6.1 million, a decrease of $912 thousand, or 13.0%, from fiscal 2018. When compared to
fiscal 2018, the decrease was principally due to the following:
• A decrease in gain on sale of SBA loans of $367 thousand, due to lower premiums on SBA loans sold in the year;
• A decrease in gain on sale of other loans of $336 thousand, due to lower volume of other loans sold; and
• A decrease in gain on sale of residential loans held for sale of $320 thousand, due to lower volume of residential loans
sold and originated in the year; partially offset by
• An increase in net unrealized loss on equity securities, due to the gain recognized on the equity security held.
Noninterest Expense
Noninterest expense for fiscal 2019 totaled $47.5 million, an increase of $11.8 million, or 33.0%, from fiscal 2018, primarily due to
the Reorganization. When compared to fiscal 2018, the increase was principally due to the following:
• An increase in pre-tax reorganization expense of $8.7 million, which included the write-off of the fair value mark on
trust preferred securities of $7.1 million, the loss associated with the termination of related interest rate swaps and caps
of $1.1 million and the related legal and other professional costs of $523 thousand;
• An increase in salaries and employee benefits of $1.8 million, primarily due to an increase in incentive compensation;
and
• An increase in data processing fees of $1.3 million, primarily due to increased IT outsourcing costs; partially offset by,
• A decrease in occupancy and equipment of $935 thousand, primarily due to a decrease in equipment repairs and
maintenance expense.
Income Taxes
Income tax expense for fiscal 2019 totaled $5.7 million, representing 29.2% of pretax income, as compared to $7.0 million, or 30.3%
of pretax income, in fiscal 2018. The decrease in the Bank's effective tax rate was principally due to the change in the federal
corporate income tax rate as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by a decrease in
benefits resulting from ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting, arising from the exercise of stock options and vesting of restricted stock awards, along with non-deductible
expenses incurred in conjunction with the Reorganization.
Financial Condition
Overview
The Bank's total assets were $1.2 billion at June 30, 2019, representing a decrease of $3.8 million, or 0.3%, compared to $1.2 billion at
June 30, 2018. Significant changes in the Bank's balance sheet components include:
• Cash and cash equivalents decreased by $100.5 million, or 63.9%, compared to June 30, 2018. The decrease was primarily
the result of the Reorganization, which allowed the Bank to release excess cash held to fund loan growth.
• The loan portfolio, excluding loans held for sale, increased by $103.3 million, or 11.8%, compared to June 30, 2018. The
increase was principally due to $407.0 million of LASG originations and purchases, partially offset by purchased and
originated loan runoff in the portfolio.
• Deposits decreased by $12.6 million, or 1.3%, from June 30, 2018, primarily due to a decrease in money market accounts of
$150.1 million, or 35.7%, partially offset by growth in time deposits of $149.5 million, or 42.5%;
• Subordinated debt decreased by $9.1 million, or 38.10% from June 30, 2019, due to the payoff of Trust Preferred Securities
in connection with the Reorganization; and
• Shareholders’ equity increased by $15.2 million from June 30, 2018, primarily due to earnings of $13.9 million. Additionally,
there was stock-based compensation of $1.4 million, other comprehensive income, net of tax, of $443 thousand and $359
thousand in dividends paid on common stock.
33
Cash and Cash Equivalents
Cash and cash equivalents decreased $100.5 million, or 63.9%, to $56.9 million at June 30, 2019, as compared to $157.4 million at
June 30, 2018. This decrease was principally the result of the Reorganization, which allowed the Bank to release excess cash held to
fund loan growth. For the year, net loan growth, including loans held for sale, was $100.0 million, offset by a net deposit decrease of
$12.6 million.
Investment Securities
The investment securities portfolio totaled $82.7 million and $87.7 million at June 30, 2019 and 2018, respectively. The Bank's
investment portfolio was comprised primarily of U.S. Government-sponsored enterprise bonds and mortgage-backed securities
guaranteed by government agencies. The composition of the Bank's securities portfolio at the dates indicated follows.
June 30, 2019
June 30, 2018
Amortized Cost
Fair Value
Amortized Cost
Fair Value
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total investment securities
$
$
57,008
18,693
7,034
82,735
$
$
(Dollars in thousands)
57,364
18,410
6,938
82,712
$
$
57,129
25,276
6,866
89,271
$
$
56,887
24,181
6,619
87,687
The table below sets forth certain information regarding the contractual maturities and weighted average yields of the Bank’s debt
securities portfolio at June 30, 2019. Actual maturities of mortgage-backed securities will differ from contractual maturities due both
to scheduled amortization and prepayments.
Within One Year
Fair Value
Yield
After One Year Through
Five Years
Fair Value
(Dollars in thousands)
Yield
After Five Years
Through Ten Years
Fair Value
Yield
U.S. Government agency securities
Agency mortgage-backed securities
Total available-for-sale debt securities
$
$
21,085
-
21,085
2.15%
0.00%
2.15%
$
$
36,279
5,754
42,033
2.63%
0.96%
2.40%
$
$
-
12,656
12,656
0.00%
1.43%
1.43%
After Ten Years
Total
Fair Value
Yield
Fair Value
Yield
U.S. Government agency securities
Agency mortgage-backed securities
Total available-for-sale debt securities
$
$
-
-
-
(Dollars in thousands)
0.00%
0.00%
0.00%
$
$
57,364
18,410
75,774
2.45%
1.28%
2.17%
The other investments measured at net asset value have no scheduled maturity date. However, the Bank’s investments can be
redeemed quarterly and daily at the closing net asset value.
Management reviews the portfolio of investments on an ongoing basis to determine if there have been any other-than-temporary
declines in value. No other-than-temporary impairment expense was recognized during fiscal 2019 or fiscal 2018.
Loans
Loans, including loans held for sale, totaled $979.0 million at June 30, 2019, compared to $879.0 million at June 30, 2018. The
increase of $100.0 million, or 11.4%, at June 30, 2019 was principally due to net increases of $89.0 million in commercial real estate
loans and $44.0 million in commercial and industrial loans, partially offset by a net decrease of $29.0 million in residential real estate
loans, $737 thousand in consumer loans and $3.2 million in loans held for sale. During fiscal 2019, the LASG originated $271.2
million in loans and the LASG purchased $135.8 million in loans.
34
The composition of the Bank’s loan portfolio (excluding loans held for sale) at the dates indicated is as follows:
June 30, 2019
June 30, 2018
Amount
Percent
of Total
Amount
(Dollars in thousands)
Commercial real estate
Commercial and industrial
Residential real estate
Consumer
Total loans
Less: Allowance for loan losses
Loans, net
$
$
668,496
232,839
71,218
2,507
975,060
5,702
969,358
68.56%
23.88%
7.30%
0.26%
100.00%
$
$
579,450
188,852
100,256
3,244
871,802
4,807
866,995
Percent
of Total
66.47%
21.66%
11.50%
0.37%
100.00%
The Bank’s loan portfolio (excluding loans held for sale) by lending division follows:
Community Banking Division
LASG
SBA Division
Total
Percent of Total
(Dollars in thousands)
June 30, 2019
Originated loans:
Residential real estate
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Consumer
Subtotal
Purchased loans:
Residential real estate
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Subtotal
Total
$
$
55,858
15,781
9,303
8,505
2,507
91,954
-
-
-
-
-
91,954
$
$
6,183
190,365
78,946
217,919
-
493,413
9,177
190,110
126,725
628
326,640
820,053
$ -
36,048
21,218
5,787
-
63,053
-
-
-
-
-
$ 63,053
$
$
62,041
242,194
109,467
232,211
2,507
648,420
9,177
190,110
126,725
628
326,640
975,060
6.36%
24.84%
11.23%
23.82%
0.25%
66.50%
0.94%
19.50%
13.00%
0.06%
33.50%
100.00%
Community Banking Division
LASG
SBA Division
Total
Percent of Total
(Dollars in thousands)
June 30, 2018
Originated loans:
Residential real estate
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Consumer
Subtotal
Purchased loans:
Residential real estate
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Subtotal
Total
$
$
79,091
18,698
11,351
10,927
3,244
123,311
-
-
-
-
-
123,311
$
$
7,111
137,463
81,916
170,873
-
397,363
13,926
150,805
125,246
995
290,972
688,335
$
$
128
29,488
24,483
6,057
-
60,156
-
-
-
-
-
60,156
$
$
86,330
185,649
117,750
187,857
3,244
580,830
13,926
150,805
125,246
995
290,972
871,802
9.90%
21.29%
13.51%
21.55%
0.37%
66.62%
1.60%
17.30%
14.37%
0.11%
33.38%
100.00%
35
The following table summarizes the scheduled maturity of the Bank’s loan portfolio at June 30, 2019. Demand loans, loans having no
stated repayment schedule, and overdraft loans are reported as being due in less than one year.
Within One Year
After One Year
Through Five Years
Scheduled Loan Maturities
After Five Years
Through Ten Years
(Dollars in thousands)
After Ten Years
Total
$
$
43,362
3,034
68,275
148,497
12,585
18
216
275,987
$
$
62,041
9,177
351,661
316,835
232,210
629
2,507
975,060
Mortgages:
Residential:
Originated
Purchased
Commercial:
Originated
Purchased
Non-mortgage loans:
Commercial:
Originated
Purchased
Consumer
Total loans
Mortgages:
Residential:
Originated
Purchased
Commercial:
Originated
Purchased
Non-mortgage loans:
Commercial:
Originated
Purchased
Consumer
Total
$
$
$
$
4,068
1,703
66,102
50,294
128,046
73
327
250,613
$
$
5,327
4,127
$
155,667
73,637
83,711
287
725
323,481
$
Fixed rate
Loans Due After One Year, by Interest Rate Type
Floating or Adjustable
(Dollars in thousands)
Total
30,932
2,792
16,485
107,249
2,773
10
2,180
162,421
$
$
27,041
4,682
269,074
159,292
101,391
546
-
562,026
$
$
9,284
313
61,617
44,407
7,868
251
1,239
124,979
57,973
7,474
285,559
266,541
104,164
556
2,180
724,447
Approximately 77.4% of total portfolio loans were variable rate products at both June 30, 2019 and 2018.
Certain purchased loans have been identified as having evidence of credit deterioration since their origination, and it is probable that
the Bank will not collect all contractually required principal and interest payments. Purchased loans are accounted for using the
measurement provisions set forth in ASC 310-30. The nonaccretable difference represents a loan's contractually required payments
receivable in excess of the amount of cash flows expected to be collected. Improvements in expected cash flows result in prospective
yield adjustments. The effect of a decrease in expected cash flows due to further credit deterioration is recorded through the allowance
for loan losses.
Other Assets
Premises and equipment, net, decreased by $1.0 million, or 15.3%, to $5.6 million at June 30, 2019, compared to $6.6 million at June
30, 2018. The decrease was primarily due to depreciation of $1.3 million in the year, partially offset by fixed assets acquired.
Real estate owned and other repossessed collateral, net, decreased by $276 thousand, or 12.4%, to $2.0 million at June 30, 2019,
compared to $2.2 million at June 30, 2018. The decrease was primarily due to sales and write-downs in the year. The real estate and
personal property collateral for commercial and consumer loans are recorded at fair value less estimated costs to sell upon transfer to
acquired assets.
The cash surrender value of the Bank's BOLI assets increased $437 thousand, or 2.6%, to $17.1 million at June 30, 2019, compared to
$16.6 million at June 30, 2018. BOLI assets are invested in the general account of three insurance companies and in separate accounts
of a fourth insurance company. A general account policy's cash surrender value is supported by the general assets of the insurance
company. A separate account policy's cash surrender value is supported by assets segregated from the general assets of the insurance
company. Standard and Poor's rated these companies A+ or better at June 30, 2019. Interest earnings, net of mortality costs, increase
the cash surrender value. These interest earnings are based on interest rates that reset each year, and are subject to minimum
guaranteed rates. These increases in cash surrender value are recognized in other income and are not subject to income taxes.
Management considers BOLI an illiquid asset. BOLI represented 9.8% of the Bank's total capital at June 30, 2019.
36
Loan servicing rights totaled $2.9 million and $3.0 million at June 30, 2019 and 2018, respectively. The $119 thousand decrease was
primarily due to the amortization and impairment booked during fiscal 2019, offset by SBA loans sold during the year.
Intangible assets totaled $434 thousand and $867 thousand at June 30, 2019 and 2018, respectively. The $433 thousand decrease was
the result of core deposit intangible amortization during fiscal 2019.
FHLBB stock totaled $1.3 million and $1.7 million at June 30, 2019 and 2018, respectively. The $394 thousand decrease was the
result of stock bought back by the FHLBB during fiscal 2019.
Deposits
The Bank's principal source of funding is its core deposit accounts. At June 30, 2019, core deposits, which the Bank defines as non-
maturity deposits and non-brokered insured time deposits, represented 99.9% of total deposits.
Total deposits decreased $12.6 million to $942.4 million as of June 30, 2019 from $954.9 million as of June 30, 2018. The decrease
was primarily due to the decrease in money market accounts attracted through ableBanking, partially offset by an increase in time
deposits during the year due to rates offered on those deposit products during fiscal 2019.
The following tables set forth certain information relative to the composition of the Bank’s average deposit accounts and the weighted
average interest rate on each category of deposits for the periods indicated:
Average
Balance
Year Ended June 30, 2019
Weighted
Average Rate
(Dollars in thousands)
Percent of Total
Average Deposits
Non-interest bearing demand
deposits and escrow accounts
Regular savings
NOW accounts
Money market accounts
Time deposits
Total average deposits
$
$
80,848
35,619
70,822
344,631
471,777
1,003,697
0.00%
0.16%
0.35%
1.56%
2.35%
1.67%
8.06%
3.55%
7.06%
34.33%
47.00%
100.00%
Average
Balance
Year Ended June 30, 2018
Weighted
Average Rate
(Dollars in thousands)
Percent of Total
Average Deposits
Non-interest bearing demand
deposits and escrow accounts
Regular savings
NOW accounts
Money market accounts
Time deposits
Total average deposits
$
$
79,767
37,514
70,486
407,680
311,544
906,991
0.00%
0.15%
0.30%
1.26%
1.44%
1.09%
8.79%
4.14%
7.77%
44.95%
34.35%
100.00%
There were $501 thousand of time deposits greater than $250 thousand as of June 30, 2019. There were no time deposits greater than
$250 thousand as of June 30, 2018.
The scheduled maturity of deposits greater than or equal to $100 thousand is set forth below:
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total time certificates greater than or equal to $100 thousand
$
$
Borrowings
June 30, 2019
(Dollars in thousands)
75,105
90,200
103,268
140,542
409,115
FHLBB advances and subordinated debt are the Bank’s sources of funding other than deposits. In fiscal 2019, total borrowings
decreased by $9.1 million, or 38.1%, to $29.8 million, primarily due to the payoff of the Trust Preferred Securities in connection with
the Reorganization.
37
Advances from the FHLBB were $15.0 million at both June 30, 2019 and 2018, respectively. Pledges of residential real estate loans,
certain commercial real estate loans, investment securities, and certain FHLBB deposits free of liens or pledges are required to secure
outstanding advances and available additional borrowing capacity from the FHLBB. At June 30, 2019, $75.8 million in investment
securities were pledged as collateral to secure potential FHLBB advances as needed. At June 30, 2018, the Bank had no pledged
investment securities.
On June 29, 2016, Northeast Bancorp entered into a Subordinated Note Purchase Agreement with certain institutional accredited
investors pursuant to which Northeast Bancorp sold and issued $15.05 million in aggregate principal amount of 6.75% fixed-to-
floating subordinated notes due 2026. As a result of the Reorganization, the subordinated debt was assumed by the Bank.
Immediately prior to the Reorganization, Northeast Bancorp redeemed the Trust Preferred Securities that it held. Northeast Bancorp
had junior subordinated debentures issued to affiliated trusts totaling $9.2 million at June 30, 2018.
Asset Quality
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management considers adequate to provide for probable loan losses based
upon evaluation of known and inherent risks in the loan portfolio. The allowance is increased by providing for loan losses through a
charge to expense and by recoveries of loans previously charged-off and is reduced by loans being charged-off.
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39
The following table reflects the annual trend of total loans 30 days or more past due, as a percentage of total loans. The increase was
primarily due to four originated relationships totaling $4.4 million and four purchased loan relationships totaling $1.8 million that
were past due as of June 30, 2019.
Past due loans to total loans
2019
1.50%
2018
0.89%
As of June 30,
2017
1.72%
2016
1.00%
2015
1.08%
Non-performing Assets
The table below sets forth the amounts and categories of the Bank’s non-performing assets at the dates indicated:
Nonperforming loans:
Originated portfolio:
Residential real estate
Commercial real estate
Commercial and industrial
Consumer
Total originated portfolio
Purchased portfolio:
Residential real estate
Commercial and industrial
Commercial real estate
Total purchased portfolio
Total nonperforming loans
Real estate owned and other repossessed collateral
Total nonperforming assets
Nonperforming loans that are current
Non-performing loans to total loans
Non-performing assets to total assets
$
$
$
June 30, 2019
June 30, 2018
June 30, 2017
(Dollars in thousands)
June 30, 2016
June 30, 2015
$
$
$
2,772
3,892
1,284
148
8,096
631
497
5,543
6,671
14,767
1,957
16,724
3,544
1.51%
1.45%
$
$
$
3,212
1,499
1,368
134
6,213
202
363
5,180
5,745
11,958
2,233
14,191
4,897
1.37%
1.23%
$
$
$
3,395
413
2,600
103
6,511
1,056
32
6,364
7,452
13,963
826
14,789
4,321
1.79%
1.37%
$
$
$
2,661
474
17
163
3,315
1,125
-
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4,512
7,827
1,652
9,479
2,271
1.13%
0.96%
3,032
994
2
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4,218
-
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6,532
10,750
1,651
12,401
484
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1.46%
At June 30, 2019, the Bank had $16.7 million of nonperforming assets, or 1.45% of total assets, compared to $14.2 million of
nonperforming assets, or 1.23% of total assets at June 30, 2018. The increase was primarily due to the addition of an originated
relationship of $1.0 million, which was placed on nonaccrual during the year ended June 30, 2019.
Troubled debt restructurings (“TDRs”) represent loans for which concessions (such as extension of repayment terms or reductions of
interest rates to below market rates) are granted due to a borrower's financial condition. Such concessions may include reductions of
interest rates to below-market terms and/or extension of repayment terms. The balances and payment status of TDRs are as follows:
June 30, 2019
June 30, 2018
Nonaccrual
Accrual
Total TDRs
$
$
(Dollars in thousands)
3,846
16,905
20,751
$
$
3,543
11,915
15,458
At June 30, 2019, the Bank had real estate owned and other repossessed collateral of $2.0 million, compared to $2.2 million at June
30, 2018. The decrease was primarily due to sales and write-downs in the year. The real estate and personal property collateral for
commercial and consumer loans are written down to fair value less estimated costs to sell upon transfer to acquired assets. Revenues
and expenses are recognized in the period when received or incurred on other real estate and in substance foreclosures. Gains and
losses on disposition are recognized in noninterest income.
We continue to focus on asset quality and allocate significant resources to credit policy, loan review, asset management, collection,
and workout functions. Despite this ongoing effort, there can be no assurance that adverse changes in the real estate markets and
economic conditions will not result in higher non-performing assets levels in the future and negatively impact our results of operations
through higher provision for loan losses, net loan charge-offs, decreased accrual of income and increased noninterest expenses.
40
Potential Problem Loans
Commercial real estate and commercial loans are periodically evaluated under a ten-point rating system. These ratings are guidelines
in assessing the risk of a particular loan. The Bank had $12.7 million and $10.1 million of loans rated substandard or worse at June 30,
2019 and 2018, respectively, an increase primarily attributable to downgrades in the commercial real estate, SBA, and purchased
portfolios during the year. The following tables present the Bank's loans by risk rating:
Commercial
Real Estate
Commercial
and Industrial
June 30, 2019
SBA
Residential(1)
$
(Dollars in thousands)
290,530
597
3,268
-
-
294,395
$ 56,076
5,186
1,791
-
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$ 63,053
219,262
6,902
260
-
-
226,424
$
$
$
10,805
36
485
-
-
11,326
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
$
$
Commercial
Real Estate
Commercial
and Industrial
June 30, 2018
SBA
Residential(1)
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
$
(Dollars in thousands)
181,515
$
-
285
-
-
181,800
$ 54,730
3,882
1,544
-
-
$ 60,156
246,107
1,821
1,500
-
-
249,428
$
$
$
$
13,403
100
823
-
-
14,326
Purchased
Portfolio
$
$
315,767
4,001
6.872
-
-
326,640
Purchased
Portfolio
$
$
279,111
5,899
5,962
-
-
290,972
Total
892,440
16,722
12,676
-
-
921,838
Total
774,866
11,702
10,114
-
-
796,682
$
$
$
$
(1)
Certain of the Bank’s loans made for commercial purposes, but secured by residential collateral, are rated under the Bank’s risk-rating system.
Risk Management
Management and the Board of the Bank recognize that taking and managing risk is fundamental to the business of banking. Through
the development, implementation and monitoring of its policies with respect to risk management, the Bank strives to measure,
evaluate and control the risks it faces. The Board and management understand that an effective risk management system is critical to
the Bank's safety and soundness. Chief among the risks faced by us are credit risk, market risk (including interest rate risk), liquidity
risk, and operational (transaction) risk.
Credit Risk
The Bank considers credit risk to be the most significant risk that it faces, in that it has the greatest potential to affect the financial
condition and operating results of the Bank. Credit risk is managed through a combination of policies and limits established by the
Board, the monitoring of compliance with these policies and limits, and the periodic evaluation of loans in the portfolio, including
those with problem characteristics. The Bank also utilizes the services of independent third parties to provide loan review services,
which consist of a variety of monitoring techniques after a loan is purchased or originated.
In general, the Bank's policies establish limits on the maximum amount of credit that may be granted to a single borrower (including
affiliates), the aggregate amount of loans outstanding by type in relation to total assets and capital, and concentrations of loans by size,
property type, and geography. Underwriting criteria, such as collateral and debt service coverage ratios and approval limits are also
specified in loan policies. The Bank's policies also address the performance of periodic credit reviews, the risk rating of loans, when
loans should be placed on non-performing status and factors that should be considered in establishing the Bank's allowance for loan
losses. For additional information, refer to "Asset Quality" above and Item 1, "Business—Lending Activities."
Market Risk
Market risk is the risk of loss due to adverse changes in market prices and rates, and typically encompasses exposures such as
sensitivity to changes in market interest rates, foreign currency exchange rates, and commodity prices. The Bank has no exposure to
foreign currency exchange or commodity price movements. Because net interest income is our primary source of revenue, interest rate
risk is a significant market risk to which the Bank is exposed.
41
Interest rate risk can be defined as the exposure of future net interest income to adverse movements in interest rates. Net interest
income is affected by changes in interest rates as well as by fluctuations in the level, mix and duration of the Bank's assets and
liabilities. Over and above the influence that interest rates have on net interest income, changes in rates also affect the volume of
lending activity, the ability of borrowers to repay loans, the volume of loan prepayments, the flow and mix of deposits, and the market
value of the Bank's assets and liabilities.
The Bank's management has established an Asset Liability Management Committee ("ALCO"), which is responsible for managing the
Bank's interest rate risk in accordance with policies and limits approved by the Board. With regard to management of market risk, the
ALCO is charged with managing the Bank's mix of assets and funding sources to produce results that are consistent with the Bank's
liquidity, capital adequacy, growth, and profitability goals.
Exposure to interest rate risk is managed by Northeast through periodic evaluations of the current interest rate risk inherent in its rate-
sensitive assets and liabilities, coupled with determinations of the level of risk considered appropriate given the Bank's capital and
liquidity requirements, business strategy, and performance objectives. Through such management, Northeast seeks to mitigate the
potential volatility in its net interest income due to changes in interest rates in a manner consistent with the risk appetite established by
the Board.
The ALCO's primary tool for measuring, evaluating, and managing interest rate risk is income simulation analysis. Income simulation
analysis measures the interest rate risk inherent in the Bank's balance sheet at a given point in time by showing the effect of interest
rate shifts on net interest income over defined time horizons. These simulations take into account the specific repricing, maturity,
prepayment and call options of financial instruments that vary under different interest rate scenarios. The ALCO reviews simulation
results to determine whether the exposure to a decline in net interest income remains within established tolerance levels over the
simulation horizons and to develop appropriate strategies to manage this exposure. The Bank considers a variety of specified rate
scenarios, including instantaneous rate shocks, against static (or flat) rates when measuring interest rate risk, and evaluates results over
two consecutive twelve-month periods. All changes are measured in comparison to the projected net interest income that would result
from an "unchanged" scenario, where interest rates remain stable over the measured time horizon(s). As of June 30, 2019, the income
simulation analysis (as noted in the table below) for the first twelve-month period indicated that exposure to changing interest rates
fell within the Bank's policy levels of tolerance.
While the ALCO reviews simulation assumptions to ensure they are reasonable, and back-tests simulation results on a periodic basis
as a monitoring tool, income simulation analysis may not always prove to be an accurate indicator of the Bank's interest rate risk or
future earnings. There are inherent shortcomings in income simulation, given the number and variety of assumptions that must be
made to perform it. For example, the projected level of future market interest rates and the shape of future interest rate yield curves
have a major impact on income simulation results. Many assumptions concerning the repricing of financial instruments, the degree to
which non-maturity deposits react to changes in market rates, and the expected prepayment rates on loans, mortgage-backed securities,
and callable debt securities are also inherently uncertain. In addition, as income simulation analysis assumes that the Bank's balance
sheet will remain static over the simulation horizon, the results do not reflect the Bank's expectations for future balance sheet growth,
nor changes in business strategy that the Bank could implement in response to rate shifts to mitigate its loss exposures. As such,
although the analysis described above provides an indication of the Bank's sensitivity to interest rate changes at a point in time, these
estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
Assuming a 200 basis point increase and 100 basis point decrease in interest rates starting on June 30, 2019, we estimate that our net
interest income in the following 12 months would increase by 3.4% if rates increased by 200 basis points and decrease by 1.1% if
rates declined by 100 basis points. These results indicate a modest level of asset sensitivity in our balance sheet. An asset-sensitive
position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time
horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative
impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in
periods of rising rates and a positive impact in periods of falling rates.
June 30, 2019 .....................................................................
June 30, 2018 .....................................................................
3.4%
2.7%
-1.1%
-1.1%
Up 200 Basis Points
Down 100 Basis Points
42
Liquidity Risk
Liquidity risk is defined as the risk associated with an organization's ability to meet current and future financial obligations of a short-
term nature. The Bank uses its liquidity on a regular basis to fund existing and future loan commitments, to pay interest on deposits
and on borrowings, to fund maturing certificates of deposit and borrowings, to fund other deposit withdrawals, to invest in other
interest-earning assets, to make dividend payments to shareholders, and to meet operating expenses. The Bank's primary sources of
liquidity consist of deposit inflows, FHLBB advances, and the amortization, prepayment and maturities of loans and securities. While
scheduled payments from the amortization and maturities of loans and securities are relatively predictable sources of funds, deposit
flows and loan and investment prepayments can be greatly influenced by general interest rates, economic conditions and competition.
In addition to these regular sources of funds, the Bank may choose to sell portfolio loans and securities to meet liquidity demands.
We monitor and forecast our liquidity position. There are several interdependent methods used by us for this purpose, including daily
review of Federal Funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, quarterly review of
liquidity forecasts and periodic review of contingent funding plans. Using these methods, the Bank actively manages its liquidity
position under the direction of the ALCO.
The following is a summary of the unused borrowing capacity of the Bank at June 30, 2019 available to meet our short-term funding
needs:
Brokered time deposits
Federal Home Loan Bank of Boston
Other available lines
Total unused borrowing capacity
$
$
287,964 Subject to policy limitation of 25% of total assets
174,100 Unused advance capacity subject to eligible and qualified collateral
17,500
479,564
As of June 30, 2019
(Dollars in thousands)
Retail deposits and other core deposit sources including deposit listing services are used by the Bank to manage its overall liquidity
position. While we currently do not seek wholesale funding such as FHLBB advances and brokered deposits, the ability to raise them
remains an important part of our liquidity contingency planning. While we closely monitor and forecast our liquidity position, it is
affected by asset growth, deposit withdrawals and meeting other contractual obligations and commitments. The accuracy of our
forecast assumptions may increase or decrease our overall available liquidity. To utilize the FHLBB advance capacity, the purchase of
additional capital stock in the Federal Home Loan Bank of Boston may be required.
At June 30, 2019, the Bank had $484.9 million of immediately accessible liquidity, defined as cash that the Bank reasonably believes
could be raised within seven days through collateralized borrowings, brokered deposits or security sales. This position represented
42.0% of total assets. The Bank also had $56.9 million of cash and cash equivalents at June 30, 2019.
Management believes that there are adequate funding sources to meet its liquidity needs for the foreseeable future. Primary funding
sources are the repayment of principal and interest on loans, the renewal of time deposits, the potential for growth in the deposit base,
and the credit availability from the FHLBB. Management does not believe that the terms and conditions that will be present at the
renewal of these funding sources will significantly impact the Bank’s operations, due to its management of the maturities of its assets
and liabilities.
For the year ended June 30, 2019, total annual interest expense on subordinated notes issued in June 2016 was $1.0 million.
Operational Risk
Operational risk, which we define as the risk of loss from failed internal processes, people and systems, and external events, is
inherent in all of our business activities. The principal ways in which we manage operational risk include the establishment of
departmental and business-specific policies and procedures, internal controls and monitoring requirements. Some specific examples
include our information security program, business continuity planning and testing, our vendor management program, reconciliation
processes, our enterprise risk assessment process, and new product and/or system introduction processes. Periodic internal audits
provide an important independent check on adherence to policies, procedures and controls designed to mitigate risk exposure.
To address these risks, management has a Senior Management Risk and Compliance Committee (“SMRCC”), whose responsibility is
to proactively identify, accurately measure, and adequately monitor and control the risks assumed by the Bank in its various products
and lines of business to ensure safe and sound operations and that the risks assumed by the Bank are consistent with the risk appetite
established by the Board.
43
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized on the
balance sheet. The contract or notional amounts of these instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent
future cash requirements. To control the credit risk associated with entering into commitments and issuing letters of credit, the Bank
uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its
lending activities.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
Unused lines of credit and commitments to extend credit typically result in loans with a market interest rate.
A summary of the amounts of the Bank’s contractual obligations and other commitments with off-balance sheet risk as of June 30,
2019 follows:
Total
Less Than
1 Year
Payments Due - By Period
1-3
Years
(In thousands)
4-5
Years
After 5
Years
Contractual obligations:
Federal Home Loan Bank advances
Subordinated debt
Capital lease obligation
Total debt obligations
Operating lease obligations
Total contractual obligations
Commitments with off-balance sheet risk:
Commitments to extend credit
Unused lines of credit
Standby letters of credit
Total commitments
Capital
$
$
$
$
15,000
15,050
331
30,381
6,011
36,392
Total
11,991
21,488
2,383
35,862
$
$
$
$
15,000
-
306
15,306
1,254
16,560
$
$
-
15,050
25
15,075
2,485
17,560
$
$
-
-
-
-
1,296
1,296
Less Than
1 Year
Amount of Commitment Expiring - By Period
1-3
Years
(In thousands)
4-5
Years
11,991
11,542
2,383
25,916
$
$
-
4,862
-
4,862
$
$
-
1,130
-
1,130
$
$
$
$
-
-
-
-
976
976
After 5
Years
-
3,954
-
3,954
Shareholders’ equity was $153.6 million at June 30, 2019, an increase of $15.2 million from June 30, 2018. The increase was
primarily due to earnings of $13.9 million, which included the effects of the Reorganization. Additionally, there was stock-based
compensation of $1.4 million, an increase in accumulated other comprehensive income of $623 thousand and $359 thousand in
dividends paid on common stock.
See Note 9 of the Notes to the Financial Statements for information on the Bank's capital ratios. Regulatory capital ratios for the Bank
currently exceed all applicable requirements, including the commitments made to the Bureau to maintain minimum Tier 1 leverage
and total capital ratios of 8.5% and 13.5%, respectively.
Impact of Inflation
The financial statements and related notes have been presented in terms of historic dollars without considering changes in the relative
purchasing power of money over time due to inflation. Unlike industrial companies, nearly all of the assets and virtually all of the
44
liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank'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.
Impact of New Accounting Standards
Note 1 of the Notes to the Financial Statement includes the FASB issued statements and interpretations affecting the Bank.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and that could potentially
result in materially different results under different assumptions and conditions. The Bank considers the following to be its critical
accounting policies:
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to
earnings. For residential and consumer loans, a charge-off is recorded no later than the point at which a loan is 180 days past due if the
loan balance exceeds the fair value of the collateral, less estimated costs to sell. For commercial loans, a charge-off is recorded on a
case-by-case basis when all or a portion of the loan is deemed to be uncollectible. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses consists of general, specific, and unallocated reserves and reflects management’s estimate of probable
loan losses inherent in the loan portfolio at the balance sheet date. Management uses a consistent and systematic process and
methodology to evaluate the appropriateness of the allowance for loan losses on a quarterly basis. The calculation of the allowance for
loan losses is segregated by portfolio segments, which include: residential real estate, commercial real estate, commercial and
industrial, consumer, and purchased loans. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate: All loans in this segment are collateralized by residential real estate and repayment is primarily
dependent on the credit quality, loan-to-value ratio and income of the individual borrower. The overall health of the
economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment.
For purposes of the Bank’s allowance for loan loss calculation, home equity loans and lines of credit are included in
residential real estate.
Commercial real estate: Loans in this segment are primarily income-producing properties. For owner-occupied properties, the
cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration
in the financial condition of the operating business. The underlying cash flows generated by non-owner occupied properties
may be adversely affected by increased vacancy rates. Management periodically obtains rent rolls and operating statements,
with which it monitors the cash flows of these loans. Adverse developments in either of these areas will have an adverse
effect on the credit quality of this segment. For purposes of the allowance for loan losses, this segment also includes
construction loans.
Commercial and industrial: Loans in this segment are made to businesses and are generally secured by the assets of the
business. Repayment is expected from the cash flows of the business. Weakness in national or regional economic conditions,
and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality of this
segment.
Consumer: Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual
borrower. Repayment of consumer loans is generally based on the earnings of individual borrowers, which may be adversely
impacted by regional labor market conditions.
Purchased: Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or
business assets and have been acquired by LASG. Loans acquired by the LASG are, with limited exceptions, performing
loans at the date of purchase. Repayment of loans in this segment is largely dependent on cash flow from the successful
operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied
property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the
real estate market, such as geographic location or property type. Loans in this segment are evaluated for impairment under
ASC 310-30. The Bank reviews expected cash flows from purchased loans on a quarterly basis. The effect of a decline in
45 expected cash flows subsequent to the acquisition of the loan is recognized through a specific allocation in the allowance for
loan losses.
The general component of the allowance for loan losses for originated loans is based on historical loss experience adjusted for
qualitative factors stratified by loan segment. The Bank does not weight periods used in that analysis to determine the average loss rate
in each portfolio segment. This historical loss factor is adjusted for the following qualitative factors:
• Levels and trends in delinquencies;
• Trends in the volume and nature of loans;
• Trends in credit terms and policies, including underwriting standards, procedures and practices, and the experience and
ability of lending management and staff;
• Trends in portfolio concentration;
• National and local economic trends and conditions;
• Effects of changes or trends in internal risk ratings; and
• Other effects resulting from trends in the valuation of underlying collateral.
There were no significant changes in the Bank's policies or methodology pertaining to the general component of the allowance for
loan losses during the years ended June 30, 2019 or 2018.
The allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a
loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair
value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral
value of the impaired loan is lower than the carrying value of the loan.
For all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and
interest owed. For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is
probable that the Bank will be unable to realize cash flows as expected at acquisition. For loans accounted for under ASC 310-30 for
which cash flows can reasonably be estimated, loan impairment is measured based on the decrease in expected cash flows from those
estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at
the loan’s effective rate assumed at acquisition. Factors considered by management in determining impairment include payment status,
collateral value, and the probability of collecting the scheduled principal and interest payments when due.
Purchased Loans
Loans that the Bank purchases are initially recorded at fair value with no carryover of the related allowance for loan and lease losses.
Determining the fair value of the purchased loans involves estimating the amount and timing of principal and interest cash flows
initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. The Bank
continues to evaluate the reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases
in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may
result in a loan being considered impaired.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” for
quantitative and qualitative disclosures about market risk.
46
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Northeast Bank
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Northeast Bank (the Bank) as of June 30, 2019 and 2018, the related statements
of income, comprehensive income, changes in shareholders' equity and cash flows for each of the two years in the period ended June
30, 2019, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Bank as of June 30, 2019 and 2018, and the results of its
operations and its cash flows for each of the two years in the period ended June 30, 2019, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Bank's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report
dated September 13, 2019 expressed an unqualified opinion on the effectiveness of the Bank's internal control over financial reporting.
Corporate Reorganization
As described in Note 1 to the financial statements, the entity completed a corporate reorganization on May 15, 2019, eliminating its
bank holding company.
Basis for Opinion
These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on the Bank’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Bank in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Bank’s auditor since 2015.
Boston, Massachusetts
September 13, 2019
47
NORTHEAST BANK
BALANCE SHEETS
(Dollars in thousands, except share and per share data)
Assets
Cash and due from banks
Short-term investments
Total cash and cash equivalents
Available-for-sale securities, at fair value
Equity securities, at fair value
Total investment securities
Residential real estate loans held for sale
SBA loans held for sale
Total loans held for sale
Loans
Commercial real estate
Commercial and industrial
Residential real estate
Consumer
Total loans
Less: Allowance for loan losses
Loans, net
Premises and equipment, net
Real estate owned and other repossessed collateral, net
Federal Home Loan Bank stock, at cost
Intangible assets, net
Loan servicing rights, net
Bank-owned life insurance
Other assets
Total assets
Liabilities and Shareholders' Equity
Deposits
Demand
Savings and interest checking
Money market
Time
Total deposits
Federal Home Loan Bank advances
Subordinated debt
Capital lease obligation
Other liabilities
Total liabilities
Commitments and contingencies
Shareholders' equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares
issued and outstanding at June 30, 2019 and 2018
Voting common stock, $1.00 par value, 25,000,000 shares authorized;
8,997,326 and 8,056,527 shares issued and outstanding at
June 30, 2019 and 2018, respectively
Non-voting common stock, $1.00 par value, 3,000,000 shares authorized;
44,783 and 882,314 shares issued and outstanding at
June 30, 2019 and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these financial statements.
June 30, 2019
June 30, 2018
2,482
54,425
56,907
75,774
6,938
82,712
3,179
731
3,910
668,496
232,839
71,218
2,507
975,060
5,702
969,358
5,582
1,957
1,258
434
2,851
17,057
11,832
1,153,858
68,782
101,061
270,835
501,693
942,371
15,000
14,829
323
27,755
1,000,278
-
-
8,997
45
78,095
67,581
(1,138)
153,580
1,153,858
$
$
$
$
3,889
153,513
157,402
81,068
6,619
87,687
3,405
3,750
7,155
579,450
188,852
100,256
3,244
871,802
4,807
866,995
6,591
2,233
1,652
867
2,970
16,620
7,564
1,157,736
72,272
109,637
420,886
352,145
954,940
15,000
23,958
605
24,803
1,019,306
-
-
8,057
882
77,016
54,236
(1,761)
138,430
1,157,736
$
$
$
$
48
NORTHEAST BANK
STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
Interest and dividend income:
Interest and fees on loans
Interest on investment securities
Other interest and dividend income
Total interest and dividend income
Interest expense:
Deposits
Federal Home Loan Bank advances
Subordinated debt
Obligation under capital lease agreements
Total interest expense
Net interest and dividend income before provision for loan losses
Provision for loan losses
Net interest and dividend income after provision for loan losses
Noninterest income:
Fees for other services to customers
Gain on sales of SBA loans
Gain on sales of residential loans held for sale
Gain on sale of other loans
Net unrealized gain on equity securities
Loss recognized on real estate owned and other repossessed
collateral and premises and equipment, net
Bank-owned life insurance income
Other noninterest income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment expense
Professional fees
Data processing fees
Marketing expense
Loan acquisition and collection expense
FDIC insurance premiums
Intangible asset amortization
Reorganization expense
Other noninterest expense
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Weighted-average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic
Diluted
Cash dividends declared per common share
The accompanying notes are an integral part of these financial statements.
Years Ended June 30,
2019
2018
$
76,627
1,684
3,519
81,830
16,768
479
2,238
24
19,509
62,321
1,309
61,012
1,769
2,588
611
582
151
(104)
437
82
6,116
23,323
3,650
1,402
3,769
580
1,913
320
433
8,695
3,428
47,513
19,615
5,731
13,884
$
62,146
1,111
2,636
65,893
9,897
547
2,102
38
12,584
53,309
1,410
51,899
1,822
2,955
931
918
-
(123)
441
84
7,028
21,565
4,585
1,749
2,447
472
1,354
317
433
-
2,808
35,730
23,197
7,031
16,166
9,032,530
9,156,233
8,906,710
9,129,152
1.54
1.52
0.04
$
$
1.81
1.77
0.04
$
$
$
$
49
NORTHEAST BANK
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Other comprehensive income, before tax:
Available-for-sale securities:
Change in net unrealized loss on available-for-sale securities
Derivatives and hedging activities:
Change in accumulated loss on effective cash flow hedges
Reclassification adjustments included in net income
Total derivatives and hedging activities
Total other comprehensive income, before tax
Income tax expense related to other comprehensive income
Other comprehensive income, net of tax
Comprehensive income
The accompanying notes are an integral part of these financial statements.
Years Ended June 30,
2019
2018
$ 13,884
$
16,166
1,410
(2,043)
1,240
(803)
607
164
443
(636)
750
106
856
220
66
154
$ 14,327
$
16,320
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51
NORTHEAST BANK
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses
Loss recognized on real estate owned and other repossessed collateral and
premises and equipment, net
Net unrealized gain on equity securities
Accretion of fair value adjustments on loans, net
Accretion of fair value adjustments on borrowings, net
Amortization of subordinated debt issuance costs
Originations of loans held for sale
Net proceeds from sales of loans held for sale
Gain on sales of residential loans held for sale, net
Gain on sales of SBA and other loans held for sale, net
Net increase (decrease) in loan servicing rights
Amortization of intangible assets
Bank-owned life insurance income, net
Depreciation of premises and equipment
Deferred income tax expense (benefit)
Stock-based compensation
Amortization of investment securities, net
Changes in other assets and liabilities:
Other assets
Other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of investment securities
Proceeds from maturities and principal payments on investment
securities
Loan purchases
Loan originations, principal collections, and purchased loan paydowns, net
Purchases and disposals of premises and equipment, net
Proceeds from sales of real estate owned and other repossessed collateral
Redemption of Federal Home Loan Bank stock
Net cash used in investing activities
Financing activities:
Net change in deposits
Dividends paid on common stock
Repayment of FHLBB borrowings
Repayment of trust preferred securities
Repayment of capital lease obligation
Repurchases for tax withholdings on restricted common stock
Stock options exercised, net
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental schedule of cash flow information:
Interest paid
Income taxes paid, net
Supplemental schedule of noncash investing and financing activities:
Transfers from loans to real estate owned and other repossessed collateral, net
The accompanying notes are an integral part of these financial statements.
$
$
$
Years Ended June 30,
2019
2018
$
13,884
$
16,166
1,309
104
(151)
(8,826)
207
7,160
(76,038)
84,035
(611)
(3,170)
119
433
(437)
1,324
(3,734)
1,366
349
(522)
1,973
18,774
(32,974)
39,161
(135,848)
39,430
(297)
755
394
(89,379)
(12,569)
(359)
-
(16,496)
(282)
(138)
(46)
(29,890)
(100,495)
157,402
56,907
19,094
4,409
$
$
1,410
123
-
(8,694)
217
110
(91,975)
99,112
(931)
(3,873)
(124)
433
(441)
1,300
498
870
802
(1,331)
5,782
19,454
(26,174)
33,742
(124,111)
32,372
(981)
1,266
286
(83,600)
65,090
(355)
(5,000)
-
(268)
(109)
(1,093)
58,265
(5,881)
163,283
157,402
12,171
5,341
601
$
2,769
52
1. Summary of Significant Accounting Policies
NOTES TO FINANCIAL STATEMENTS
The accounting and reporting policies of Northeast Bank (the “Bank") conform to accounting principles generally accepted in the
United States of America ("US GAAP") and conform to practices within the financial services industry.
Corporate Reorganization
On May 15, 2019, as the result of a corporate reorganization designed to eliminate its bank holding company structure, Northeast
Bancorp (the “Company”), a Maine corporation, merged with and into its wholly-owned subsidiary, the Bank, a Maine state-chartered
bank, with the Bank continuing as the surviving corporation (the “Reorganization”). Unless the context otherwise requires, references
in this Annual Report on Form 10-K to “Company,” “we,” “us” and “our” for periods prior to May 15, 2019, refer to Northeast
Bancorp, which was the holding company and the registrant prior to the Reorganization, and, for periods after the Reorganization, to
the Bank.
At the effective time of the Reorganization, each share of Northeast Bancorp’s common stock issued and outstanding immediately
prior to the Reorganization was automatically converted to one share of common stock of the Bank having the same designations,
rights, powers and preferences and the same qualifications, limitations and restrictions as those associated with each share of
Northeast Bancorp. As a result, Northeast Bancorp shareholders, upon consummation of the Reorganization, became Bank
shareholders. The Bank continues to be subject to regulation by the Maine Bureau of Financial Institutions (the “Bureau”). Because
the Bank is an insured depository institution that is not a member bank of the Board of Governors of the Federal Reserve System
(“FRB”), its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). The Bank is no longer subject to the
FRB’s regulation and supervision (except such regulations as are made applicable to the Bank by law and regulation of the FDIC).
Business
The Bank is a Maine state-chartered bank. The Bank is subject to supervision and regulation by applicable state and federal banking
agencies, including the Bureau and the FDIC. The Bank faces competition from banks and other financial institutions. The Bank
provides a full range of banking services to individual and corporate customers throughout south-central and western Maine and
conducts loan purchasing and origination activities nationwide.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current year's presentation.
Use of Estimates
The financial statements have been prepared in conformity with US GAAP. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and reported amounts of revenue and expenses during the reporting period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses,
the determination of fair values in conjunction with the application of loan acquisition accounting, and the on-going evaluation of
assets for potential impairment.
Concentrations of Credit Risk
Most of the Community Banking Division's business activity is with customers located within the State of Maine. However, the
business activities of the Bank’s LASG and the SBA Division are diversified across the country. In all regions, the Bank’s focus is to
originate and purchase commercial real estate and commercial and industrial loans. Repayment of loans is expected from cash flows
of the borrower. Losses on secured loans are limited by the value of the collateral upon default of the borrowers. The Bank does not
have any significant concentrations to any one industry or customer.
53 Cash and Cash Equivalents
For purposes of presentation in the statements of cash flows, cash and cash equivalents consist of cash and due from banks and short-
term investments. The Bank is required to maintain a certain reserve balance in the form of cash or deposits with other financial
institutions. At June 30, 2019 and 2018, such reserve balances totaled $2.3 million and $1.5 million, respectively.
Investment Securities
Securities for which the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and carried at
amortized cost. Those securities held for indefinite periods of time, but not necessarily to maturity are classified as available-for-sale.
Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability, liquidity, or
capital management strategies and may be sold in response to changes in interest rates, maturities, asset/liability mix, liquidity needs,
regulatory capital needs or other business factors. Debt securities available-for-sale are carried at estimated fair value with unrealized
gains and losses reported on an after-tax basis in shareholders' equity as accumulated other comprehensive income or loss. Equity
investments measured at net asset value are carried at estimated fair value with changes in unrealized gains and losses recorded in
noninterest income in the statements of income.
Interest and dividends on securities are recorded on the accrual method. Premiums and discounts on securities are amortized or
accreted into interest income by the level-yield method over the remaining period to contractual maturity, adjusted for the effect of
actual prepayments in the case of mortgage-backed securities. These estimates of prepayment assumptions are made based upon the
actual performance of the underlying security, current interest rates, the general market consensus regarding changes in mortgage
interest rates, the contractual repayment terms of the underlying loans, the priority rights of the investors to the cash flows from the
mortgage securities and other economic conditions. When differences arise between anticipated prepayments and actual prepayments,
the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Unamortized premium or
discount is adjusted to the amount that would have existed had the new effective yield been applied since purchase, with a
corresponding charge or credit to interest income.
Security transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification method
and are recorded in noninterest income.
Management evaluates securities for other-than-temporary impairment on a periodic basis. Factors considered in determining whether
an impairment is other than temporary include: (1) the length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Bank to hold the investment for a
period of time sufficient to allow for any anticipated recovery in fair value. If the Bank intends to sell an impaired security, the Bank
records an other-than-temporary loss in an amount equal to the entire difference between the fair value and amortized cost. If a
security is determined to be other-than-temporarily impaired, but the Bank does not intend to sell the security, only the credit portion
of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Federal Home Loan Bank Stock
During the periods presented, the Bank has owned investments in the stock of the Federal Home Loan Bank of Boston ("FHLBB").
No readily-available market exists for these stocks, and they have no quoted market values. The Bank, as a member of the FHLBB, is
required to maintain investments in the capital stock of the FHLBB equal to their membership base investments plus an activity-based
investment determined according to the Bank's level of outstanding FHLBB advances. The Bank reviews its investments in FHLBB
stock periodically to determine if other-than-temporary impairment exists. The Bank reviews recent public filings, rating agency
analysis and other factors, when making the determination. As of June 30, 2019, no impairment has been recognized.
Loans Held for Sale and Loan Servicing
Residential real estate mortgage loans are designated as held for sale or held to maturity based on intent, which is determined when
loans are underwritten. Loans originated and held for sale in the secondary market are carried at the lower of cost or fair value. The
SBA Division loans are designated as held for sale based on intent to sell, which is determined on a quarterly basis. The guaranteed
portions of the loans are transferred to held for sale and are carried at the lower of cost or fair value. Realized gains and losses on sales
of residential loans are determined using the specific identification method, and realized gains and losses on sales of SBA loans are
54 determined using the allocation of participating interests sold and retained. Direct loan origination costs and fees related to loans held
for sale are deferred upon origination and are recognized as an adjustment to the gain or loss on the date of sale.
In connection with the mortgage loans to be held for sale, the Bank often offers interest rate lock commitments to prospective
borrowers. The Bank manages this interest rate risk by entering into offsetting forward sale agreements with third party investors for
certain funded loans and loan commitments. The Bank uses "best efforts" forward loan sale commitments to mitigate the risk of
potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. The gross effect of
the derivative loan commitments and forward sale agreements is nominal at each date presented.
In its SBA Division activities, the Bank recognizes the SBA servicing rights as separate assets, which is classified as servicing rights,
net, on the balance sheet. The Bank capitalizes SBA servicing rights at the net present value of the fee income and servicing cost
spread upon the sale of the related loans. The Bank uses the amortization method to subsequently measure servicing assets. The SBA
servicing rights are amortized over the estimated weighted average life of the loans. The Bank's assumptions with respect to
prepayments, which affect the estimated average life of the loans, are adjusted quarterly and as necessary to reflect current
circumstances. The Bank evaluates the estimated life and fair value of its servicing portfolio based on data that is disaggregated to
reflect note rate, type, and term on the underlying loans. The Bank performs an assessment of capitalized SBA servicing rights for
impairment based on the current fair value of those rights. Fair value of the servicing rights is based on a valuation model that
calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds and
default rates and losses. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized
amount. If the Bank later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be
recorded as an increase to income.
Loans
Loans are carried at the principal amounts outstanding or amortized acquired fair value, in the case of acquired loans, adjusted by
partial charge-offs and net of deferred loan costs or fees. Loan fees and certain direct origination costs are deferred and amortized into
interest income over the expected term of the loan using the level-yield method. When a loan is paid off, any unamortized discount or
premium is recognized in interest income. Interest income is accrued based upon the daily principal amount outstanding except for
loans on nonaccrual status.
Loans purchased by the Bank are accounted for under ASC 310-30, Receivables—Loans and Debt Securities Acquired with
Deteriorated Credit Quality ("ASC 310-30"). At acquisition, the effective interest rate is determined based on the discount rate that
equates the present value of the Bank's estimate of cash flows with the purchase price of the loan. Prepayments are not assumed in
determining a purchased loan's effective interest rate and income accretion. The application of ASC 310-30 limits the yield that may
be accreted on the purchased loan, or the "accretable yield," to the excess of the Bank's estimate, at acquisition, of the expected
undiscounted principal, interest, and other cash flows over the Bank's initial investment in the loan. The excess of contractually
required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan's "nonaccretable
difference." Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase
to the loan's effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield. The effect of
subsequent credit-related declines in expected cash flows of purchased loans are recorded through a specific allocation in the
allowance for loan losses.
Loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when, in
management's judgment, the collectability of interest or principal of the loan has been significantly impaired. Loans accounted for
under ASC 310-30 are placed on nonaccrual when it is not possible to reach a reasonable expectation of the timing and amount of cash
flows to be collected on the loan. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is
reversed against interest income on loans. Interest on nonaccrual loans is accounted for on a cash-basis or using the cost-recovery
method when collectability is doubtful. A loan is returned to accrual status when collectability of principal is reasonably assured and
the loan has performed for a reasonable period of time.
In cases where a borrower experiences financial difficulties and the Bank makes certain concessionary modifications to contractual
terms, the loan is classified as a TDR, and therefore, by definition, is an impaired loan. Concessionary modifications may include
adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or
repossession of collateral. For loans accounted for under ASC 310-30, the Bank evaluates whether it has granted a concession by
55 comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected
arising from changes in estimate after acquisition. As a result, if an ASC 310-30 loan is modified to be consistent with, or better than,
the Bank's expectations at acquisition, the modified loan would generally not qualify as a TDR. Nonaccrual loans that are restructured
generally remain on nonaccrual status for a minimum period of six months to demonstrate that the borrower can meet the restructured
terms. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should
remain on accrual status. If the borrower's ability to meet the revised payment schedule is not reasonably assured, the loan is classified
as a nonaccrual loan. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to
earnings. For residential and consumer loans, a charge-off is recorded no later than the point at which a loan is 180 days past due if the
loan balance exceeds the fair value of the collateral, less estimated costs to sell. For commercial loans, a charge-off is recorded on a
case-by-case basis when all or a portion of the loan is deemed to be uncollectible. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses consists of general, specific, and unallocated reserves and reflects management’s estimate of probable
loan losses inherent in the loan portfolio at the balance sheet date. Management uses a consistent and systematic process and
methodology to evaluate the appropriateness of the allowance for loan losses on a quarterly basis. The calculation of the allowance for
loan losses is segregated by portfolio segments, which include: residential real estate, commercial real estate, commercial and
industrial, consumer, and purchased loans. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate: All loans in this segment are collateralized by residential real estate and repayment is primarily
dependent on the credit quality, loan-to-value ratio and income of the individual borrower. The overall health of the
economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment.
For purposes of the Bank’s allowance for loan loss calculation, home equity loans and lines of credit are included in
residential real estate.
Commercial real estate: Loans in this segment are primarily income-producing properties. For owner-occupied properties, the
cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration
in the financial condition of the operating business. The underlying cash flows generated by non-owner occupied properties
may be adversely affected by increased vacancy rates. Management periodically obtains rent rolls and operating statements,
with which it monitors the cash flows of these loans. Adverse developments in either of these areas will have an adverse
effect on the credit quality of this segment. For purposes of the allowance for loan losses, this segment also includes
construction loans.
Commercial and industrial: Loans in this segment are made to businesses and are generally secured by the assets of the
business. Repayment is expected from the cash flows of the business. Weakness in national or regional economic conditions,
and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality of this
segment.
Consumer: Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual
borrower. Repayment of consumer loans is generally based on the earnings of individual borrowers, which may be adversely
impacted by regional labor market conditions.
Purchased: Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or
business assets and have been acquired by LASG. Loans acquired by the LASG are, with limited exceptions, performing
loans at the date of purchase. Repayment of loans in this segment is largely dependent on cash flow from the successful
operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied
property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the
real estate market, such as geographic location or property type. Loans in this segment are evaluated for impairment under
ASC 310-30. The Bank reviews expected cash flows from purchased loans on a quarterly basis. The effect of a decline in
expected cash flows subsequent to the acquisition of the loan is recognized through a specific allocation in the allowance for
loan losses.
56 SBA: Loans in this segment are comprised of both commercial real estate and commercial and industrial loans to small
businesses, underwritten and originated by the Bank’s SBA Division. Loans are underwritten and originated primarily in
accordance with SBA 7(a) guidelines, and are partially guaranteed by the SBA. Loans are primarily secured by income-
producing properties and/or assets of the businesses or borrowers. Adverse developments in national or regional economic
conditions, and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality
of this segment.
The general component of the allowance for loan losses for originated loans is based on historical loss experience adjusted for
qualitative factors stratified by loan segment. The Bank does not weight periods used in that analysis to determine the average loss rate
in each portfolio segment. This historical loss factor is adjusted for the following qualitative factors:
• Levels and trends in delinquencies and non-performing loans;
• Trends in the volume and nature of loans;
• Trends in credit terms and policies, including underwriting standards, procedures and practices, and the experience and
ability of lending management and staff;
• Trends in portfolio concentration;
• National and local economic trends and conditions;
• Effects of changes or trends in internal risk ratings; and
• Other effects resulting from trends in the valuation of underlying collateral.
There were no significant changes in the Bank's policies or methodology pertaining to the general component of the allowance for
loan losses during the years ended June 30, 2019 or 2018.
The allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a
loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair
value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral
value of the impaired loan is lower than the carrying value of the loan.
For all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and
interest owed. For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is
probable that the Bank will be unable to realize cash flows as expected at acquisition. For loans accounted for under ASC 310-30 for
which cash flows can reasonably be estimated, loan impairment is measured based on the decrease in expected cash flows from those
estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at
the loan’s effective rate assumed at acquisition. Factors considered by management in determining impairment include payment status,
collateral value, and the probability of collecting the scheduled principal and interest payments when due.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of the assets or the respective lease terms. Premises and
equipment under capital leases are amortized over the estimated useful lives of the assets or the respective lease terms, whichever is
shorter. Maintenance and repairs are charged to expense as incurred and the cost of major renewals and betterments are capitalized.
57
Intangible Assets
Identifiable intangible assets subject to amortization are amortized over the estimated lives of the intangibles using a method that
approximates the amount of economic benefits that are realized by the Bank. Identifiable intangible assets are reviewed for
impairment annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable.
Real Estate Owned and Other Repossessed Collateral
Assets in control of the Bank or acquired through foreclosure or repossession are held for sale and are initially recorded at fair value
less estimated costs to sell at the date control is established, resulting in a new cost basis. The amount by which the recorded
investment in the loan exceeds the fair value (net of estimated cost to sell) of the foreclosed asset is charged to the allowance for loan
losses. Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a
valuation allowance or through a direct write-off. Subsequent increases in the fair value may only be recorded to the extent of any
previously recognized valuation allowance. Rental revenue received and gains and losses recognized on foreclosed assets is included
in other noninterest income, whereas operating expenses and changes in the valuation allowance relating to foreclosed assets are
included in other noninterest expense.
Impairment of Long-Lived Assets
The Bank reviews long-lived assets, including premises and equipment, for impairment whenever events or changes in business
circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not
be fully recoverable. The Bank performs undiscounted cash flow analyses to determine if impairment exists. If impairment is
determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if
any, are based on the estimated proceeds to be received, less costs of disposal.
Bank-Owned Life Insurance
Increases in the cash surrender value of bank-owned life insurance policies, as well as death benefits received net of any cash
surrender value, are recorded in noninterest income, and are not subject to income taxes. The cash surrender values of the policies not
previously endorsed to participants are recorded as assets of the Bank. Any amounts owed to participants relating to these policies are
recorded as liabilities of the Bank. The Bank reviews the financial strength of the insurance carriers prior to the purchase of life
insurance policies and no less than annually thereafter.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Accordingly, changes resulting from the Tax Cuts and Jobs Act (the “Act”) enacted on December 22,
2017 were recognized in the financial statements as of and for the year ended June 30, 2018. The Bank's policy is to recognize interest
and penalties assessed on uncertain tax positions in income tax expense. See Note 11 to the financial statements. The Bank exercises
significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. Additionally, see
Note 11 for detail regarding reserves for uncertain tax positions as of June 30, 2019 and 2018.
Effective July 1, 2017, with the application of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting, the Bank no longer records the excess tax benefits or deficiencies related to share-based
compensation in additional paid-in capital. Instead, excess tax benefits or deficiencies are recorded in the income statement as part of
the income tax expense on a prospective basis. For interim reporting purposes, the excess tax benefits or deficiencies are recorded as
discrete items in the period in which they arise. Excess tax benefits are now presented as an operating activity in the statement of cash
flows. In addition, under the new guidance, when calculating incremental shares for earnings per share, entities exclude from assumed
proceeds excess tax benefits that previously would have been recorded in additional paid-in capital. The total income tax benefit
recorded in income tax expense relating to excess tax benefits on stock-based compensation for the year ended June 30, 2019 and
2018 was $214 thousand and $1.3 million, respectively.
58 Stock-Based Compensation
The Bank's stock-based compensation plans provide for awards of stock options, restricted stock and other stock-based compensation
to directors, officers and employees. The cost of employee services received in exchange for awards of equity instruments is based on
the grant-date fair value of those awards. Compensation cost is recognized over the requisite service period as a component of
compensation expense. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite
service period for the entire award. The Bank uses the Black-Scholes model to estimate the fair value of stock options, while the
market price of the Bank's common stock at the date of grant is used for restricted stock awards.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available-for-sale, unrealized losses related to factors other than credit on debt securities,
unrealized gains and losses on cash flow hedges and deferred gains on hedge accounting transactions.
Earnings Per Share
Basic earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula under
which earnings per share is calculated from common stock and participating securities according to dividends declared and
participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to
participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment
awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not
subject to performance-based measures. Basic earnings per share is calculated by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding (inclusive of participating securities). Diluted earnings
per share have been calculated in a manner similar to that of basic earnings per share, except that the weighted-average number of
common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all
potentially dilutive common shares (such as those resulting from the exercise of stock options or the attainment of performance
measures) were issued during the period, computed using the treasury stock method.
Derivatives
Derivative instruments are carried at fair value in the Bank's financial statements. The accounting for changes in the fair value of a
derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship, and further, by
the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Bank
designates the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge. For
derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income, net of related tax, and reclassified into earnings in the same period or periods during
which the hedged transactions affect earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative
change in the present value of future cash flows of the hedged item (i.e., the ineffective portion), if any, is recognized in current
earnings during the period. For derivative instruments designated and qualifying as a fair value hedge (i.e., hedging the exposure to
changes in the fair value of an asset or liability or an identified portion thereof that is attributable to the hedged risk), the gain or loss
on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in
current earnings during the period of the change in fair values. At the inception of a hedge, the Bank documents certain items,
including but not limited to the following: the relationship between hedging instruments and hedged items, Bank risk management
objectives, hedging strategies, and the evaluation of hedge transaction effectiveness. Documentation includes linking all derivatives
designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions.
Hedge accounting is discontinued prospectively when (1) a derivative is no longer highly effective in offsetting changes in the fair
value or cash flow of a hedged item, (2) a derivative expires or is sold, (3) a derivative is de-designated as a hedge, because it is
unlikely that a forecasted transaction will occur, or (4) it is determined that designation of a derivative as a hedge is no longer
appropriate. For derivative instruments not designated as hedging instruments, the gain or loss on the derivative is recognized in
current earnings during the period of change.
59
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not
maintain effective control over the transferred assets. There are no agreements to repurchase before their maturity.
Transfers of a portion of a loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating
interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash
flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, and the loan holders
must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or
exchange the entire loan.
The Bank sells financial assets in the normal course of business, the majority of which are related to the SBA-guaranteed portion of
loans, as well as residential mortgage loan sales through established programs, commercial loan sales through participation
agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the
Bank considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the
balance sheet. With the exception of servicing and certain performance-based guarantees, the Bank's continuing involvement with
financial assets sold is minimal and generally limited to market customary representation and warranty clauses.
When the Bank sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on
sale depends on the previous carrying amount of the transferred financial assets, the servicing right recognized, and the consideration
received, and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held
by the Bank are carried at the lower of cost or fair value.
Advertising Costs
Advertising costs are expensed as incurred.
Segment Reporting
All of the Bank's operations are considered by management to be one operating segment.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The
core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii)
identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU
2015-14, Revenue from Contracts with Customers (“Topic 606”) (“ASU 2015-14”) was issued in August 2015 which deferred
adoption to annual reporting periods beginning after December 15, 2017, which was adopted during the three months ended
September 30, 2018. The timing of the Bank’s revenue recognition did not change. The Bank’s largest portions of revenue, interest
and fees on loans, interest and dividend income on securities and short-term investments, bank-owned life insurance income, and gain
on sales of loans, are specifically excluded from the scope of the guidance. Additionally, fees for other services to customers includes
loan servicing fee income which is accounted for under ASC Topic 860, Transfers and Servicing, (“Topic 860”), and is not subject to
Topic 606. The other component of fees for other services to customers is deposit fees. The majority of the Bank’s deposit fees are
specifically related to a customer accessing its funds, in which case the revenue is currently recognized in a consistent manner with
Topic 606. Revenue that is not specifically related to a customer accessing its funds (i.e. account maintenance fees), can be waived;
however, the amount of waived fees is not considered material, and thus the revenue is consistently recognized with Topic 606. All
other revenue is also recognized in a manner consistent with Topic 606. Because of the above, the adoption did not have an impact on
the Bank’s financial statements.
60
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities (“ASU 2016-01”). This guidance changes how entities account for equity investments
that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to
measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A
practicability exception will be available for equity investments that do not have readily determinable fair values; however, the
exception requires the Bank to adjust the carrying amount for impairment and observable price changes in orderly transactions for the
identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of
current GAAP. The Bank adopted this guidance during the three months ended September 30, 2018. This adoption resulted in a
reclassification of $180 thousand from accumulated other comprehensive loss to retained earnings in the financial statements, with no
net effect on shareholders' equity. In addition, the disclosure of the fair value of “Loans, net” in “Notes to Financial Statements – Note
17: Fair Value Measurements” is calculated based on an exit pricing strategy versus an entry pricing strategy.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new guidance establishes the principles
to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities will be
required to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose
qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to
renew and terminate leases. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods
within the fiscal year. The Bank is currently evaluating the impact of the adoption of ASU 2016-02 to determine the potential impact it
will have on its financial statements. The Bank’s assets and liabilities will increase based on the present value of the remaining lease
payments for leases in place at the adoption date; however, this is not expected to be material to the Bank’s results of operations. Upon
adoption of ASU 2016-02 on July 1, 2019, the Bank recorded an asset of approximately $4.5 million and a liability of approximately
$5.5 million on the balance sheet as a result of recognizing the right-of-use assets and lease liabilities.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). This guidance is
intended to provide financial statement users with more decision-useful information about the expected credit losses on financial
instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the
amendments in this guidance replace the incurred loss impairment methodology in current GAAP with a methodology that reflects
expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss
estimates. ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the
fiscal year beginning after December 15, 2018. The Bank is evaluating the provisions of the guidance, and will closely monitor
developments and additional guidance to determine the potential impact on the Bank’s financial statements. Additionally, in July
2019, the FASB made tentative decisions to delay the effective date for ASU 2016-13. Management is in the process of identifying the
methodologies and the additional data requirements necessary to implement the guidance and has engaged an existing third-party
service provider to assist in implementation.
In April and May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”) and ASU 2019-05, Financial
Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”), respectively. These updates clarify the
guidance in ASU 2016-13 which introduced Topic 326. ASU 2019-04 clarifies and improves areas of guidance related to the recently
issued standards on credit losses, hedging, and recognition and measurement. ASU 2019-05 provides entities that have certain
instruments within the scope of subtopic 326-20 with an option to irrevocably elect the fair value option. These ASUs will be effective
for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15,
2018. The Bank does not plan on adopting early and is still assessing the potential disclosure impact for these amendments and will
adopt in conjunction with ASU 2016-13.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
(“ASU 2017-09”) which amends the scope of modification accounting for share-based payment arrangements. This update provides
guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to
apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions,
and classification of the awards are the same immediately before and after the modification. This update was adopted and did not have
an impact on the Bank’s financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”). This guidance permits
hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk, and improves the
financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its
financial statements. The amendments in this guidance are effective for public business entities for fiscal years beginning after
61 December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The adoption of this guidance is not expected to have a significant impact on the Bank’s financial statements.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and ASU 2018-11,
Leases (Topic 842) (“ASU 2018-11”). The guidance provides clarification on the application of ASU 2016-02, specifically on certain
narrow aspects of the guidance issued under ASU 2016-02, including comparative reporting requirements for initial adoption and, for
lessors only, separating lease and non-lease components in a contract and allocating the consideration in the contract to the separate
components. For entities that have not adopted ASU 2016-02 before the issuance of these updates, the amendments in this guidance
are the same as the effective date and transition requirements in ASU 2016-02. The adoption of this guidance is not expected to have a
significant impact on the Bank’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820) (“ASU 2018-13”). This update modifies
disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This includes removing requirements
related to transfers between Level 1 and Level 2, the policy of timing of transfers between levels, and the valuation process for Level 3
fair value measurements, modifying disclosure requirements related to investments in certain entities that calculate net asset value, and
adding disclosure requirements for changes in unrealized gains and losses for recurring Level 3 fair value measurements and the range
and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this
guidance are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Bank’s
financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing
Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”). This
guidance permits the use of the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark
interest rate, in addition to the London Interbank Offered Rate (“LIBOR”) swap rate due to concerns about the sustainability of
LIBOR. The amendments in this update are required to be adopted concurrently with ASU 2017-12. The adoption of this guidance is
not expected to have a significant impact on the Bank’s financial statements.
62
2. Investment Securities
The following presents a summary of the amortized cost, gross unrealized holding gains and losses, and fair value of investment
securities.
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total investment securities
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total investment securities
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
June 30, 2019
$
$
$
$
57,008
18,693
7,034
82,735
Amortized
Cost
57,129
25,276
6,866
89,271
$
$
$
$
(Dollars in thousands)
370
2
-
372
$
$
June 30, 2018
(14)
(285)
(96)
(395)
Gross Unrealized
Gains
Gross Unrealized
Losses
(Dollars in thousands)
-
-
-
-
$
$
(242)
(1,095)
(247)
(1,584)
$
$
$
$
57,364
18,410
6,938
82,712
Fair
Value
56,887
24,181
6,619
87,687
At June 30, 2019, the Bank held no securities of any single issuer (excluding the U. S. Government and federal agencies) with a book
value that exceeded 10% of shareholders’ equity.
When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. There were no
securities sold during the years ending June 30, 2019 or 2018. At June 30, 2019, $75.8 million in investment securities were pledged
as collateral to secure potential FHLBB advances. At June 30, 2018, the Bank had no pledged investment securities.
The following summarizes the Bank’s gross unrealized losses and fair values aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position.
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total investment securities
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total investment securities
$
$
$
$
Less than 12 Months
Fair
Value
Unrealized
Losses
-
-
-
-
$
$
-
-
-
-
June 30, 2019
More than 12 Months
Fair
Value
Unrealized
Losses
(Dollars in thousands)
9,031
18,010
5,350
(14)
(285)
(96)
$
$
$
32,391
$
(395)
Less than 12 Months
Fair
Value
Unrealized
Losses
25,988
1,265
-
27,253
$
$
(126)
(27)
-
(153)
$
$
June 30, 2018
More than 12 Months
Fair
Value
Unrealized
Losses
(Dollars in thousands)
30,899
22,916
5,076
58,891
(116)
(1,068)
(247)
(1,431)
$
$
Total
Fair
Value
Unrealized
Losses
9,031
18,010
5,350
32,391
$
$
(14)
(285)
(96)
(395)
Total
Fair
Value
56,887
24,181
5,076
86,144
Unrealized
Losses
$
$
(242)
(1,095)
(247)
(1,584)
$
$
$
$
There were no other-than-temporary impairment losses on securities during the years ended June 30, 2019 and 2018.
At June 30, 2019, the Bank had twenty-five securities in a continuous loss position for greater than twelve months. At June 30, 2019,
all of the Bank’s investment securities were issued or guaranteed by either government agencies or government-sponsored enterprises.
The decline in fair value of the Bank’s investment securities at June 30, 2019 is attributable to changes in interest rates.
63
In addition to considering current trends and economic conditions that may affect the quality of individual securities within the Bank’s
investment portfolio, management of the Bank considers the Bank’s ability and intent to hold such securities to maturity or recovery
of cost. At June 30, 2019, the Bank did not intend to sell and it is not more likely than not that the Bank will be required to sell the
investment securities before recovery of its amortized cost. As such, management does not believe any of the Bank’s investment
securities are other-than-temporarily impaired at June 30, 2019.
The investments measured at net asset value include a fund that seeks to invest in securities either issued or guaranteed by the U.S.
government or its agencies, as well as a fund that primarily invests in the federally guaranteed portion of SBA 7(a) loans that adjust
quarterly or monthly and are indexed to the Prime Rate. The underlying composition of these funds is primarily government agencies,
other investment-grade investments, or the guaranteed portion of SBA 7(a) loans, as applicable. As of June 30, 2019, the effective
duration of the fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies is 4.09 years.
The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of June 30, 2019.
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Total U.S. Government agency securities
Agency mortgage-backed securities
Total available-for-sale debt securities
$
$
Amortized Cost
Fair Value
(Dollars in thousands)
21,061
35,947
-
-
57,008
18,693
75,701
$
$
21,085
36,279
-
-
57,364
18,410
75,774
3. Loans, Allowance for Loan Losses and Credit Quality
The composition of the Bank’s loan portfolio is as follows on the dates indicated.
Originated
June 30, 2019
Purchased
Total
(Dollars in thousands)
Originated
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Total loans
$
$
294,395
226,424
63,053
62,041
2,507
648,420
$
$
316,835
628
-
9,177
-
326,640
$
$
611,230
227,052
63,053
71,218
2,507
975,060
$
$
249,428
181,800
60,156
86,202
3,244
580,830
June 30, 2018
Purchased
$
$
276,051
995
-
13,926
-
290,972
Total
$
$
525,479
182,795
60,156
100,128
3,244
871,802
Total loans include deferred loan origination fees, net, of $113 thousand as of June 30, 2019 and deferred loan origination costs, net,
of $223 thousand as of June 30, 2018.
Loans pledged as collateral with the FHLBB for outstanding borrowings and additional borrowing capacity totaled $215.8 million and
$128.3 million at June 30, 2019 and 2018, respectively.
During the years ended June 30, 2019 and 2018, the Bank sold three LASG purchased loans with a total principal balance of $4.9
million for a gain of $582 thousand, and four LASG purchased loans with a total principal balance of $2.8 million for a gain of $918
thousand, respectively.
Related Party Loans
Certain of the Bank's related parties are credit customers of the Bank in the ordinary course of business. All loans and commitments
included in such transactions are on such terms, including interest rates, repayment terms and collateral, as those prevailing at the time
for comparable transactions with persons who are not affiliated with the Bank and do not involve more than a normal risk of
collectability or present other features unfavorable to the Bank.
64
As of June 30, 2019 and 2018, the outstanding loan balances to directors, officers, principal shareholders and their associates were
$107 thousand and $129 thousand, respectively. All loans to these related parties were current and accruing at those dates.
Past Due and Nonaccrual Loans
The following is a summary of past due and nonaccrual loans:
30-59
Days
60-89
Days
June 30, 2019
Past Due
90 Days or
More-Still
Accruing
Past Due
90 Days or
More-
Nonaccrual
Total
Past
Due
(Dollars in thousands)
Total
Current
Total
Loans
Non-
Accrual
Loans
$
$
$
$
1,300
-
392
172
37
1,901
777
18
-
795
2,696
30-59
Days
27
-
-
493
77
597
659
17
-
676
1,273
$
$
$
$
17
-
-
150
27
194
961
-
4
965
1,159
$
$
-
-
-
-
-
-
-
-
-
-
$
$
2,398
13
1,288
2,083
81
5,863
3,969
279
631
4,879
10,742
$
$
3,715
13
1,680
2,405
145
7,958
5,707
297
635
6,639
14,597
June 30, 2018
Past Due
90 Days or
More-Still
Accruing
Past Due
90 Days or
More-
Nonaccrual
60-89
Days
Total
Past
Due
(Dollars in thousands)
210
-
-
181
82
473
274
-
-
274
747
$
$
-
-
-
-
-
-
-
-
-
-
-
$
$
98
32
831
1,355
19
2,335
3,086
91
202
3,379
5,714
$
$
335
32
831
2,029
178
3,405
4,019
108
202
4,329
7,734
$
$
$
$
290,680
226,411
61,373
59,636
2,362
640,462
311,128
331
8,542
320,001
960,463
Total
Current
249,093
181,768
59,325
84,173
3,066
577,425
272,032
887
13,724
286,643
864,068
$
$
$
$
294,395
226,424
63,053
62,041
2,507
648,420
316,835
628
9,177
326,640
975,060
Total
Loans
249,428
181,800
60,156
86,202
3,244
580,830
276,051
995
13,926
290,972
871,802
$
$
$
$
3,417
13
1,745
2,773
148
8,096
5,543
497
631
6,671
14,767
Non-
Accrual
Loans
1,428
34
1,405
3,212
134
6,213
5,180
363
202
5,745
11,958
Originated portfolio:
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Total originated portfolio
Purchased portfolio:
Commercial real estate
Commercial and industrial
Residential real estate
Total purchased portfolio
Total loans
Originated portfolio:
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Total originated portfolio
Purchased portfolio:
Commercial real estate
Commercial and industrial
Residential real estate
Total purchased portfolio
Total loans
65
Allowance for Loan Losses and Impaired Loans
The following table sets forth activity in the Bank’s allowance for loan losses:
Year Ended June 30, 2019
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Consumer
Purchased
SBA
Total
Beginning balance
Provision (credit)
Recoveries
Charge-offs
Ending balance
$
$
605
(7)
27
(249)
376
$
$
1,527
530
8
-
2,065
$
$
508
177
34
(2)
717
$
(Dollars in thousands)
39
22
27
(38)
50
$
$
$
587
(59)
-
(8)
520
$
$
1,541
646
-
(213)
1,974
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
Consumer
Purchased
SBA
Year Ended June 30, 2018
Beginning balance
Provision (credit)
Recoveries
Charge-offs
Ending balance
$
$
473
301
14
(183)
605
$
$
1,218
309
-
-
1,527
$
$
247
236
25
-
508
$
(Dollars in thousands)
53
(1)
40
(53)
39
$
$
$
303
395
-
(111)
587
$
$
1,371
170
-
-
1,541
$
$
$
$
4,807
1,309
96
(510)
5,702
Total
3,665
1,410
79
(347)
4,807
The following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology.
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
June 30, 2019
Consumer
(Dollars in thousands)
Purchased
SBA
Total
Allowance for loan losses:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
Loans:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
$
$
$
$
128
248
-
376
4,930
57,111
-
62,041
$
$
$
$
105
1,960
-
2,065
3,666
290,729
-
294,395
$
$
$
$
4
713
-
717
6,913
219,511
-
226,424
$
$
$
$
33
17
-
50
182
2,325
-
2,507
$
$
$
$
-
-
520
520
-
-
326,640
326,640
$
$
$
$
227
1,747
-
1,974
3,348
59,705
-
63,053
$
$
$
$
497
4,685
520
5,702
19,039
629,381
326,640
975,060
Residential
Real Estate
Commercial
Real Estate
Commercial
and Industrial
June 30, 2018
Consumer
(Dollars in thousands)
Purchased
SBA
Total
Allowance for loan losses:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
Loans:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
$
$
$
$
322
283
-
605
5,682
80,520
-
86,202
$
$
$
$
139
1,388
-
1,527
2,687
246,741
-
249,428
$
$
$
$
8
500
-
508
33
181,767
-
181,800
$
$
$
$
6
33
-
39
292
2,952
-
3,244
$
$
$
$
-
-
587
587
-
-
290,972
290,972
$
$
$
$
112
1,429
-
1,541
3,170
56,986
-
60,156
$
$
$
$
587
3,633
587
4,807
11,864
568,966
290,972
871,802
The following table sets forth information regarding impaired loans. Loans accounted for under ASC 310-30 that have performed
based on cash flow and accretable yield expectations determined at date of acquisition are not considered impaired assets and have
been excluded from the tables below.
66
Impaired loans without a valuation allowance:
Originated:
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Purchased:
Commercial real estate
Commercial and industrial
Residential real estate
Total
Impaired loans with a valuation allowance:
Originated:
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Purchased:
Commercial real estate
Commercial and industrial
Residential real estate
Total
Total impaired loans
Recorded
Investment
June 30, 2019
Unpaid
Principal
Balance
$
$
2,643
6,909
3,014
3,550
143
7,892
297
202
24,650
1,023
4
334
1,380
39
3,676
199
429
7,084
31,734
$
$
2,643
6,909
3,001
3,550
143
10,108
359
217
26,930
1,023
4
334
1,380
39
4,031
244
488
7,543
34,473
Related
Allowance
Recorded
Investment
(Dollars in thousands)
$
$
-
-
-
-
-
-
-
-
-
105
4
227
128
33
316
199
5
1,017
1,017
$
$
1,445
-
2,597
3,162
271
6,601
108
202
14,386
1,242
33
573
2,520
21
4,748
349
-
9,486
23,872
June 30, 2018
Unpaid
Principal
Balance
Related
Allowance
$
$
1,438
-
2,597
3,154
296
9,330
186
217
17,218
1,234
33
573
2,497
22
5,362
407
-
10,128
27,346
$
$
-
-
-
-
-
-
-
-
-
139
8
112
322
6
280
307
-
1,174
1,174
The following tables set forth information regarding interest income recognized on impaired loans.
Year Ended June 30,
2019
2018
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
(Dollars in thousands)
Interest
Income
Recognized
Impaired loans without a valuation allowance:
Originated:
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Purchased:
Commercial real estate
Commercial and industrial
Residential real estate
Total
Impaired loans with a valuation allowance:
Originated:
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Purchased:
Commercial real estate
Commercial and industrial
Residential real estate
Total
Total impaired loans
$
$
2,244
1,738
2,261
3,013
234
7,170
139
202
17,001
1,106
1,741
1,388
1,855
35
3,769
336
107
10,337
27,338
$
$
1
59
178
37
2
267
-
-
544
52
130
-
86
-
163
1
8
440
984
$
$
2,001
-
1,957
3,697
271
8,754
42
489
17,211
1,354
31
747
2,120
33
4,266
251
66
8,868
26,079
$
$
176
-
112
94
18
275
-
-
675
84
3
11
159
2
186
3
1
449
1,124
67
Credit Quality
The Bank utilizes a ten-point internal loan rating system for commercial real estate, construction, commercial and industrial, and
certain residential loans as follows:
Loans rated 1-6: Loans in these categories are considered “pass” rated loans. Loans in categories 1-5 are considered to have low to
average risk. Loans rated 6 are considered marginally acceptable business credits and have more than average risk.
Loans rated 7: Loans in this category are considered “special mention.” These loans show signs of potential weakness and are being
closely monitored by management.
Loans rated 8: Loans in this category are considered “substandard.” Loans classified as substandard are inadequately protected by the
current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined
weakness or weaknesses that jeopardize the orderly repayment of the debt.
Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in one
graded 8 with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable.
Loans rated 10: Loans in this category are considered “loss” and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Bank formally reviews the credit quality and ratings of all loans subject to risk
ratings. Annually, the Bank engages an independent third-party to review a significant portion of loans within these segments.
Management uses the results of these reviews as part of its annual review process. Risk ratings on purchased loans, with and without
evidence of credit deterioration at acquisition, are determined relative to the Bank’s recorded investment in that loan, which may be
significantly lower than the loan’s unpaid principal balance.
The following tables present the Bank’s loans by risk rating.
Commercial
Real Estate
Commercial
and Industrial
June 30, 2019
SBA
Residential(1)
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
$
$
$
$
290,530
597
3,268
-
-
294,395
$
$
219,262
6,902
260
-
-
226,424
$ 56,076
5,186
1,791
-
-
$ 63,053
$
(Dollars in thousands)
10,805
36
485
-
-
11,326
$
June 30, 2018
Commercial
Real Estate
Commercial
and Industrial
246,107
1,821
1,500
-
-
249,428
$
$
181,515
-
285
-
-
181,800
SBA
$ 54,730
3,882
1,544
-
-
$ 60,156
$
Residential(1)
(Dollars in thousands)
13,403
100
823
-
-
14,326
$
Purchased
Portfolio
$
$
315,767
4,001
6,872
-
-
326,640
Purchased
Portfolio
$
$
279,111
5,899
5,962
-
-
290,972
Total
892,440
16,722
12,676
-
-
921,838
Total
774,866
11,702
10,114
-
-
796,682
$
$
$
$
(1)
Certain of the Bank’s loans made for commercial purposes, but secured by residential collateral, are rated under the Bank’s risk-rating system.
Troubled Debt Restructurings
The following table shows the Bank’s post-modification balance of TDRs by type of modification.
68
Years Ended June 30,
2019
2018
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(Dollars in thousands)
6
1
6
1
-
14
$
$
925
6,900
431
54
-
8,310
3
1
4
8
1
17
$
$
73
15
2,302
3,362
94
5,846
Extended maturity
Adjusted interest rate
Rate and maturity
Principal deferment
Court ordered concession
Total
The following table shows loans modified in a TDR and the change in the recorded investment subsequent to the modifications.
Number of
Contracts
2019
Recorded
Investment
Pre-Modification
Years Ended June 30,
Recorded
Investment
Post-Modification
Number of
Contracts
(Dollars in thousands)
2018
Recorded
Investment
Pre-Modification
Recorded
Investment
Post-Modification
4
-
3
1
-
8
3
3
6
14
$
$
224
-
243
6,900
-
7,367
923
20
943
8,310
$
$
224
-
243
6,900
-
7,367
923
20
943
8,310
8
-
5
1
-
14
2
1
3
17
$
$
707
-
3,303
655
-
4,665
820
269
1,089
5,754
$
$
709
-
3,370
655
-
4,734
844
268
1,112
5,846
Originated portfolio:
Residential real estate
Home equity
Commercial real estate
Commercial and industrial
Consumer
Total originated portfolio
Purchased portfolio:
Commercial real estate
Commercial and industrial
Total purchased portfolio
Total
As of June 30, 2019, there were no further commitments to lend to borrowers associated with loans modified in a TDR.
The Bank considers TDRs past due 90 days or more to be in payment default. No loans modified in a TDR in the last twelve months
defaulted during the years ended June 30, 2019 and 2018.
ASC 310-30 Loans
The following tables present a summary of loans accounted for under ASC 310-30 that were acquired by the Bank during the period
indicated.
Years Ended June 30,
2019
2018
Contractually required payments receivable
Nonaccretable difference
Cash flows expected to be collected
Accretable yield
Fair value of loans acquired
$
$
$
(Dollars in thousands)
193,698
(1,414)
192,284
(56,436)
135,848
$
179,726
(4,321)
175,405
(51,294)
124,111
Certain of the loans accounted for under ASC 310-30 that were acquired by the Bank are not accounted for using the income
recognition model because the Bank cannot reasonably estimate cash flows expected to be collected. When acquired these loans are
placed on nonaccrual. The carrying amounts of such loans are as follows.
Loans acquired during the period
Loans at end of period
$
As of and for the Years Ended June 30,
2018
2019
(Dollars in thousands)
-
5,667
$
820
5,278
69
The following tables summarize the activity in the accretable yield for loans accounted for under ASC 310-30.
Beginning balance
Acquisitions
Accretion
Reclassifications from nonaccretable difference to
accretable yield
Disposals and other changes
Ending balance
$
$
Years Ended June 30,
2019
2018
(Dollars in thousands)
138,178
56,436
(22,961)
2,383
(27,041)
146,995
$
$
131,197
51,294
(17,947)
5,827
(32,193)
138,178
The following table provides information related to the unpaid principal balance and carrying amounts of ASC 310-30 loans.
Unpaid principal balance
Carrying amount
$
June 30, 2019
June 30, 2018
(Dollars in thousands)
352,717
318,886
$
318,876
284,317
4. Transfers and Servicing of Financial Assets
The Bank sells loans in the secondary market and, for certain loans, retains the servicing responsibility. Consideration for the sale
includes the cash received as well as the related servicing rights asset. The Bank receives fees for the services provided.
Capitalized servicing rights as of June 30, 2019 totaled $2.9 million, compared to $3.0 million as of June 30, 2018, and are classified
as loan servicing rights, net, on the balance sheet.
Mortgage loans sold in the year ended June 30, 2019 totaled $41.2 million, compared to $63.8 million in the year ended June 30,
2018. Mortgage loans serviced for others totaled $7.1 million at June 30, 2019 and $8.7 million at June 30, 2018. Additionally, the
Bank was servicing commercial loans participated out to various other institutions amounting to $22.3 million and $32.2 million at
June 30, 2019 and 2018, respectively.
SBA loans sold during the year ended June 30, 2019 totaled $35.5 million, compared to $29.2 million in the year ended June 30, 2018.
SBA loans serviced for others totaled $171.9 million at June 30, 2019 and $162.0 million at June 30, 2018.
Mortgage and SBA loans serviced for others are accounted for as sales and therefore are not included on the accompanying balance
sheet. The risks inherent in mortgage servicing assets and SBA servicing assets relate primarily to changes in prepayments that result
from shifts in interest rates.
Contractually specified servicing fees were $823 thousand and $817 thousand for the years ended June 30, 2019 and 2018,
respectively, and were included as a component of fees for other services to customers within noninterest income.
The significant assumptions used in the valuation for loan servicing rights as of June 30, 2019 included a discount rate, ranging from
6.0% to 17.6% and a weighted average prepayment speed assumption of 14.7%.
SBA servicing rights activity was as follows:
(Dollars in thousands)
Balance, June 30, 2017
Additions
Amortization/Disposals
Impairment
Balance, June 30, 2018
Additions
Amortization/Disposals
Impairment
Balance, June 30, 2019
$
$
$
2,839
931
(769)
(31)
2,970
870
(859)
(130)
2,851
70
5. Premises and Equipment
Premises and equipment consists of the following:
June 30, 2019
June 30, 2018
Estimated Useful Life
(Dollars in thousands)
(In years)
Land
Buildings
Assets recorded under capital lease
Leasehold and building improvements
Furniture, fixtures and equipment
Total
Less accumulated depreciation
Net premises and equipment
$
$
767
2,157
1,850
3,681
9,024
17,479
11,897
5,582
$
$
767
1,702
1,850
3,646
8,749
16,714
10,123
6,591
n/a
39
Term of lease
5-39 (or term of lease, if shorter)
3-7
Depreciation and amortization of premises and equipment included in occupancy and equipment expense was $1.3 million for both
years ended June 30, 2019 and 2018.
6. Deposits
The composition of deposits is as follows:
Demand
NOW
Money market
Regular savings
Time certificates
Total deposits
$
$
June 30, 2019
June 30, 2018
$
(Dollars in thousands)
68,782
66,491
270,835
34,570
501,693
942,371
$
72,272
73,347
420,886
36,290
352,145
954,940
There were $501 thousand of time deposits greater than $250 thousand as of June 30, 2019. There were no time deposits greater than
$250 thousand as of June 30, 2018.
The scheduled maturities of time certificates by fiscal year are as follows:
Fiscal Year
2020
2021
2022
2023
2024
Thereafter
Total
June 30, 2019
(Dollars in thousands)
318,951
115,315
52,055
10,011
5,361
-
501,693
$
$
7. Borrowings
Federal Home Loan Bank Advances
The Bank has one advance from the Federal Home Loan Bank of Boston for $15.0 million, which renews on a quarterly basis. The
weighted average interest rate was 2.65% and 2.05% as of June 30, 2019 and 2018, respectively.
At June 30, 2019, no FHLBB advances were subject to call provisions and as such, may not be called prior to the stated maturity.
Certain mortgage loans and available-for-sale securities, free of liens, pledges and encumbrances have been pledged under a blanket
agreement to secure these advances. The Bank is required to own stock in the FHLBB in order to borrow from the FHLBB.
At June 30, 2019, the Bank had approximately $174.1 million of additional capacity to borrow from the FHLBB, compared to $48.7
million as of June 30, 2018.
71
Capital Lease Obligation
In fiscal 2006, the Bank recognized a capital lease obligation for its Lewiston, Maine, headquarters. The present value of the lease
payments over fifteen years exceeded 90% of the fair value of the property.
The outstanding capital lease obligations are as follows for years ending June 30:
Capital Lease Obligation
(Dollars in thousands)
2020
2021
Total
Imputed interest
Capital lease obligation
$
$
8. Subordinated Debt
306
25
331
(8)
323
Immediately prior to the Reorganization, the Company redeemed its junior subordinated debentures issued in connection with the trust
preferred securities issued by affiliated trusts, for $16.5 million. Accordingly, as a result of the redemption, the Bank recognized a
charge in the amount of $7.1 million related to the write-off of a fair value adjustment recorded as a result of the FHB Formation in
2010.
On June 29, 2016, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors
(the “Purchasers”) whereby the Company sold and issued $15.05 million in aggregate principal amount of 6.75% fixed-to-floating
subordinated notes due 2026 (the “Notes”). In May 2019, in connection with the Reorganization, the Notes were assumed by the
Bank. The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. Issuance costs were
$552 thousand and have been netted against Subordinated Debt on the balance sheet. These costs are being amortized over five years,
which represents the period from issuance to the first redemption date of July 1, 2021. Total amortization expense for both years
ended June 30, 2019 and 2018 was $110 thousand, with $221 thousand remaining to be amortized as of June 30, 2019, over the next
two years.
The Notes mature on July 1, 2026, with a fixed interest rate of 6.75% payable semiannually in arrears for five years until July 1, 2021.
Subsequently, the Bank will be obligated to pay 3-month LIBOR plus 557 basis points quarterly in arrears until either the early
redemption date or the maturity date. The Notes are not convertible into or exchangeable for any other securities or assets of the Bank
or any of its subsidiaries. The Notes are redeemable by the Bank, in whole or in part, on or after July 1, 2021 and at any time upon the
occurrence of certain events. Any redemption by the Bank would be at a redemption price equal to 100% of the outstanding principal
amount of the Notes being redeemed, including any accrued and unpaid interest.
9. Capital and Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized."
As of June 30, 2019 and 2018, the most recent notification from the Bank's regulator categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum
Common equity tier 1 capital, total capital, Tier 1 capital and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have changed the institution's regulatory designation as "well-
capitalized" under the regulatory framework for prompt corrective action.
72
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios
as set forth in the table below. At June 30, 2019 and 2018, the Bank's ratios exceeded the regulatory requirements. Management
believes that the Bank met all capital adequacy requirements to which they were subject as of June 30, 2019 and 2018. As a result of
the Reorganization, the Bank is the standalone entity, with no Company ratios as of June 30, 2019. The Bank's regulatory capital ratios
are set forth below as of June 30, 2019 and 2018, and the Company’s ratios are included as of June 30, 2018.
Actual
Minimum Capital
Requirements
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Minimum
Capital Ratio
with Capital
Conservation
Buffer
Ratio
June 30, 2019:
Common equity tier 1 capital to risk
weighted assets
$
154,311
15.89%
$
43,706
>4.5%
$
63,131
>6.5%
(Dollars in thousands)
Total capital to risk weighted assets
174,894
18.01%
77,699
>8.0%
97,124
>10.0%
Tier 1 capital to risk weighted assets
154,311
15.89%
58,274
>6.0%
77,699
Tier 1 capital to average assets
154,311
12.86%
47,979
>4.0%
569,974
>8.0%
>5.0%
June 30, 2018:
Common equity tier 1 capital to risk
weighted assets:
Company
Bank
Total capital to risk weighted assets:
Company
Bank
Tier 1 capital to risk weighted assets:
Company
Bank
Tier 1 capital to average assets:
Company
Bank
$
139,247
156,856
16.02%
18.04%
$
39,113
39,120
>4.5%
>4.5%
N/A
56,506
$
N/A
>6.5%
167,567
161,714
19.28%
18.60%
69,535
69,546
>8.0%
>8.0%
N/A
86,933
N/A
>10.0%
147,990
156,856
17.03%
18.04%
52,151
52,160
>6.0%
>6.0%
147,990
156,856
13.12%
13.92%
45,102
45,075
>4.0%
>4.0%
N/A
69,546
N/A
56,344
N/A
>8.0%
N/A
>5.0%
7.0%
10.5%
8.5%
4.0%
7.0%
7.0%
10.5%
10.5%
8.5%
8.5%
4.0%
4.0%
In addition to the minimum regulatory capital required for capital adequacy purposes included in the table above, the Bank is required
to maintain a capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and
discretionary bonuses. The required amount of the capital conservation buffer was 0.625% on January 1, 2016 and increased by
0.625% each year until it reached 2.5% on January 1, 2019.
73 10. Earnings Per Common Share (“EPS”)
EPS is computed by dividing net income allocated to common shareholders by the weighted-average common shares outstanding. The
following table shows the weighted-average number of common shares outstanding for the periods indicated. Shares issuable relative
to stock options granted have been reflected as an increase in the shares outstanding used to calculate diluted EPS, after applying the
treasury stock method. The number of shares outstanding for basic and diluted EPS is presented as follows:
Years ended June 30,
2019
2018
Net income
(Dollars in thousands, except share and
per share data)
$
13,884
16,166
$
Weighted average shares used in calculation of basic earnings per share
Incremental shares from assumed exercise of dilutive securities
Weighted average shares used in calculation of diluted earnings per share
9,032,530
123,703
9,156,233
8,906,710
222,442
9,129,152
Earnings per common share:
Diluted earnings per common share:
$
1.54
1.52
$
1.81
1.77
No stock options were excluded from the calculation of diluted EPS due to the exercise price for the years ended June 30, 2019 and
2018.
11. Income Taxes
The components of current and deferred income tax expense follow:
Years Ended June 30,
2019
2018
(Dollars in thousands)
Current provision
Federal
State
Total current provision
Deferred expense (benefit)
Federal
State
Total deferred expense (benefit)
Total tax provision
$
$
6,644
2,821
9,465
(2,710)
(1,024)
(3,734)
5,731
$
$
4,133
1,606
5,739
1,189
103
1,292
7,031
The reconciliation between the statutory federal income tax rate of 21% for the year ended June 30, 2019 and 28% for the year ended
June 30, 2018, and the effective tax rate on income follows:
Expected income tax expense at federal tax rate
State tax, net of federal tax benefit
Non-taxable BOLI income
Low-income housing tax credit, net of adoption of ASU 2014-01
Tax exempt interest income
Stock compensation excess tax benefits (ASU 2016-09)
Statutory rate change
Other
Total tax expense
$
$
Years Ended June 30,
2019
2018
(Dollars in thousands)
4,119
1,419
(92)
(34)
-
(172)
-
491
5,731
$
$
6,509
1,231
(124)
(37)
(5)
(1,266)
497
226
7,031
74
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
June 30 follows:
Deferred tax assets
Allowance for loan losses
Loan basis differential
Capital lease
Compensation and benefits
Stock-based compensation
Unrealized loss on derivatives
Unrealized loss on investment securities
Interest on nonperforming loans
Derivative basis differential
Other
Gross deferred tax asset
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities
Intangible assets
Prepaid expenses
Premises and equipment
Borrowings basis differential
Unrealized gain on investment securities
Other
Total deferred tax liability
Net deferred tax asset
June 30,
2019
2018
(Dollars in thousands)
$
$
1,553
1,109
89
1,298
948
439
-
427
-
417
6,280
-
6,280
118
402
546
-
20
768
1,854
4,426
$
$
1,315
931
166
252
863
222
428
349
41
408
4,975
-
4,975
237
433
707
1,939
-
812
4,128
847
The net deferred tax asset was included in other assets in the accompanying balance sheets as of June 30, 2019 and 2018.
On December 22, 2017, the Act became law. The Act amends the Internal Revenue Code to reduce tax rates and modify policies,
credits, and deductions for individuals and businesses. For businesses, the Act reduced the corporate tax rate from a maximum
of 35% to 21%. However, as the Bank is a fiscal year June 30 year end, the blended corporate tax rate for the year ended June 30,
2018 was 28%. The corporate tax rate reduction to 21% was effective July 1, 2018.
In accordance with ASC 740, Income Taxes, deferred tax assets are to be reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of
the tax benefit depends upon the existence of sufficient taxable income within the carry-back and future periods. The Bank believes
that it is more likely than not that the net deferred tax asset as of June 30, 2019 will be realized, based upon the ability to generate
future taxable income as well as the availability of current and historical taxable income.
For federal tax purposes, the Bank has a $2.0 million reserve for loan losses which remains subject to recapture. If any portion of the
reserve is used for purposes other than to absorb the losses for which it was established, approximately 130% of the amount actually
used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Bank intends to use the
reserve only to absorb loan losses, no provision has been made for potential liability that would result if 100% of the reserve were
recaptured.
From time to time, the Internal Revenue Service (the "IRS") and state tax authorities may review or challenge specific tax positions
taken by the Bank in its ordinary course of business. The Bank accounts for uncertainties in income taxes by reserving for tax
positions that may not be upheld under examination. Increases to the Bank's unrealized tax positions occur as a result of accruing for
the unrecognized tax benefit as well the accrual of interest and penalties related to prior year positions. Decreases in the Bank's
unrealized tax positions occur as a result of the statute of limitation lapsing on prior year positions or settlements relating to
outstanding positions. The Bank reserves for uncertain tax positions, as well as related interest and penalties, as a component of
income tax expense therefore affecting the effective tax rate. The following is a reconciliation of the beginning and ending amounts of
the Bank's uncertain tax positions:
75
Tax Position
Interest and Penalties
(Dollars in thousands)
Total
Balance at June 30, 2017
Reduction of tax positions for prior years
Increase for prior year tax position
Increase for current year tax position
Balance at June 30, 2018
Reduction of tax positions for prior years
Increase for prior year tax position
Increase for current year tax position
Balance at June 30, 2019
$
$
$
-
-
-
-
-
-
34
21
55
$
$
$
-
-
-
-
-
-
11
7
18
$
$
$
-
-
-
-
-
-
45
28
73
The Bank is currently open to audit under the statute of limitations by the IRS and state taxing authorities for the fiscal 2016 tax return
and forward.
12. Employee Benefit Plans
401(k) Plan
The Bank offers a contributory 401(k) plan that is available to all full-time salaried and hourly-paid employees who have attained age
18, and completed 90 days of employment. Employees may contribute up to 100% of their base compensation, subject to IRS
limitations. The Bank will match 50% of each employee's contribution up to the first 6% contributed. For the years ended June 30,
2019 and 2018, the Bank contributed $357 thousand and $340 thousand, respectively.
Deferred Compensation
The Bank has individual deferred compensation agreements with five former senior officers. The Bank recognized deferred
compensation expense of $30 thousand and $31 thousand for the years ended June 30, 2019 and 2018, respectively. At June 30, 2019
and 2018 the Bank's deferred compensation liability was $510 thousand and $526 thousand, respectively.
13.
Stock-Based Compensation
A summary of stock option activity for the year ended June 30, 2019 follows:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable, beginning of year
Vested
Exercised
Forfeited or expired
Exercisable, end of year
Shares
436,226
-
(14,789)
-
421,437
Shares
436,226
-
(14,789)
-
421,437
Weighted
Average Exercise Price
$
$
12.46
-
9.38
-
12.57
Weighted Average
Grant Date Fair Value
2.89
-
1.79
-
2.93
All stock options were fully vested in the year ended June 30, 2018. There were no options granted in the years ended June 30, 2019
or 2018.
76
The following table summarizes information about stock options outstanding at June 30, 2019:
Options Outstanding
Options Exercisable
(Dollars in thousands, except per share data)
$
Weighted
Average
Exercise Price
9.38
12.63
13.93
12.57
Number
124,818
5,000
291,619
421,437
Weighted
Average
Remaining Life
3.59 years
2.58
1.50
2.13
Aggregate
Intrinsic
Value
$
2,272
75
3,980
6,327
$
Weighted
Average
Exercise Price
9.38
$
12.63
13.93
12.57
Number
124,818
5,000
291,619
421,437
Weighted
Average
Remaining Life
3.59 years
2.58
1.50
2.13
Aggregate
Intrinsic
Value
$
2,272
75
3,980
6,327
$
A summary of restricted stock activity for the year ended June 30, 2019 follows:
Unvested at beginning of period
Granted
Vested
Forfeited and cancelled
Unvested at end of period
Shares
318,334
116,925
(67,663)
(18,500)
349,096
Weighted Average Grant
Date Fair Value
$
11.71
22.38
10.04
16.00
15.38
A summary of the vesting schedule for the shares granted in the year ended June 30, 2019 follows:
•
•
•
89,925 restricted shares vest in three equal annual installments, commencing on August 14, 2021;
25,000 restricted shares are subject to performance-based vesting over a three-year period (the “performance shares”). The
performance shares include an absolute metric and a sliding metric within the performance period. The absolute metric
requires that the Bank be in compliance with the regulatory commitments made to the Bureau. The sliding metric is based on
reaching certain thresholds in regards to the Bank’s return on equity (“ROE”). The performance shares shall vest in certain
defined increments for such periods if the ROE is at least 70% of such targeted returns. This performance will be measured
on both a year-by-year basis for three years, and an average basis over the three-year performance period; and
2,000 restricted shares vest in three equal annual installments, commencing on October 1, 2021.
Stock-based compensation totaled $1.4 million and $870 thousand for the years ended June 30, 2019 and 2018, respectively. The tax
benefit related to stock-based compensation expensed totaled $399 thousand for the year ended June 30, 2019 and $264 thousand for
the year ended June 30, 2018. The estimated amount and timing of future pre-tax stock-based compensation expense to be recognized
are as follows.
2020
2021
2022
Years Ending June 30,
2023
(Dollars in thousands)
2024
Total
Restricted stock
$
1,128
$
909
$
559
$
444
$
52
$
3,092
14. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks
The Bank is a party to financial instruments with off-balance sheet risk 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. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized on the balance sheets. The contract amounts of those instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
77
Financial instruments with contract amounts, which represent credit risk, are as follows:
Commitments to originate loans
Unused lines of credit
Standby letters of credit
June 30,
2019
2018
(Dollars in thousands)
11,991
21,488
2,383
$
20,431
29,478
3,183
$
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties. The Bank has recorded an allowance for possible losses on commitments and unfunded loans
totaling $52 thousand for both June 30, 2019 and 2018.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
Those guarantees are issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. As of June 30, 2019 and 2018, the maximum potential
amount of the Bank's obligation was $2.4 million and $3.2 million, respectively, for financial and standby letters of credit. The Bank's
outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Bank may seek recourse
through the customer's underlying line of credit. If the customer's line of credit is also in default, the Bank may take possession of the
collateral, if any, securing the line of credit.
Lease Obligations
The Bank leases certain properties used in operations under terms of various non-cancelable operating leases, most of which include
renewal options. The leases contain renewal options and escalation clauses which provide for increased rental expense as these leases
expire. Rental expense under leases totaled $1.1 million and $1.2 million for the years ended June 30, 2019 and 2018.
Approximate future minimum lease payments over the remaining terms of the Bank's leases at June 30, 2019 are as follows:
Fiscal year
2020
2021
2022
2023
2024
Thereafter
Total
Minimum lease
payments
(Dollars in thousands)
1,254
$
1,237
1,248
1,016
280
976
6,011
$
Legal Proceedings
The Bank is party to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any,
arising from such litigation and claims will not be material to the Bank's financial position or results of operations.
78
15. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) follows:
Change in net unrealized loss
on available-for-sale securities
Change in accumulated loss on
effective cash flow hedges
Reclassification adjustment
included in net income
Total derivatives and hedging activities
Adoption of ASU 2016-01
Adoption of ASU 2018-02
Total other comprehensive income (loss)
Pre-tax
Amount
2019
Tax Expense
(Benefit)
Years Ended June 30,
After-tax
Amount
Pre-tax
Amount
(Dollars in thousands)
2018
Tax Expense
(Benefit)
After-tax
Amount
$
1,410
$
381
$
1,029
$
(636)
$
(171)
$
(465)
(2,043)
1,240
(803)
247
-
854
$
(552)
335
(217)
67
-
231
(1,491)
905
(586)
180
-
623
$
$
$
750
106
856
-
-
220
$
203
34
237
-
283
349
547
72
619
-
(283)
(129)
$
Accumulated other comprehensive loss is comprised of the following components:
June 30, 2019
June 30, 2018
(Dollars in thousands)
Unrealized gain (loss) on available-for-sale securities
$
Tax effect
Net-of-tax amount
Unrealized loss on cash flow hedges
Tax effect
Net-of-tax amount
Accumulated other comprehensive loss
$
73
(20)
53
(1,630)
439
(1,191)
(1,138)
$
$
(1,584)
428
(1,156)
(827)
222
(605)
(1,761)
16. Derivatives
The Bank has stand-alone derivative financial instruments in the form of swap agreements that derive their value from the underlying
interest rate. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations,
payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure
arises in the event of nonperformance by the counterparties to these agreements, and is limited to the net difference between the
calculated amounts to be received and paid, if any. Such differences, which represent the fair value of the derivative instruments, are
reflected on the Bank's balance sheet as derivative assets and derivative liabilities. The Bank controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to meet their
obligations.
The Bank currently holds derivative instruments that contain credit-risk related features that are in a net liability position, which may
require that collateral be assigned to dealer banks. At June 30, 2019 and 2018, the Bank had posted cash collateral totaling $1.6
million and $800 thousand, respectively, with dealer banks related to derivative instruments in a net liability position.
The Bank does not offset fair value amounts recognized for derivative instruments. The Bank does not net the amount recognized for
the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the
same counterparty under a master netting arrangement.
Risk Management Policies—Derivative Instruments
The Bank evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement
in relation to the reduction in net income volatility within an assumed range of interest rates.
79
Interest Rate Risk Management—Cash Flow Hedging Instruments
The Bank uses variable rate debt as a source of funds for use in the Bank's lending and investment activities and other general business
purposes. These debt obligations expose the Bank to variability in interest payments due to changes in interest rates. If interest rates
increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is
prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate
interest payments.
Information pertaining to outstanding swap agreements is as follows:
Notional
Amount
Inception Date
Termination
Date
Index
June 30, 2019
Receive
Rate
Pay
Rate
(Dollars in thousands)
Interest rate swaps on FHLB advances:
$
5,000
5,000
5,000
15,000
$
July 2013
July 2013
July 2013
July 2033
July 2028
July 2023
3 Mo. LIBOR
3 Mo. LIBOR
3 Mo. LIBOR
2.32%
2.32%
2.32%
3.38%
3.23%
2.77%
Notional
Amount
Inception Date
Termination
Date
Index
Interest rate swaps on FHLB advances:
$
5,000
5,000
5,000
July 2033
July 2028
July 2023
Forward-starting interest rate swaps on Trust Preferred Securities:
September 2029
February 2018
February 2030
February 2018
July 2013
July 2013
July 2013
6,000
10,000
3 Mo. LIBOR
3 Mo. LIBOR
3 Mo. LIBOR
3 Mo. LIBOR
3 Mo. LIBOR
Interest rate caps:
6,000
10,000
47,000
$
October 2014
March 2015
September 2019
February 2020
3 Mo. LIBOR
3 Mo. LIBOR
June 30, 2018
Receive
Rate
Pay
Rate
(Dollars in thousands)
2.05%
2.05%
2.05%
5.14%
4.23%
n/a
n/a
3.38%
3.23%
2.77%
5.88%
4.98%
n/a
n/a
Strike
Rate
Unrealized
Loss
Fair Value
Balance Sheet
Location
n/a
n/a
n/a
Strike
Rate
n/a
n/a
n/a
n/a
n/a
2.50%
2.50%
$
$
$
$
(846)
(573)
(211)
(1,630)
Unrealized
Loss
(293)
(154)
15
(81)
(140)
(91)
(83)
(827)
$
$
(846)
(573)
(211)
(1,630)
Fair Value
$
$
(293)
(154)
15
(81)
(140)
15
49
(589)
Other Liabilities
Other Liabilities
Other Liabilities
Balance Sheet
Location
Other Liabilities
Other Liabilities
Other Assets
Other Liabilities
Other Liabilities
Other Assets
Other Assets
Changes in the fair value of interest rate caps and swaps designated as hedging instruments of the variability of cash flows associated
with variable rate debt are reported in other comprehensive income. These amounts subsequently are reclassified into interest expense
as a yield adjustment in the same period in which the related interest on the debt affects earnings. Risk management results for the
years ended June 30, 2019 and 2018 related to the balance sheet hedging of variable rate debt indicates that the hedges were effective.
Amounts recognized in income related to amounts excluded from effectiveness testing resulted from amortization of the acquisition
price of interest rate caps. For the years ended June 30, 2019 and 2018, amounts recognized in income related to the amortization of
the interest rate caps. Additionally, the loss from termination of the interest rate caps and forward-starting interest rate swaps was
reclassified into income during the year ended June 30, 2019. The table below presents amounts recognized in income related to
interest rate cap amortization, hedge ineffectiveness, the swap and cap termination and amounts excluded from effectiveness testing.
Years Ended June 30,
2019
2018
(Dollars in thousands)
Interest expense:
Interest rate caps
Interest rate swap
Total
$
$
(240)
(1,000)
(1,240)
$
$
(106)
-
(106)
The Bank does not expect to record interest income or interest expense related to interest rate swap or interest rate cap ineffectiveness
in the next twelve months.
Reorganization
As a result of the Reorganization in May 2019, the Bank terminated its forward-starting interest swaps on the Trust Preferred
Securities and its interest rate caps on the Trust Preferred Securities. As a result, the Bank recorded a $1.1 million loss, which is
recorded in the Reorganization expense line in the statement of income.
80
17. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Bank uses
prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market
dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to
be reclassified from one level to another. When market assumptions are not readily available, the Bank’s own assumptions are set to
reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant
decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same.
ASC 820, Fair Value Measurement, defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy under ASC 820 are described below:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has
the ability to access at the measurement date.
Level 2 — Valuations based on significant observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of
fair value requires more judgment. Accordingly, the degree of judgment exercised by the Bank in determining fair value is greatest for
instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement.
Valuation techniques - There have been no changes in the valuation techniques used during the current period.
Transfers - There were no transfers of assets and liabilities measured at fair value on a recurring or nonrecurring basis during the
current period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
Investment securities - Where quoted prices are available in an active market, securities are classified within Level 1 of the
valuation hierarchy. Examples of such instruments include publicly-traded common and preferred stocks. If quoted prices are
not available, then fair values are estimated by using pricing models (i.e., matrix pricing) and market interest rates and credit
assumptions or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation
hierarchy. Examples of such instruments include government agency and government sponsored enterprise mortgage-backed
securities, as well as certain preferred and trust preferred stocks. Level 3 securities are securities for which significant
unobservable inputs are utilized.
Certain investments are measured at fair value using the net asset value per share as a practical expedient. These investments
include a fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies, as well as
a fund that primarily invests in the federally guaranteed portion of SBA 7(a) loans. The Bank’s investment in securities either
issued or guaranteed by the U.S. government or its agencies can be redeemed daily at the closing net asset value per share.
The Bank’s investment in SBA 7(a) loans can be redeemed quarterly with sixty days’ notice. In accordance with ASU 2015-
07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per
Share (Or Its Equivalent), these investments have not been included in the fair value hierarchy.
Derivative financial instruments - The valuation of the Bank’s interest rate swaps and caps are determined using widely
accepted valuation techniques including discounted cash flow analyses on the expected cash flows of derivatives. These
analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based
81
inputs, including forward interest rate curves and implied volatilities. Unobservable inputs, such as credit valuation
adjustments are insignificant to the overall valuation of the Bank’s derivative financial instruments. Accordingly, the Bank
has determined that its interest rate derivatives fall within Level 2 of the fair value hierarchy.
The fair value of derivative loan commitments and forward loan sale agreements are estimated using the anticipated market
price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as
Level 2. The fair value of such instruments was nominal at each date presented.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:
Collateral dependent impaired loans - Valuations of impaired loans measured at fair value are determined by a review of
collateral values. Certain inputs used in appraisals are not always observable, and therefore impaired loans are generally
categorized as Level 3 within the fair value hierarchy.
Real estate owned and other repossessed collateral - The fair values of real estate owned and other repossessed collateral are
estimated based upon appraised values less estimated costs to sell. Certain inputs used in appraisals are not always
observable, and therefore may be categorized as Level 3 within the fair value hierarchy. When inputs used in appraisals are
primarily observable, they are classified as Level 2.
Loan servicing rights - The fair value of the SBA and mortgage servicing rights is based on a valuation model that calculates
the present value of estimated future net servicing income. Adjustments are only recorded when the discounted cash flows
derived from the valuation model are less than the carrying value of the asset. Certain inputs are not observable, and therefore
loan servicing rights are generally categorized as Level 3 within the fair value hierarchy.
Fair Value of other Financial Instruments:
Cash and cash equivalents - The fair value of cash, due from banks, interest-bearing deposits and Federal Home Loan Bank of
Boston overnight deposits approximates their relative book values, as these financial instruments have short maturities.
FHLBB stock - The carrying value of FHLBB stock approximates fair value based on redemption provisions of the FHLBB.
Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing
loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Bank’s historical
experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic
conditions, lending conditions and the effects of estimated prepayments.
Loans held for sale - The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.
Interest receivable - The fair value of this financial instrument approximates the book value as this financial instrument has a
short maturity. It is the Bank’s policy to stop accruing interest on loans past due by more than 90 days. Therefore, this financial
instrument has been adjusted for estimated credit losses.
Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW
accounts and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on
the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided
by the deposit liabilities compared to the cost of borrowing funds in the market. If that value were considered, the fair value of
the Bank’s net assets could increase.
FHLBB advances, capital lease obligations and subordinated debentures - The fair value of the Bank’s borrowings with the
FHLBB is estimated by discounting the cash flows through maturity or the next re-pricing date based on current rates available
to the Bank for borrowings with similar maturities. The fair value of the Bank’s capital lease obligations and subordinated
debentures are estimated by discounting the cash flows through maturity based on current rates available to the Bank for
borrowings with similar maturities.
82
Off-Balance Sheet Credit-Related Instruments - Fair values for off-balance-sheet, credit-related financial instruments are based
on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of such instruments was nominal at each date presented.
Assets and liabilities measured at fair value on a recurring basis are summarized below.
Assets
Investment securities:
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value(1)
Liabilities
Other liabilities – interest rate swaps
Assets
Investment securities:
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value(1)
Other assets – interest rate caps
Other assets – interest rate swaps
Liabilities
Other liabilities – interest rate swaps
$
$
$
$
Total
Level 1
Level 2
Level 3
(Dollars in thousands)
June 30, 2019
$
57,364
18,410
6,938
1,630
$
-
-
-
-
$
$
June 30, 2018
$
57,364
18,410
-
1,630
$
Total
Level 1
Level 2
Level 3
(Dollars in thousands)
$
56,887
24,181
6,619
64
15
668
$
-
-
-
-
-
-
$
$
$
56,887
24,181
-
64
15
668
$
-
-
-
-
-
-
-
-
-
-
(1)
In accordance with ASU 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not
been classified in the fair value hierarchy. The fair value amount presented in the table is intended to permit reconciliation of the fair value amount to the financial
statements.
Assets measured at fair value on a nonrecurring basis are summarized below.
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
Total
Level 1
Level 2
Level 3
June 30, 2019
$
$
1,683
1,957
2,851
Total
1,917
2,233
2,970
$
$
(Dollars in thousands)
$
-
-
-
June 30, 2018
Level 1
Level 2
(Dollars in thousands)
$
-
-
-
-
-
-
-
-
-
$
$
1,683
1,957
2,851
Level 3
1,917
2,233
2,970
The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on
a nonrecurring basis at the dates indicated.
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
Fair Value
June 30,
2019
June 30,
2018
(Dollars in thousands)
$
$
1,683
1,957
2,851
1,917
2,233
2,970
Valuation Technique
Appraisal of collateral(1)
Appraisal of collateral(1)
Discounted cash flow(2)
(1) Fair value is generally determined through independent appraisals of the underlying collateral. The Bank may also use another available source of collateral
assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors such as economic
factors and estimated liquidation expenses. The range of these possible adjustments was 15% to 100%.
(2) Fair value is determined using a discounted cash flow model. The unobservable inputs include anticipated rate of loan prepayments and discount rates. The range of
prepayment assumptions used was 10.6% to 14.7%. For discount rates, the range was 6.0% to 17.6%.
83
The table below summarizes the total losses on assets measured at fair value on a non-recurring basis for the years ended June 30,
2019 and 2018.
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
Total
Years Ended June 30,
2019
2018
(Dollars in thousands)
$
$
(247)
(57)
(130)
(434)
$
$
(519)
(135)
(31)
(685)
The following table presents the estimated fair value of the Bank's financial instruments.
Financial assets:
Cash and cash equivalents
Investment securities
Equity investments measured at net asset value(1)
Federal Home Loan Bank stock
Loans held for sale
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Federal Home Loan Bank advances
Capital lease obligation
Subordinated debt
Interest rate swaps
Financial assets:
Cash and cash equivalents
Investment securities
Equity investments measured at net asset value(1)
Federal Home Loan Bank stock
Loans held for sale
Loans, net
Accrued interest receivable
Interest rate caps
Interest rate swaps
Financial liabilities:
Deposits
Federal Home Loan Bank advances
Capital lease obligation
Subordinated debt
Interest rate swaps
$
$
Carrying
Amount
Fair Value Measurements at June 30, 2019
Total
Level 1
Level 2
Level 3
56,907
75,774
6,938
1,258
3,910
975,060
3,559
942,371
15,000
323
14,829
1,630
$
56,907
75,774
6,938
1,258
3,910
973,018
3,559
944,278
15,000
327
14,041
1,630
(Dollars in thousands)
$
$
56,907
-
-
-
-
-
-
-
-
-
-
-
-
75,774
-
1,258
3,910
-
3,559
944,278
15,000
327
-
1,630
$
-
-
-
-
-
973,018
-
-
-
-
14,041
-
Carrying
Amount
Fair Value Measurements at June 30, 2018
Total
Level 1
Level 2
Level 3
157,402
81,068
6,619
1,652
7,155
866,995
2,528
64
15
954,940
15,000
605
23,958
668
$
157,402
81,068
6,619
1,652
7,155
868,730
2,528
64
15
953,216
15,000
619
25,961
668
(Dollars in thousands)
$
$
157,402
-
-
-
-
-
-
-
-
-
-
-
-
-
-
81,068
-
1,652
7,155
-
2,528
64
15
953,216
15,000
619
-
668
$
-
-
-
-
-
868,730
-
-
-
-
-
-
25,961
-
(1)
In accordance with ASU 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical
expedient have not been classified in the fair value hierarchy. The fair value amount presented in the table is intended to permit reconciliation of the fair
value amount to the financial statements.
84
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Bank carried out an evaluation, under the supervision and with the participation of the Bank’s management, including the Bank’s
Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Bank’s Chief Executive Officer and Chief Financial
Officer concluded that as of June 30, 2019, the Bank’s disclosure controls and procedures are effective. Disclosure controls and
procedures are controls and procedures designed to ensure that information required to be disclosed in the Bank’s reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms. In addition, no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the fourth quarter of our fiscal year ended
June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
An evaluation was performed under the supervision and with the participation of the Bank’s management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our internal controls and procedures
over financial reporting (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this annual report.
Management Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting. The standard
measures adopted by management in making its evaluation are the measures in Interest Control—Integrated Framework (2013)
published by the Committee of Sponsoring Organizations of the Treadway Commission. We do not expect that our disclosure controls
and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objective will be met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors, and
instances of fraud, if any, within the Bank have been or will be detected. The inherent limitations include, among other things, the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls
and procedures also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management or employee override of the controls and procedures. The design of any system of controls and procedures is based in
part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, controls and procedures may become inadequate because of
changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitation in
a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Based on their evaluation of disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded,
subject to the limitations described above, that our internal controls and procedures over financial reporting as of the end of the period
covered by this report were effective and that there were no material weaknesses.
85
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Northeast Bank
Opinion on the Internal Control Over Financial Reporting
We have audited Northeast Bank’s (the Bank) internal control over financial reporting as of June 30, 2019, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting
as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the balance sheets as of June 30, 2019 and 2018, and the related statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the two years in the period ended June 30, 2019, and the related notes to the financial
statements of the Bank and our report dated September 13, 2019 expressed an unqualified opinion.
Basis for Opinion
The Bank’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting in the accompanying “Management Report on Internal Control over Financial
Reporting”. Our responsibility is to express an opinion on the Bank’s internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Boston, Massachusetts
September 13, 2019
86 Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal controls, or in other factors that could significantly affect our internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation, including any corrective
actions with regard to significant deficiencies or material weaknesses.
Item 9B.
Other Information
None.
PART III
Directors, Executive Officers and Corporate Governance
Item 10.
The information required by Item 10 shall be included in the Proxy Statement and is incorporated herein by reference.
Executive Compensation
Item 11.
The information required by Item 11 shall be included in the Proxy Statement and is incorporated herein by reference.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 12.
The information required by Item 12 shall be included in the Proxy Statement and is incorporated herein by reference.
Certain Relationships and Related Transactions, and Director Independence
Item 13.
The information required by Item 13 shall be included in the Proxy Statement and is incorporated herein by reference.
Principal Accounting Fees and Services
Item 14.
The information required by Item 14 shall be included in the Proxy Statement and is incorporated herein by reference.
87
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedules
Balance Sheets as of June 30, 2019 and 2018
Statements of Income for the years ended June 30, 2019 and 2018
Statements of Comprehensive Income for the years ended June 30, 2019 and 2018
Statements of Changes in Shareholders’ Equity for the years ended June 30, 2019 and 2018
Statements of Cash Flows for the years ended June 30, 2019 and 2018
Notes to Financial Statements
(b) Exhibits
2.1 Agreement and Plan of Merger, dated as of January 7, 2019, by and between Northeast Bank and Northeast Bancorp
(incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed with the SEC by Northeast Bancorp
on January 7, 2019).
3.1 Amended and Restated Articles of Incorporation of Northeast Bank (incorporated by reference to Exhibit 3.1 of the
Current Report on Form 8-K, filed with the SEC by Northeast Bancorp on January 7, 2019).
3.2 Amended and Restated Bylaws of Northeast Bank (incorporated by reference to Exhibit 3.2 of the Current Report on
Form 8-K filed with the SEC by Northeast Bancorp on January 7, 2019).
4.1 Description of Capital Stock of Northeast Bank (incorporated by reference to Exhibit 4.1 of the Current Report on
Form 8-K filed with the SEC by Northeast Bancorp on January 7, 2019).
4.2 Form of 6.75% Fixed-to-Floating Subordinated Note due 2026 (1).
10.1+ Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan (2).
10.2a+ Form of Restricted Stock Award Agreement under the Northeast Bancorp Amended and Restated 2010 Stock Option
and Incentive Plan (issued on or after May 25, 2017) (2).
10.2b+ Form of Restricted Stock Award Agreement under the Northeast Bancorp Amended and Restated 2010 Stock Option
and Incentive Plan (issued before May 25, 2017) (2).
10.3+ Form of Non-Qualified Stock Option Agreement for Company Employees under the Northeast Bancorp Amended and
Restated 2010 Stock Option and Incentive Plan (2).
10.4+ Non-Qualified Time-Based Stock Option Agreement, dated December 29, 2010, by and between Northeast Bancorp
10.5+ Non-Qualified Performance-Based Stock Option Agreement, dated March 22, 2013, by and between Northeast
10.6+ Non-Qualified Stock Option Agreement, dated December 30, 2010, by and between Northeast Bancorp and Robert
10.7+ Form of Indemnification Agreement, dated as of December 29, 2010, by and between Northeast Bancorp and each of
10.8+ Employment Agreement, dated December 30, 2010, by and between Northeast Bancorp and Richard Wayne (3).
10.9 Subordinated Note Purchase Agreement, dated June 29, 2016, by and among Northeast Bancorp and the Purchasers
and Richard Wayne (3).
Bancorp and Richard Wayne (4).
Glauber (3).
the members of the Board (3).
identified therein (6).
21 Subsidiaries of Northeast Bank*
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
32.1 Rule 13a-14(b) Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
88 * Filed herewith
** Furnished herewith
+ Management contract or compensatory plan or agreement
(1) Previously filed by Northeast Bancorp, the Bank’s former holding company, with the Securities and Exchange Commission on
Northeast Bancorp’s Annual Report on Form 10-K filed on June 29, 2016, and assumed by the Bank pursuant to the Agreement
and Plan of Merger dated as of January 7, 2019, by and between Northeast Bank and Northeast Bancorp.
(2) Previously filed by Northeast Bancorp, the Bank’s former holding company, with the Securities and Exchange Commission on
Northeast Bancorp’s Annual Report on Form 10-K filed on September 13, 2017, and assumed by the Bank pursuant to the
Agreement and Plan of Merger dated as of January 7, 2019, by and between Northeast Bank and Northeast Bancorp.
(3) Previously filed by Northeast Bancorp, the Bank’s former holding company, with the Securities and Exchange Commission on
Northeast Bancorp’s Current Report on Form 8-K filed on January 5, 2011, and assumed by the Bank pursuant to the Agreement
and Plan of Merger dated as of January 7, 2019, by and between Northeast Bank and Northeast Bancorp.
(4) Previously filed by Northeast Bancorp, the Bank’s former holding company, with the Securities and Exchange Commission on
Northeast Bancorp’s Current Report on Form 8-K filed on March 26, 2013, and assumed by the Bank pursuant to the Agreement
and Plan of Merger dated as of January 7, 2019, by and between Northeast Bank and Northeast Bancorp.
(5) Previously filed by Northeast Bancorp, the Bank’s former holding company, with the Securities and Exchange Commission on
Northeast Bancorp’s Current Report on Form 8-K filed on June 29, 2016), and assumed by the Bank pursuant to the Agreement
and Plan of Merger dated as of January 7, 2019, by and between Northeast Bank and Northeast Bancorp.
Item 16. Form 10-K Summary
None.
89 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHEAST BANK
SIGNATURES
Date: September 13, 2019
By:
/s/ RICHARD WAYNE
Richard Wayne
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ RICHARD WAYNE
Richard Wayne
Title
Date
Chief Executive Officer and Director
(Principal Executive Officer)
September 13, 2019
/s/ JEAN-PIERRE LAPOINTE
Jean-Pierre Lapointe
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
September 13, 2019
/s/ ROBERT GLAUBER
Robert Glauber
/s/ MATTHEW BOTEIN
Matthew Botein
/s/ CHERYL DORSEY
Cheryl Dorsey
/s/ JOHN C. ORESTIS
John C. Orestis
/s/ DAVID TANNER
David Tanner
/s/ JUDITH E. WALLINGFORD
Judith E. Wallingford
Chairman of the Board
September 13, 2019
Director
Director
Director
Director
Director
September 13, 2019
September 13, 2019
September 13, 2019
September 13, 2019
September 13, 2019
90
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Salvatore Salzillo
SVP, Business Development
Fred Schwartz
SVP, Business Development
Sarah Shomphe
SVP, Director of Owned
Real Estate
Jack Sullivan
SVP, Asset Management
Lindsay Wiedemann
SVP, Corporate Controller
BOARD OF DIRECTORS
SENIOR MANAGEMENT
Robert R. Glauber,
Chairman
Lecturer
Harvard Kennedy
School of Government
Matthew B. Botein
Co-Founder and
Managing Partner
Gallatin Point Capital LLC
Cheryl Lynn Dorsey
President
Echoing Green
John C. Orestis
President and Chief
Executive Officer
North Country Associates
David A. Tanner
Managing Director
Three Mile Capital LLC
Richard Wayne
President and Chief
Executive Officer
Patrick Dignan
Executive Vice President
Robert Banaski
SVP, Director of
Community Banking
Daniel Bagley
SVP, Director of
Information Technology
Brian Christensen
SVP, Loan Underwriting
Brian Doherty
SVP, Loan Underwriting
Brian Fenwick
Managing Director,
Director of Loan Underwriting
Lindsay Guttell
SVP, Asset Management
Judith E. Wallingford
Retired President
The Maine Water Company
Christopher Hickey
Managing Director,
Director of Asset Management
Richard Wayne
President and Chief
Executive Officer
Northeast Bank
Heidi Jacques
SVP, Director of Human
Resources
Julie Jenkins
SVP, Director of Operations
Kerry Kearn-Kawai
SVP, Legal Counsel
James Krumsiek, Esq.
Managing Director,
Legal Counsel
Jean-Pierre Lapointe
Chief Financial Officer
Jonathan Levirne
SVP, Business Development
Theresa Morrison
SVP, Director of
Real Estate Valuation
Jerry Murphy
SVP, Loan Underwriting
Kelly Palmer
SVP, Director of Credit
Administration
Brian Pinheiro
Chief Risk Officer
SHAREHOLDER INFORMATION
CORPORATE OFFICES
BRANCH OFFICES
Northeast Bank
500 Canal Street
Lewiston, ME 04240
207.786.3245
Northeast Bank
200 Berkeley Street
Boston, MA 02116
617.585.3200
Northeast Bank
27 Pearl Street
Portland, ME 04101
207.774.1426
Connecting All Locations
800.284.5989
www.northeastbank.com
Annual Meeting
10:00 am EST, Tuesday, November 12, 2019 at
the offices of Goodwin Procter LLP, 100 Northern
Avenue, Boston, MA 02210.
Transfer Agent
Computershare, Inc.
250 Royall Street
Canton, MA 02021
800.942.5909
Annual Report on Form 10-K and
Other Financial Information
A copy of Northeast Bank’s Annual Report on
Form 10-K filed with the Federal Deposit Insurance
Corporation may be obtained from the Bank by
sending a written request to:
Shareholder Relations
Northeast Bank
500 Canal Street
Lewiston, ME 04240
The common stock of Northeast Bank trades on
NASDAQ under the symbol NBN.
Forward-Looking Statements
Certain statements in this report that are not
historical facts may be considered forward-looking
statements. For more information regarding factors
that could cause actual results to differ materially
from those projected in the forward-looking
statements, see “A Note About Forward-Looking
Statements” in the Bank’s 2019 Annual Report on
Form 10-K.
Northeast Bank is an Equal Opportunity Employer.
AUBURN
232 Center Street
Auburn, ME 04210
207.783.5632
AUGUSTA
235 Western Avenue
Augusta, ME 04330
207.623.0603
BETHEL
11 Main Street
Bethel, ME 04217
207.824.2117
BRUNSWICK
186 Maine Street
Brunswick, ME 04011
207.729.8711
BUCKFIELD
2 Depot Street
Buckfield, ME 04220
207.336.2371
HARRISON
46 Main Street
Harrison, ME 04040
207.583.2954
LEWISTON
500 Canal Street
Lewiston, ME 04240
207.786.3245
POLAND
1399 Maine Street
Poland, ME 04274
207.998.3475
PORTLAND
27 Pearl Street
Portland, ME 04101
207.774.1426
SOUTH PARIS
235 Main Street
South Paris, ME 04281
207.743.8168