2022 Annual Report
This has been a truly transformative year for the Bank.
We are immensely proud of our team who has worked
professionally and tirelessly throughout the year to serve
our customers and community.
Rick Wayne, President & Chief Executive Officer
TO OUR SHAREHOLDERS,
Fiscal 2022 was a pivotal year for Northeast Bank (the “Bank”), as we shifted our focus from the Small Business
Administration’s Paycheck Protection Program (“PPP”) and our correspondent relationship with The Loan
Source, Inc. to growing our National Lending Division. During the year, we (i) grew our loan portfolio with high
quality, higher-yielding loans, (ii) generated lower-cost deposits, primarily in our Community Banking Division, (iii)
successfully transitioned from work-from-home to a hybrid work environment and entered into a new lease for
our Boston corporate office in the vibrant Seaport neighborhood, and (iv) continued our investment in our most
important resources: people and technology.
NATIONAL LENDING
Throughout fiscal 2022, our National Lending Division
continued to build our commercial loan portfolio,
in purchases
generating a record $775.8 million
and originations, for net growth of $284.3 million, or
29.8%, over June 30, 2021 balances. For fiscal 2022, the
purchased and originated portfolios generated returns
of 8.92% and 6.73%, respectively. We continued to grow
our lender finance business, whereby we leverage non-
bank lenders, which accounted for $318.1 million, or 54%,
of total fiscal 2022 originations. The vast majority of our
originated loans are tied to the Prime Rate with interest
rate floors and low advance rates or loan-to-values, often
providing for both interest reserves and higher rates in
the unlikely event of a default. This careful structuring
of our loan terms positions us well for the future in a
rising rate environment.
1,400
1,200
1,000
800
600
400
200
0
National Lending Portfolio
($ in millions)
29.8%
2018
2019
2020
2021
2022
June 30,
ASSET QUALITY
As always, the Bank’s loan portfolio continues to operate with a “high-touch” approach by our in-house asset
managers with the goal of providing a high level of service to our borrowers with sharp attention to each credit.
We have a proven track record of the success of this “high-touch” approach, as we successfully and proactively
worked with our borrowers to provide them with temporary relief during the height of the COVID-19 pandemic,
allowing for them to resume payments as economic conditions improved. We continue to remain diligent and
focused on asset quality, ending fiscal 2022 with past due loans of just $7.0 million, or 0.53% of total loans. This
represented the lowest level of delinquencies since the first quarter of fiscal 2017, at which time the Bank’s loan
book totaled just $688.7 million, as compared to $1.30 billion as of June 30, 2022.
FINANCIAL HIGHLIGHTS
For fiscal 2022, we recorded net income of $42.2 million and achieved earnings per diluted common share of $5.34,
a return on average equity of 17.40%, and a return on average assets of 2.68%. This was achieved primarily through
correspondent fee income, loan growth, and the repositioning of liabilities, as we grew net interest income by $16.3
million, or 24.4%, over fiscal 2021 to $83.4 million, as the Bank transitions to the expected ending of PPP-related income
in the near future. Given our significant earnings in fiscal 2022 coupled with our active share repurchase plan, tangible
book value per share increased by $4.93, or 17.4%, over June 30, 2021, to $33.19.
Net Income ($ in millions)
Tangible Book Value per Share(3)
80
70
60
50
40
30
20
10
0
2018
2019(1)
2020
2021(2)
2022
Fiscal Year Ended June 30,
17.4%
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
2018
2019
2020
2021
2022
June 30,
MAINE BANKING
During fiscal 2022, we continued the repositioning of our deposit portfolio from higher-rate time deposits to lower-cost,
stable non-maturity funds primarily via our Community Banking Division. We have invested in branding, technology,
marketing, and customer outreach to increase our presence in the Maine deposit market. These efforts have proven
successful, as through fiscal 2022, we increased Community Banking non-maturity deposits by $316.3 million(4), primarily
focused in NOW and Savings accounts. Furthermore, we reduced our average cost of deposits to 35 basis points in fiscal
2022, as compared to 74 basis points for fiscal 2021 and 173 basis points for fiscal 2020.
We have adopted a Community Reinvestment Act (“CRA”) Strategic Plan (“CRA Strategic Plan”) in order to tailor our CRA
goals and objectives to address the needs of our community while maintaining our national lending strategy. The CRA
Strategic Plan emphasizes community development lending, service hours, donations, and investments. Our employees
contribute hundreds of service hours annually supporting low- or moderate-income individuals through financial
literacy programs.
[1] Fiscal 2019 removes the non-recurring expenses (after tax) of $6.4 million related to our corporate reorganization in 2019.
[2] Fiscal 2021 net income includes the gain on sale of PPP loans (after tax) of $33.0 million. Excluding this, net income would have been $38.5 million in fiscal 2021.
[3] Tangible Book Value per Share represents total shareholders’ equity less the sum of preferred stock and intangible assets divided by common shares outstanding.
[4] Excludes the collection account related to PPP activity, whose balance was $183.8 million and $859.5 million at June 30, 2022 and 2021, respectively.
This has been a truly transformative year for the Bank. We are immensely proud of our team who has worked
professionally and tirelessly throughout the year to serve our customers and community. We are grateful for the
support of our engaged Board of Directors, who continues to provide valuable insight and guidance as we continue to
grow our Bank in a thoughtful and prudent manner. We are eager to build on this year’s success in the coming years.
I look forward to reporting to you next year on our accomplishments for fiscal 2023 and, as always, thank you for your
continued support.
Sincerely,
Rick Wayne
President and Chief Executive Officer
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
Pinion
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended June 30, 2022
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)
27 Pearl Street, Portland, Maine
(Address of principal executive offices)
01-0029040
(I.R.S. Employer
Identification No.)
04101
(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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(a) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
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, 2021 was approximately $242,350,730.
As of September 2, 2022, the registrant had outstanding 7,538,382 shares of voting common stock, $1.00 par value per share, and zero shares of non-voting common stock, $1.00
par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2022 Annual Meeting of Shareholders to be held on November 15, 2022 (the “Proxy Statement”) 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 the Proxy Statement with the Federal Deposit Insurance Corporation no
later than 120 days after the end of its fiscal year ended June 30, 2022.
1
Table of Contents
Part I
Part II
Item 1.
Business ....................................................................................................................................................... 4
Item 1A.
Risk Factors ................................................................................................................................................. 14
Item 1B.
Unresolved Staff Comments ........................................................................................................................ 24
Item 2.
Properties ..................................................................................................................................................... 24
Item 3.
Legal Proceedings ........................................................................................................................................ 24
Item 4.
Mine Safety Disclosures .............................................................................................................................. 24
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities ..................................................................................................................................................... 25
Item 6.
[Reserved] .................................................................................................................................................... 26
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................................... 52
Item 8.
Financial Statements and Supplementary Data ............................................................................................ 53
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................... 89
Item 9A.
Controls and Procedures .............................................................................................................................. 89
Item 9B.
Other Information ........................................................................................................................................ 91
Part III
Part IV
Item 10. Directors, Executive Officers and Corporate Governance ........................................................................... 91
Item 11. Executive Compensation ............................................................................................................................. 91
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .... 91
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................. 91
Item 14. Principal Accounting Fees and Services ...................................................................................................... 91
Item 15. Exhibits, Financial Statement Schedules .................................................................................................... 92
Item 16. Form 10-K Summary .................................................................................................................................. 93
2
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”; ongoing disruptions due to the COVID-19 pandemic; changes in
employment levels, general business and economic conditions on a national basis and in the local markets in which the Bank operates;
changes in customer behavior due to changing business and economic conditions (including concerns about inflation) or legislative or
regulatory initiatives; the possibility that future credits losses are higher than currently expected due to changes in economic
assumptions, customer behavior or adverse economic developments; turbulence in the capital and debt markets; changes in interest
rates and real estate values; competitive pressures from other financial institutions; 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; reputational risk relating to the Bank’s participation in the Paycheck
Protection Program and other pandemic-related legislative and regulatory initiatives and programs; operational risks including, but not
limited to, cybersecurity, fraud, natural disasters, climate change and future pandemics; 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, net operating earnings per share, operating return on
average assets, operating return on average equity, operating efficiency ratio, and operating common dividend payout ratio. 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.
3
Item 1.
Overview
Business
PART I
Northeast Bank (the “Bank”), a Maine state-chartered bank organized in 1872, is a Maine-based full-service financial institution.
As of June 30, 2022, the Bank had total assets of $1.58 billion, total deposits of $1.29 billion, and shareholders’ equity of $248.3
million. We gather retail deposits through our seven full-service branches in Maine and through our online deposit program,
ableBanking; originate loans through the Community Banking Division and Small Business Administration’s (“SBA”) Division; and
purchase and originate commercial loans, typically secured by real estate, on a nationwide basis through our National Lending
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 National Lending Division’s purchased and originated 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.
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.
Generating deposits to fund our business. We offer a full line of deposit products through our seven-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
National Lending Division activities are nationwide. The National Lending Division 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 National Lending Division 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 Community Banking Division’s market area is 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, financial technology 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.
4
Lending Activities
General
We conduct our loan-related activities through two primary channels: the National Lending Division and the Community Banking
Division. The National Lending Division 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 National Lending Division also originates commercial real estate and commercial and industrial loans on a
nationwide basis. The Community Banking Division originates loans directly to consumers and businesses located in its market area.
At June 30, 2022, our total loan portfolio (excluding loans held for sale) was $1.30 billion, of which $1.24 billion, or 94.8%, was
purchased or originated by the National Lending Division and $34.9 million, or 2.7%, was originated by the Community Banking
Division. $33.0 million, or 2.5%, were originated traditional Small Business Administration (“SBA”) loans. The following table sets
forth certain information concerning our portfolio loan purchases and originations for the periods indicated (including loans held for
sale):
Years Ended June 30,
2022
2021
(Dollars in thousands)
$
1,040,624
$
1,001,055
Loans, including loans held for sale, beginning of year
Additions:
National Lending Division purchases and originations:
Originations
Purchases
Subtotal
SBA PPP funded originations
SBA Traditional funded originations
Community Bank originations:
Residential mortgages held for sale
Residential mortgages held for investment
Commercial real estate
Commercial and industrial
Consumer
Subtotal
Total originations and purchases
Reductions:
Sales of SBA PPP loans
Sales of residential loans held for sale
Sales of traditional SBA and other loans
Charge-offs
Pay-downs and amortization, net
Total reductions
Loans, including loans held for sale, end of year
$
Annual percentage increase in loans
587,840
187,917
775,754
6,516
592
-
-
210
137
-
347
783,209
(6,333)
-
-
(421)
(512,213)
(518,967)
1,304,866
25.39%
$
308,862
169,489
478,351
2,836,589
2,294
5,930
177
-
332
62
6,501
3,323,735
(2,867,054)
(6,703)
-
(939)
(409,470)
(3,284,166)
1,040,624
3.95%
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, 2022, the Bank’s legal lending limit was $50.8 million.
We typically retain servicing rights for all loans that we originate or purchase.
National Lending Division Purchases and Originations
General. Loans originated or purchased by the National Lending Division were $1.24 billion as of June 30, 2022, which consisted of
$841.9 million of commercial real estate loans, $348.1 million of commercial and industrial loans, and $46.9 million of one- to four-
family residential loans. The following table summarizes the National Lending Division loan portfolio as of June 30, 2022:
Purchased
Non-owner occupied commercial real estate
Owner-occupied commercial real estate
Commercial and industrial
1-4 family residential
Total
$
$
300,220
169,871
80
7,511
477,682
Originated
(In thousands)
307,198
$
64,638
348,057
39,336
759,229
$
Total
$
$
607,418
234,509
348,137
46,847
1,236,911
5
Since the inception of the National Lending Division through June 30, 2022, we have purchased loans with an aggregate investment of
$1.4 billion, of which $187.9 million was purchased during fiscal 2022. We have also originated National Lending Division loans
totaling $2.2 billion, of which $587.8 million was originated in fiscal 2022. As of June 30, 2022, the unpaid principal balance of loans
purchased or originated by the National Lending Division ranged from $1 thousand to $20 million and have an average balance of
$771 thousand. The real estate loans were secured principally by retail, industrial, hospitality, multi-family and office properties in 44
states.
The following table shows the National Lending Division loan portfolio stratified by book value as of June 30, 2022, excluding
deferred fees and costs:
Range
Amount
Percent of Total
(Dollars in thousands)
$0 - $1,000
$1,000 - $3,000
$3,000 - $6,000
$6,000 - $9,000
Greater than $9,000
Total
$
$
226,619
288,026
269,562
224,583
227,728
1,236,518
18.33%
23.29%
21.80%
18.16%
18.42%
100.00%
The following tables show the National Lending Division loan portfolio by location and type of collateral as of June 30, 2022,
excluding deferred fees and costs:
Collateral Type
Lender Finance
Office
Retail
Multifamily
Industrial
Hospitality
Mixed Use
Other CRE
All Other
Total
Amount
(Dollars in thousands)
327,843
$
191,759
159,191
152,377
120,912
85,540
73,840
47,888
77,168
1,236,518
$
Percent of Total
State
26.51%
15.51%
12.87%
12.32%
9.78%
6.93%
5.97%
3.87%
6.24%
100.00%
NY
CA
FL
TX
NJ
IL
AZ
Non-real estate
All other states
Total
Amount
(Dollars in thousands)
$
496,995
213,954
102,827
59,136
40,800
23,999
23,179
98,391
177,237
1,236,518
$
Percent of Total
40.19%
17.30%
8.32%
4.79%
3.30%
1.94%
1.87%
7.96%
14.33%
100.00%
Loan Purchase Strategies. The National Lending Division’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, 2022, purchased loans had an unpaid principal balance of $512.0 million and a book value of $477.7 million, representing
a total discount of 6.7%.
6
The following table shows the purchased loan portfolio as of June 30, 2022 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
$
$
15,760
2,955
12,284
66,717
379,966
477,682
3.30%
0.62%
2.57%
13.97%
79.54%
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
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 experienced an active market during 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 National Lending
Division Credit Committee.
Collateral Valuation. The estimated value of the real property collateralizing the loan is determined by the National Lending
Division’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 National Lending Division typically conduct an in-person
site inspection.
We generally view cash flow from operations as the primary source of repayment on purchased loans. The National Lending Division
analyzes the current and likely future cash flows generated by the collateral to repay the loan. Also considered are minimum debt
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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 National Lending
Division considers the following:
• Collateral securing the loan;
• Geographic location;
•
Financial resources of the borrower or guarantors, if any;
• Recourse nature of the loan;
• 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 National Lending
Division 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 National Lending Division also originates commercial loans on a nationwide
basis. Capitalizing on our purchased loan infrastructure, the National Lending 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 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 National Lending Division 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.
Community Banking Division Originations
Loan Portfolio
• Residential Mortgage Loans. Historically, we originated 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 offered 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, 2022, the Community Banking Division’s
portfolio residential and home equity loans totaled $22.4 million, or 1.7% of total loans. Of the residential loans we held for
investment at June 30, 2022, approximately 73.1% were adjustable rate. Included in residential loans are home equity lines of
credit and other second mortgage loans aggregating approximately $2.1 million. During the fiscal year ended June 30, 2021, the
Bank shuttered its residential mortgage lending division. In order to continue to offer residential mortgage loans to its customers,
the Bank entered into an agreement with Fairway Independent Mortgage Corporation, whereby the Bank refers its customers and
earns a fee for successful mortgage originations.
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• Commercial Real Estate Loans. We originate multi-family and other commercial real estate loans secured by property primarily
in Maine. At June 30, 2022, the Community Banking Division’s commercial real estate loans outstanding were $9.9 million, or
0.8% of total loans. Although the largest commercial real estate loan originated by the Community Banking Division had a
principal balance of $753 thousand at June 30, 2022, the remainder 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, 2022, commercial and industrial loans
outstanding were $1.9 million, or 0.1% of total loans. At June 30, 2022, there were 32 commercial and industrial loans
outstanding with an average principal balance of $58 thousand. The largest of these commercial and industrial loans had a
principal balance of $375 thousand at June 30, 2022.
• Consumer Loans. We hold mobile home and overdraft and deposit-secured loans. At June 30, 2022, consumer loans outstanding
were $741 thousand, or 0.1% of total loans.
Underwriting of Loans. Our underwriting process for 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.
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 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 seven-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.
Our online deposit program, ableBanking, provides an additional channel through which to obtain core deposits to support our growth.
AbleBanking, a division of Northeast Bank, had $85.0 million in money market and time deposits as of June 30, 2022. We also use
deposit listing services to gather deposits in support of our liquidity and asset/liability management objectives from time to time. At
June 30, 2022, listing service deposits totaled $8.9 million, bearing a weighted-average remaining term of 0.49 years.
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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, 2022, we had $150.4 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, 2022, the Bank employed 165 full-time and 15 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, 2022, the Bank had seven wholly owned non-bank subsidiaries, all of which were established to hold commercial real
estate acquired as a result of loan workouts:
• 200 Elm Realty, LLC
• 500 Pine Realty, LLC
• 17 Dogwood Realty, LLC
• 1795 Little Diamond Realty, LLC
• 1872 Peaks Realty, LLC
• 1630 Spectacle Realty, LLC
• 1786 Cliff Realty, LLC
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 state-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. In
addition, Maine law requires that any person obtain the approval of the Maine Superintendent of Financial Institutions before
acquiring control of a Maine financial institution. Similarly, under the Bank Holding Company Act of 1956, as amended, a company
may not acquire control of a bank without first having obtained the approval of the Board of Governors of the Federal Reserve System
(the “FRB”).
Deposit Insurance. Deposit obligations of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) up to $250,000 per
depositor for deposits.
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Deposit insurance premiums are based on assets. For established small banks, which are generally those banks with less than $10
billion of assets that have been insured for at least five years, each of seven financial ratios and a weighted average of CAMELS
composite ratings are multiplied by a corresponding pricing multiplier. The sum of these products is added to a uniform amount, with
the resulting sum being an institution’s initial base assessment rate (subject to minimum or maximum assessment rates based on a
bank’s CAMELS composite rating). For the years ended June 30, 2022 and 2021, the FDIC insurance assessment expense for the
Bank was $395 thousand and $283 thousand, respectively.
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, among other circumstances, 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.
Acquisitions and Branching. Prior approval from the Bureau and the FDIC is required 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. 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 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.
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 purchase or 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. 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 assets may be subject to increased FDIC
deposit insurance premium 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 “Economic Growth Act”), which was enacted in 2018, amended the FDIA to exempt a capped amount
of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions.
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 a “satisfactory” 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
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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. Accumulated other comprehensive income (“AOCI”) (positive or
negative) must be reflected in Tier 1 capital; however, the Bank made a one-time permanent election to continue to exclude AOCI
from capital.
Under the FDIC’s capital rules, 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, these rules require an institution to establish a capital conservation
buffer of common equity Tier 1 capital above the minimum risk-based capital 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.
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 Economic Growth Act directs the federal bank regulatory agencies to establish a community bank leverage ratio
(“CBLR”) of tangible capital to average total consolidated assets of not less than 8% or more than 10%. Under the final rule issued by
federal banking agencies, effective January 1, 2020, depository institutions and depository institution holding companies that have less
than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to Tier 1 capital
divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the community bank leverage ratio
framework. A community banking organization that elects to use the community bank leverage ratio framework and that maintains a
leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital
requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-
capitalized ratio requirements for purposes of Section 38 of the FDIA. The final rule includes a two-quarter grace period during which
a qualifying banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9% leverage
ratio requirement, generally would still be deemed well-capitalized so long as the banking organization maintains a leverage ratio
greater than 8%. At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the community
bank leverage ratio framework or otherwise must comply with and report under the generally applicable rule. As required by Section
4012 the CARES Act, the federal banking agencies temporarily lowered the community bank leverage ratio, issuing two interim final
rules to set the community bank leverage ratio at 8.0%. Effective January 1, 2022, the community bank leverage ratio was set at 8.0%
beginning in the second quarter of 2020 through the end of the year. Community banks that have a leverage ratio reverted to 9.0%.
The Bank has not elected to use the community bank leverage framework.
The Bank is currently considered “well capitalized” under all regulatory definitions.
Safety and Soundness Standard. Guidelines adopted by the federal bank regulatory agencies pursuant to the FDIA establish general
standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting,
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interest rate exposure, asset growth, asset quality, earnings, and compensations 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 restricting asset growth, requiring an institution to
increase its ratio of tangible equity to assets or 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 the 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
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).
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 Consumer Financial Protection Bureau (“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, and 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 Economic Growth Act included provisions that ease certain requirements related to mortgage
transactions for small institutions 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, an annual disclosure is not required to be provided by a financial
institution if the financial institution only discloses information under exceptions from GLBA that do not require an opt-out to be
provided and if there has been no change in its privacy policies and procedures since its most recent 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
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“sensitive information” has been compromised if unauthorized use of the information is “reasonably possible.” All fifty states, as well
as the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, 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 has developed and implemented 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 amended 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 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 any transactions or series of 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 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 to acquire a bank or
merge banks or effect 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 or other transactions relating to , a sanctioned country, or with certain
designated persons and entities; (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 certain 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. Failure to comply with these sanctions could have serious legal and reputational consequences for the Bank.
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."
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Risks Associated With Our Business
The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers,
business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain
and cannot be predicted.
The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in
which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase
unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively,
including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to
heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we have put in
place for our employees. Government policies and directives related to the pandemic are subject to change. Changes in customer
behavior due to work from home arrangements and other pandemic related responses may impact the demand for our products and
services, which could adversely affect our revenue.
Our participation in the SBA’s Paycheck Protection Program (“PPP”) may expose us to reputational harm as well as the risk that
the SBA may not fund some or all of the guarantees associated with PPP loans.
As of June 30, 2022, life-to-date, we have originated more than 34,600 loans aggregating $3.33 billion through the PPP. We depend
on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and
any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any
other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely
impact our business. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated,
funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already
paid under the guaranty, seek recovery of any loss related to the deficiency from us.
Potential losses incurred in connection with possible repurchases and indemnification payments related to PPP loans that we have
sold to Loan Source may require us to increase our financial statement reserves in the future.
In June 2020, we entered into a loan purchase and sale agreement with Loan Source under which we sold $457.6 million in PPP loans
originated by us to Loan Source. In fiscal 2021, we amended the loan purchase and sale agreement under which we sold an additional
$2.87 billion in PPP loans. In connection with those sales, we made certain representations and warranties, which, if breached, may
require us to repurchase such loans or indemnify Loan Source for actual losses incurred in respect of such loans. These representations
and warranties include representations covering compliance with PPP rules and applicable laws in connection with the origination of
the PPP loans. To date, we have not had to repurchase any of these loans, nor have we received any indemnification claims under the
loan purchase and sale agreement. However, if we were required to repurchase these loans or if we receive such indemnity claims, we
could incur losses in connection with loan repurchases and indemnification claims, and any such losses might exceed our financial
statement reserves, requiring us to increase such reserves. In that event, any losses we might have to recognize and any increases we
might have to make to our reserves could have a material adverse effect on our business, financial position, liquidity, results of
operations or cash flows.
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, 2022, 36.6% 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 National
Lending Division 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 National Lending
Division 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, 2022, the loans held in our loan portfolio that were originated by third parties had been held by us for approximately
2.3 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.
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Our loan portfolio includes commercial real estate and commercial and industrial loans, which are generally riskier than other
types of loans.
At June 30, 2022, our commercial real estate mortgage and commercial and industrial loan portfolios comprised 94.6% 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.
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 National Lending
Division that are secured by assets located nationwide. Continued deterioration in the economic conditions, including high
unemployment levels, in 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.
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 maintain 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.
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. 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
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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
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.
The fair value of our investment securities can fluctuate due to factors outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse
changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions with respect to
individual securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and
continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and
realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely
affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a
security is other than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity
of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and
interest payments on the security. Significant negative changes to valuations could result in impairments in the value of the Bank’s
securities portfolio, which could have an adverse effect on the Bank’s financial condition or results of operations.
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
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key personnel that we depend upon for success. Frequently, we compete in the market for talent with entities that are not subject to
comprehensive regulation, including with respect to incentive compensation. 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 may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but
complementary financial, credit, operational, compliance, and legal reporting systems; internal controls; management review
processes; and other mechanisms. In some cases, management of our risks depends upon the use of analytical and/or forecasting
models, which, in turn, rely on assumptions and estimates. If the models used to mitigate these risks are inadequate, or the assumption
or estimates are inaccurate or otherwise flawed, we may fail to adequately protect against risks and may incur losses. In addition, there
may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, which could
lead to unexpected losses and our results of operations or financial condition could be materially adversely affected.
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 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
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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, blizzard, flood, fire or earthquake, 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.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could
significantly impact our business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment.
As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world
have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. The
U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative
and regulatory initiatives seeking to mitigate the effects of climate change. These agreements and measures may result in the imposition
of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes, each of which
may require us to expend significant capital and incur compliance, operating, maintenance, and remediation costs. Consumers and
businesses may also change their behavior on their own as a result of these concerns. The impact on our customers will likely vary
depending on their specific attributes, including reliance on, or role in, carbon intensive activities. Our efforts to take these risks into
account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be
effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
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
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.
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
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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.
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.
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.
Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer
preferences.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven
products and services. The widespread adoption of new technologies, including cryptocurrencies and payment systems, could require
substantial expenditures to modify or adapt our existing products and services. We might not be successful in developing or
introducing new or modified products and services, integrating new products or services into our existing offerings, responding or
adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our
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products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently
developing and maintaining loyal customers.
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 FRB. 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.
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 LIBOR may adversely affect our business, financial condition, and results of operations.
LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including loans,
securities, funding sources, interest rate swaps and other derivatives. ICE Benchmark Administration (“IBA”), the authorized and
regulated administrator of LIBOR, recently announced it would consult on its plans for the discontinuation of LIBOR. IBA ended the
publication of some LIBOR tenors on December 31, 2021 and the remaining LIBOR tenors are intended to end in June 2023.
Financial services regulators issued guidance on the ongoing use of LIBOR, encouraging banks to transition away from LIBOR as
soon as practicable and to not enter into new transactions referencing LIBOR after December 31, 2021. Financial services regulators
and industry groups have collaborated to develop alternate reference rate indices or reference rates. The transition to a new reference
rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies. We have
established a cross-functional project team to address the LIBOR transition, have established a replacement reference rate for LIBOR,
and have begun implementing the transition process for loans currently referencing LIBOR. Given the complexity of the transition, as
well as the different risk characteristics between LIBOR and the replacement reference rate, we continue to evaluate the impact the
transition, which may, ultimately, adversely affect our business, financial condition, or results of operations.
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
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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 Regulatory Environment
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 extensive federal and state regulation. 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, subject us to additional costs, including costs of
compliance; limit the types of financial services and products we may offer; and/or increase the ability of non-banks to offer
competing financial services and products. 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."
Regulatory capital requirements force banks to maintain capital as a percentage of their assets, with an emphasis on common equity as
opposed to other components of capital. The need to maintain capital and liquidity, and regulatory scrutiny with respect to capital
levels, may 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 stringent capital requirements which may adversely impact return on equity, require additional capital raises, or
limit the ability to pay dividends or repurchase shares.
Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital
and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier
1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage
ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, which if complied will result in the following
minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a
total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying
discretionary bonuses if its capital level falls below the capital conservation buffer amount. The application of these capital
requirements could, among other things, require us to maintain higher capital resulting in lower returns on equity, and we may be
required to obtain additional capital to comply or result in regulatory actions if we are unable to comply with such requirements.
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.
22
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.
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 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.
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.
23
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, 2022, the Bank conducted its business from its headquarters in Portland, Maine, an office in Boston, Massachusetts, and
an office in Lewiston, Maine. The Bank also conducts business from its seven full-service bank branches in Maine, including its
headquarters. 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 Portland, Maine; Boston, Massachusetts; and Lewiston, Maine offices, the Bank leases three of its other locations.
For information regarding the Bank's lease commitments, please refer to "Premises, Equipment and Leases" under Note 4 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.
Item 4. Mine Safety Disclosures
Not applicable.
24
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." As of the close of business on
September 2, 2022, there were approximately 284 registered shareholders of record of voting common stock.
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 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.
The following table summarizes repurchases of the Bank’s outstanding common shares in the fourth quarter of fiscal year 2022:
Issuer Purchases of Equity Securities
(a) Total
number
of shares
purchased
82,152
34,183
168,874
285,209
(b) Average
price paid
per share
$ 34.43
35.53
36.21
35.61
$
(c) Total number
of shares
purchased as
part of publicly
announced plans
82,152
34,183
168,874
285,209
(d) Maximum
number of shares that
may yet be purchased
under the plans
1,000,000
965,817
796,943
796,943
Period
April 1 – April 30, 2022
May 1 – May 31, 2022
June 1 – June 30, 2022
Total
On July 21, 2020, the Board of Directors adopted a share repurchase program to purchase up to $10.2 million of common stock, or up
to 600,000 shares, representing 7.3% of the Bank’s outstanding common stock. On April 21, 2021, the FDIC and Bureau approved the
number of shares available under this plan to increase up to 1,000,000 shares, or up to $25.0 million of common stock. The Bank
terminated this repurchase plan on April 20, 2022. The Bank repurchased 765,056 shares at a weighted average price per share of
$32.68 through April 20, 2022 under this program.
On April 20, 2022, the Board of Directors adopted a new share repurchase program to purchase up to $40.0 million of common stock,
or up to 1,000,000 shares, representing 13.1% of the Bank’s outstanding common stock. The Bank repurchased 203,057 shares at a
weighted average price per share of $36.09 through June 30, 2022 under this program. This repurchase program may be suspended or
terminated at any time without prior notice, and it will expire April 13, 2023.
Item 6. [Reserved]
Not applicable.
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
2022
2021
As of and for the Years Ended June 30,
2020
2019
(Dollars in thousands, except per share data)
$
$
$
$
$
$
$
83,684
18,697
64,987
4,500
13,184
-
40,393
33,278
10,541
22,737
$ 81,830
19,509
62,321
1,309
6,116
8,695
38,818
19,615
5,731
$ 13,884
$
$
2018
65,893
12,584
53,309
1,410
7,028
-
35,730
23,197
7,031
16,166
-
22,737
6,373
$ 20,257
-
$
16,166
2.57
2.53
2.57
2.53
$ 1.54
1.52
$ 2.24
2.20
0.04
20.09
$
0.04
16.98
$
$
$
1.81
1.77
1.81
1.77
0.04
15.49
$
1,257,635
971,602
1,012,352
46,876
164,739
1,153,858
975,060
942,371
30,152
153,580
$
1,157,736
871,802
954,940
39,563
138,430
Selected operating data:
Interest and dividend income
Interest expense
Net interest income
Provision (credit) for loan losses
Noninterest income
Reorganization expense
Other noninterest expense
Income before income taxes
Income tax expense
Net income
$
$
88,536
5,112
83,424
(2,462)
24,445
-
48,783
61,548
19,385
42,163
$
$
Reconciliation of Net Income (GAAP) to Net Operating Earnings (non-GAAP):
Reorganization expense, net of tax
Net operating earnings (non-GAAP)
-
42,163
$
$
78,125
11,039
67,086
(1,396)
72,033
-
39,426
101,089
29,586
71,503
-
71,503
$
$
$
$
5.40
5.34
5.40
5.34
0.04
33.37
1,582,759
1,304,866
1,287,693
19,451
248,321
$
$
$
$
8.64
8.55
8.64
8.55
0.04
28.51
2,174,402
1,040,624
1,862,430
36,111
232,391
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
Total Loans
Deposits
Borrowings and lease liability
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
2.68%
17.40%
45.22%
15.42%
2.68%
17.40%
45.22%
0.75%
0.75%
16.13%
19.47%
4.53%
37.44%
28.34%
12.10%
4.53%
37.44%
28.34%
0.47%
0.47%
13.63%
24.29%
1.82%
14.21%
51.67%
12.83%
1.82%
14.21%
51.67%
1.58%
1.58%
13.36%
19.61%
1.16%
9.42%
69.43%
12.31%
1.69%
13.74%
56.72%
2.63%
1.82%
12.86%
18.01%
1.49%
12.47%
59.22%
11.94%
1.49%
12.47%
59.22%
2.26%
2.26%
13.12%
19.28%
(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.
26
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 years ended June 30, 2022 ("fiscal 2022") and 2021 ("fiscal 2021"). 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 2022 include the following:
• Net income for fiscal 2022 was $42.2 million, or $5.34 per diluted common share, compared to $71.5 million, or $8.55 per
diluted common share, for fiscal 2021.
• Generated loans of $783.2 million, primarily under the National Lending Division, which purchased loans totaling
$187.9 million and originated loans totaling $587.8 million, earning average portfolio yields of 8.9% and 6.7%, respectively.
The purchased loan yield of 8.9% 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 8.9% for fiscal 2022.
• Recorded correspondent fee income of $22.5 million for fiscal 2022, compared to $23.5 million for fiscal 2021.
Purchased
2022
Originated
Years Ended June 30,
2021
Total
Purchased
Originated
Total
(Dollars in thousands)
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)
$
199,523
187,914
$
587,840
587,840
8.91%
8.92%
6.73%
N/A
Total loans as of period end:
Unpaid principal balance
Net investment basis
$
512,006
477,682
$
759,229
759,229
$
$
787,363
775,754
$
181,591
169,489
$
308,862
308,862
7.65%
8.92%
8.91%
8.91%
6.93%
N/A
1,271,235
1,236,911
$
466,059
429,054
$
523,535
523,535
$
$
490,453
478,351
7.84%
8.91%
989,594
952,589
(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.”
Paycheck Protection Program (“PPP”). Through June 30, 2022, the Bank had originated over 34,600 PPP loans totaling $3.33 billion
in connection with the PPP, comprised of $6.5 million, $2.84 billion, and $487.5 million during the years ended June 30, 2022, 2021,
and 2020, respectively. The Bank subsequently sold PPP loans with a total principal balance of $6.5 million, $2.87 billion, and $671.4
million, and recorded a net gain of $86 thousand, $46.7 million, and $9.7 million on the sales primarily resulting from the recognition
of net deferred fees, offset by purchase price discounts, during the years ended June 30, 2022, 2021, and 2020, respectively.
On June 12, 2020, the Bank entered into a correspondent agreement (the “Correspondent Agreement”) with Loan Source and ACAP
SME, LLC (“ACAP”) to act as the correspondent for Loan Source in connection with Loan Source’s pledge of PPP loans to the PPP
Liquidity Facility (“PPPLF”). The PPP loans to be pledged by Loan Source are required to be PPP loans originated by depository
institutions and purchased by Loan Source. ACAP has agreed to act as a loan service provider for Loan Source in connection with the
purchased PPP loans. Under the Correspondent Agreement, and with certain exceptions, the Bank will be compensated by Loan
Source for acting as correspondent on a per loan basis that varies based on, among other things, the amount of the fee Loan Source
receives on the PPP loans it purchases and the terms of such PPP loans. The Bank does not assume any liability for any PPP loans
pledged by Loan Source to the PPPLF pursuant to the Correspondent Agreement. Through June 30, 2022, Loan Source purchased
$11.24 billion of PPP loans, including $3.33 billion of PPP loans from the Bank, and approximately $7.91 billion of PPP loans from
lenders other than the Bank, which generated a correspondent fee for the Bank of $8.9 million, which continues to be recognized over
the expected life of the loans. The Bank also receives one half of the net servicing income on the remaining $1.44 billion PPP
portfolio owned by Loan Source as of June 30, 2022.
Troubled Debt Restructuring (“TDR”) Relief. From March 1, 2020 through January 1, 2022, a financial institution may elect to
suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19
pandemic that would otherwise be categorized as a TDR. This TDR relief is applicable for the term of the loan modification that
occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions
27
are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. Through June 30,
2022, the Bank had granted 317 short-term deferments, none of which were still under deferral as of June 30, 2022. These short-term
deferments were not classified as TDR loans and were not reported as past due provided that they are performing in accordance with
the modified terms.
Results of Operations for the years ended June 30, 2022 and 2021
General
Net income for the year ended June 30, 2022 was $42.2 million, or $5.34 per diluted common share, compared to $71.5 million, or
$8.55 per diluted common share, for the year ended June 30, 2021.
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 $83.4 million for the year
ended June 30, 2022, as compared to $67.1 million for the year ended June 30, 2021. The increase was primarily due to
increased loan interest income, primarily in the National Lending Division portfolio, decreased deposit interest expense and
decreased interest expense on subordinated debt.
The following table summarizes interest income and related yields recognized on the Bank's loans:
Average
Balance
41,009
35,678
627,786
458,036
1,085,822
1,162,509
633
1,163,142
$
$
$
$
2022
Interest
Income
$
$
$
$
2,143
2,356
42,256
40,820
83,076
87,575
17
87,592
Years Ended June 30,
Yield
(Dollars in thousands)
Average
Balance
5.23%
6.60%
6.73%
8.91%
7.65%
7.53%
2.69%
7.53%
$
$
$
$
56,711
45,764
469,632
400,141
869,773
972,248
166,230
1,138,478
2021
Interest
Income
$
$
$
$
2,746
2,441
32,560
35,649
68,209
73,396
3,522
76,918
Yield
4.84%
5.33%
6.93%
8.91%
7.84%
7.55%
2.12%
6.76%
Community Banking
SBA National
National Lending:
Originated
Purchased
Total National Lending
Total excluding SBA PPP
SBA PPP
Total including SBA PPP
The yield on purchased loans is affected by unscheduled loan payoffs, which result in the 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 $12.0 million for the year ended June 30, 2022, an increase of $3.9 million from the year ended June 30, 2021. The
following table summarizes the total return recognized on the purchased loan portfolio:
Years Ended June 30,
2022
2021
Income
Return (1)
Income
Return (1)
Regularly scheduled interest and accretion
Transactional income:
Gain on real estate owned
Accelerated accretion and loan fees
Total transactional income
Total
$
28,811
31
12,009
12,040
40,851
$
(Dollars in thousands)
6.29%
$
27,536
0.01%
2.62%
2.63%
8.92%
$
-
8,113
8,113
35,649
6.88%
0.00%
2.03%
2.03%
8.91%
(1) The total return on purchased loans represents scheduled accretion, accelerated accretion and gains on real estate owned 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 periods shown. Total return is considered a non-GAAP financial measure.
• An increase of $1.1 million in the credit for loan losses, primarily due to more significant decreases in qualitative factors
associated with the COVID-19 pandemic, primarily in the SBA portfolio, during the year ended June 30, 2022, as a result of
continued improvements and stabilization in the economy, real estate valuations, and loan performance from the COVID-19
pandemic, as compared to smaller decreases in the year ended June 30, 2021. This decrease was partially offset by loan
growth during the year ended June 30, 2022, primarily in the originated commercial real estate and commercial and industrial
portfolios.
• A decrease of $47.6 million in noninterest income, principally due to the following:
• A decrease in gain on sale of PPP loans of $46.6 million, due to the sale of PPP loans with a total principal balance of
$6.3 million in fiscal 2022, as compared to $2.87 billion in fiscal 2021;
28
• A decrease in correspondent fee income of $924 thousand from the recognition of correspondent fees and net servicing
income due to a decrease in average PPP loans held by Loan Source; and
• An increase in unrealized loss on equity securities of $407 thousand; partially offset by,
• A decrease in loss on real estate owned of $628 thousand, due to net gains on the sale of properties in fiscal 2022 as
compared to write-downs and losses on the sale of properties in fiscal 2021.
• An increase of $9.4 million in noninterest expense, primarily due to the following:
• An increase in salaries and employee benefits of $8.7 million, primarily due to decreases in deferred salaries contra-
expense related to the origination of PPP loans in fiscal 2021, and increases in regular and stock compensation expense;
• An increase in other noninterest expense of $641 thousand, primarily due to the quarterly valuation of SBA servicing
rights, which resulted in net impairment of $182 thousand in fiscal 2022, as compared to a net recovery of $263 thousand
in fiscal 2021, and a $310 thousand increase in travel and meals and entertainment expense; and
• An increase in marketing expense of $191 thousand, primarily due to increases in website and television advertising;
partially offset by,
• A decrease in occupancy and equipment expense of $267 thousand, primarily due to decreases in depreciation, supplies,
and real estate taxes.
29
Net Interest Income
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated:
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
PPPLF 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
Interest rate spread
Net interest margin (5)
Cost of funds (6)
Year Ended June 30,
Average
Balance
2022
Interest
Income/
Expense
$
$
316
87,592
26
602
88,536
960
806
565
2,198
4,529
493
-
-
90
5,112
$
$
$
$
64,560
1,163,142
1,306
290,167
1,519,175
2,681
49,503
1,571,359
330,228
265,116
110,145
185,347
890,836
15,000
-
-
5,228
911,064
403,760
14,167
1,328,991
242,368
1,571,359
Average
Yield/
Rate
0.49%
7.53%
1.99%
0.21%
5.83%
0.29%
0.30%
0.51%
1.19%
0.51%
3.29%
0.00%
0.00%
1.72%
0.56%
Average
Balance
2021
Interest
Income/
Expense
$
$
754
76,918
61
392
78,125
495
1,517
57
6,798
8,867
535
400
1,126
111
11,039
$
$
$
$
69,762
1,138,478
1,750
314,405
1,524,395
2,728
50,909
1,578,032
167,505
312,537
39,844
424,894
944,780
24,072
114,341
14,995
5,895
1,104,083
261,322
21,643
1,387,048
190,984
1,578,032
$
83,424
$
67,086
5.27%
5.49%
0.39%
Average
Yield/
Rate
1.08%
6.76%
3.49%
0.12%
5.12%
0.30%
0.49%
0.14%
1.60%
0.94%
2.22%
0.35%
7.51%
1.88%
1.00%
4.12%
4.40%
0.81%
(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) Net interest margin is calculated as net interest income divided by total interest-earning assets.
(6) Cost of funds is calculated as total interest expense divided by total interest-bearing liabilities plus demand deposits and escrow accounts.
30
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, 2022
Compared to the Year Ended June 30, 2021
Change Due to Volume
Change Due to Rate
Total Change
(In thousands)
Interest earning assets:
Investment securities
Loans
FHLBB stock
Short-term investments
Total increase in interest income
Interest-bearing liabilities:
Interest-bearing deposits
Federal Home Loan Bank advances
$
Paycheck Protection Program Liquidity Facility advances
Subordinated debt
Capital lease obligations
Total decrease in interest expense
Total increase in net interest and dividend income
$
(52)
1,696
(13)
(32)
1,599
(2,664)
(244)
(400)
(1,126)
(12)
(4,446)
6,045
$
$
(386)
8,978
(22)
242
8,812
$
(438)
10,674
(35)
210
10,411
(1,674)
202
-
-
(9)
(1,481)
10,293
(4,338)
(42)
(400)
(1,126)
(21)
(5,927)
16,338
$
For the year ended June 30, 2022, the $6.0 million volume-related change in net interest income was mainly the result of the decrease
in average interest-bearing deposits, which decreased by $53.9 million, and the shift in composition of the deposit portfolio, which
included a $239.5 million average decrease in time deposits. Additionally, loan balances increased by $24.7 million, on average
compared to fiscal 2021, and average balances on both PPPLF and subordinated debt decreased by $114.3 million and $15.0 million,
respectively. The rate-related increase in fiscal 2022 compared to fiscal 2021 was principally due to an increase in rates on loans and
short-term investments, and a decrease in rates offered on deposits, partially offset by a decrease in rate earned on investment
securities. For fiscal 2022, the net interest margin earned of 5.49% was 109 basis points higher than that earned for fiscal 2021,
primarily due to higher rates earned on loans and short-term investments, higher average balances in loans, and lower rates offered on
deposits, partially offset by lower rates earned on investment securities.
The Bank’s total cost of funds decreased to 0.39% in fiscal 2022, from 0.81% in fiscal 2021, due to lower rates offered on the deposit
portfolio and higher average balances of non-interest-bearing deposits related to a PPP collection deposit account.
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 originated loans and for incremental reserves
required for purchased loans based on estimates of deteriorated credit quality post-purchase.
The provision (credit) for loan losses for the fiscal year ended June 30, 2022 was a credit of $2.5 million, an increase of $1.1 million
from the credit for loan losses of $1.4 million for the year ended June 30, 2021. The increase in the credit for loan losses reflects
decreases in certain qualitative factors during fiscal 2022, primarily in the SBA portfolio, as a result of continued improvements and
stabilization in the economy, real estate valuations, and loan performance from the COVID-19 pandemic. This decrease was partially
offset by loan growth during the year ended June 30, 2022, primarily in the originated commercial real estate and commercial and
industrial portfolios. At June 30, 2022 and 2021, the allowance for loan losses was $5.0 million and $7.3 million, respectively, and the
ratio of allowance for loan losses to total loans was 0.39% and 0.70%, respectively.
Net recoveries for fiscal 2022 totaled $177 thousand, representing approximately -0.02% of the Bank's average portfolio loan balance
during the fiscal year. This compares to net charge-offs of $469 thousand, or 0.04%, in fiscal 2021, representing a decrease of $646
thousand in fiscal 2022.
31
For additional information on the allowance for loan losses, see "Asset Quality."
Noninterest Income
Noninterest income for fiscal 2022 totaled $24.4 million, a decrease of $47.6 million, or 66.1%, from fiscal 2021. When compared to
fiscal 2021, the decrease was principally due to the following:
• A decrease in gain on sale of PPP loans of $46.6 million, due to the sale of PPP loans with a total principal balance of
$6.3 million in fiscal 2022, as compared to $2.87 billion in fiscal 2021;
• A decrease in correspondent fee income of $924 thousand from the recognition of correspondent fees and net servicing
income as a result of the correspondent arrangement entered into with Loan Source during the quarter ended June 30,
2020. Under the correspondent arrangement, the Bank earns a correspondent fee when Loan Source purchases PPP loans
and the Bank subsequently shares in net servicing income on such purchased PPP loans. Correspondent income for the
year ended June 30, 2022 is comprised of the following components:
Correspondent Fee
Amortization of Purchased Accrued Interest
Earned Net Servicing Interest
Total
Income Earned
(In thousands)
$
4,329
6,549
11,650
22,528
$
A summary of PPP loans purchased by Loan Source and related amounts that the Bank will earn over the expected life of
the loans is as follows:
Quarter
PPP Loans
Purchased by
Loan Source(3)
Q4 FY 2020
Q1 FY 2021
Q2 FY 2021
Q3 FY 2021
Q4 FY 2021
Q1 FY 2022
Total
$ 1,272,900
2,112,100
1,333,500
2,141,900
4,371,000
6,300
$ 11,237,700
Less amounts recognized in Q4 FY 22
Less amounts recognized in previous quarters
Amount remaining to be recognized
Correspondent
Fee
(In thousands)
Purchased
Accrued Interest(1)
$ 2,891
5,348
495
-
171
-
$ 8,905
(1,067)
(7,342)
$ 496
$ 688
2,804
3,766
598
2,703
1
$ 10,560
(1,451)
(7,883)
$ 1,226
Total(2)
$ 3,579
8,152
4,261
598
2,874
1
$ 19,465
(2,518)
(15,225)
$ 1,722
(1) - The Bank's share
(2) - Expected to be recognized into income over life of loans
(3) - Loan Source’s ending PPP loan balance was $1.44 billion as of June 30, 2022
• An increase in unrealized loss on equity securities of $407 thousand; partially offset by,
• A decrease in loss on real estate owned of $628 thousand, due to net gains on the sale of properties in fiscal 2022 as
compared to write-downs and losses on the sale of properties in fiscal 2021.
Noninterest Expense
Noninterest expense for fiscal 2022 totaled $48.8 million, an increase of $9.4 million, or 23.7%, from fiscal 2021. When compared to
fiscal 2021, the decrease was principally due to the following:
• An increase in salaries and employee benefits of $8.7 million, primarily due to decreases in deferred salaries contra-
expense related to the origination of PPP loans in fiscal 2021, and increases in regular and stock compensation expense;
• An increase in other noninterest expense of $641 thousand, primarily due to the quarterly valuation of SBA servicing
rights, which resulted in net impairment of $182 thousand in fiscal 2022, as compared to a net recovery of $263 thousand
in fiscal 2021, and a $310 thousand increase in travel and meals and entertainment expense; and
• An increase in marketing expense of $191 thousand, primarily due to increases in website and television advertising;
partially offset by,
• A decrease in occupancy and equipment expense of $267 thousand, primarily due to decreases in depreciation, supplies,
and real estate taxes.
32
Income Taxes
Income tax expense for fiscal 2022 totaled $19.4 million, representing 31.5% of pretax income, as compared to $29.6 million, or
29.3% of pretax income, in fiscal 2021. The increase in the Bank's effective tax rate was primarily due to changes in state tax
apportionment, as the prior year apportionment was significantly impacted by the gain on sale of PPP loans in states with lower tax
rates, as well as a one-time income tax accrual adjustment of $290 thousand during the year ended June 30, 2022.
Results of Operations for the years ended June 30, 2021 and 2020
General
Net income for the year ended June 30, 2021 was $71.5 million, or $8.55 per diluted common share, compared to $22.7 million, or
$2.53 per diluted common share, for the year ended June 30, 2020. Earnings were positively impacted in the year ended June 30, 2021
by the sale of $2.87 billion in PPP loans to Loan Source, which resulted in a pre-tax net gain of $46.7 million ($32.8 million net of
tax).
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 $67.1 million for the year
ended June 30, 2021, as compared to $65.0 million for the year ended June 30, 2020. The increase was primarily due to
lower deposit interest expense, partially offset by lower loan interest income, primarily in the National Lending Division
originated portfolio, lower interest income on available-for-sale securities, and lower interest and dividend income on short-
term investments.
The following table summarizes interest income and related yields recognized on the Bank's loans:
Average
Balance (1)
$
$
$
$
56,711
45,764
469,632
400,141
869,773
972,248
166,230
1,138,478
2021
Interest
Income
$
$
$
$
2,746
2,441
32,560
35,649
68,209
73,396
3,522
76,918
Years Ended June 30,
Average
Balance (1)
Yield
(Dollars in thousands)
4.84%
5.33%
6.93%
8.91%
7.84%
7.55%
2.12%
6.76%
$
$
$
$
82,472
55,511
479,054
356,958
836,012
973,995
55,649
1,029,644
2020
Interest
Income
$
$
$
$
4,470
4,066
35,572
35,201
70,773
79,309
1,561
80,870
Yield
5.42%
7.32%
7.43%
9.86%
8.47%
8.20%
2.81%
7.85%
Community Banking
SBA National
National Lending:
Originated
Purchased
Total National Lending
Total excluding SBA PPP
SBA PPP
Total including SBA PPP
(1)
Includes loans held for sale.
The yield on purchased loans is affected by unscheduled loan payoffs, which result in the 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 $8.1 million for the year ended June 30, 2021, a decrease of $1.3 million from the year ended June 30, 2020. The following
table summarizes the total return recognized on the purchased loan portfolio:
Years Ended June 30,
2021
2020
Income
Return (1)
Income
Return (1)
Regularly scheduled interest and accretion
Transactional income:
Gain on real estate owned
Accelerated accretion and loan fees
Total transactional income
Total
$
27,536
-
8,113
8,113
35,649
$
(Dollars in thousands)
6.88%
$
26,202
0.00%
2.03%
2.03%
8.91%
$
395
8,999
9,394
35,596
7.34%
0.11%
2.52%
2.63%
9.97%
(2) The total return on purchased loans represents scheduled accretion, accelerated accretion and gains on real estate owned 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 periods shown. Total return is considered a non-GAAP financial measure.
33
• A decrease of $5.9 million in the provision (credit) for loan losses, primarily due to decreases in certain qualitative factors
during fiscal 2021, as a result of continued improvements from the COVID-19 pandemic, primarily in the SBA portfolio, as
compared to significant increases in fiscal 2020, at the onset of the COVID-19 pandemic, primarily allocated to the SBA loan
portfolio due to higher risk of losses in that portfolio. This decrease was partially offset by loan growth during fiscal 2021,
primarily in the originated commercial real estate and commercial and industrial portfolios.
• An increase of $58.8 million in noninterest income, principally due to the following:
• An increase in gain on sale of PPP loans of $37.0 million, due to the sale of PPP loans with a total principal balance of
$2.87 billion in fiscal 2021, as compared to $457.6 million in fiscal 2020; and
• An increase in correspondent fee income of $23.4 million due to the Bank entering into the correspondent arrangement at
the end of fiscal 2020; partially offset by,
• A decrease in gain on sale of SBA loans of $793 thousand, due to no loans sold in fiscal 2021;
• A decrease in gain on sale of residential loans held for sale of $493 thousand, due to lower volume sold in fiscal 2021 as
the Bank shuttered its residential lending division in fiscal 2021; and
• An increase in loss on real estate owned of $458 thousand, due to write-downs and losses on the sale of properties in
fiscal 2021.
• A decrease of $967 thousand in noninterest expense, primarily due to the following:
• A decrease in salaries and employee benefits of $2.5 million, primarily due to increases in deferred salaries contra-
expense related to the origination of PPP loans, partially offset by increases in regular and incentive compensation; and
• A decrease in other noninterest expense of $596 thousand, primarily due to the quarterly valuation of SBA servicing
rights, which resulted in a net recovery of $263 thousand in fiscal 2021, as compared to net impairment of $153 thousand
in fiscal 2020; and
• A decrease in intangible asset amortization of $434 thousand, as the core deposit intangible was fully amortized as of
June 30, 2020; partially offset by,
• An increase in loan expense of $1.2 million, primarily due to correspondent expenses associated with Loan Source of
$1.7 million, partially offset by decreased collection expense due to reimbursements during fiscal 2021; and
• An increase in data processing fees of $514 thousand, primarily due to increased IT hardware expense, computer service
fees, and implementation fees.
34
Net Interest Income
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated:
Years Ended June 30,
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
PPPLF 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
Interest rate spread
Net interest margin (5)
Cost of funds (6)
Average
Balance
2021
Interest
Income/
Expense
$
$
754
76,918
61
392
78,125
495
1,517
57
6,798
8,867
535
400
1,126
111
11,039
$
$
$
$
69,762
1,138,478
1,750
314,405
1,524,395
2,728
50,909
1,578,032
167,505
312,537
39,844
424,894
944,780
24,072
114,341
14,995
5,895
1,104,083
261,322
21,643
1,387,048
190,984
1,578,032
Average
Yield/
Rate
1.08%
6.76%
3.49%
0.12%
5.12%
0.30%
0.49%
0.14%
1.60%
0.94%
2.22%
0.35%
7.51%
1.88%
1.00%
Average
Balance
78,656
1,029,644
2,204
94,586
1,205,090
2,971
38,363
1,246,424
75,984
276,264
34,517
496,531
883,296
34,918
50,295
14,883
5,169
988,561
88,805
9,097
1,086,463
159,961
1,246,424
$
$
$
$
2020
Interest
Income/
Expense
$
$
1,695
80,870
94
1,025
83,684
364
4,096
57
12,066
16,583
689
174
1,126
125
18,697
$
67,086
$
64,987
4.12%
4.40%
0.81%
(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 Federal Reserve Bank and FHLB overnight deposits and other interest-bearing deposits.
(5) Net interest margin is calculated as net interest income divided by total interest-earning assets.
(6) Cost of funds is calculated as total interest expense divided by total interest-bearing liabilities plus demand deposits and escrow accounts.
Average
Yield/
Rate
2.15%
7.85%
4.26%
1.08%
6.94%
0.48%
1.48%
0.17%
2.43%
1.88%
1.97%
0.35%
7.57%
2.42%
1.89%
5.05%
5.39%
1.74%
35
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, 2021
Compared to the Year Ended June 30, 2020
Change Due to Volume
Change Due to Rate
Total Change
(In thousands)
Interest earning assets:
Investment securities
Loans
FHLBB stock
Short-term investments
Total decrease in interest income
Interest-bearing liabilities:
Interest-bearing deposits
Federal Home Loan Bank advances
$
Paycheck Protection Program Liquidity Facility advances
Subordinated debt
Capital lease obligations
Total decrease in interest expense
Total increase in net interest and dividend income
$
(174)
8,033
(17)
855
8,697
(750)
(233)
225
8
16
(734)
9,431
$
$
(767)
(11,985)
(16)
(1,488)
(14,256)
$
(941)
(3,952)
(33)
(633)
(5,559)
(6,966)
79
1
(8)
(30)
(6,924)
(7,332)
(7,716)
(154)
226
-
(14)
(7,658)
2,099
$
For the year ended June 30, 2021, the $9.4 million volume-related change in net interest income was mainly the result of the
significant increase in loan and short-term investment average balances, which grew by $108.8 million and $219.8 million,
respectively, on average compared to fiscal 2020, partially offset by higher volume of interest-bearing deposits. The rate-related
decrease in fiscal 2021 compared to fiscal 2020 was principally due to a decrease in rates on loans and short-term investments,
partially offset by lower rates offered on deposits. For fiscal 2021, the net interest margin earned of 4.40% was ninety-nine basis
points lower than that earned for fiscal 2020, primarily due to lower rates earned on loans and short-term investments, due to higher
average balances of PPP loans relative to total loans, which earn interest at 1.00%, lower transactional income on purchased loans, and
higher average balances of short-term investments due to cash held by the Bank related to a PPP collection deposit account.
The Bank’s total cost of funds decreased to 0.81% in fiscal 2021, from 1.74% in fiscal 2020, due to lower rates offered on the deposit
portfolio, lower rates on FHLB advances, and higher average balances of non-interest bearing deposits related to a PPP collection
deposit account.
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 originated loans and for incremental reserves
required for purchased loans based on estimates of deteriorated credit quality post-purchase.
The provision for loan losses for the fiscal year ended June 30, 2021 was a credit of $1.4 million, a decrease of $5.9 million from the
provision for loan losses of $4.5 million for the year ended June 30, 2020. The decrease in the provision for loan losses reflects
decreases in certain qualitative factors during the current quarter as a result of continued improvements from the COVID-19
pandemic. This decrease was partially offset by loan growth during the year ended June 30, 2021, primarily in the originated
commercial real estate and commercial and industrial portfolios. At June 30, 2021 and 2020, the allowance for loan losses was $7.3
million and $9.2 million, respectively, and the ratio of allowance for loan losses to total loans was 0.70% and 0.94%, respectively.
Net charge-offs for fiscal 2021 totaled $462 thousand, representing approximately 0.04% of the Bank's average portfolio loan balance
during the fiscal year. This compares to $1.0 million, or 0.10%, in fiscal 2020, representing a decrease of $562 thousand in fiscal
2021.
For additional information on the allowance for loan losses, see "Asset Quality."
36
Noninterest Income
Noninterest income for fiscal 2021 totaled $72.0 million, an increase of $58.8 million, or 446.4%, from fiscal 2020. When compared
to fiscal 2020, the increase was principally due to the following:
• An increase in gain on sale of PPP loans of $37.0 million, due to the sale of PPP loans with a total principal balance of
$2.87 billion in fiscal 2021, as compared to $457.6 million in fiscal 2020, which resulted in a net gain based on the
recognition of net deferred fees; and
• An increase in correspondent fee income of $23.4 million from the recognition of correspondent fees and net servicing
income as a result of the correspondent arrangement entered into with Loan Source during the quarter ended June 30,
2020. Under the correspondent arrangement, the Bank earns a correspondent fee when Loan Source purchases PPP loans
and the Bank subsequently shares in net servicing income on such purchased PPP loans. Correspondent income for the
year ended June 30, 2021 is comprised of the following components:
Correspondent Fee
Amortization of Purchased Accrued Interest
Earned Net Servicing Interest
Total
Income Earned
(In thousands)
$
4,061
2,785
16,606
23,452
$
A summary of PPP loans purchased by Loan Source and related amounts that the Bank will earn over the expected life of
the loans is as follows:
Quarter
PPP Loans
Purchased by
Loan Source(3)
Q4 FY 2020
Q1 FY 2021
Q2 FY 2021
Q3 FY 2021
Q4 FY 2021
Total
$ 1,272,900
2,112,100
1,333,500
2,141,900
4,371,000
$ 11,231,400
Less amounts recognized in Q4 FY 21
Less amounts recognized in previous quarters
Amount remaining to be recognized
Correspondent
Fee
(In thousands)
Purchased
Accrued Interest(1)
$ 2,891
5,348
495
-
171
$ 8,905
(1,080)
(3,001)
$ 4,824
$ 688
2,804
3,766
598
3,452
$ 11,308
(972)
(1,813)
$ 8,523
Total(2)
$ 3,579
8,152
4,261
598
3,623
$ 20,213
(2,052)
(4,814)
$ 13,347
(1) - Northeast Bank's share
(2) - Expected to be recognized into income over life of loans
(3) - Loan Source’s ending PPP loan balance was $8.39 billion as of June 30, 2021
These increases were partially offset by the following:
• A decrease in gain on sale of SBA loans of $793 thousand, due to no loans sold in fiscal 2021;
• A decrease in gain on sale of residential loans held for sale of $493 thousand, due to lower volume sold in fiscal 2021 as
the Bank shuttered its residential lending division in fiscal 2021; and
• An increase in loss on real estate owned of $458 thousand, due to write-downs and losses on the sale of properties in
fiscal 2021.
Noninterest Expense
Noninterest expense for fiscal 2021 totaled $39.4 million, a decrease of $967 thousand, or 2.4%, from fiscal 2020. When compared to
fiscal 2020, the decrease was principally due to the following:
• A decrease in salaries and employee benefits of $2.5 million, primarily due to the increase in deferred salaries contra-
expense related to the origination of PPP loans, partially offset by increases in regular and incentive compensation; and
• A decrease in other noninterest expense of $596 thousand, primarily due to the quarterly valuation of SBA servicing
rights, which resulted in a net recovery of $263 thousand in fiscal 2021, as compared to net impairment of $153 thousand
in fiscal 2020; and
• A decrease in intangible asset amortization of $434 thousand, as the core deposit intangible was fully amortized as of
June 30, 2020; partially offset by,
37
• An increase in loan expense of $1.2 million, primarily due to correspondent expenses associated with Loan Source of
$1.7 million, partially offset by decreased collection expense due to reimbursements during fiscal 2021; and
• An increase in data processing fees of $514 thousand, primarily due to increased IT hardware expense, computer service
fees, and implementation fees.
Income Taxes
Income tax expense for fiscal 2021 totaled $29.6 million, representing 29.3% of pretax income, as compared to $10.5 million, or
31.7% of pretax income, in fiscal 2020. The decrease in the Bank's effective tax rate was principally due to a one-time recapture of the
tax reserve for loan losses as a result of the repurchase of common stock during fiscal 2020, in the amount of $554 thousand, that was
not incurred again in fiscal 2021. Additionally, there was a decrease in the state tax rate due to changes in apportionment, primarily
from the sale of PPP loans.
Financial Condition
Overview
The Bank's total assets were $1.58 billion at June 30, 2022, representing a decrease of $591.6 million, or 27.2%, compared to $2.17
billion at June 30, 2021. Significant changes in the Bank's balance sheet components include:
• Cash and short-term investments decreased by $838.4 million, or 83.0%, primarily due to the timing of a large deposit
account related to PPP loan payoff collections at June 30, 2021, which has decreased throughout the fiscal year. Cash and
short-term investments may fluctuate significantly while PPP collections, including forgiveness amounts, continue,
depending on the timing of receipts and remittances of cash amounts.
• The loan portfolio increased by $264.2 million, or 25.4%, compared to June 30, 2021. The increase was principally due to
growth in the National Lending Division originated and purchased portfolios, partially offset by decreases in SBA National
and Community Banking Divisions.
• Deposits decreased by $574.7 million, or 30.9%, from June 30, 2021. The decrease was attributable to decreases in demand
deposits of $643.5 million, or 66.2% and time deposits of $150.5 million, or 54.2%, partially offset by an increase in savings
and interest checking deposits of $260.2 million, or 80.1%. The primary reason for the net decrease in deposits was due to
timing of the receipt of short-term customer funds related to PPP payoff collections prior to June 30, 2021, which were
subsequently used to pay down NEWITY’s PPPLF balance during the year ended June 30, 2022.
• Shareholders’ equity increased by $15.9 million, or 6.9%, from June 30, 2021, primarily due to net income of $42.2 million,
partially offset by the repurchase of 821 thousand shares of common stock at a weighted average price per share of $34.09,
which resulted in a $28.0 million decrease to shareholders’ equity. Shareholders’ equity also increased by $1.9 million as a
result of stock compensation expense recognized.
Cash and Cash Equivalents
Cash and short-term investments decreased by $838.4 million, or 83.0%, primarily due to the timing of a large deposit account related
to PPP loan payoff collections at June 30, 2021, which has decreased throughout the fiscal year. Cash and short-term investments may
fluctuate significantly while PPP collections, including forgiveness amounts, continue, depending on the timing of receipts and
remittances of cash amounts.
38
Securities
The securities portfolio totaled $61.7 million and $67.0 million at June 30, 2022 and 2021, respectively. The decrease of $5.3 million
was primarily the result of the runoff of the agency mortgage-backed securities held by the Bank.
The Bank's securities 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, 2022
June 30, 2021
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
$
$
51,080
4,775
7,361
63,216
$
$
50,285
4,626
6,798
61,709
(In thousands)
$
$
51,561
7,938
7,282
66,781
$
$
51,591
8,146
7,230
66,967
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, 2022. Actual maturities of mortgage-backed securities will differ from contractual maturities due both
to scheduled amortization and prepayments.
Within One Year
Fair Value
Yield
U.S. Government agency securities
Agency mortgage-backed securities
Total available-for-sale debt securities
$
$
25,880
49
25,929
0.14%
0.96%
0.14%
After One Year Through
Five Years
Fair Value
(Dollars in thousands)
Yield
$
$
24,405
504
24,909
1.17%
1.78%
1.18%
After Five Years
Through Ten Years
Fair Value
Yield
$
$
-
4,073
4,073
0.00%
1.37%
1.37%
After Ten Years
Total
Fair Value
Yield
(Dollars in thousands)
Fair Value
Yield
U.S. Government agency securities
Agency mortgage-backed securities
Total available-for-sale debt securities
$
$
-
-
-
0.00%
0.00%
0.00%
$
$
50,285
4,626
54,911
0.64%
1.41%
0.71%
The other securities measured at net asset value have no scheduled maturity date. However, the Bank’s securities can be redeemed
quarterly and daily at the closing net asset value.
Management reviews the portfolio of securities on an ongoing basis to determine if there have been any other-than-temporary declines
in value. No other-than-temporary impairment was recognized during fiscal 2022 or 2021.
Loans
Total loans, including loans held for sale, totaled $1.30 billion at June 30, 2022, compared to $1.04 billion at June 30, 2021. The
increase of $264.2 million, or 25.4%, for fiscal 2022 was principally due to increases in the National Lending Division originated and
purchased loan portfolios, partially offset by decreases in SBA National and Community Banking Divisions.
The composition of the Bank’s loan portfolio (excluding loans held for sale) at the dates indicated is as follows:
Commercial real estate
Commercial and industrial
Residential real estate
Consumer
Total loans
Less: Allowance for loan losses
Loans, net
June 30, 2022
June 30, 2021
Amount
$
$
882,187
352,729
69,209
741
1,304,866
5,028
1,299,838
Percent
of Total
Amount
(Dollars in thousands)
67.61%
27.03%
5.30%
0.06%
100.00%
$
$
725,287
257,604
56,591
1,142
1,040,624
7,313
1,033,311
Percent
of Total
69.70%
24.75%
5.44%
0.11%
100.00%
39
The Bank’s loan portfolio (excluding loans held for sale) by lending division follows:
Community Banking
Division
National Lending
Division
SBA Division
Total
Percent of
Total
June 30, 2022
Originated loans:
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Residential real estate
Consumer
Subtotal
$
Purchased loans:
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Residential real estate
Subtotal
Total
June 30, 2021
Originated loans:
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Residential real estate
Consumer
Subtotal
Purchased loans:
Commercial real estate: non-owner occupied
Commercial real estate: owner-occupied
Commercial and industrial
Residential real estate
Subtotal
Total
$
$
$
(Dollars in thousands)
4,855
5,092
1,858
22,363
741
34,909
-
-
-
-
-
34,909
9,368
5,738
2,572
29,666
1,142
48,486
-
-
-
-
-
48,486
$
$
$
$
307,200
64,638
348,056
39,335
-
759,229
300,220
169,871
80
7,511
477,682
1,236,911
187,593
65,950
251,954
18,038
-
523,535
275,809
144,024
334
8,887
429,054
952,589
$ 16,390
13,921
2,735
-
-
33,046
-
-
-
-
-
$ 33,046
$ 19,508
17,297
2,744
-
-
39,549
-
-
-
-
-
$ 39,549
$
$
$
$
328,445
83,651
352,649
61,698
741
827,184
300,220
169,871
80
7,511
477,682
1,304,866
216,469
88,985
257,270
47,704
1,142
611,570
275,809
144,024
334
8,887
429,054
1,040,624
25.17%
6.41%
27.02%
4.73%
0.06%
63.39%
23.01%
13.02%
0.00%
0.58%
36.61%
100.00%
20.80%
8.55%
24.72%
4.58%
0.11%
58.76%
26.50%
13.84%
0.05%
0.85%
41.24%
100.00%
40
The following table summarizes the scheduled maturity of the Bank’s loan portfolio at June 30, 2022. 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 Fifteen Years
(In thousands)
After Fifteen Years
Total
12,743
-
35,360
56,306
1,163
-
10
105,582
$
$
61,698
7,511
412,096
470,091
352,648
81
741
1,304,866
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
$
$
$
$
9,811
4,784
$
31,604
1,591
$
7,540
1,136
$
188,210
67,264
168,007
1
91
438,168
$
177,708
209,342
182,278
62
457
603,042
$
Fixed rate
Loans Due After One Year, by Interest Rate Type
Floating or Adjustable
(In thousands)
Total
13,976
600
4,444
177,638
3,409
-
650
200,717
$
$
37,931
2,127
219,422
225,188
181,234
79
-
665,981
$
$
$
10,818
137,179
1,200
18
183
158,074
51,907
2,727
223,866
402,826
184,643
79
650
866,698
Approximately 76.8% of total loans were variable rate products at June 30, 2022, compared to 75.5% at June 30, 2021.
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 $1.7 million, or 14.8%, compared to June 30, 2021. The decrease was primarily due to
depreciation, partially offset by additions.
Real estate owned and other repossessed collateral, net, decreased from$1.6 million at June 30, 2021 to zero at June 30, 2022. The
decrease was primarily due to the sale of four assets, two of which were also transferred in during the year ended June 30, 2022. 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 bank-owned life insurance (“BOLI”) assets increased $424 thousand, or 2.4%, and amounted
to $17.9 million and $17.5 million at June 30, 2022 and 2021, respectively. 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,
2022. 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 noninterest
41
income and are not subject to income taxes. Management considers BOLI an illiquid asset. BOLI represented 7.0% of the Bank's total
capital at June 30, 2021.
Loan servicing rights, net totaled $1.3 million and $2.1 million at June 30, 2022 and 2021, respectively. The $776 thousand decrease
was primarily due to payoffs, amortization, and impairment charges booked, partially offset by servicing assets acquired during fiscal
2022.
FHLBB stock totaled $1.6 million and $1.2 million at June 30, 2022 and 2021, respectively. The $401 thousand increase was the
result of the Bank purchasing FHLB stock during fiscal 2022.
Deposits
The Bank's principal source of funding is its core deposit accounts. At June 30, 2022, core deposits, which the Bank defines as non-
maturity deposits, non-brokered insured time deposits and time deposits less than or equal to $250 thousand, represented 98.5% of
total deposits.
Total deposits decreased $574.7 million to $1.29 billion as of June 30, 2022 from $1.86 billion as of June 30, 2021. The decrease was
primarily due to decreases in demand deposits, time deposits, and money market accounts, partially offset by an increase in savings
and interest checking accounts.
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:
Year Ended June 30, 2022
Non-interest bearing demand
deposits and escrow accounts
Regular savings
NOW accounts
Money market accounts
Time deposits
Total average deposits
Year Ended June 30, 2021
Non-interest bearing demand
deposits and escrow accounts
Regular savings
NOW accounts
Money market accounts
Time deposits
Total average deposits
Average
Balance
(Dollars in thousands)
Weighted
Average Rate
Percent of Total
Average Deposits
$
$
$
$
403,760
110,145
330,228
265,116
185,347
1,294,596
261,322
39,844
167,505
312,537
424,894
1,206,102
0.00%
0.51%
0.29%
0.30%
1.19%
0.35%
0.00%
0.14%
0.30%
0.49%
1.60%
0.74%
31.19%
8.51%
25.51%
20.48%
14.31%
100.00%
21.67%
3.30%
13.89%
25.91%
35.23%
100.00%
There were $19.5 million and $7.7 million of time deposits greater than $250 thousand as of June 30, 2022 and 2021, respectively.
The scheduled maturity of deposits greater than $250 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 $250 thousand
Borrowings
June 30, 2022
(In thousands)
4,034
3,789
2,302
9,423
19,548
$
$
FHLBB advances and subordinated debt are the Bank’s sources of funding other than deposits. In fiscal 2022, total borrowings
decreased by $15.1 million, or 50.1%, to $15.0 million, due to the redemption of subordinated debt.
Advances from the FHLBB were $15.0 million at June 30, 2022 and 2021. Pledges of residential real estate loans, certain commercial
real estate loans, 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, 2022, $54.9 million in securities were pledged as collateral to
secure potential FHLBB advances as needed, compared to $59.7 million at June 30, 2021.
42
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. In connection with the merger of the Bank’s former bank holding company with and into the
Bank, the subordinated debt was assumed by the Bank. On July 1, 2021, the Bank redeemed the subordinated notes in full at par plus
accrued interest.
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.
43
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As of June 30, 2022, past due loans totaled $7.0 million, or 0.53% of total loans, compared to past due loans totaling $11.3 million, or
1.08% of total loans, as of June 30, 2021. The decrease was primarily due to 14 purchased loans totaling $5.3 million that became
current or paid off, partially offset by one purchased loan totaling $1.0 million that became past due during the year ended June 30,
2022.
The following table reflects the annual trend of total loans 30 days or more past due, as a percentage of total loans:
Past due loans to total loans
2022
0.53%
2021
1.08%
As of June 30,
2020
1.69%
2019
1.50%
2018
0.89%
Non-performing Assets
The table below sets forth the amounts and categories of the Bank’s non-performing assets at the dates indicated:
2022
2021
As of June 30,
2020
(Dollars in thousands)
2019
2018
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
$
$
$
$
$
$
550
5,031
202
11
5,794
71
28
7,053
7,152
12,946
-
12,946
6,561
0.99%
0.82%
$
$
$
696
5,756
286
43
6,781
1,114
148
10,715
11,977
18,758
1,639
20,397
9,990
1.80%
0.94%
$
$
$
832
6,861
2,058
29
9,780
1,169
210
9,946
11,325
21,105
3,274
24,379
5,703
2.17%
1.94%
$
$
$
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%
As of June 30, 2022, nonperforming assets totaled $12.9 million, or 0.82% of total assets, compared to $20.4 million, or 0.94% of total
assets, as of June 30, 2021. The decrease was primarily due to the sale of four other real estate owned properties totaling $1.7 million
and the payoff of two nonperforming National Lending Division originated loans totaling $2.4 million and two nonperforming
purchased loans totaling $3.3 million during the year ended June 30, 2022.
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, 2022
June 30, 2021
Nonaccrual
Accrual
Total TDRs
$
$
(In thousands)
$
4,357
23,165
27,522
$
5,451
22,319
27,770
At June 30, 2022, the Bank had zero real estate owned and other repossessed collateral, compared to $1.6 million at June 30, 2021.
The decrease was primarily due to the sale of four assets, two of which were transferred in during the year ended June 30, 2022. 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. 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.
The Bank continues 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.
45
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 $12.0 million and $11.9 million of loans rated substandard or worse at June 30,
2022 and 2021, respectively. The following tables present the Bank's loans by risk rating:
Commercial
Real Estate
Commercial
and Industrial
SBA
Residential(1)
Purchased
Portfolio
June 30, 2022
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
June 30, 2021
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
$
$
$
$
(In thousands)
$
$
373,348
4,131
4,306
-
-
381,785
258,616
8,570
1,463
-
-
268,649
342,986
6,900
28
-
-
349,914
$ 32,076
456
514
-
-
$ 33,046
247,483
6,910
133
-
-
254,526
$ 35,974
2,596
979
-
-
$ 39,549
$
$
$
$
$
$
41,166
-
-
-
-
41,166
20,543
30
35
-
-
20,608
$
$
$
$
468,264
2,266
7,152
-
-
477,682
410,743
8,984
9,327
-
-
429,054
Total
1,257,840
13,753
12,000
-
-
1,283,593
973,359
27,090
11,937
-
-
1,012,386
$
$
$
$
(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.
From March 2020 through June 30, 2022, the Bank granted 317 short-term deferments, none of which remained under deferral as of
June 30, 2022. These short-term deferments are not classified as troubled debt restructured loans and will not be reported as past due
provided that they are performing in accordance with the modified terms.
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.
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
46
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 the management of market risk,
the ALCO is in charge of 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 the Bank 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, the Bank 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, 2022, 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, 2022, we estimate that our net
interest income in the following 12 months would increase by 7.6% if rates increased by 200 basis points and decrease by 2.8% 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, 2022 ....................................................................
June 30, 2021 ....................................................................
7.6%
12.5%
(2.8%)
0.1%
Up 200 Basis Points
Down 100 Basis Points
47
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, 2022 available to meet our short-term funding
needs:
As of June 30, 2022
(In thousands)
Brokered time deposits
One-way sweep deposits
Federal Home Loan Bank of Boston
Other available lines
Total unused borrowing capacity
$
$
395,690 Subject to policy limitation of 25% of total assets
-
150,388 Unused advance capacity subject to eligible and qualified collateral
17,500
563,578
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 FHLBB may be required.
At June 30, 2022, the Bank had $563.6 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
35.6% of total assets. The Bank also had $172.1 million of cash and cash equivalents at June 30, 2022.
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 years ended June 30, 2021, and 2020, total annual interest expense was $1.0 million and $1.0 million, respectively, and
amortization of issuance costs on subordinated notes issued in June 2016 was $110 thousand and $111 thousand, respectively. There
was no interest expense or amortization of issuance costs recognized during the year ended June 30, 2022.
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, 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.
48
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,
2022 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
Lease liability
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
28,468
43,468
Total
9,398
30,495
-
38,893
$
$
$
$
15,000
1,482
16,482
$
$
-
4,689
4,689
$
$
-
4,636
4,636
Less Than
1 Year
Amount of Commitment Expiring – By Period
1-3
Years
(In thousands)
4-5
Years
9,398
27,847
-
37,245
$
$
-
521
-
521
$
$
-
-
-
-
$
$
$
$
-
17,661
17,661
After 5
Years
-
2,127
-
2,127
Shareholders’ equity was $248.3 million at June 30, 2022, an increase of $15.9 million, or 6.9%, from June 30, 2021. The increase
was primarily due to net income of $42.2 million, partially offset by the repurchase of 821 thousand shares of common stock at a
weighted average price per share of $34.09, which resulted in a $28.0 million decrease to shareholders’ equity. Shareholders’ equity
also increased by $1.9 million as a result of stock compensation expense recognized.
See Note 8 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.
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
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.
49
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 and Estimates
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.
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. 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.
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 the National Lending Division. Loans acquired by the National Lending Division
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
50
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.
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.
During the year ended June 30, 2022, the Bank migrated the loss data used in calculating the general component of the allowance for
loan losses for the SBA segment from 100% external to 100% internal data, blending by an additional 25% of internal data in each of
the four quarters of fiscal 2022, to utilize 100% internal data at June 30, 2022. Other than this change, 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, 2022 or 2021.
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.
51
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.
52
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, 2022 and 2021, the related statements
of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended June
30, 2022, 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, 2022 and 2021, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2022, 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, 2022, 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 9, 2022 expressed an unqualified opinion on the effectiveness of the Bank's internal control over financial reporting.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or
disclosures to which it relates.
Allowance for Loan Losses
As described in Note 3 of the financial statements, the Bank’s allowance for loan losses totaled $5.0 million as of June 30, 2022. The
allowance for loan losses for originated loans consists of two components: the specific reserve for loans individually evaluated and
deemed impaired of $234 thousand and the general reserve for larger groups of homogeneous loans collectively evaluated for
impairment of $4.4 million. The allowance for loan losses for purchased loans consists of $348 thousand. The collectively evaluated
component of the allowance for loan losses for originated loans, or qualitative reserve, is based on historical loss experience adjusted
for qualitative factors by loan segment. As described in Note 1 of the financial statements, the qualitative factors used by the Bank
include considerations such as the levels and trends in delinquencies and non-performing loans; trends in the volume and nature of
loans; trends in credit terms and policies; 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. The
53
evaluation and measurement of these qualitative factors requires management to apply a significant amount of judgment and involves
assumptions that are sensitive to change.
We identified the qualitative reserve for originated loans collectively evaluated in the allowance for loan losses as a critical audit
matter because auditing the underlying qualitative factors involved a high degree of auditor judgment given the high degree of
subjectivity exercised by management in developing the qualitative factors.
Our audit procedures related to management’s evaluation and establishment of the qualitative reserve for originated loans collectively
evaluated in the allowance for loan losses include the following, among others:
• We obtained an understanding of the relevant controls related to the qualitative factors applied to the general reserve for
originated loans collectively evaluated in the allowance for loan losses and tested such controls for design and operating
effectiveness, including controls over management’s establishment, review and approval of the qualitative factors.
• We tested management’s process and significant judgments in the evaluation and establishment of the qualitative factors used
in the qualitative reserve for originated loans collectively evaluated in the allowance for loan losses, which included:
o Validating the source of information used by management by comparing to the relevant internal or external
information from which it was derived, as well as testing the completeness and accuracy of the source data used by
management.
o Evaluating the reasonableness of management’s judgments related to the qualitative factors and the correlation to
potential losses by evaluating the adjustments in terms of magnitude and directional consistency based on the data
utilized in the determination of the qualitative factors.
/s/ RSM US LLP
We have served as the Bank’s auditor since 2015.
Boston, Massachusetts
September 9, 2022
54
NORTHEAST BANK
BALANCE SHEETS
(In thousands, except share and per share data)
Cash and due from banks
Short-term investments
Total cash and cash equivalents
Assets
Available-for-sale debt securities, at fair value
Equity securities, at fair value
Total securities
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
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
Lease liability
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Shareholders’ equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares
issued and outstanding at June 30, 2022 and 2021
Voting common stock, $1.00 par value, 25,000,000 shares authorized;
7,442,103 and 8,150,480 shares issued and outstanding at
June 30, 2022 and 2021, respectively
Non-voting common stock, $1.00 par value, 3,000,000 shares authorized;
No shares issued and outstanding at June 30, 2022 and 2021
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
June 30, 2022
June 30, 2021
$
$
$
$
2,095
169,984
172,079
54,911
6,798
61,709
882,187
352,729
69,209
741
1,304,866
5,028
1,299,838
9,606
-
1,610
1,285
17,922
18,710
1,582,759
329,007
585,274
246,095
127,317
1,287,693
15,000
-
4,451
27,294
1,334,438
-
7,442
-
38,749
202,980
(850)
248,321
1,582,759
$
$
$
$
2,850
1,007,641
1,010,491
59,737
7,230
66,967
725,287
257,604
56,591
1,142
1,040,624
7,313
1,033,311
11,271
1,639
1,209
2,061
17,498
29,955
2,174,402
972,495
325,062
287,033
277,840
1,862,430
15,000
15,050
6,061
43,470
1,942,011
-
8,151
-
64,420
161,132
(1,312)
232,391
2,174,402
The accompanying notes are an integral part of these financial statements.
55
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 available-for-sale securities
Other interest and dividend income
Total interest and dividend income
Interest expense:
Deposits
Federal Home Loan Bank advances
Paycheck Protection Program Liquidity Facility
Subordinated debt
Obligation under lease agreements
Total interest expense
Net interest and dividend income before provision (credit) for loan losses
Provision (credit) for loan losses
Net interest and dividend income after provision (credit) for loan losses
Noninterest income:
Fees for other services to customers
Gain on sales of PPP loans
Gain on sales of SBA loans
Gain on sales of residential loans held for sale
Net unrealized gain (loss) on equity securities
Gain (loss) on real estate owned, other repossessed collateral and
premises and equipment, net
Correspondent fee income
Bank-owned life insurance income
Loss on assets held for sale
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 (credits)
Intangible asset amortization
Other noninterest expense
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Weighted-average 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.
2022
Years Ended June 30,
2021
2020
87,592
316
628
88,536
4,529
493
-
-
90
5,112
83,424
(2,462)
85,886
1,646
86
-
-
(511)
155
22,528
424
-
117
24,445
31,138
3,558
1,891
4,544
733
3,202
395
-
3,322
48,783
61,548
19,385
42,163
$
$
76,918
754
453
78,125
8,867
535
400
1,126
111
11,039
67,086
(1,396)
68,482
1,869
46,701
-
107
(104)
(473)
23,452
424
-
57
72,033
22,430
3,825
1,930
4,468
542
3,267
283
-
2,681
39,426
101,089
29,586
71,503
$
$
80,870
1,695
1,119
83,684
16,583
689
174
1,126
125
18,697
64,987
4,500
60,487
1,619
9,702
793
600
148
(15)
20
566
(337)
88
13,184
24,976
3,588
1,783
3,954
337
2,059
(15)
434
3,277
40,393
33,278
10,541
22,737
7,806,626
7,902,610
8,275,577
8,360,355
8,859,037
8,991,428
5.40
5.34
0.04
$
$
8.64
8.55
0.04
$
$
2.57
2.53
0.04
$
$
$
$
56
NORTHEAST BANK
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive (loss) income, before tax:
Change in net unrealized gain or loss on available-for-sale securities
Change in accumulated loss on effective cash flow hedges
Total other comprehensive income (loss), before tax
Income tax expense (benefit) related to other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income
The accompanying notes are an integral part of these financial statements.
2022
Years Ended June 30,
2021
2020
$
42,163
$
71,503
$
22,737
(1,183)
1,813
630
168
462
42,625
$
(589)
1,153
564
154
410
71,913
$
755
(1,557)
(802)
(218)
(584)
22,153
$
57
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T
NORTHEAST BANK
STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses
(Gain) loss recognized on real estate owned and other repossessed collateral and
premises and equipment, net
Net unrealized loss (gain) on equity securities
Accretion of fair value adjustments on loans, 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
Gain on sales of PPP loans, net
Unrealized loss on SBA PPP loans held for sale
Net 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 bank-owned life insurance death benefits
Proceeds from sales of real estate owned and other repossessed collateral
Net (purchases) redemptions of Federal Home Loan Bank stock
Net cash provided by (used in) investing activities
Financing activities:
Net change in deposits
Dividends paid on common stock
Repurchases of common stock
Advances (repayments) under Paycheck Protection Program Liquidity
Facility, net
Repayment of subordinated debt
Repayment of lease liability
Cancellations for tax withholdings on restricted common stock
Stock options exercised, net
Net cash provided by (used in) financing activities
Net change 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
Transfers from fixed assets to real estate owned and other repossessed
collateral, net
Capitalization of lease liability
The accompanying notes are an integral part of these financial statements.
59
2022
Years Ended June 30,
2021
2020
$
42,163
$
71,503
$
(2,462)
(155)
511
(11,378)
-
(6,333)
6,232
-
-
(86)
-
776
-
(424)
2,603
819
1,869
474
10,249
(14,361)
30,497
(16,925)
20,015
(187,914)
(64,639)
(1,056)
-
1,972
(401)
(248,948)
(574,737)
(315)
(27,980)
-
(15,050)
(1,610)
(219)
(50)
(619,961)
(838,412)
1,010,491
172,079
5,726
17,993
$
$
53
$
118
-
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473
104
(10,717)
110
(2,872,780)
2,866,973
(107)
-
(46,701)
-
52
-
(424)
2,600
(713)
978
401
(12,973)
10,956
8,339
(42,817)
46,912
(169,489)
191,778
(1,264)
-
2,160
181
27,461
850,078
(331)
(5,743)
(12,440)
-
(1,365)
(130)
965
831,034
866,834
143,657
1,010,491
11,337
32,462
1,005
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2,930
$
$
$
$
$
$
22,737
4,500
15
(148)
(8,642)
111
(492,548)
496,616
(600)
(793)
(9,702)
337
738
434
(566)
2,518
(4,388)
1,102
216
14
4,356
16,307
(15,045)
26,288
(171,262)
161,846
(1,155)
549
410
(132)
1,499
69,981
(358)
(11,474)
12,440
-
(1,381)
(234)
(30)
68,944
86,750
56,907
143,657
18,818
13,294
1,639
71
5,554
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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.
Business
The Bank is a Maine state-chartered bank. The Bank is subject to supervision and regulation by Maine Bureau of Financial Institutions
(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. These reclassifications did
not impact previously reported net income or shareholders' equity.
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 ongoing 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 National Lending 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.
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 both June 30, 2022 and 2021, such reserve balances totaled $2.6 million.
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.
60
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 an investment in the stock of the Federal Home Loan Bank of Boston ("FHLBB").
No readily-available market exists for this stock, and it has no quoted market value. 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, 2022, 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. The Bank’s Paycheck Protection Program (“PPP”) loans are designated as held for sale. Loans originated and
held for sale in the secondary market are carried at the lower of cost or fair value with any losses recognized in non-interest income.
U.S. Small Business Administration (“SBA”) 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 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.
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
61
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 troubled debt restructuring (“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 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.
62
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, purchased and SBA 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 the National Lending Division. Loans acquired by the National Lending Division
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 nonowner-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.
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. 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;
63
• 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.
During the year ended June 30, 2022, the Bank migrated from using external peer group data as the basis for the Bank’s historical loss
factor to utilizing the Bank’s internal historical loss data for its SBA allowance segment. There were no additional changes in the
Bank’s policies or methodology pertaining to the general component of the allowance for loan losses during the year ended June 30,
2022. 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 year ended June 30, 2021.
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. Right of use assets are
included in premises and equipment and amortized over the lease term or estimated useful life, whichever is shorter. Maintenance and
repairs are charged to expense as incurred and the cost of major renewals and betterments are capitalized.
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
64
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.
Correspondent Fee Income
The Bank receives correspondent fee income from a third party in connection with a loan correspondent agreement entered into in
June 2020. As a result of this agreement, when the third party purchases PPP loans at a discount, the Bank shares in the resulting
discount from those purchases in exchange for access to the Bank’s correspondent relationship with the Board of Governors of the
Federal Reserve System. During the year ended June 30, 2021, the Bank received $6.0 million in correspondent fees. The Bank did
not receive any correspondent fees during the year ended June 30, 2022. These fees are deferred, along with those received in prior
periods, and are included in other liabilities on the balance sheet and the recognition of the income is included in correspondent fee
income in the income statement. The Bank recognizes the correspondent fees in income over the expected lives of the related loans.
For the years ended June 30, 2022, 2021 and 2020, the Bank recognized $4.3 million, $4.1 million and $20 thousand, respectively, in
correspondent fee income.
In addition to the correspondent fee described above, the Bank also shares in the net servicing income on purchased PPP loans,
comprised of the amortization of purchased accrued interest and the earned net servicing interest on the portfolio over time. As of June
30, 2022, the Bank estimated the net servicing income earned based on the existing PPP portfolio and information provided by the
third party. The Bank recorded a receivable of $4.6 million, included in other assets on the balance sheet, and the recognition of the
income is included in correspondent fee income in the income statement. The Bank will continue to recognize the net servicing
income over the expected lives of the related loans (primarily two years). During the years ended June 30, 2022 and 2021, the Bank
recognized $18.2 million and $19.4 million, respectively, in net servicing income. No net servicing income was recognized during the
year ended June 30, 2020. The timing and amount of this net servicing income is subject to change, depending on a number of factors,
primarily the balance and amount of time that the loans are outstanding, including when and if the SBA approves the forgiveness of
individual loans. Until the loans are forgiven or repaid, the loans will continue to accrue interest, and the Bank will continue to update
its estimated net servicing income in future quarters.
Revenue Recognition
While the majority of the Bank's revenue is generated from contracts with customers, our primary sources of revenue, interest and
dividend income (primarily loan interest income), are outside of the scope of ASC 606, "Revenue from Contracts with Customers,"
and are accounted for under other ASC topics. The core principles of this standard require an entity to recognize revenue to depict the
transfer of goods and services to customers as performance obligations are satisfied.
The primary areas of income within the scope of ASC 606, deposit and interchange fees and correspondent fee income, are
components of noninterest income in the Bank’s Statements of Income and are discussed below.
Deposit and interchange fees are comprised of deposit account related charges and income generated from electronic payment
interchanges. Deposit account charges consist of certain transactional analysis fees net of earning balance credits, monthly account
service fees, and transactional fees such as overdraft fees. Analysis and monthly account services fees are recognized over the period
the service is performed. For transactional fees, the performance obligation and the revenue are recognized at a point of time and
payment is typically received as the service is rendered. Interchange income is generated primarily from retail debit card transactions
processed through the card payment network. The performance obligation and the revenue are recognized when the service is
performed.
65
Correspondent fee income is comprised of the recognition of correspondent fees received, the recognition of purchased accrued
interest, and net servicing income, based on the average balance of remaining loans being serviced, as discussed above. The
performance obligation and the revenue are recognized over time as the service is performed.
The following noninterest income components are not subject to ASC 606: income on BOLI, net gains/losses on equity securities, and
net gains on sales of loans, and are covered under other ASC topics. The remaining revenue items in noninterest income are not
material.
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. The Bank's policy is to recognize interest and penalties assessed on uncertain tax positions in income tax
expense (See Note 10). The Bank exercises significant judgment in evaluating the amount and timing of recognition of the resulting
tax assets and liabilities. Additionally, see Note 10 for detail regarding reserves for uncertain tax positions as of June 30, 2022 and
2021.
Excess tax benefits or deficiencies in relation to stock-based compensation 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 presented as an operating activity in the statement of cash flows. In
addition, 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 years ended June 30, 2022, 2021 and 2020 was $221 thousand,
$558 thousand and $199 thousand, respectively.
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 market price of the Bank's common stock at the date of grant 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.
66
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.
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.
67
Segment Reporting
All of the Bank's operations are considered by management to be one operating segment.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 U.S. 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. In October 2019, the FASB
made a final decision to delay the effective date for ASU 2016-13 for smaller reporting companies, which allows the Bank to adopt
the standard on July 1, 2023. Management has elected to delay the adoption of ASU 2016-13. Management has engaged an existing
third party service provider to assist in implementation and is in the process of identifying the methodologies necessary to implement
the guidance.
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments (“ASU 2020-03”). This
guidance provides updates on a wide variety of Topics in the Codification, including updates to the interaction of Topic 842 and Topic
326, and the interaction of Topic 326 and Subtopic 860-20. This ASU will be effective under the same effective dates as ASU 2016-
13.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). This guidance provides
optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by
reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and
other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The
amendments in this Update are effective for all entities as of March 12, 2020 through December 12, 2022. The adoption of this
guidance did not have a significant impact on the Bank’s financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASU 2022-02”). This guidance
provides updates on Troubled Debt Restructurings (“TDRs”) by Creditors and Vintage Disclosures. The amendments in this Update
eliminate the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings
by creditors when a borrower is experiencing financial difficulty. This ASU will be effective under the same effective dates as ASU
2016-13.
Subsequent Events
The Bank has evaluated the impact of events that have occurred subsequent to June 30, 2022 through the date the financial statements
were available to be filed with the FDIC. Based on this evaluation, the Bank has determined none of these events were required to be
recognized in the financial statements and related notes.
68
2. Securities
The following presents a summary of the amortized cost, gross unrealized holding gains and losses, and fair value of securities.
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
June 30, 2022
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total securities
June 30, 2021
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total securities
$
$
$
$
51,080
4,775
7,361
63,216
51,561
7,938
7,282
66,781
$
$
$
$
(In thousands)
-
-
-
-
64
208
-
272
$
$
$
$
(795)
(149)
(563)
(1,507)
(33)
-
(52)
(85)
$
$
$
$
50,285
4,626
6,798
61,709
51,591
8,146
7,230
66,967
At June 30, 2022, 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 ended June 30, 2022, 2021 or 2020. At June 30, 2022, securities with a fair value of $54.9 million were
pledged as collateral to secure potential FHLBB advances, compared to $59.7 million at June 30, 2021.
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.
June 30, 2022
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value
Total investment securities
June 30, 2021
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
More than 12 Months
Fair
Value
Unrealized
Losses
(In thousands)
$
36,516
4,626
-
$
41,142
$
23,307
-
5,591
$
28,898
$
$
$
$
(449)
(149)
-
(598)
(33)
-
(52)
(85)
$
$
$
$
13,769
-
5,142
18,911
-
-
-
-
$
$
$
$
(346)
-
(563)
(909)
-
-
-
-
$
$
$
$
Total
Fair
Value
Unrealized
Losses
50,285
4,626
5,142
60,053
23,307
-
5,591
28,898
$
(795)
(149)
(563)
$
(1,507)
$
$
(33)
-
(52)
(85)
There were no other-than-temporary impairment losses on securities during the years ended June 30, 2022, 2021 and 2020.
At June 30, 2022, all of the Bank’s securities were issued or guaranteed by either government agencies or government-sponsored
enterprises. The change in fair value of the Bank’s securities at June 30, 2022 is attributable to changes in interest rates.
In addition to considering current trends and economic conditions that may affect the quality of individual securities within the Bank’s
securities 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, 2022, the Bank did not intend to sell and it is not more likely than not that the Bank will be required to sell the
securities before recovery of its amortized cost. As such, management does not believe any of the Bank’s securities are other-than-
temporarily impaired at June 30, 2022.
The securities 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 securities, or the guaranteed portion of SBA 7(a) loans, as applicable. As of June 30, 2022, 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 4.45 years.
69
The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of June 30, 2022.
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.
Amortized Cost
Fair Value
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
$
$
(In thousands)
26,137
24,943
-
-
51,080
4,775
55,855
$
$
25,880
24,405
-
-
50,285
4,626
54,911
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, 2022
Purchased
Total
Originated
Commercial real estate
Commercial and industrial
SBA
Residential real estate
Consumer
Total loans
$
$
381,785
349,914
33,046
61,698
741
827,184
$
$
470,091
80
-
7,511
-
477,682
$
$
851,876
349,994
33,046
69,209
741
1,304,866
268,649
254,526
39,549
47,704
1,142
611,570
$
(In thousands)
$
June 30, 2021
Purchased
$
$
419,833
334
-
8,887
-
429,054
Total
$
$
688,482
254,860
39,549
56,591
1,142
1,040,624
Total loans include deferred loan origination fees, net, of $598 thousand as of June 30, 2022 and deferred loan origination fees, net, of
$329 thousand as of June 30, 2021.
Loans pledged as collateral with the FHLBB for outstanding borrowings totaled $282.2 million and $289.3 million, and provided
additional borrowing capacity which totaled $150.4 million and $203.4 million, at June 30, 2022 and 2021, respectively.
The Bank sold no National Lending Division purchased loans during the years ended June 30, 2022, 2021, and 2020.
PPP loans
During the years ended June 30, 2022, 2021, and 2020, the Bank participated in the PPP and originated $6.5 million, $2.84 billion, and
$487.5 million of loans in connection with the PPP, respectively. The Bank subsequently sold PPP loans with a total principal balance
of $6.3 million, $2.87 billion and $457.6 million, recording a net gain of $86 thousand, $46.7 million and $9.7 million on the sales
primarily resulting from the recognition of net deferred fees, offset by purchase price discounts, during the years ended June 30, 2022,
2021, and 2020, respectively. The Bank had no PPP loans held for sale at June 30, 2022 or 2021.
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.
There were no loans outstanding to directors, officers, principal shareholders and their associates as of June 30, 2022. As of June 30,
2021, the outstanding loan balances to directors, officers, principal shareholders and their associates were $75 thousand, all of which
were current and accruing at that date.
70
Past Due and Nonaccrual Loans
The following is a summary of past due and nonaccrual loans:
June 30, 2022
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
June 30, 2021
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
30-59
Days
60-89
Days
Past Due 90
Days or More-
Nonaccrual
Total
Past
Due
(In thousands)
Total
Current
Total
Loans
Non-
Accrual
Loans
$
$
$
$
-
-
148
36
1
185
650
-
-
650
835
1,200
-
232
59
-
1,491
-
-
-
-
1,491
$
$
$
$
-
-
39
106
-
145
33
-
-
33
178
23
-
-
208
3
234
1,012
-
-
1,012
1,246
$
$
$
$
1,221
5
589
221
8
2,044
3,846
-
71
3,917
5,961
1,005
-
788
320
36
2,149
5,222
57
1,114
6,393
8,542
$
$
$
$
1,221
5
776
363
9
2,374
4,529
-
71
4,600
6,974
2,228
-
1,020
587
39
3,874
6,234
57
1,114
7,405
11,279
$
$
$
$
380,564
349,909
32,270
61,335
732
824,810
465,562
80
7,440
473,082
1,297,892
266,421
254,526
38,529
47,117
1,103
607,696
413,599
277
7,773
421,649
1,029,345
$
$
$
$
381,785
349,914
33,046
61,698
741
827,184
470,091
80
7,511
477,682
1,304,866
268,649
254,526
39,549
47,704
1,142
611,570
419,833
334
8,887
429,054
1,040,624
$
$
$
$
4,573
26
634
550
11
5,794
7,053
28
71
7,152
12,946
549
4,389
1,105
696
42
6,781
10,715
148
1,114
11,977
18,758
There were no loans 90 days or more past due and still accruing at June 30, 2022 or 2021.
Allowance for Loan Losses and Impaired Loans
The following table sets forth activity in the Bank’s allowance for loan losses:
Commercial
Real Estate
Commercial
and Industrial
SBA
Residential
Real Estate
(In thousands)
Consumer
Purchased
Total
Balance as of June 30, 2019
Provision
Recoveries
Charge-offs
Balance as of June 30, 2020
Provision
Recoveries
Charge-offs
Balance as of June 30, 2021
Provision
Recoveries
Charge-offs
Balance as of June 30, 2022
$
$
2,065
221
1
(210)
2,077
254
1
(10)
2,322
226
8
(61)
2,495
$
$
717
224
20
(4)
957
239
-
(1)
1,195
279
1
(2)
1,473
$
$
1,974
3,542
-
(539)
4,977
(1,584)
446
(721)
3,118
(2,927)
282
(24)
449
$
$
376
150
5
(82)
449
(218)
3
-
234
(10)
29
-
253
$
$
50
20
3
(44)
29
19
3
(19)
32
(18)
4
(8)
10
$
$
520
343
-
(174)
689
(106)
17
(188)
412
(12)
97
(149)
348
$
$
5,702
4,500
29
(1,053)
9,178
(1,396)
470
(939)
7,313
(2,462)
421
(244)
5,028
71
The following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology.
Commercial
Real Estate
Commercial
and
Industrial
Residential
SBA
Real Estate
Consumer
Purchased
Total
(In thousands)
$
-
2,495
-
$
187
1,286
-
$
$
2,495
$
1,473
$
4
445
-
449
$
42
211
-
$
$
1
9
-
$
253
$
10
$
-
-
348
348
June 30, 2022
Allowance for loan losses:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
Loans:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
$
11,853
369,932
-
$ 381,785
$
6,926
342,988
-
$ 349,914
June 30, 2021
Allowance for loan losses:
Individually evaluated
Collectively evaluated
ASC 310-30
$
47
2,275
-
$
82
1,113
-
$
$
$
1,040
32,006
-
33,046
$
1,718
59,980
-
$ 61,698
77
3,041
-
$
57
177
-
Total
$
2,322
$
1,195
$
3,118
$
234
Loans:
Individually evaluated
Collectively evaluated
ASC 310-30
Total
$
12,282
256,367
-
$ 268,649
$
7,041
247,485
-
$ 254,526
$
$
1,744
37,805
-
39,549
$
2,174
45,530
-
$ 47,704
$
$
$
$
$
$
35
706
-
741
7
25
-
32
77
1,065
-
1,142
$
$
$
$
$
$
14,539
-
463,143
477,682
-
-
412
412
18,281
-
410,773
429,054
$
$
$
$
$
$
$
$
234
4,446
348
5,028
36,111
805,612
463,143
1,304,866
270
6,631
412
7,313
41,599
588,252
410,773
1,040,624
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.
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, 2022
Unpaid
Principal
Balance
$
$
11,853
26
916
1,101
34
9,938
-
897
24,765
-
6,900
124
617
1
3,676
28
-
11,346
36,111
$
$
11,853
26
916
1,101
34
14,454
-
944
29,328
-
6,900
124
617
1
4,479
73
-
12,194
41,522
72
Related
Allowance
Recorded
Investment
(In thousands)
$
$
-
-
-
-
-
-
-
-
-
-
187
4
42
1
320
28
-
582
582
$
$
5,056
10
869
1,362
56
14,324
64
1,927
23,668
7,226
7,031
875
812
21
1,881
85
-
17,931
41,599
June 30, 2021
Unpaid
Principal
Balance
Related
Allowance
$
$
5,056
10
869
1,363
56
17,715
109
1,973
27,151
7,225
7,031
875
812
21
2,293
129
-
18,386
45,537
$
$
-
-
-
-
-
-
-
-
-
47
82
77
57
7
328
84
-
682
682
The following tables set forth information regarding interest income recognized on impaired loans.
2022
Years Ended June 30,
2021
2020
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$
$
9,601
12
1,028
1,204
36
13,145
5
1,354
26,385
3,768
7,294
189
694
12
2,611
49
-
14,617
41,002
$
251
-
23
15
1
224
-
-
514
205
154
9
47
-
77
-
-
492
1,006
$
$
$
4,344
1,731
1,641
2,949
47
14,960
66
2,075
27,813
3,815
5,338
2,544
1,383
23
3,934
106
-
17,143
44,956
$
$
616
60
-
122
10
204
-
34
1,046
160
143
-
76
4
119
-
22
524
1,570
$
$
4,815
6,983
2,749
1,989
80
10,239
145
1,226
28,226
628
114
1,429
1,262
28
4,050
160
-
7,671
35,897
$
$
47
283
68
31
3
199
-
20
651
11
3
-
78
2
213
-
-
307
958
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
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.
73
The following tables present the Bank’s loans by risk rating.
Commercial
Real Estate
Commercial
and Industrial
June 30, 2022
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
June 30, 2021
Loans rated 1- 6
Loans rated 7
Loans rated 8
Loans rated 9
Loans rated 10
Total
$
$
$
$
373,348
4,131
4,306
-
-
381,785
258,616
8,570
1,463
-
-
268,649
$
$
$
$
342,986
6,900
28
-
-
349,914
247,483
6,910
133
-
-
254,526
SBA
$ 32,076
456
514
-
-
$ 33,046
$ 35,974
2,596
979
-
-
$ 39,549
Residential(1)
(In thousands)
41,166
-
-
-
-
41,166
$
$
$
$
20,543
30
35
-
-
20,608
Purchased
Portfolio
468,264
2,266
7,152
-
-
477,682
410,743
8,984
9,327
-
-
429,054
$
$
$
$
Total
1,257,840
13,753
12,000
-
-
1,283,593
973,359
27,090
11,937
-
-
1,012,386
$
$
$
$
(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.
Years Ended June 30,
2022
2021
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
3
-
7
6
-
16
(Dollars in thousands)
1,472
-
4,674
1,353
-
7,499
$
$
6
-
4
6
3
19
$
$
9,612
-
4,251
9,151
393
23,407
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
2022
Recorded
Investment
Pre-Modification
Years Ended June 30,
Recorded
Investment
Post-Modification
Number of
Contracts
(Dollars in thousands)
2021
Recorded
Investment
Pre-Modification
Recorded
Investment
Post-Modification
2
-
1
1
-
4
12
-
12
16
$
$
68
-
1,349
407
-
1,824
5,468
-
5,468
7,292
$
$
71
-
1,486
407
-
1,964
5,535
-
5,535
7,499
3
-
4
2
-
9
9
1
10
19
$
$
7,150
-
7,008
336
-
14,494
7,732
790
8,522
23,016
$
$
7,150
-
7,333
336
-
14,819
7,798
790
8,588
23,407
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, 2022, 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, 2022 and 2021.
74
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,
2022
2021
Contractually required payments receivable
Nonaccretable difference
Cash flows expected to be collected
Accretable yield
Fair value of loans acquired
$
$
(In thousands)
$
238,827
(6,305)
232,522
(44,608)
187,914
$
213,636
(3,531)
210,105
(40,616)
169,489
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,
2021
2022
(In thousands)
1,065
6,435
$
1,035
8,457
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,
2022
2021
(In thousands)
137,987
44,608
(28,080)
8,411
(30,226)
132,700
$
$
154,936
40,616
(26,683)
4,815
(35,697)
137,987
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, 2022
June 30, 2021
(In thousands)
$
501,989
469,578
455,108
419,815
4. Premises, Equipment and Leases
Premises, equipment and leases consist of the following:
June 30, 2022
June 30, 2021
Estimated Useful Life
(In thousands)
(In years)
Land
Buildings
Right-of-use assets
Leasehold and building improvements
Furniture, fixtures and equipment
Total
Less accumulated depreciation
Net premises and equipment
$
$
747
1,898
8,483
4,209
12,419
27,756
18,150
9,606
$
$
747
2,053
8,483
3,953
12,266
27,502
16,231
11,271
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 $2.6 million, $2.6
million, and $2.5 million for the years ended June 30, 2022, 2021, and 2020, respectively.
The Bank leases six 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
75
expire. Rental expense under leases totaled $1.6 million, $1.6 million, and $1.3 million for the years ended June 30, 2022, 2021, and
2020, respectively.
The weighted average remaining lease term for operating leases at June 30, 2022 was 5.8 years and the weighted average discount rate
was 1.65%.
Approximate future minimum lease payments over the remaining terms of the Bank's leases at June 30, 2022 are as follows:
Minimum lease
payments
(In thousands)
$
$
1,482
2,360
2,330
2,357
2,279
17,661
28,469
Fiscal year
2023
2024
2025
2026
2027
Thereafter
Total
5. Deposits
The composition of deposits is as follows:
Demand
NOW
Money market
Regular savings
Time certificates
Total deposits
June 30, 2022
June 30, 2021
(In thousands)
$
$
329,007
445,237
246,095
140,037
127,317
1,287,693
$
$
972,495
269,056
287,033
56,006
277,840
1,862,430
There were $19.5 million and $7.7 million of time certificates greater than $250 thousand as of June 30, 2022 and 2021, respectively.
The scheduled maturities of time certificates by fiscal year at June 30, 2022 are as follows:
Fiscal Year
2023
2024
2025
2026
2027
Total
$
$
(In thousands)
89,670
22,746
8,232
4,820
1,849
127,317
6. Borrowings
Federal Home Loan Bank Advances
The Bank has one advance from the FHLBB for $15.0 million, which renews on a quarterly basis. The weighted average interest rate
was 0.87% and 0.46% as of June 30, 2022 and 2021, respectively.
At June 30, 2022, 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, 2022, the Bank had approximately $150.4 million of additional capacity to borrow from the FHLBB, compared to $203.4
million as of June 30, 2021.
76
7. Subordinated Debt
On June 29, 2016, Northeast Bancorp, the former holding company of the Bank, entered into a Subordinated Note Purchase
Agreement with certain institutional accredited investors (the “Purchasers”) whereby Northeast Bancorp 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 Northeast Bancorp 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 were 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, 2021 and 2020 was $110 thousand.
There was no amortization expense recognized for the year ended June 30, 2022.
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. On July 1, 2021, the Bank redeemed the Notes, which became redeemable on July 1, 2021. The Bank
redeemed the Notes at a redemption price equal to 100% of the outstanding principal amount of the Notes being redeemed, plus any
accrued and unpaid interest.
8. 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, 2022 and 2021, 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.
77
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, 2022 and 2021, 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, 2022 and 2021. The Bank's
regulatory capital ratios are set forth below as of June 30, 2022 and 2021.
Actual
Minimum Capital
Requirements
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
June 30, 2022
Common equity tier 1 capital to risk-
weighted assets
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
249,149
19.08%
$
58,772
>4.5%
$
84,893
>6.5%
Total capital to risk-weighted assets
254,248
19.47%
104,483
>8.0%
130,604
>10.0%
Tier 1 capital to risk-weighted assets
249,149
19.08%
78,362
>6.0%
104,483
Tier 1 capital to average assets
249,149
16.13%
61,772
>4.0%
77,215
>8.0%
>5.0%
June 30, 2021
Common equity tier 1 capital to risk-
weighted assets
$
233,668
22.16%
$
47,457
>4.5%
$
68,548
>6.5%
Total capital to risk-weighted assets
256,115
24.29%
84,367
>8.0%
105,459
>10.0%
Tier 1 capital to risk-weighted assets
233,668
22.16%
63,275
>6.0%
Tier 1 capital to average assets
233,668
13.63%
68,594
>4.0%
84,367
85,742
>8.0%
>5.0%
Minimum
Capital Ratio
with Capital
Conservation
Buffer
Ratio
7.0%
10.5%
8.5%
4.0%
7.0%
10.5%
8.5%
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.
9. 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,
Net income
Average number of common shares outstanding
Less: average unvested non-participating restricted stock awards
Weighted average shares used in calculation of basic EPS
Effect of dilutive stock options
Effect of dilutive unvested restricted stock awards
Weighted average shares used in calculation of diluted earnings per share
Earnings per common share:
Diluted earnings per common share:
$
$
2022
2021
(In thousands, except share and per share data)
$
71,503
$
42,163
7,905,996
(99,370)
7,806,626
80,075
15,909
7,902,610
8,275,577
-
8,275,577
84,778
-
8,360,355
5.40
5.34
$
8.64
8.55
$
2020
22,737
8,859,037
-
8,859,037
132,391
-
8,991,428
2.57
2.53
No stock options were excluded from the calculation of diluted EPS due to the exercise price for the years ended June 30, 2022, 2021
and 2020.
78
10. Income Taxes
The components of current and deferred income tax expense are as follows:
Current provision
Federal
State
Total current provision
Deferred benefit
Federal
State
Total deferred benefit
Total tax provision
2022
Years Ended June 30,
2021
(In thousands)
2020
$
$
10,887
7,679
18,566
1,158
(339)
819
19,385
$
$
19,742
10,557
30,299
(540)
(173)
(713)
29,586
$
$
8,832
6,097
14,929
(2,471)
(1,917)
(4,388)
10,541
The reconciliation between the statutory federal income tax rate of 21% and the effective tax rate on income follows:
2022
Years Ended June 30,
2021
2020
Expected income tax expense at federal tax rate
State tax, net of federal tax benefit
Non-taxable BOLI income
Stock compensation excess tax federal benefits (ASU 2016-09)
Bad debt recapture
162(m) disallowance
Other
Total income tax expense
$
$
12,925
5,799
(89)
(151)
-
442
459
19,385
$
$
(In thousands)
21,229
8,204
(89)
(364)
-
269
337
29,586
$
$
6,988
3,302
(119)
(145)
413
79
23
10,541
79
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 investment securities
Unrealized loss on derivatives
Interest on nonperforming loans
Correspondent and net deferred loan fees on PPP loans
Other
Gross deferred tax asset
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities
Prepaid expenses
Premises and equipment
Unrealized gain on investment securities
Other
Total deferred tax liability
Net deferred tax asset
2022
June 30,
(In thousands)
2021
$
$
1,578
1,298
1,397
2,555
1,361
255
60
2,653
130
117
11,404
-
11,404
202
2,207
-
403
2,812
8,592
$
$
2,135
1,288
1,769
2,367
935
-
548
2,049
1,385
249
12,725
-
12,725
218
2,259
65
602
3,144
9,581
The net deferred tax asset was included in other assets on the accompanying balance sheets as of June 30, 2022 and 2021.
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, 2021 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 and state tax purposes, the Bank recaptured a $2.0 million reserve for loan losses during fiscal 2020 due to the Bank
repurchasing stock in excess of this tax bad debt tax reserve. The tax effect of the recapture was reflected in the financial statements
for the year ended June 30, 2020.
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 Bank had no uncertain tax positions for the years ended June 30,
2022, 2021 or 2020.
The Bank is currently open to audit under the statute of limitations by the IRS and state taxing authorities for the fiscal 2019 tax return
and forward.
11. 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 upon the first pay cycle
of the month following start 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,
2022, 2021, and 2020, the Bank contributed $455 thousand, $365 thousand, and $185 thousand, respectively.
80
Deferred Compensation
The Bank has individual deferred compensation agreements with five former senior officers. The Bank recognized deferred
compensation expense of $27 thousand, $28 thousand, and $29 thousand for the years ended June 30, 2022, 2021, and 2020,
respectively. At June 30, 2022 and 2021 the Bank's deferred compensation liability was $459 thousand and $477 thousand,
respectively.
12. Stock-Based Compensation
A summary of stock option activity for the year ended June 30, 2022 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
118,342
-
(10,061)
-
108,281
Shares
118,342
-
(10,061)
-
108,281
Weighted
Average Exercise Price
$
$
$
$
9.49
-
10.67
-
9.38
Weighted Average
Grant Date Fair Value
1.88
-
2.84
-
1.79
All stock options were fully vested in the year ended June 30, 2022. There were no options granted in the years ended June 30, 2022
or 2021.
The following table summarizes information about stock options outstanding at June 30, 2022:
(Dollars in thousands, except per share data)
Options Outstanding and Exercisable
Weighted
Average
Exercise Price
$ 9.38
Number
108,281
Weighted
Average
Remaining
Life
0.59 years
Aggregate
Intrinsic Value
$ 2,940
A summary of restricted stock activity for the year ended June 30, 2022 follows:
Unvested at beginning of period
Granted
Vested
Forfeited and cancelled
Unvested at end of period
Shares
167,093
136,575
(77,724)
(23,166)
202,778
Weighted Average Grant
Date Fair Value
$
20.52
34.84
19.26
32.83
29.24
Stock-based compensation expense totaled $1.9 million, $978 thousand, and $1.1 million for the years ended June 30, 2022, 2021 and
2020, respectively. The tax benefit related to stock-based compensation expensed totaled $589 thousand, $286 thousand and $349
thousand for the years ended June 30, 2022, 2021 and 2020, respectively. The estimated amount and timing of future pre-tax stock-
based compensation expense to be recognized are as follows.
2023
2024
Restricted stock
$
1,812
$
1,505
$
Years Ending June 30,
2026
2025
(In thousands)
213
$
2027
Total
-
$
-
$
3,530
81
13. 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.
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,
2022
2021
(In thousands)
$
$
9,398
30,495
-
15,585
27,455
-
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 $71 thousand and $84 thousand for June 30, 2022 and 2021, respectively.
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, 2022 and 2021, the maximum potential
amount of the Bank's obligation was $0, 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.
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.
14. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) follow:
Change in net unrealized gain (loss)
on available-for-sale securities
Change in accumulated loss on
effective cash flow hedges
Total other comprehensive income
Pre-tax
Amount
2022
Tax Expense
(Benefit)
Years Ended June 30,
After-tax
Amount
Pre-tax
Amount
(In thousands)
2021
Tax Expense
(Benefit)
After-tax
Amount
$
(1,183)
1,813
630
$
$
$
(320)
488
168
$
$
(863)
1,325
462
$
$
(589)
1,153
564
$
$
(158)
312
154
$
$
(431)
841
410
82
Change in net unrealized gain
on available-for-sale securities
Change in accumulated loss on
effective cash flow hedges
Total other comprehensive loss
Year Ended June 30,
Pre-tax
Amount
$
$
755
(1,557)
(802)
2020
Tax Expense
(Benefit)
$
$
203
(421)
(218)
After-tax
Amount
$
$
552
(1,136)
(584)
Accumulated other comprehensive loss is comprised of the following components:
June 30, 2022
June 30, 2021
Unrealized (loss) gain 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
$
15. Derivatives
(In thousands)
$
(944)
255
(689)
(221)
60
(161)
(850)
239
(65)
174
(2,034)
548
(1,486)
(1,312)
$
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, 2022 and 2021, the Bank had posted cash collateral totaling $2.5
million, 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.
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.
83
Information pertaining to outstanding swap agreements is as follows:
Notional
Amount
Inception
Date
Termination
Date
Index
Receive
Rate
Pay
Rate
Strike
Rate
Unrealized
Loss
Fair Value
Balance Sheet
Location
June 30, 2022
Interest rate swaps on FHLB
advances:
$
5,000
5,000
5,000
$
15,000
July 2013
July 2033
July 2013
July 2028
July 2013
July 2023
June 30, 2021
Interest rate swaps on FHLB
advances:
$
5,000
5,000
5,000
$
15,000
July 2013
July 2033
July 2013
July 2028
July 2013
July 2023
3 Mo.
LIBOR
3 Mo.
LIBOR
3 Mo.
LIBOR
3 Mo.
LIBOR
3 Mo.
LIBOR
3 Mo.
LIBOR
(Dollars in thousands)
2.29%
2.29%
2.29%
0.15%
0.15%
0.15%
3.38%
3.23%
2.77%
3.38%
3.23%
2.77%
n/a
n/a
n/a
n/a
n/a
n/a
$
(173)
(69)
21
$
(173)
(69)
21
$
(221)
$
(221)
Other Liabilities
Other Liabilities
Other Liabilities
(1,079)
$
$
(1,079)
Other Liabilities
(707)
(248)
(707)
(248)
Other Liabilities
Other Liabilities
$
(2,034)
$
(2,034)
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, 2022 and 2021 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, 2022, 2021 and 2020, no amounts were recognized in income.
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.
16. 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
84
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:
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 securities
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 60 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 securities 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
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.
85
Fair Value of other Financial Instruments:
Cash and cash equivalents - The fair value of cash, due from banks, interest-bearing deposits and FHLBB 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.
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.
86
Assets and liabilities measured at fair value on a recurring basis are summarized below.
Total
Level 1
Level 2
(In thousands)
Level 3
June 30, 2022
Assets
Securities:
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value(1)
Liabilities
Other liabilities – interest rate swaps
June 30, 2021
Assets
Securities:
U.S. Government agency securities
Agency mortgage-backed securities
Equity investments measured at net asset value(1)
$
$
$
$
50,285
4,626
6,798
221
$
$
51,591
8,146
7,230
Liabilities
Other liabilities – interest rate swaps
$
2,034
$
-
-
-
-
-
-
-
-
$
$
$
$
$
50,285
4,626
-
221
$
$
51,591
8,146
-
2,034
$
-
-
-
-
-
-
-
-
(1)
In accordance with ASU 820-10, certain securities 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.
Total
Level 1
Level 2
Level 3
June 30, 2022
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
June 30, 2021
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
$
$
$
$
632
-
1,285
1,101
1,639
2,061
(In thousands)
$
$
-
-
-
-
-
-
$
$
-
-
-
-
-
-
632
-
1,285
1,101
1,639
2,061
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,
2022
June 30,
2021
Valuation Technique
$
(In thousands)
632
-
1,285
$
1,101
1,639
2,061
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 7% to 40%.
(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 0.4% to 39.3% and the weighted average prepayment assumption used was 18.6%. For discount rates, the range was 0.4% to 50.1%
and the weighted average discount rate used was 14.9%.
The table below summarizes the total gains (losses) on assets measured at fair value on a non-recurring basis for the years ended June
30, 2022, 2021 and 2020.
Years Ended June 30,
Collateral dependent impaired loans
Real estate owned and other repossessed collateral
Loan servicing rights
Total
$
$
2022
(13)
-
(182)
(195)
87
$
2021
(In thousands)
49
(180)
263
132
$
2020
$
$
(895)
395
(153)
(653)
The following table presents the estimated fair value of the Bank's financial instruments.
June 30, 2022
Financial assets:
Cash and cash equivalents
Securities
Equity securities 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
Paycheck Protection Program Liquidity Facility
Capital lease obligation
Subordinated debt
Interest rate swaps
June 30, 2021
Financial assets:
Cash and cash equivalents
Securities
Equity securities 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
Paycheck Protection Program Liquidity Facility
Capital lease obligation
Subordinated debt
Interest rate swaps
$
Carrying
Amount
169,984
54,911
6,798
1,610
-
1,298,838
3,585
1,287,693
15,000
-
4,451
-
221
$
1,007,641
59,737
7,230
1,209
-
1,033,311
3,083
1,862,430
15,000
-
6,061
15,050
2,034
$
$
Total
169,984
54,911
6,798
1,610
-
1,298,177
3,585
1,285,403
14,998
-
4,218
-
221
1,007,641
59,737
7,230
1,209
-
1,037,230
3,083
1,864,216
15,000
-
6,138
15,484
2,034
Level 1
(In thousands)
Level 2
Level 3
$
169,984
-
-
-
-
-
-
-
-
-
-
-
-
$
1,007,641
-
-
-
-
-
-
-
-
-
-
-
-
$
$
-
54,911
-
1,610
-
-
3,585
1,285,403
14,998
-
4,218
-
221
-
59,737
-
1,209
-
-
3,083
1,864,216
15,000
-
6,138
-
2,034
$
$
-
-
-
-
-
-
1,298,177
-
-
-
-
-
-
-
-
-
-
-
1,037,230
-
-
-
-
-
15,484
-
(1)
In accordance with ASU 820-10, certain securities 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.
88
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, 2022, 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, 2022 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.
RSM US LLP, an independent registered public accounting firm that audited the financial statements of the Bank included in this
annual report, has issued an audit opinion on the effectiveness of the Bank’s internal control over financial reporting as of June 30,
2022. The report, which expresses an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting
as of June 30, 2022, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
89
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, 2022, 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, 2022, 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, 2022 and 2021, the related statements of income, comprehensive income, changes in
shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2022 of the Bank and our report dated
September 9, 2022 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’s 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 9, 2022
90
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.
91
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedules
Balance Sheets as of June 30, 2022 and 2021
Statements of Income for the years ended June 30, 2022, 2021, and 2020
Statements of Comprehensive Income for the years ended June 30, 2022, 2021, and 2020
Statements of Changes in Shareholders’ Equity for the years ended June 30, 2022, 2021, and 2020
Statements of Cash Flows for the years ended June 30, 2022, 2021, and 2020
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 FDIC on May 15, 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 FDIC on May 15, 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 FDIC on May 15, 2019).
4.1 Description of Registrant’s Securities. (incorporated by reference to Exhibit 4.1 of the Current Report on Form 10-K
filed with the FDIC on September 11, 2020).
10.1+ Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan (1).
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) (1).
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) (1).
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 (1).
10.4+ Non-Qualified Performance-Based Stock Option Agreement, dated March 22, 2013, by and between Northeast
Bancorp and Richard Wayne (3).
the members of the Board (2).
10.5+ Form of Indemnification Agreement, dated as of December 29, 2010, by and between Northeast Bancorp and each of
10.6+ Employment Agreement, dated December 30, 2010, by and between Northeast Bancorp and Richard Wayne (2).
10.7 Paycheck Protection Program Liquidity Facility Correspondent Agreement, dated June 12, 2020, by and among
Northeast Bank, The Loan Source, Inc. and ACAP SME, LLC (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed with the FDIC on June 17, 2020).
10.8 Loan Purchase and Sale Agreement, dated June 18, 2020, by and between Northeast Bank and The Loan Source, Inc.
(incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the FDIC on June 25, 2020).
10.90 First Amendment to Paycheck Protection Program Liquidity Facility Correspondent Agreement, dated March 2, 2021,
by and among Northeast Bank, The Loan Source, Inc. and ACAP SME, LLC (incorporated by reference to Exhibit
10.1 of the Current Report on Form 8-K filed with the FDIC on March 3, 2021).
10.10 Loan Purchase and Sale Agreement, dated March 2, 2021, by and between Northeast Bank and The Loan Source, Inc.
(incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the FDIC on March 4, 2021).
10.11 Marketing Services Agreement, dated August 6, 2021, by and between Northeast Bank, United Operations, LLC and
American Loan Funding Company LLC (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-
K filed with the FDIC on August 11, 2021).
92
10.12 Master Loan Participation Agreement, dated August 6, 2021, by and between Northeast Bank and American Loan
Funding Company LLC (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the
FDIC on August 11, 2021).
10.13 Lender Service Provider Agreement, dated August 6, 2021, by and between Northeast Bank and United Operations,
LLC (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the FDIC on August 11,
2021).
10.14+ Northeast Bank 2021 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-Q filed with the FDIC on May 7, 2021).
10.15+ Form of Restricted Stock Award Agreement under the Northeast Bank 2021 Stock Option and Incentive Plan*
10.16+ Form of Performance Restricted Stock Award Agreement under the Northeast Bank 2021 Stock Option and Incentive
Plan*
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.**
* 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 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.
(2) 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.
(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 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.
Item 16. Form 10-K Summary
None.
93
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 9, 2022
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
/s/ JEAN-PIERRE LAPOINTE
Jean-Pierre Lapointe
/s/ MATTHEW BOTEIN
Matthew Botein
/s/ CHERYL DORSEY
Cheryl Dorsey
/s/ WILLIAM MAYER
William Mayer
/s/ JOHN C. ORESTIS
John C. Orestis
/s/ DAVID TANNER
David Tanner
/s/ JUDITH E. WALLINGFORD
Judith E. Wallingford
Title
Date
Chief Executive Officer and Director
(Principal Executive Officer)
September 9, 2022
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
September 9, 2022
Chairman of the Board
September 9, 2022
September 9, 2022
September 9, 2022
September 9, 2022
September 9, 2022
September 9, 2022
Director
Director
Director
Director
Director
94
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(This page intentionally left blank)
Board of Directors
Matthew B. Botein | Chairman
Co-Founder & Managing Partner
Gallatin Point Capital LLC
Cheryl Lynn Dorsey
President
Echoing Green
William P. Mayer
Retired Partner
Goodwin Procter LLP
John C. Orestis
President & Chief Executive Officer
North Country Associates
David A. Tanner
Managing Director
Three Mile Capital LLC
Judith E. Wallingford
Retired President
The Maine Water Company
Rick Wayne
President & Chief Executive Officer
Northeast Bank
Senior Management
Rick Wayne
President & Chief Executive Officer
Patrick Dignan
EVP, Chief Operating Officer
Robert Banaski
SVP, Director of
Community Banking
Kati Goudouros
SVP, Director of Commercial Loan
Processing
Lindsay Guttell
SVP, Senior Asset Manager
Taylor Hatch
SVP, Director of Banking Operations
John Longinetti
SVP, Director of Deposit Services
Theresa Morrison
Managing Director, Real Estate
Jerry Murphy
SVP, Senior Underwriter
Bethany Belanger
SVP, Director of Retail Banking
Christopher Hickey
Managing Director, Asset Management
Sadie Naimoli
SVP, Senior Enterprise Risk Manager
& CRA Officer
Jeffrey Bradbury
SVP, Director of Information
Technology
Meegan Casey
SVP, Legal Counsel
Matthew Colpitts
SVP, Director of Government Banking
Chris Delamater
SVP, Director of Customer Experience
Brian Doherty
Managing Director, Relationship
Management
Brian Fenwick
Managing Director, Loan Underwriting
Thomas Gillespie
SVP, Loan Underwriting
Louise Gillis
SVP, Commercial Loan Servicing
Manager
Heidi Jacques
SVP, Director of Human Resources
Kelly Palmer
SVP, Director of Credit Administration
Julie Jenkins
SVP, Chief Information Officer
Jonathan Popovich
SVP, National Lending
Rebecca Jones
SVP, Corporate Controller
Robert Rynarzewski
SVP, National Lending
Kerry Kearn-Kawai
SVP, Legal Counsel
David Kenneally
SVP, Senior Relationship Manager
Steven Kennedy
SVP, Senior Portfolio Manager
Michelle Labbe
SVP, Attorney
Jean-Pierre Lapointe
SVP, Chief Financial Officer
Jonathan Levirne
Managing Director, National Lending
Sarah Shomphe
SVP, Director of Owned Real Estate
& Underwriting Manager
Jack Sullivan
SVP, Senior Asset Manager
Tim Tower
SVP, Relationship Manager
David Toye
SVP, Relationship Manager
Steve Tsoflias
SVP, National Lending
SHAREHOLDER INFORMATION
CORPORATE OFFICES
BANKING CENTERS
Annual Meeting
12:00 pm ET, Tuesday, November 15, 2022
at the Offices of Goodwin Procter LLP
100 Northern Avenue
Boston, MA 02210
Northeast Bank
One Marina Park Drive
Floor 8
Boston, MA 02210
617.585.3200
Transfer Agent
Computershare, Inc.
150 Royall Street, Suite 101
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
27 Pearl Street
Portland, ME 04101
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 2022 Annual
Report on Form 10-K.
Northeast Bank is an Equal Opportunity
Employer.
Northeast Bank
27 Pearl Street
Portland, ME 04101
207.774.1426
Northeast Bank
35 Canal Street
Lewiston, ME 04240
207.786.3245
Connecting All
Locations
800.284.5989
www.northeastbank.com
COMMERCIAL REAL
ESTATE LENDING
OFFICES
MIAMI
2222 Ponce De Leon Blvd
3rd Floor
Coral Gables, FL 33134
305.442.9553
NEW YORK
250 West 55th Street
Suite 1502
New York, NY 10019
617.775.3600
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
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