Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 02/14/2012 17:23:47)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly report pursuant to Section 13 or 15 (d) of

the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2011

Commission File Number: 1-14588

 

 

Northeast Bancorp

(Exact name of registrant as specified in its charter)

 

 

 

Maine   01-0425066

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

500 Canal Street, Lewiston, Maine   04240
(Address of Principal executive offices)   (Zip Code)

(207) 786-3245

Registrant’s telephone number, including area code

 

 

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 subjected to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of February 14, 2012, the registrant had outstanding 3,312,173 shares of voting common stock, $1.00 par value per share and 195,351 shares of non-voting common stock, $1.00 par value per share.

 

 

 


Table of Contents

Part I.

  

Financial Information

     3   
  

Item 1.

  

Financial Statements (unaudited)

     3   
     

Consolidated Balance Sheets
December 31, 2011 and June 30, 2011

     3   
     

Consolidated Statements of Income
Three and Six Months Ended December  31, 2011
Three Days Ended December 31, 2010
89 Days Ended December 28, 2010
181 Days Ended December 28, 2010

     4   
     

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended December  31, 2011
Three Days Ended December 31, 2010
181 Days Ended December 28, 2010

     6   
     

Consolidated Statements of Cash Flows
Six Months Ended December  31, 2011
181 Days Ended December 28, 2010
Three Days Ended December 31, 2010

     8   
     

Notes to Unaudited Consolidated Financial Statements

     9   
  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   
  

Item 3.

  

Quantitative and Qualitative Disclosure about Market Risk

     46   
  

Item 4.

  

Controls and Procedures

     46   

Part II.

  

Other Information

     47   
  

Item 1.

  

Legal Proceedings

     47   
  

Item 1A.

  

Risk Factors

     47   
  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     47   
  

Item 3.

  

Defaults Upon Senior Securities

     47   
  

Item 4.

  

[Removed and Reserved]

     47   
  

Item 5.

  

Other Information

     47   
  

Item 6.

  

Exhibits

     47   

 

2


Table of Contents

PART 1- FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)

 

     December 31,
2011
    June 30,
2011
 

Assets

    

Cash and due from banks

   $ 3,005      $ 3,227   

Short-term investments

     55,358        80,704   
  

 

 

   

 

 

 

Total cash and cash equivalents

     58,363        83,931   

Available-for-sale securities, at fair value

     139,480        148,962   

Loans held for sale

     8,189        5,176   

Loans

    

Residential real estate

     98,129        95,417   

Commercial real estate

     162,999        117,761   

Construction

     1,280        2,015   

Commercial business

     19,210        22,225   

Consumer

     65,441        72,495   
  

 

 

   

 

 

 

Total loans

     347,059        309,913   

Less: Allowance for loan losses

     737        437   
  

 

 

   

 

 

 

Loans, net

     346,322        309,476   

Premises and equipment, net

     9,262        8,271   

Acquired assets, net

     837        690   

Accrued interest receivable

     1,761        1,244   

Federal Home Loan Bank stock, at cost

     4,889        4,889   

Federal Reserve Bank stock, at cost

     871        871   

Intangible assets, net

     5,012        13,133   

Bank owned life insurance

     14,047        13,794   

Other assets

     5,522        5,956   
  

 

 

   

 

 

 

Total assets

   $ 594,555      $ 596,393   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits

    

Demand

   $ 43,682      $ 48,215  

Savings and interest checking

     87,356        89,804  

Money market

     43,353        48,695  

Brokered time deposits

     4,905        4,924  

Certificates of deposit

     221,728        209,480  
  

 

 

   

 

 

 

Total deposits

     401,024        401,118  

Federal Home Loan Bank advances

     43,684        43,922  

Structured repurchase agreements

     67,089        68,008  

Short-term borrowings

     1,744        2,515  

Junior subordinated debentures issued to affiliated trusts

     8,029        7,957  

Capital lease obligation

     1,994        2,075  

Other borrowings

     0        2,229  

Other liabilities

     5,091        3,615  
  

 

 

   

 

 

 

Total liabilities

     528,655        531,439  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $1.00 par value, 1,000,000 shares authorized; 4,227 shares issued and outstanding at December 31, 2011 and June 30, 2011; liquidation preference of $1,000 per share

     4        4  

Voting common stock, $1.00 par value, 13,500,000 shares authorized; 3,312,173 issued and outstanding at December 31, 2011 and June 30, 2011, respectively

     3,312        3,312  

Non-voting common stock, $1.00 par value, 1,500,000 shares authorized 195,351 issued and outstanding at December 31, 2011 and June 30, 2011, respectively

     195        195  

Warrants to purchase common stock

     406        406  

Additional paid-in capital

     49,982        49,700  

Unearned restricted stock

     (145     (163

Retained earnings

     11,846        11,726  

Accumulated other comprehensive income (loss)

     300        (226
  

 

 

   

 

 

 

Total stockholders’ equity

     65,900        64,954  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 594,555      $ 596,393   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

    Successor Company (1)      Predecessor Company (2)  
    Three Months Ended
December 31, 2011
    Six Months Ended
December 31, 2011
    Three Days Ended
December 31, 2010
     89 Days Ended
December 28, 2010
    181 Days Ended
December 28, 2010
 

Interest and dividend income:

            

Interest on loans

  $ 5,874      $ 11,011      $ 196       $ 5,468      $ 11,210   

Interest and dividends on available-for-sale securities

    541        1,180        45         1,439        3,111   

Dividends on regulatory stock

    21        33        0         9        18   

Other interest and dividend income

    36        83        1         28        39   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

    6,472        12,307        242         6,944        14,378   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Interest expense:

            

Deposits

    836        1,673        42         1,273        2,796   

Federal Home Loan Bank advances

    258        516        15         451        918   

Structured repurchase agreements

    249        497        23         685        1,392   

Short-term borrowings

    3        8        6         205        376   

Junior subordinated debentures issued to affiliated trusts

    185        368        6         167        340   

Obligation under capital lease agreements

    25        51        1         27        55   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

    1,556        3,113        93         2,808        5,877   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Net interest and dividend income before provision for loan losses

    4,916        9,194        149         4,136        8,501   

 

Provision for loan losses

    134        534        0         453        912   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

    4,782        8,660        149         3,683        7,589   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Noninterest income:

            

Fees for other services to customers

    370        710        14         331        698   

Net securities gains

    433        380        0         5        17   

Gain on sales of residential loans

    770        1,426        49         919        1,867   

Gain on sale of commercial loan

    203        203        0         0        0   

Investment commissions

    704        1,391        25         625        1,174   

Bank-owned life insurance income

    126        253        4         123        250   

Bargain purchase gain

    0        0        14,921         0        0   

Other income

    86        107        7         153        225   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

    2,692        4,470        15,020         2,156        4,231   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Noninterest expense:

            

Salaries and employee benefits

    3,729        7,446        139         2,493        4,949   

Occupancy and equipment expense

    916        1,765        23         674        1,352   

Professional fees

    277        692        10         239        509   

Data processing fees

    289        563        8         273        521   

Marketing expense

    254        345        4         123        230   

FDIC insurance premiums

    122        239        5         170        346   

Intangible asset amortization

    337        673        0         0        0   

Merger expense

    0        0        3,050         23        94   

Other

    953        1,807        103         751        1,454   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

    6,877        13,530        3,342         4,746        9,455   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Income (loss) from continuing operations before income tax expense (benefit)

    597        (400     11,827         1,093        2,365   

Income tax expense (benefit)

    179        (224     (14      310        698   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Net income (loss) from continuing operations

  $ 418      $ (176   $ 11,841       $ 783      $ 1,667   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

(Continued)

 

    Successor Company (1)      Predecessor Company (2)  
    Three Months Ended
December 31, 2011
    Six Months Ended
December 31, 2011
    Three Days Ended
December 31, 2010
     89 Days Ended
December 28, 2010
    181 Days Ended
December 28, 2010
 

Discontinued operations:

            

Income (loss) from discontinued operations

  $ 0      $ 186      $ (10    $ (23   $ 94   

Gain on sale of discontinued operations

    0        1,529        0         105        105   

Income tax expense (benefit)

    0        592        (4      29        70   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) from discontinued operations

    0        1,123        (6      53        129   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Net income

  $ 418      $ 947      $ 11,835       $ 836      $ 1,796   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Net income available to common stockholders

  $ 320      $ 751      $ 11,835       $ 777      $ 1,677   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Weighted-average shares outstanding:

            

Basic

    3,494,498        3,494,498        3,492,498         2,331,332        2,330,197   

Diluted

    3,511,994        3,494,498        3,588,756         2,358,647        2,354,385   

Earnings per common share:

            

Basic:

            

Income (loss) from continuing operations

  $ 0.09      $ (0.11   $ 3.38       $ 0.31      $ 0.66   

Income from discontinued operations

    0.00        0.32        0.00         0.02        0.06   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

  $ 0.09      $ 0.21      $ 3.38       $ 0.33      $ 0.72   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Diluted:

            

Income (loss) from continuing operations

  $ 0.09      $ (0.11   $ 3.29       $ 0.31      $ 0.66   

Income from discontinued operations

    0.00        0.32        0.00         0.02        0.05   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

  $ 0.09      $ 0.21      $ 3.29       $ 0.33      $ 0.71   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Periods Ended December 31, 2011, December 31, 2010 and December 28, 2010

(Unaudited)

(Dollars in thousands, except per share data)

 

   

 

Preferred Stock

    Common Stock     Warrants
to Purchase
Common Stock
    Additional
Paid-in  Capital
    Unearned
Restricted
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
 
    Shares     Amount     Shares     Amount              

Predecessor Company (2)

                   

Balance at June 30, 2010

    4,227      $ 4        2,323,832      $ 2,324      $ 133      $ 6,761      $ 0      $ 37,338      $ 4,346      $ 50,906   

Net income for 181 days ended December 28, 2010

    0        0        0        0        0        0        0        1,796        0        1,796   

Other comprehensive loss net of tax:

                   

Unrealized loss on purchased interest rate caps and swap, net

    0        0        0        0        0        0        0        0        (10     (10

Unrealized loss on available-for-sale securities, net

    0        0        0        0        0        0        0        0        (1,863     (1,863
                   

 

 

 

Total comprehensive loss

                      (77

Dividends on preferred stock

    0        0        0        0        0        0        0        (106     0        (106

Dividends on common stock at $0.09 per share

    0        0        0        0        0        0        0        (419     0        (419

Stock options exercised

    0        0        7,500        8        0        54        0        0        0        62   

Accretion of preferred stock

    0        0        0        0        0        16        0        (16     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 28, 2010

    4,227      $ 4        2,331,332      $ 2,332      $ 133      $ 6,831      $ 0      $ 38,593      $ 2,473      $ 50,366   

 

 

Successor Company (1)

                   

Balance at December 29, 2010

    4,227      $ 4        2,331,332      $ 2,332      $ 406      $ 33,685      $ 0      $ 0      $ 0      $ 36,427   

Net income for three days ended December 31, 2010

    0        0        0        0        0        0        0        11,835        0        11,835   

Other comprehensive income net of tax:

                   

Unrealized gain on available-for-sale securities, net

    0        0        0        0        0        0        0        0        188        188   
                   

 

 

 

Total comprehensive income

                      12,023   

Restricted stock award

    0        0        13,026        13        0        168        (181     0        0        0   

Voting common stock issued

    0        0        965,815        965        0        12,489        0        0        0        13,454   

Non-voting common stock issued

    0        0        195,351        195        0        2,526        0        0        0        2,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    4,227      $ 4        3,505,524      $ 3,505      $ 406      $ 48,868      $ (181   $ 11,835      $ 188      $ 64,625   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Periods Ended December 31, 2011, December 31, 2010 and December 28, 2010

(Unaudited)

(Dollars in thousands, except per share data)

(Continued)

 

   

 

Preferred Stock

    Common Stock     Warrants
to Purchase
Common Stock
    Additional
Paid-in  Capital
    Unearned
Restricted
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
 
    Shares     Amount     Shares     Amount              

Successor Company (1)

                   

Balance at June 30, 2011

    4,227      $ 4        3,507,524      $ 3,507      $ 406      $ 49,700      $ (163   $ 11,726      $ (226   $ 64,954   

Net income

    0        0        0        0        0        0        0        947        0        947   

Other comprehensive loss, net of tax:

                   

Unrealized loss on purchased interest rate caps and swap, net

    0        0        0        0        0        0        0        0        (123     (123

Unrealized gain on available-for-sale securities, net

    0        0        0        0        0        0        0        0        649        649   
                   

 

 

 

Total comprehensive income

                      1,473   

Dividends on preferred stock

    0        0        0        0        0        0        0        (106     0        (106

Dividends on common stock at $0.18 per share

    0        0        0        0        0        0        0        (631     0        (631

Stock-based compensation

    0        0        0        0        0        192        18        0        0        210   

Accretion of preferred stock

    0        0        0        0        0        90        0        (90     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    4,227      $ 4        3,507,524      $ 3,507      $ 406      $ 49,982      $ (145   $ 11,846      $ 300      $ 65,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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NORTHEAST BANCORP AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

    Successor Company (1)     Predecessor Company (2)  
    Six Months Ended
December 31, 2011
    Three Days Ended
December 31, 2010
    181 Days Ended
December 28, 2010
 

Cash flows from operating activities:

       

Net income

  $ 947      $ 11,835      $ 1,796   

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

       

Provision for loan losses

    534        0        912   

(Gain) loss on sale or impairment of repossessed collateral, net

    (50     0        91   

Accretion of fair value adjustments on loans, net

    (1,124     0        0   

Accretion of fair value adjustments on deposits, net

    (716     0        0   

Accretion of fair value adjustments on borrowings, net

    (1,088     0        0   

Originations of loans held for sale

    (72,454     (1,975     (96,575

Net proceeds from sales of loans held for sale

    70,867        1,682        104,843   

Gain on sales of loans held for sale

    (1,426     (49     (1,867

Proceeds from sale of commercial loan

    711        0        0   

Gain on sale of commercial loan

    (203     0        0   

Amortization of intangible assets

    742        6        344   

Bank-owned life insurance income, net

    (253     (4     (250

Depreciation of premises and equipment

    604        9        520   

Loss (gain) on sale of premises and equipment

    2        0        (6

Net gain on sale of available-for-sale securities

    (380     0        (17

Deferred income tax benefit

    0        0        (313

Stock-based compensation

    210        0        0   

Gain on sale of insurance business

    (1,529     0        (104

Net amortization of securities

    843        0        89   

Bargain purchase gain

    0        (14,921     0   

Changes in other assets and liabilities:

       

Interest receivable

    (517     82        121   

Decrease in prepaid FDIC assessment

    323        0        120   

Other assets and liabilities

    372        (1,201     33   
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (3,585     (4,536     9,737   
 

 

 

   

 

 

   

 

 

 

 

Cash flows from investing activities:

       

Proceeds from sales of available-for-sale securities

    49,053        0        173   

Purchases of available-for-sale securities

    (51,274     0        (19,001

Proceeds from maturities and principal payments on available-for-sale securities

    12,223        0        26,806   

Loan purchases

    (51,662     0        0   

Loan originations and principal collections, net

    14,141        386        14,292   

Purchases of premises and equipment

    (1,754     (90     (503

Proceeds from sales of premises and equipment

    0        0        36   

Proceeds from sales of repossessed collateral

    660        0        217   

Proceeds from sale of assets of insurance division

    9,726        0        147   
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (18,887     296        22,167   
 

 

 

   

 

 

   

 

 

 

 

Cash flows from financing activities:

       

Net increase (decrease) in deposits

    622        2,658        (9,580

Net (decrease) increase in short-term borrowings

    (771     (1,009     16,875   

Dividends paid on preferred stock

    (106     0        (106

Dividends paid on common stock

    (631     0        (419

Issuance of common stock

    0        16,175        62   

Repayment of other borrowings

    (2,129     0        (496

Repayment of capital lease obligation

    (81     0        (77
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (3,096     17,824        6,259   
 

 

 

   

 

 

   

 

 

 

 

Net (decrease) increase in cash and cash equivalents

    (25,568     13,584        38,163   

 

Cash and cash equivalents, beginning of period

    83,931       58,598        20,435   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 58,363     $ 72,182      $ 58,598   
 

 

 

   

 

 

   

 

 

 

 

Supplemental schedule of cash flow information:

       

Interest paid

  $ 4,985      $ 356      $ 5,800   

Income taxes paid, net

    254        0        846   

 

Supplemental schedule of noncash investing and financing activities:

       

Transfer from loans to acquired assets

  $ 757      $ 0      $ 124   

Transfer from acquired assets to loans

    0        0        143   

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

December 31, 2011

 

1. Basis of Presentation

The accompanying unaudited condensed and consolidated interim financial statements include the accounts of Northeast Bancorp (“Northeast” or the “Company”) and its wholly-owned subsidiary, Northeast Bank (the “Bank”). These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position at December 31, 2011; the results of operations for the three and six-month periods ended December 31, 2011, the three days ended December 31, 2010, and the 89 and 181 days ended December 28, 2010; the changes in stockholders’ equity for the six-month period ended December 31, 2011, the three days ended December 31, 2010, and the 181 days ended December 28, 2010; the cash flows for the six-month period ended December 31, 2011, the three days ended December 31, 2010, and the 181 days ended December 28, 2010. Operating results for the three and six-month periods ended December 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012. For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2011 included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011 (“Fiscal 2011”) filed with the Securities and Exchange Commission.

 

2. Merger Transaction

On December 29, 2010, the merger of the Company and FHB Formation LLC, a Delaware limited liability company (“FHB”), was consummated. As a result of the merger, the surviving company received a capital contribution of $16.2 million (in addition to the approximately $13.1 million in cash consideration paid to former stockholders), and the former members of FHB collectively acquired approximately 60% of our outstanding common stock. The Company has applied the acquisition method of accounting, as described in ASC 805, Business Combinations (“ASC 805”) to the merger, which represents an acquisition by FHB of Northeast, with Northeast as the surviving company (the “Successor Company”). In the application of ASC 805 to this transaction, the following was considered:

Identify the Accounting Acquirer : FHB was identified as the accounting acquirer. FHB, which was incorporated on March 9, 2009, acquired a controlling financial interest of approximately 60% of the Successor Company’s total outstanding voting and non-voting common stock in exchange for contributed capital and cash consideration.

In the evaluation and identification of FHB as the accounting acquirer, it was concluded that FHB was a substantive entity involved in significant pre-merger activities, including the following: raising capital; incurring debt; incurring operating expenses; leasing office space; hiring staff to develop the surviving company’s business plan; retaining professional services firms; and identifying acquisition targets and negotiating potential transactions, including the merger.

Determine the Acquisition Date : December 29, 2010, the closing date of the merger, was the date that FHB gained control of the combined entity.

Recognize assets acquired and liabilities assumed : Because neither Northeast Bancorp, the Predecessor Company (the acquired company), nor FHB (the accounting acquirer) exist as separate entities after the merger, a new basis of accounting at fair value for the Successor Company’s assets and liabilities was established in the consolidated financial statements. At the acquisition date, the Successor Company recognized the identifiable assets acquired and the liabilities assumed based on their then fair values in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”) . The Successor Company recognized a bargain purchase gain as the difference between the total purchase price and the net assets acquired.

As a result of application of the acquisition method of accounting to the Successor Company’s balance sheet, the Successor Company’s financial statements from the periods prior to the transaction date are not directly comparable to the financial statements for periods subsequent to the transaction date. To make this distinction, the Company has labeled balances and results of operations prior to the transaction date as “Predecessor Company” and balances and results of operations for periods subsequent to the transaction date as “Successor Company.” The lack of comparability arises from the assets and liabilities having new accounting bases as a result of recording them at their fair values as of the transaction date rather than at historical cost basis. To denote this lack of comparability, a heavy black line has been placed between the Successor Company and Predecessor Company columns in the Consolidated Financial Statements and in the tables in the notes to the statements.

 

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As a result of the transaction, the Company committed to the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Maine Bureau of Financial Institutions (the “Bureau”), to, among other things, (i) maintain a Tier 1 leverage ratio of at least 10%, (ii) maintain a total risk-based capital ratio of at least 15%, (iii) limit purchased loans to 40% of total loans, (iv) fund 100% of the Company’s loans with core deposits, and (v) hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital. The Company is currently in compliance with all commitments to the Federal Reserve and the Bureau.

 

3. Loans, Allowance for Loan Losses and Credit Quality

The composition of the Company’s loan portfolio is as follows on the dates indicated. The Company’s “originated portfolio” consists of loans originated before and after the Merger. The Company’s “purchased portfolio” consists of loans acquired subsequent to the Merger through its Loan Acquisition and Servicing Group (“LASG”).

 

     December 31, 2011      June 30, 2011  
     (Dollars in thousands)  

Loans:

     

Originated portfolio:

     

Residential real estate

   $ 94,556       $ 95,417   

Commercial real estate

     115,102         117,124   

Construction

     1,280         2,015   

Commercial business

     19,210         22,225   

Consumer (1)

     65,441         72,495   
  

 

 

    

 

 

 

Total originated portfolio

     295,589         309,276   

Purchased portfolio:

     

Commercial real estate

     47,897         637   

Residential real estate

     3,573         0   
  

 

 

    

 

 

 

Total purchased portfolio

     51,470         637   

Total loans

     347,059         309,913   

Less: Allowance for loan losses

     737         437   
  

 

 

    

 

 

 

Loans, net

   $ 346,322       $ 309,476   
  

 

 

    

 

 

 

 

(1) Consumer loans include home equity loans and lines totaling $45.9 million and $50.1 million at December 31, 2011 and June 30, 2011, respectively.

In the fourth quarter of Fiscal 2011, the Company launched its loan acquisition and servicing business, which operates at the Company’s office in Boston, Massachusetts. Through the LASG, the Company purchases loans originated throughout the United States that are secured by commercial real estate, multi-family residential real estate and other business assets. These loans are generally purchased at a discount from the loan’s unpaid principal balance from sellers in the financial services industry or government agencies. From the date of inception through December 31, 2011, the LASG had purchased loans with principal balances at acquisition totaling $64.3 million, for an aggregate purchase price of $52.3 million. The Company intends to continue to grow this segment of its loan portfolio, both in absolute terms and as a percentage of its total loan portfolio.

The Company’s community bank loan origination activities are predominantly conducted in south-central and western Maine and south-eastern New Hampshire. In its Maine and New Hampshire market areas, the Company originates single-family and multi-family residential loans, commercial real estate loans, commercial business loans and a variety of consumer loans. In addition, the Company originates loans for the construction of residential homes, multi-family properties, commercial real estate properties, and for land development. The majority of loans originated by the Company are collateralized by real estate. The ability and willingness of residential and commercial real estate, commercial business and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers’ geographic area and/or the general economy.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the loan is well secured by collateral and in process of collection. The determination of past due status is based on the contractual terms of the loan. In all cases, the Company ceases the accrual of interest if the Company considers collection of principal or interest to be doubtful. All interest accrued but not collected for loans that are placed on nonaccrual are reversed against interest income. The interest on these loans is accounted for on a cash or cost recovery basis, until the loan qualifies for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans purchased by the Company are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). The Company has elected to account for all purchased loans under ASC 310-30, including those with insignificant or no credit deterioration. At acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company’s estimate of cash flows with the purchase price of the loan. Prepayments are not generally assumed in determining a purchased loan’s effective interest rate and income accretion.

 

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The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, “the accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’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 declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

Purchased credit impaired (“PCI”) loans are defined as those loans acquired with evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the purchaser will be unable to collect all contractually required payments receivable. The Company does not characterize purchased loans with no or insignificant credit impairment as PCI loans.

The following table presents a summary of PCI loans purchased during the six months ended December 31, 2011.

 

     Commercial Real Estate and
Commercial Business
 
     (Dollars in thousands)  

Contractually required payments receivable

   $ 10,064   

Nonaccretable difference

     (2,958
  

 

 

 

Cash flows expected to be collected

     7,106   

Accretable yield

     (3,122
  

 

 

 

Fair value of loans acquired

   $ 3,984   
  

 

 

 

The following table presents a summary of PCI loans acquired through the Merger on December 29, 2010.

 

     Residential Real Estate
and Consumer
    Commercial Real Estate
and Commercial Business
    Total  
     (Dollars in thousands)  

Contractually required payments receivable

   $ 4,148      $ 4,977      $ 9,125   

Nonaccretable difference

     (1,282     (1,893     (3,175
  

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected

     2,866        3,084        5,950   

Accretable yield

     (958     (344     (1,302
  

 

 

   

 

 

   

 

 

 

Fair value of PCI loans acquired

   $ 1,908      $ 2,740      $ 4,648   
  

 

 

   

 

 

   

 

 

 

Changes in the accretable yield related to PCI loans during the three and six months ended December 31, 2011 follow.

 

     Three Months Ended December 31, 2011  
     Acquired through
Merger
    Purchased     Total  
     (Dollars in thousands)  

Beginning balance

   $ 209      $ 2,951      $ 3,160   

Accretion

     (208     (488     (696

Acquisitions

     0        95        95   

Reclassifications from nonaccretable difference

     361        210        571   

Disposals and transfers

     (121     (614     (735
  

 

 

   

 

 

   

 

 

 

End balance

   $ 241      $ 2,154      $ 2,395   
  

 

 

   

 

 

   

 

 

 
     Six Months Ended December 31, 2011  
     Acquired through
Merger
    Purchased     Total  
     (Dollars in thousands)  

Beginning balance

   $ 373      $ 0      $ 373   

Accretion

     (372     (564     (936

Acquisitions

     0        3,122        3,122   

Reclassifications from nonaccretable difference

     361        210        571   

Disposals and transfers

     (121     (614     (735
  

 

 

   

 

 

   

 

 

 

End balance

   $ 241      $ 2,154      $ 2,395   
  

 

 

   

 

 

   

 

 

 

The following table provides information related the unpaid principal balance and carrying amounts of PCI loans.

 

     December 31, 2011      June 30, 2011  
     Acquired through
Merger
     Purchased      Total      Acquired through
Merger
     Purchased      Total  
     (Dollars in thousands)      (Dollars in thousands)  

Unpaid principal balance of PCI loans

   $ 4,698       $ 5,844       $ 10,542       $ 7,110       $ 937       $ 8,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount of PCI loans

   $ 2,864       $ 3,093       $ 5,957       $ 4,228       $ 637       $ 4,865   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated periodically based upon management’s review of available information, including, but not limited to, the quality of the loan portfolio, certain economic conditions, the value of the underlying collateral and the level of non-accruing and criticized loans. Management relies on its loan quality reviews, its experience and evaluation of economic conditions, among other factors, in determining the amount of provision required for the allowance for loan losses. Determining the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate (including home equity loans), commercial real estate, commercial business, and consumer. The Company currently considers its loss experience subsequent to the Merger in its quantitative historical loss analysis. The Company does not weight periods used in that analysis to determine the average loss rate in each portfolio segment. Further, the Company considers qualitative information, including certain experience of the Predecessor Company, in determining its average loss factor for purposes of Company’s allowance for loan losses. Qualitative factors considered in the Company’s analysis include: levels/trends in delinquencies and substandard loans; trends in volumes and terms of loans; effects of changes in risk rating and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and regional economic trends and conditions. There were no significant changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three or six months ended December 31, 2011.

The qualitative factors are determined based on the various risk characteristic of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by residential real estate and repayment is dependent on the credit quality 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 Company’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, 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.

Commercial business: 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. Weak national or regional economic conditions, and a resultant decrease 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 secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the LASG. Loans acquired by the LASG are, with limited exceptions, performing loans at date of purchase that may have some credit deterioration since origination. Repayment of these loans is largely dependent on cash flow from the successful operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market such as geographic location or property type. Loans in this segment are evaluated for

 

12


Table of Contents

impairment under ASC 310-30. The Company 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 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 for commercial business and commercial real estate loans 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 that the carrying value of that loan. Large groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all loans modified in troubled debt restructurings are individually reviewed for impairment.

For all segments except the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company 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 Company will be unable to realize cash flows as estimated at acquisition. Loan impairment of purchased loans is measured based on the decrease in expected cash flows from those estimated at acquisition, excluding changes due to decreases in interest rate indices. Factors considered by management in determining impairment include payment status, collateral value, and the probability of the collecting scheduled principal and interest payments when due.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). The Company considers all loans identified as being modified in a TDR as impaired loans. By policy, the Company does not remove TDRs from impairment classification. There were no loans modified in a TDR during the three or six months ended December 31, 2011. At December 31, 2011, there were no material payment defaults of loans previously modified in a TDR during the preceding six months. At December 31, 2011 and June 30, 2011, TDRs totaled $955 thousand and $1.1 million, respectively.

The following table sets forth activity in the Successor Company’s allowance for loan losses by portfolio segment.

Three months ended December 31, 2011:

 

     Residential
Real Estate
    Commercial
Real Estate
     Commercial
Business
    Purchased (1)      Consumer     Total  
     (Dollars in thousands)  

Beginning balance

   $ 124      $ 114       $ 418      $ 0       $ 54      $ 710   

Provision (benefit)

     33        33         (191     0         259        134   

Recoveries

     1        0         12        0         13        26   

Charge-offs

     (33     0         (8     0         (92     (133
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

End balance

   $ 125      $ 147       $ 231      $ 0       $ 234      $ 737   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six months ended December 31, 2011:

 

     Residential
Real Estate
    Commercial
Real Estate
    Commercial
Business
    Purchased (1)      Consumer     Total  
     (Dollars in thousands)  

Beginning balance

   $ 34      $ 147      $ 238      $ 0       $ 18      $ 437   

Provision (benefit)

     147        24        (33     0         396        534   

Recoveries

     1        0        34        0         28        63   

Charge-offs

     (57     (24     (8     0         (208     (297
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

End balance

   $ 125      $ 147      $ 231      $ 0       $ 234      $ 737   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Purchased loans included above include commercial real estate, commercial business, and commercial loans secured by residential real estate. The Company separately analyzes loans purchased by the LASG from other segments in determining the allowance for loan losses. There have been no charge-offs or reductions in the cash flow estimates made at the time of loan acquisition in the Company’s purchased loan portfolio. As a result, no provision has been made for potential losses related to such loans from inception of the Company’s LASG through December 31, 2011.

 

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The following table sets forth activity in the Predecessor Company’s allowance for loan losses. There was no activity in the Successor Company’s allowance for loan losses during the three days ended December 31, 2010.

 

     89 Days
Ended
December 28,
2010
    181 Days
Ended
December 28,
2010
 
     (Dollars in thousands)  

Beginning balance

   $ 5,862      $ 5,806   

Provision

     453        912   

Recoveries

     92        108   
  

 

 

   

 

 

 
     6,407        6,826   

Charge-offs

     (440     (859

End balance

   $ 5,967      $ 5,967   
  

 

 

   

 

 

 

The following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology.

 

     December 31, 2011  
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Business
     Consumer      Total  
     (Dollars in thousands)  

Allowance for loan losses:

              

Individually evaluated

   $ 0       $ 64       $ 224       $ 0       $ 288   

Collectively evaluated

     125         83         7         234         449   

Purchased (1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 125       $ 147       $ 231       $ 234       $ 737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated

   $ 542       $ 2,601       $ 1,119       $ 0       $ 4,262   

Collectively evaluated

     140,876         112,757         18,091         19,603         291,327   

Purchased (1)

     3,573         47,897         0         0         51,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 144,991       $ 163,255       $ 19,210       $ 19,603       $ 347,059   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2011  
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Business
     Consumer      Total  
     (Dollars in thousands)  

Allowance for loan losses:

              

Individually evaluated

   $ 0       $ 119       $ 196       $ 0       $ 315   

Collectively evaluated

     34         28         42         18         122   

Purchased (1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34       $ 147       $ 238       $ 18       $ 437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated

   $ 0       $ 1,221       $ 1,922       $ 0       $ 3,143   

Collectively evaluated

     146,585         116,810         20,303         22,435         306,133   

Purchased (1)

     0         637         0         0         637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 146,585       $ 118,668       $ 22,225       $ 22,435       $ 309,913   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Expected cash flows from individual purchased loans are reviewed quarterly by the Company. Post acquisition, the effect of a decline in expected cash flows is recorded through the allowance for loan losses as a specific allocation.

The following table sets forth information regarding impaired loans. The recorded investment in impaired loans includes discounts or premiums from acquisition through purchase or merger. Interest income recognized includes interest received or accrued based on loan principal and contractual interest rates; amounts do not include accretion or amortization of acquisition discounts or premiums as such amounts related to impaired loans are insignificant. Loans acquired with deteriorated credit quality 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.

 

     As of December 31, 2011      For the three months ended
December 31, 2011
     For the six months ended
December 31, 2011
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)      (Dollars in thousands)      (Dollars in thousands)  

Impaired loans without a valuation allowance:

                    

Residential 1-4 family

   $ 542       $ 602       $ 0       $ 271       $ 7       $ 181       $ 8   

Commercial real estate

     2,414         2,648         0         1,549         37         1,148         58   

Commercial business

     479         792         0         340         1         578         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,435         4,042         0         2,160         45         1,907         71   

Impaired loans with a valuation allowance:

                    

Residential 1-4 family

     0         0         0         73         0         49         0   

Commercial real estate

     187         219         64         268         3         469         3   

Commercial business

     640         672         224         678         0         741         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     827         891         288         1,019         3         1,259         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 4,262       $ 4,933       $ 288       $ 3,179       $ 48       $ 3,166       $ 74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     As of June 30, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (Dollars in thousands)  

Impaired loans without a valuation allowance:

        

Commercial real estate

   $ 348       $ 348       $ 0   

Commercial business

     1,054         1,054         0   
  

 

 

    

 

 

    

 

 

 

Total

     1,402         1,402         0   

Impaired loans with a valuation allowance:

        

Commercial real estate

     873         873         119   

Commercial business

     868         868         196   
  

 

 

    

 

 

    

 

 

 

Total

     1,741         1,741         315   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 3,143       $ 3,143       $ 315   
  

 

 

    

 

 

    

 

 

 

The following is a summary of past due and non-accrual loans:

 

     December 31, 2011  
     30-59
Days
     60-89
Days
     Past Due
90 Days
or More-
Still
Accruing
     Past Due
90 Days or
More-
Nonaccrual
     Total
Past
Due
     Total
Current
     Total
Loans
     Non-
Accrual
Loans
 
     (Dollars in thousands)  

Residential real estate:

                       

Residential 1- 4 family

   $ 315       $ 704       $ 0       $ 2,787       $ 3,806       $ 90,752       $ 94,556       $ 3,264   

Residential 1- 4 family - purchased

     0         0         0         0         0         3,573         3,573         0   

Home equity

     217         32         0         153         402         45,434         45,836         182   

Commercial real estate

     492         0         0         441         933         114,169         115,102         1,998   

Commercial real estate - purchased

     0         0         0         0         0         47,897         47,897         0   

Construction

     0         0         0         0         0         1,280         1,280         0   

Commercial business

     363         0         0         921         1,284         17,926         19,210         1,119   

Consumer

     829         371         0         326         1,526         18,077         19,605         329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,216       $ 1,107       $ 0       $ 4,628       $ 7,951       $ 339,108       $ 347,059       $ 6,892   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     30-59
Days
     60-89
Days
     Past Due
90 Days or
More-Still
Accruing
     Past Due
90 Days or
More-
Nonaccrual
     Total
Past
Due
     Total
Current
     Total
Loans
     Non-
Accrual
Loans
 
     (Dollars in thousands)  

Residential real estate:

                       

Residential 1- 4 family

   $ 257       $ 1,021       $ 0       $ 1,779       $ 3,057       $ 92,360       $ 95,417       $ 2,195   

Home equity

     117         0         0         89         206         49,854         50,060         205   

Commercial real estate

     0         492         0         934         1,426         115,698         117,124         3,601   

Commercial real estate - purchased

     0         0         0         0         0         637         637         0   

Construction

     0         0         0         121         121         1,893         2,015         121   

Commercial business

     4         75         751         416         1,246         20,979         22,225         559   

Consumer

     566         338         0         508         1,412         21,024         22,435         527   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 944       $ 1,926       $ 751       $ 3,847       $ 7,468       $ 302,445       $ 309,913       $ 7,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

The Company utilizes an eight point internal loan rating system for commercial real estate, construction and commercial business loans as follows:

Loans rated 1 – 4: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 5: Loans in this category are considered “special mention.” These loans are beginning to show signs of potential weakness and are being closely monitored by management.

Loans rated 6: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if the current net worth inadequately protects it and the paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 7: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, highly questionable and improbable.

 

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Table of Contents

Loans rated 8: Loans in this category are considered “loss” and of such little value that their continuance as loans is not warranted. There were no loans rated 8 at December 31, 2011 or June 30, 2011.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction, and commercial business loans. Semi-annually, the Company 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 Company’s recorded investment in that loan, which may be significantly lower than the loan’s unpaid principal balance.

The following tables present the Company’s loans by risk rating.

 

     December 31, 2011  
     Commercial
Real Estate
     Commercial
Real Estate  -

Purchased
     Commercial
Business
     Construction  
     (Dollars in thousands)  

Loans rated 1- 4

   $ 108,612       $ 47,897       $ 17,540       $ 735   

Loans rated 5

     2,056         0         400         0   

Loans rated 6

     4,434         0         1,270         0   

Loans rated 7

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 115,102       $ 47,897       $ 19,210       $ 735   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     Commercial
Real Estate
     Commercial
Real Estate -
Purchased
     Commercial
Business
     Construction  
     (Dollars in thousands)  

Loans rated 1- 4

   $ 106,717       $ 637       $ 18,201       $ 2,015   

Loans rated 5

     3,133         0         1,169         0   

Loans rated 6

     7,274         0         2,855         0   

Loans rated 7

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 117,124       $ 637       $ 22,225       $ 2,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4. Securities Available-for-Sale

Securities available-for-sale at amortized cost and approximate fair values are summarized below:

 

     December 31, 2011      June 30, 2011  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 45,845       $ 45,925       $ 48,827       $ 48,737   

Mortgage-backed securities issued by government agencies

     92,813         93,555         99,637         99,558   

Equity securities

     0         0         193         216   

Trust preferred securities

     0         0         466         451   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 138,658       $ 139,480       $ 149,123       $ 148,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

The gross unrealized gains and unrealized losses on available-for-sale securities are as follows:

 

     December 31, 2011      June 30, 2011  
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
 
     (Dollars in thousands)  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 81       $ 1       $ 7       $ 97   

Mortgage-backed securities issued by government agencies

     743         1         212         291   

Equity securities

     0         0         23         0   

Trust preferred securities

     0         0         8         23   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 824       $ 2       $ 250       $ 411   
  

 

 

    

 

 

    

 

 

    

 

 

 

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. The following table summarizes realized gains and losses on available-for-sale securities.

 

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Table of Contents

 

Three Months Ended Three Months Ended Three Months Ended
Successor Company    Three Months Ended
December 31, 2011
     Six Months Ended
December 31, 2011
    Three Days Ended
December 31, 2010
 
     (Dollars in thousands)  

Gross realized gains

   $ 433       $ 447      $ 0   

Gross realized losses

     0         (67     0   
  

 

 

    

 

 

   

 

 

 

Net security gains

   $ 433       $ 380      $ 0   
  

 

 

    

 

 

   

 

 

 

 

 

 

Three Months Ended Three Months Ended Three Months Ended
Predecessor Company    89 Days Ended
December 28, 2010
     181 Days Ended
December 31, 2010
      
     (Dollars in thousands)     

Gross realized gains

   $ 5       $ 17      

Gross realized losses

     0         0      
  

 

 

    

 

 

    

Net security gains

   $ 5       $ 17      
  

 

 

    

 

 

    

The following summarizes the Company’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.

 

Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
     Less than 12 Months      More than 12 Months      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

December 31, 2011:

  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 2,999       $ 1       $ 0       $ 0       $ 2,999       $ 1   

Mortgage-backed securities issued by government agencies

     2,625         1         0         0         2,625         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,624       $ 2       $ 0       $ 0       $ 5,624       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
     Less than 12 Months      More than 12 Months      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

June 30, 2011:

  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 46,130       $ 97       $ 0       $ 0       $ 46,130       $ 97   

Mortgage-backed securities issued by government agencies

     51,367         291         0         0         51,367         291   

Trust preferred securities

     174         23         0         0         174         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 97,671       $ 411       $ 0       $ 0       $ 97,671       $ 411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no other-than-temporary impairment losses on securities during the three or six months ended December 31, 2011. There were no other-than-temporary impairment losses on securities for the three days ended December 31, 2010, nor the 89 or 181 days ended December 28, 2010.

At December 31, 2011, the Company had two available-for-sale securities with continuous unrealized losses for less than twelve months, representing aggregate depreciation from amortized cost of less than 1%. At December 31, 2011, all of the Company’s available-for-sale securities were issued by either government agencies or government-sponsored enterprises. The decline in fair value of the Company’s available-for-sale securities at December 31, 2011 is attributable to changes in interest rates.

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of December 31, 2011. 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
 
     (Dollars in thousands)  

Due after one year through five years

   $ 45,845       $ 45,925   

Due after five years through ten years

     0         0   

Due after ten years

     0         0   
  

 

 

    

 

 

 
     45,845         45,925   

Mortgage-backed securities

     92,813         93,555   
  

 

 

    

 

 

 
   $ 138,658       $ 139,480   
  

 

 

    

 

 

 

 

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Table of Contents
5. Stock-Based Compensation

A summary of the stock option activity for the six months ended December 31, 2011 is as follows:

 

     Shares     Weighted
Average
Exercise Price
 

Outstanding at beginning of period

     764,549      $ 14.05   

Granted

     0        0   

Exercised

     0        0   

Forfeited

     (8,500     13.10   
  

 

 

   

Outstanding and at end of period

     756,049      $ 14.06   
  

 

 

   

Exercisable

     90,898      $ 14.04   
  

 

 

   

The following table summarizes information about stock options outstanding at December 31, 2011.

 

       Options Outstanding      Options Exercisable  
Weighted Average
Exercise Price
     Number      Weighted Average
Remaining Life
     Aggregate
Intrinsic Value
     Number      Weighted Average
Remaining Life
     Aggregate
Intrinsic Value
 
$ 13.93         594,039         9.0 years       $ 0         74,698         9.0 years       $ 0   
  14.52         162,010         9.0 years         0         16,200         9.0 years         0   
  

 

 

          

 

 

       
  14.06         756,049         9.0 years         0         90,898         9.0 years         0   
  

 

 

          

 

 

       

At December 31, 2011, all unvested stock options outstanding are expected to vest.

On December 29, 2010, the Company granted 13,026 shares of the Company’s restricted stock to a senior executive of the Company. The holder of this award participates fully in the rewards of stock ownership of the Company, including voting rights and dividend rights. This award has been determined to have a fair value of $13.93 per share based on the average price at which the Company’s common stock traded on the date of grant. Forty percent of the award will vest on December 29, 2012, and the remainder will vest in three equal annual installments commencing on December 29, 2013. At December 31, 2011, no restricted common shares were vested. All restricted common shares are expected to vest.

At December 31, 2011, performance-based stock appreciation rights (“SARs”) with underlying shares of non-voting common stock totaling 81,006 were outstanding. As of December 31, 2011, the Company has accrued the maximum liability payable under the SAR grant, which equates to $0.59 per share, or a total of $48 thousand. The SARs expire in December of 2020.

The estimated amount and timing of future pre-tax stock-based compensation expense to be recognized are as follows for the fiscal years ending June 30:

 

     January –
June 2012
     2013      2014      2015      2016      2017      Total  
     (Dollars in thousands)  

Stock options

   $ 192       $ 384       $ 370       $ 351       $ 221       $ 48       $ 1,566   

Restricted stock

     18         36         36         36         18         0         144   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 210       $ 420       $ 406       $ 387       $ 239       $ 48       $ 1,710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011, the Company had outstanding a warrant to purchase 67,958 shares of common stock issued to the U.S. Department of the Treasury (the “Treasury”) on December 12, 2008 in connection with the Company’s participation in the Troubled Asset Relief Program on December 12, 2008. The warrant has an exercise price of $9.33 per share and expires on December 12, 2018. The warrant is recorded as a permanent component of stockholders’ equity in accordance with ASC 815, Derivatives and Hedging . At December 31, 2011, the intrinsic value of the warrant was $222 thousand.

 

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Table of Contents
6. Discontinued Operations

On August 31, 2011, the Company sold customer lists and certain fixed assets of its wholly-owned subsidiary, Northeast Bank Insurance Group, Inc. (“NBIG”) to local insurance agencies in two separate transactions. The Varney Agency, Inc. of Bangor, Maine purchased the assets of nine NBIG offices in Anson, Auburn, Augusta, Bethel, Livermore Falls, Scarborough, South Paris, Thomaston and Turner, Maine. The NBIG office in Berwick, Maine, which operates under the name of Spence & Matthews, was acquired by Bradley Scott, previously a member of NBIG’s senior management team. The sale gain, net of income taxes, combined with the elimination of customer list and non-compete intangibles increased tangible equity by approximately $8.4 million. The following is a summary of the sale transactions.

 

     (Dollars in thousands)  

Sale proceeds

   $ 9,726   

Less:

  

Customer lists and other intangible assets, net

     7,379   

Fixed assets, net of accumulated depreciation

     157   

Severance and other direct expenses

     661   
  

 

 

 

Pre-tax gain recognized

   $ 1,529   
  

 

 

 

Operations associated with NBIG for the periods presented have been classified as discontinued operations in the accompanying consolidated statements of income. The Company has eliminated all intercompany transactions in presenting discontinued operations for each period. Insurance commissions associated with NBIG were $965 thousand for the six months ended December, 2011, all of which was recognized in the first quarter of the fiscal year ending June 30, 2012 (“Fiscal 2012”). Insurance commissions were $37 thousand for the three days ended December 31, 2010 and $1,221 and $2,661 thousand for the 89 and 181 days ended December 28, 2010, respectively. Intangible and fixed assets associated with discontinued operations totaled approximately $7.4 million and $160 thousand, respectively, at June 30, 2011. In connection with the transaction, the Company repaid borrowings associated with NBIG totaling $2.1 million.

NBIG had previously sold customer lists and certain fixed assets of its agency offices in Jackman, Maine to Worldwide Risk Management, Inc. on December 22, 2010; in Rangeley, Maine to Morton & Furbish Insurance Agency on January 31, 2010; and in Mexico, Maine to UIG, Inc. on December 31, 2009.

 

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Table of Contents
7. Earnings Per 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 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:

 

    Successor Company     Predecessor Company  
    Three months ended
December 31, 2011
    Six months ended
December 31, 2011
    Three days ended
December 31, 2010
    89 days ended
December 28, 2010
    181 days ended
December 28, 2010
 
   

(Dollars in thousands, except share and

per share data)

    (Dollars in thousands, except share and
per share data)
 

 

Net income (loss) from continuing operations

  $ 418      $ (176   $ 11,841      $ 783      $ 1,667   

Preferred stock dividends

    (53     (106     0        (51     (104

Accretion of preferred stock

    (45     (90     0        (8     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations available to common shareholders

  $ 320      $ (372   $ 11,841      $ 724      $ 1,548   

 

Undistributed earnings (loss) of continuing operations allocated to participating securities

    1        (1     (44     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations allocated to common shareholders

  $ 319      $ (371   $ 11,797      $ 724      $ 1,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Net income (loss) from discontinued operations available to common shareholders

  $ 0      $ 1,123      $ (6   $ 53      $ 129   

Undistributed earnings (loss) of discontinued operations allocated to participating securities

    0        4        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations allocated to common shareholders

  $ 0      $ 1,119      $ (6   $ 53      $ 129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Weighted average shares used in calculation of basic earnings per share

    3,494,498        3,494,498        3,492,498        2,331,332        2,330,197   

Incremental shares from assumed exercise of dilutive securities

    17,496        0        96,258        27,315        24,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in calculation of diluted earnings per share

    3,511,994        3,494,498        3,588,756        2,358,647        2,354,385   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Earnings per common share:

           

Income (loss) from continuing operations

  $ 0.09      $ (0.11   $ 3.38      $