Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 02/14/2011 17:59:12)
 
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, 2010

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 10, 2011, the registrant had outstanding 3,310,173 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.

 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
 

Part I.
Financial Information
 
Item 1.
Financial Statements (Unaudited)
     
   
December 31, 2010 (Unaudited) and June 30, 2010
     
   
  Three Days Ended December 31, 2010
  89 Days Ended December 28, 2010
  181 Days Ended December 28, 2010
  Three Months Ended December 31, 2009
  Six Months Ended December 31, 2009
     
   
  Three Days Ended December 31, 2010
  181 Days Ended December 28, 2010
  Six Months Ended December 31, 2009
     
   
  Three Days Ended December 31, 2010
  181 Days Ended December 28, 2010
  Six Months Ended December 31, 2009
     
   
     
 
Item 2.
     
 
Item 3.
     
 
Item 4.
     
Part II.
Other Information
     
 
Item 1.
     
 
Item 1A.
     
 
Item 2.
     
 
Item 3.
     
 
Item 4.
     
 
Item 5.
     
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 

 
2
 
 

PART 1 - FINANCIAL INFORMATION
 
   
Item 1. Financial Statements (Unaudited)
 
   
NORTHEAST BANCORP AND SUBSIDIARY
 
 
(Dollars in thousands)
 
   
Successor
   
Predecessor
 
   
Company (1)
   
Company (2)
 
   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Cash and due from banks
  $ 3,398     $ 7,019  
Interest-bearing deposits
    68,784       13,416  
Total cash and cash equivalents
    72,182       20,435  
                 
Available-for-sale securities, at fair value
    153,521       164,188  
Loans held-for-sale
    8,195       14,254  
                 
Loans receivable
               
Residential real estate
    152,035       155,613  
Commercial real estate
    117,075       121,175  
Construction
    9,161       5,525  
Commercial business
    25,166       30,214  
Consumer
    57,796       69,782  
Total loans, gross
    361,233       382,309  
Less allowance for loan losses
    -       5,806  
Loans, net
    361,233       376,503  
                 
Premises and equipment, net
    8,013       7,997  
Acquired assets, net
    965       1,292  
Accrued interest receivable
    1,878       2,081  
Federal Home Loan Bank stock, at cost
    4,889       4,889  
Federal Reserve Bank stock, at cost
    597       597  
Intangible assets
    13,739       11,371  
Bank owned life insurance
    13,540       13,286  
Other assets
    6,068       5,714  
Total assets
  $ 644,820     $ 622,607  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 

NORTHEAST BANCORP AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands)
 
(Continued)
 
   
Successor
   
Predecessor
 
   
Company (1)
   
Company (2)
 
   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
   
(Audited)
 
Liabilities and Stockholders' Equity
           
Liabilities:
           
Deposits
           
Demand
  $ 37,849     $ 35,266  
Savings and interest checking
    94,702       89,024  
Money market
    56,795       55,556  
Brokered time deposits
    4,890       4,883  
Certificates of deposit
    186,130       199,468  
Total deposits
    380,366       384,197  
                 
Federal Home Loan Bank advances
    52,244       50,500  
Structured repurchase agreements
    68,877       65,000  
Short-term borrowings
    62,034       46,168  
Junior subordinated debentures issued to affiliated trusts
    7,889       16,496  
Capital lease obligation
    2,154       2,231  
Other borrowings
    2,134       2,630  
Other liabilities
    4,147       4,479  
Total liabilities
    579,845       571,701  
                 
Commitments and contingent liabilities
               
                 
Stockholders' equity
               
Preferred stock, $1.00 par value, 1,000,000 shares authorized; 4,227 shares issued and outstanding
               
at December 31, 2010 and June 30, 2010, liquidation preference of $1,000 per share
    4       4  
Voting common stock, at stated value, 13,500,000 shares authorized; 3,310,173 and 2,323,832
               
issued and outstanding at December 31, 2010 and June 30, 2010, respectively
    3,310       2,324  
Non-voting common stock, at stated value, 1,500,000 shares authorized; 195,351 and 0 shares
               
shares issued and outstanding at December 31, 2010 and June 30, 2010, respectively
    195       -  
Warrants
    313       133  
Additional paid-in capital
    49,311       6,761  
Unearned restricted stock award
    (181 )     -  
Retained earnings
    11,835       37,338  
Accumulated other comprehensive income
    188       4,346  
Total stockholders' equity
    64,975       50,906  
                 
Total liabilities and stockholders' equity
  $ 644,820     $ 622,607  
 
               
See accompanying notes to unaudited consolidated financial statements.
             
(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.
 
 
 
 

 
4
 
 

NORTHEAST BANCORP AND SUBSIDIARY
 
 
(Unaudited)
 
(Dollars in thousands, except share and per share data)
 
                               
   
Successor
   
Predecessor
 
   
Company (1)
   
Company (2)
 
   
3 Days
   
89 Days
   
181 Days
   
Three Months
   
Six Months
 
   
Ended
   
Ended
   
Ended
   
Ended
   
Ended
 
   
December 31,
   
December 28,
   
December 28,
   
December 31,
   
December 31,
 
   
2010
   
2010
   
2010
   
2009
   
2009
 
Interest and dividend income:
                             
Interest on loans
  $ 196     $ 5,468     $ 11,210     $ 6,033     $ 12,075  
Taxable interest on available-for-sale securities
    41       1,310       2,854       1,725       3,437  
Tax-exempt interest on available-for-sale securities
    4       113       231       119       235  
Dividends on available-for-sale securities
    -       16       26       20       27  
Dividends on Federal Home Loan Bank and Federal
  Reserve Bank stock
    -       9       18       9       18  
Other interest and dividend income
    1       28       39       2       8  
Total interest and dividend income
    242       6,944       14,378       7,908       15,800  
                                         
Interest expense:
                                       
Deposits
    42       1,273       2,796       1,771       3,825  
Federal Home Loan Bank advances
    15       451       918       476       880  
Structured repurchase agreements
    23       685       1,392       708       1,479  
Short-term borrowings
    6       205       376       178       321  
Junior subordinated debentures issued to affiliated trusts
    6       167       340       200       405  
Obligation under capital lease agreements
    1       27       55       29       60  
Other borrowings
    1       36       75       57       113  
Total interest expense
    94       2,844       5,952       3,419       7,083  
                                         
Net interest and dividend income before provision
  for loan losses
    148       4,100       8,426       4,489       8,717  
                                         
Provision for loan losses
    -       453       912       453       876  
Net interest and dividend income after provision for
  loan losses
    148       3,647       7,514       4,036       7,841  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
NORTHEAST BANCORP AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
(Dollars in thousands, except share and per share data)
 
(Continued)                              
   
Successor
   
Predecessor
 
   
Company (1)
   
Company (2)
 
   
3 Days
   
89 Days
   
181 Days
   
Three Months
   
Six Months
 
   
Ended
   
Ended
   
Ended
   
Ended
   
Ended
 
   
December 31,
   
December 28,
   
December 28,
   
December 31,
   
December 31,
 
   
2010
   
2010
   
2010
   
2009
   
2009
 
                                         
Noninterest income:
                                       
Fees for other services to customers
    14       331       698       401       766  
Net securities gains
    -       5       17       15       43  
Gain on sales of loans
    49       919       1,867       358       567  
Investment commissions
    25       625       1,174       535       988  
Insurance commissions
    37       1,221       2,661       1,379       2,964  
BOLI income
    4       123       250       126       251  
Bargain purchase gain
    14,921       -       -       -       -  
Other  income
    7       258       330       215       218  
Total noninterest income
    15,057       3,482       6,997       3,029       5,797  
                                         
Noninterest expense:
                                       
Salaries and employee benefits
    167       3,319       6,670       3,523       6,924  
Occupancy and equipment expense
    28       774       1,556       869       1,659  
Professional fees
    10       248       527       237       585  
Data processing fees
    10       322       618       306       627  
Intangible assets amortization
    6       168       344       186       372  
Merger expense
    3,050       23       94       -       -  
Other
    117       1,100       2,138       1,122       2,001  
  Total noninterest expense
    3,388       5,954       11,947       6,243       12,168  
                                         
Income before income tax (benefit) expense
    11,817       1,175       2,564       822       1,470  
Income tax (benefit) expense
    (18 )     339       768       173       325  
                                         
Net income
  $ 11,835     $ 836     $ 1,796     $ 649     $ 1,145  
 
                                       
Net income available to common stockholders
  $ 11,833     $ 777     $ 1,677     $ 589     $ 1,023  
                                         
                                         
Weighted-average shares outstanding
                                       
Basic
    3,492,498       2,331,332       2,330,197       2,321,528       2,321,430  
Diluted
    3,588,756       2,358,647       2,354,385       2,324,073       2,326,204  
Earnings per common share:
                                       
 Basic
  $ 3.38     $ 0.33     $ 0.72     $ 0.25     $ 0.44  
 Diluted
  $ 3.29     $ 0.33     $ 0.71     $ 0.25     $ 0.44  
                 
See accompanying notes to unaudited consolidated financial statements.
   
                 
(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.
 
 
6
 
 

NORTHEAST BANCORP AND SUBSIDIARY
 
 
Periods Ended December 31, 2010, December 28, 2010 and December 31, 2009
 
(Unaudited)
 
(Dollars in thousands)
 
                                                 
Accumulated
       
                                  Additional    
Unearned
         
Other
       
 
Preferred Stock
   
Common Stock
         
Paid-in
   
Restricted
   
Retained
   
Comprehensive
       
Predecessor Company (2):
Shares
   
Amount
   
Shares
   
Amount
   
Warrants
   
Capital
   
Stock
   
Earnings
   
Income
   
Total
 
Balance at June 30, 2009
  4,227     $ 4       2,321,332     $ 2,321     $ 133     $ 6,709     $ -     $ 36,698     $ 1,451     $ 47,316  
Net income for six
  months ended
  December 31, 2009
  -       -       -       -       -       -       -       1,145       -       1,145  
Other comprehensive
  income net of tax:
                                                                             
Net unrealized loss on
  purchased interest rate
  caps and swap
  -       -       -       -       -       -       -       -       (13 )     (13 )
  Net unrealized gain on
     investments available
   
for sale, net of
    reclassification
    adjustment
  -       -       -       -       -       -       -       -       1,518       1,518  
Total comprehensive
  income
                                                                          2,650  
                                                                               
Dividends on preferred
  stock
  -       -       -       -       -       -       -       (105 )     -       (105 )
Dividends on common
  stock at $0.09 per share
  -       -       -       -       -       -       -       (418 )     -       (418 )
Stock options exercised
  -       -       1,000       1       -       7       -       -       -       8  
Accretion of preferred
 stock
  -       -       -       -       -       12       -       (12 )     -       -  
Amortization of issuance
  cost of preferred stock
  -       -       -       -       -       3       -       (3 )     -       -  
                                                                               
Balance at December 31,
  2009
  4,227     $ 4       2,322,332     $ 2,322     $ 133     $ 6,731     $ -     $ 37,305     $ 2,956     $ 49,451  
                                                                               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 
 
 
NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Statements of Changes in Stockholders' Equity
 
Periods Ended December 31, 2010, December 28, 2010 and December 31, 2009
 
(Unaudited)
 
(Dollars in thousands)
 
(Continued)                                                  
Accumulated
       
                                    Additional    
Unearned
         
Other
       
   
Preferred Stock
   
Common Stock
         
Paid-in
   
Restricted
   
Retained
   
Comprehensive
       
Predecessor Company (2):  
Shares
   
Amount
   
Shares
   
Amount
   
Warrants
   
Capital
   
Stock
   
Earnings
   
Income
   
Total
 
Balance at June 30, 2010
  4,227     $ 4       2,323,832     $ 2,324     $ 133     $ 6,761     $ -     $ 37,338     $ 4,346     $ 50,906  
Net income for 181 days
  ended December 31, 2010
  -       -       -       -       -       -       -       1,796       -       1,796  
Other comprehensive loss
  net of tax:
                                                                             
Net unrealized loss on
 purchased interest rate
 caps and swap
  -       -       -       -       -       -       -       -       (27 )     (27 )
Net unrealized loss on
   investments available

   for sale, net of
   reclassification
   adjustment
  -       -       -       -       -       -       -       -       (1,863 )     (1,863 )
Total comprehensive loss
                                                                          (94 )
                                                                               
Dividends on preferred
  stock
  -       -       -       -       -       -       -       (106 )     -       (106 )
Dividends on common
  stock at $0.09 per share
  -       -       -       -       -       -       -       (419 )     -       (419 )
Stock options exercised
  -       -       7,500       8       -       54       -       -       -       62  
Accretion of preferred
  stock
  -       -       -       -       -       13       -       (13 )     -       -  
Amortization of issuance
  cost of preferred stock
  -       -       -       -       -       3       -       (3 )     -       -  
                                                                               
Balance at December 28,
  2010
  4,227     $ 4       2,331,332     $ 2,332     $ 133     $ 6,831     $ -     $ 38,593     $ 2,456     $ 50,349  
                                                                               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8
 
 
 
NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Statements of Changes in Stockholders' Equity
 
Periods Ended December 31, 2010, December 28, 2010 and December 31, 2009
 
(Unaudited)
 
(Dollars in thousands)
 
(Continued)                                                  
Accumulated
       
                                    Additional    
Unearned
         
Other
       
   
Preferred Stock
   
Common Stock
         
Paid-in
   
Restricted
   
Retained
   
Comprehensive
       
Successor Company(1):  
Shares
   
Amount
   
Shares
   
Amount
   
Warrants
   
Capital
   
Stock
   
Earnings
   
Income
   
Total
 
Balance at December 29,
  2010 (3)
  4,227     $ 4       2,331,332     $ 2,332     $ 313     $ 34,128     $ -     $ -     $ -     $ 36,777  
Net income for three days
 ended December 31, 2010
  -       -       -       -       -       -       -       11,835       -       11,835  
Other comprehensive
  income net of tax:
                                                                             
   Net unrealized gain on
   investments available
for
   sale, net of
   reclassification
   adjustment
  -       -       -       -       -       -       -       -       188       188  
Total comprehensive
  income
                                                                          12,023  
                                                                               
Restricted stock award
  -       -       13,026       13       -       168       (181 )     -       -       -  
Voting common stock
  issued
  -       -       965,815       965       -       12,489       -       -       -       13,454  
Non-voting common
  stock issued
  -       -       195,351       195       -       2,526       -       -       -       2,721  
                                                                               
Balance at December 31,
  2010
  4,227     $ 4       3,505,524     $ 3,505     $ 313     $ 49,311     $ (181 )   $ 11,835     $ 188     $ 64,975  
   
See accompanying notes to unaudited consolidated financial statements.
 
 
(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.
   
 (3) Balances reflect acquisition accounting entries from the merger with FHB Formation LLC on December 29, 2010.
 
 
 
 
 
 
 
 
 
9
 
 

NORTHEAST BANCORP AND SUBSIDIARY
 
 
(Unaudited)
 
(Dollars in thousands)
 
   
Successor
   
Predecessor
 
   
Company (1)
   
Company (2)
 
   
Three days ended
   
181 days ended
   
Six Months ended
 
   
December 31,
   
December 28,
   
December 31,
 
   
2010
   
2010
   
2009
 
Cash flows from operating activities:
                 
Net income
  $ 11,835     $ 1,796     $ 1,145  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
Provision for loan losses
    -       912       876  
Provision for REO
    -       113       -  
Provision made for deferred compensation
    2       105       94  
Write-down of available-for-sale securities
    -       -       65  
Write-down of non-marketable securities
    -       -       99  
Amortization of intangible assets
    6       344       372  
BOLI income, net
    (4 )     (250 )     (251 )
Depreciation of premises and equipment
    9       520       532  
Net securities gains
    -       (17 )     (43 )
Net (gain) loss on sale of acquired assets
    -       (16 )     206  
Net gain on sale of insurance business
    -       (104 )     (116 )
Net change in loans held-for-sale
    (342 )     6,401       882  
Net amortization (accretion) of securities
          90       (29 )
Bargain purchase gain
    (14,921 )     -       -  
Change in other assets and liabilities:
                       
Interest receivable
    82       121       (42 )
Prepayment FDIC assessment
          -       (2,191 )
Decrease in prepayment FDIC assessment
          120       -  
Other assets and liabilities
    (1,203 )     (831 )     (1,199 )
                         
Net cash (used in) provided by operating activities
    (4,536 )     9,304       400  
                         
Cash flows from investing activities:
                       
Proceeds from the sales of available-for-sale securities
    -       173       1,124  
Purchases of available-for-sale securities
    -       (19,001 )     (44,124 )
Proceeds from maturities and principal payments on available-for-sale securities
           26,805       24,737  
Loan originations and principal collections, net
    386       14,440       1,615  
Purchases of premises and equipment
    (90 )     (490 )     (521 )
Proceeds from sales of premises and equipment
    -       36       -  
Proceeds from sales of acquired assets
    -       483       319  
Proceeds from sale of insurance businesses
    -       154       270  
                         
Net cash provided by (used in) investing activities
    296       22,600       (16,580 )
 
 
 
 
 
 
 
 
 
 
 
 
10
 
 

NORTHEAST BANCORP AND SUBSIDIARY
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
(Continued)
 
(Dollars in thousands)
           
   
Successor
   
Predecessor
 
   
Company (1)
   
Company (2)
 
   
Three days ended
   
181 days ended
   
Six Months ended
 
   
December 31,
   
December 28,
   
December 31,
 
   
2010
   
2010
   
2009
 
Cash flows from financing activities:
                 
Net increase (decrease) in deposits
    2,658       (9,580 )     (10,952 )
Advances from the Federal Home Loan Bank
            -       12,500  
Repayment of advances from the Federal Home Loan Bank
    -       -       (2,000 )
Net repayments on Federal Home Loan Bank overnight advances
    -       -       2,645  
Net (decrease) increase in short-term borrowings
    (1,009 )     16,875       11,525  
Dividends paid
            (525 )     (524 )
Issuance of common stock
    16,175       62       8  
Repayment on debt from insurance agencies acquisitions
    -       (496 )     (634 )
Repayment on capital lease obligation
    -       (77 )     (73 )
                         
Net cash provided by financing activities
    17,824       6,259       12,495  
                         
Net increase (decrease) in cash and cash equivalents
    13,584       38,163       (3,685 )
                         
Cash and cash equivalents, beginning of period
    58,598       20,435       13,023  
                         
Cash and cash equivalents, end of period
  $ 72,182     $ 58,598     $ 9,338  
                         
Supplemental schedule of cash flow information:
                       
Interest paid
  $ 356     $ 5,781     $ 7,176  
Income taxes paid
  $ -     $ 846     $ 205  
                         
Supplemental schedule of noncash investing and financing activities:
                       
Transfer from loans to acquired assets
  $ -     $ 346     $ 731  
Transfer from acquired assets to loans
    -       56       45  
Change in valuation allowance for unrealized losses  (gains) on available-for-sale
  securities, net of tax
    (2,638 )     (1,890 )     1,506  
Net change in deferred taxes for unrealized losses  (gains) on available-for-sale securities
    1,359       974       (775 )

Additional supplemental information as a result of the merger on December 29, 2010 is disclosed in Note 2 "Merger Transaction" of these consolidated statements.
 
See accompanying notes to unaudited consolidated financial statements.
   
(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.
 
 
 
 
 
 
 
 
 
 

 
11
 
 

NORTHEAST BANCORP AND SUBSIDIARY
December 31, 2010

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, 2010, the results of operations for the three-day period ended December 31, 2010, the 89- and the 181-day periods ended December 28, 2010 and the three- and six-month periods ended December 31, 2009, the changes in stockholders' equity for the three-day period ended December 31, 2010, the 181-day period ended December 28, 2010 and the six-month period ended December 31, 2009, and the cash flows for the three-day period ended December 31, 2010, the 181-day period ended December 28, 2010 and the six-month period ended December 31, 2009. Operating results for the six-month period ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2011. For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2010 included in the Company's Annual Report on Form 10-K.

2.            Merger Transaction

On December 29, 2010, the merger of the Company and FHB Formation LLC (“FHB”) was consummated. FHB is the entity through which a group of independent accredited investors (the “Investors”) purchased 937,933 of the Company’s outstanding common shares and 1,161,166 newly-issued voting and non-voting common shares, at a price equal to $13.93 per share. As a result of this transaction, $16.2 million of new capital was contributed to the Company and the Investors collectively own approximately 60% of the outstanding common shares of the Company. We have applied the acquisition method of accounting, as described in Accounting Standards Codification (“ASC”) 805, “ Business Combinations, ” to this transaction, which represents an acquisition by FHB of Northeast, with Northeast as the surviving company.

As a result of application of the acquisition method of accounting to the Company’s balance sheet, the 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, we have 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, the Company has placed a heavy black line between the Successor Company and Predecessor Company columns in the Consolidated Financial Statements and in the tables in the notes to the statements and in this discussion. In addition, the lack of comparability means that the periods being reported in the fiscal year ended June 30, 2011 in the statements and tables are not the same periods as reported for the fiscal year ended June 30, 2010.

Under the acquisition method of accounting, the Company assets acquired and liabilities assumed are recorded at their respective fair values as of the transaction date. In connection with the merger, the consideration paid, and the assets acquired and liabilities assumed recorded at fair value on the date of acquisition, are summarized in the following tables:

         ( Dollars in Thousands)     
Consideration Paid:
     
FHB investors' purchase of 937,933 existing Northeast shares, at $13.93  per Surviving Company share
  $ 13,065  
Existing Northeast shareholders' retention of shares in Surviving Company,  1,393,399 shares at $13.93 per share
    19,410  
Total consideration paid:
  $ 32,475  
 
 
 
 
 
 
 
 
12
 
 
 
       
Net Assets Acquired:
  (Dollars in Thousands)
Assets:
     
Cash and short-term investments
  $ 58,598  
Securities available for sale
    153,315  
Loans
    369,498  
Premises and equipment
    7,944  
Bank-owned life insurance
    13,536  
Core deposit intangible
    5,924  
Other identifiable intangibles
    7,822  
Other assets
    14,409  
    $ 631,046  
         
Liabilities and Preferred Equity Assumed:
       
Deposits
  $ 378,523  
Overnight borrowings
    63,043  
Term borrowings
    125,409  
Jr. subordinated debentures issued to affiliated trusts
    7,889  
Other liabilities
    4,340  
Preferred stock
    4,446  
    $ 583,650  
         
Total identifiable net assets
  $ 47,396  
         
Consideration paid
  $ 32,475  
         
Bargain purchase gain recorded in income
  $ 14,921  

In this transaction, the estimated fair values of the Company’s net assets were greater than the purchase price. This resulted in a bargain purchase gain of $14.9 million, which was reported by the Company as income in the three-day period ended December 31, 2010. The bargain purchase gain reflected in these financial statements represents an estimate. While most of the asset and liability fair valuations as of December 31, 2010 are complete, the valuation of identifiable intangibles associated with the Company’s insurance agency, and associated deferred taxes, is based on a preliminary estimate. The transaction resulted in a gain principally because intangible asset fair values were identified totaling $13.7 million, while the purchase price paid by Investors was based on the Company’s tangible book value as of September 30, 2009. Direct costs associated with the merger were expensed by the Company as incurred. Through December 31, 2010, those expenses, principally legal, accounting and investment banking fees, amounted to $3.7 million, of which $3.1 million was incurred in the six-month period ended December 31, 2010.

The fair value of the loan portfolio was $369.5 million, and included $4.6 million of loans with evidence of deterioration in credit quality since origination for which it is probable, as of the transaction date, that the Company will be unable to collect all contractually required payments receivable. In accordance with ASC 310-30 this resulted in a non-accretable difference of $1.9 million, which is defined as the loan’s contractually required payments in excess of the amount of its cash flows expected to be collected. The Company considered factors such as payment history, collateral values, and accrual status when determining whether there was evidence of deterioration of a loan’s credit quality at the transaction date. The Company’s previously established allowance for loan losses is not carried forward in the determination of loan fair value.

The core deposit intangible asset recognized as part of the transaction is being amortized over its estimated useful life of 9.7 years. Existing goodwill totaling $4.1 million, recorded in conjunction with previous insurance agency acquisitions, was eliminated when determining the fair value of net assets. Other insurance agency identifiable intangibles, principally the value of agency customer lists, were estimated preliminarily by an insurance valuation specialist.

The fair value of savings and transaction accounts was assumed to approximate their carrying value, since these deposits have no stated maturity and are payable upon demand. The fair values of certificates of deposit and term borrowings were determined by discounting their contractual cash flows at current market rates.

Commitments in Connection with Regulatory Approval of the Merger
 
 
 
 
13
 
 
The merger required the approval of the Maine Bureau of Financial Institutions (the “Bureau”) and the Federal Reserve Bank of Boston (the “Federal Reserve”). Those approvals contain certain commitments by the Company, including the following:
 
·  
 
 
 
 
The Federal Reserve requires that Northeast (i) maintain a leverage ratio (Tier 1) 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 loans with core deposits, (v) hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital, and (vi) amend the articles of incorporation to address certain technical concerns that the Federal Reserve had relating to the convertibility and transferability of non-voting common stock.
 
·  
 
 
The Bureau requires that, for a two-year period, Northeast receive the prior approval of the Bureau for any material deviation from the business plan. The Bureau’s approval includes other conditions on capital ratios and loan purchasing that are either the same as or less stringent than those of the Federal Reserve.
 
The Federal Reserve commitments with respect to capital ratios and loan funding are subject to transition periods (in most cases, from January 1 through June 30, 2011). The Company has filed a preliminary proxy statement for a special meeting of shareholders to amend the Company's articles of incorporation as required by the Federal Reserve. The Company and the Bank are currently in compliance with all other commitments to the Federal Reserve and Bureau.
 
3.            Loans

The Company’s loan portfolio includes residential real estate, commercial real estate, construction, commercial and consumer segments. Residential real estate loans include classes for one- to four-family owner occupied, second mortgages and equity lines of credit.

Consumer loans include classes for personal and indirect loans for autos, boats and recreational vehicles. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful.  All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these is accounted for on a cash basis or cost recovery method, until qualifying 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.

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.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general, allocated and unallocated components, as further described below.

General Component

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, commercial real estate, construction, commercial and consumer.  Management uses a rolling average of historical losses based on a time frame appropriate to capture the relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.  There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses in the fiscal year ended June 30, 2011.

The qualitative factors are determined based on the various risk characteristics 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 owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
 
 
14
 
 
Commercial real estate – Loans in this segment are primarily income-producing properties located in Maine and New Hampshire.  The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and monitors the cash flows of these loans.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from the sale of the property.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
 
Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – Loans in this segment are secured by autos, boats, recreational vehicles and deposits with the Bank, and are also unsecured.  Repayment is dependent on the credit quality of the individual borrower.

Allocated Component

The allocated component relates to loans that are classified as impaired.  Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction 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 than the carrying value of that loan.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

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.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  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.

The Company periodically may agree to modify the contractual terms of the loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficultly, the modification is considered a troubled debt restructuring (“TDR”).  All TDRs are initially classified as impaired.

Unallocated Component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the loan portfolio.
 
 
 
15
 
 
The following is a summary of the composition of loans at the dates indicated:

   
December 31, 2010
   
June 30, 2010
 
   
(Dollars in thousands)
 
Residential  real estate:
           
   1-4 family
  $ 100,228     $ 102,584  
   Second mortgages
    25,931       27,316  
   Equity lines of credit
    25,876       25,713  
Commercial
    117,075       121,175  
Construction
    9,161       5,525  
             Total mortgage loans on real estate
    278,271