Exhibit 99.1
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION RELATING TO THE MERGER
The following unaudited pro forma condensed combined financial information and explanatory notes show the impact on the historical financial positions and results of operations of First Federal of Northern Michigan Bancorp, Inc. (“First Federal Bancorp”) and Alpena Banking Corporation (“Alpena”) and have been prepared to illustrate the effects of the merger of Alpena with and into First Federal Bancorp (the “Merger”). The Merger was accounted for as an acquisition by First Federal Bancorp of Alpena using the acquisition method of accounting; and accordingly, the assets and liabilities of Alpena were recorded at their respective fair values on August 8, 2014, the effective date of the Merger. The Merger was effected by the issuance of shares of First Federal Bancorp common stock to Alpena shareholders. Each share of Alpena’s common stock was converted into the right to receive 1.549 shares of First Federal Bancorp common stock, with cash in lieu of fractional shares.
The following unaudited pro forma combined consolidated statements of operations give effect to the Merger as if the Merger occurred on June 30, 2014 and combine the historical financial statements of First Federal Bancorp and Alpena. The unaudited pro forma financial statements were prepared with First Federal Bancorp treated as the “accounting acquirer” and Alpena as the “accounting acquiree,” consistent with accounting for the Merger as an acquisition under the acquisition method of accounting. The consideration transferred to complete the Merger has been allocated to Alpena’s assets and liabilities based upon their estimated fair values as of the date of completion of the Merger. The fair values represent our best estimate based on available information and facts and circumstances in existence on the effective date of the Merger. The fair values employed herein are subject to change for up to one year after the closing date of the transaction if information unknown relative to closing date fair values becomes available. The pro forma calculations shown below assume a closing price of $5.59, which represents the closing price of First Federal Bancorp’s common stock on August 8, 2014.
The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial condition had the Merger been completed on the dates described above, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. The financial information should be read in conjunction with the accompanying Notes to the Unaudited Pro Forma Combined Consolidated Financial Information. Certain reclassifications have been made to Alpena’s historical financial information in order to conform to First Federal Bancorp’s presentation of financial information.
First Federal Bancorp and Subsidiaries
Unaudited Pro Forma Combined Statements of Financial Condition
At June 30, 2014 (1)
First Federal Bancorp Historical | Alpena Banking Corporation Historical | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Assets | |||||||||||||||||
Cash and cash equivalents | $ | 3,235 | $ | 419 | $ | (219 | ) | $ | 3,435 | (A) | |||||||
Overnight deposits with Federal Home Loan Bank | 2 | 8,279 | — | 8,281 | |||||||||||||
Total cash and cash equivalents | 3,237 | 8,698 | (219 | ) | 11,716 | ||||||||||||
Securities available for sale, at fair value | 61,466 | 22,853 | — | 84,319 | |||||||||||||
Securities held to maturity | 2,215 | ― | — | 2,215 | |||||||||||||
Loans – net | 135,069 | 33,937 | 668 | 169,674 | (B) | ||||||||||||
— | — | (2,041 | ) | (2,041 | ) | (C) | |||||||||||
— | — | 352 | 352 | (D) | |||||||||||||
Loans held for sale | 380 | 163 | — | 543 | |||||||||||||
Federal Home Loan Bank stock | 3,266 | 157 | — | 3,423 | |||||||||||||
Property and equipment | 5,123 | 2,740 | (1,061 | ) | 6,802 | (E) | |||||||||||
Foreclosed real estate | 1,723 | 136 | — | 1,859 | |||||||||||||
Accrued interest receivable | 714 | 199 | — | 913 | |||||||||||||
Intangible assets | ― | ― | 1,392 | 1,392 | (F) | ||||||||||||
Deferred tax asset | 575 | ― | 259 | 834 | (G) | ||||||||||||
Originated mortgage servicing right – net | 773 | ― | — | 773 | |||||||||||||
Bank-owned life insurance | 4,668 | ― | — | 4,668 | |||||||||||||
Other assets | 581 | 227 | — | 808 | |||||||||||||
Total assets | $ | 219,790 | $ | 69,110 | $ | (650 | ) | $ | 288,250 | ||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||
Liabilities | |||||||||||||||||
Non-interest bearing deposits | 24,652 | 16,630 | — | 41282 | |||||||||||||
Interest-bearing deposits | 144,347 | 44,914 | 73 | 189,334 | (H) | ||||||||||||
Advances from Federal Home Loan Bank | 25,157 | — | — | 25,157 | |||||||||||||
REPO sweep accounts | — | — | — | — | |||||||||||||
Accrued expenses and other liabilities | 1,475 | 469 | — | 1,944 | |||||||||||||
Total liabilities | 195,631 | 62,013 | 73 | 257,717 | |||||||||||||
Stockholders’ Equity | |||||||||||||||||
Common stock | 32 | 5,337 | (5,329 | ) | 40 | (I) | |||||||||||
Additional paid-in capital | 23,854 | — | 4,704 | 28,558 | (I) | ||||||||||||
Retained earnings | 2,964 | 1,776 | (1,776 | ) | 2,964 | (I) | |||||||||||
— | — | 1,881 | 1,881 | (J) | |||||||||||||
— | — | (219 | ) | (219 | ) | (A) | |||||||||||
Treasury stock at cost | (2,964 | ) | — | — | (2,964 | ) | |||||||||||
Accumulated other comprehensive (loss) income | 273 | (16 | ) | 16 | 273 | (I) | |||||||||||
Total stockholders’ equity | 24,159 | 7,097 | (723 | ) | 30,533 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 219,790 | $ | 69,110 | $ | (650 | ) | $ | 288,250 |
First Federal Bancorp and Subsidiaries
Unaudited Pro Forma Combined Statement of Income
For the Six Months Ended June 30, 2014 (1)
First Federal Bancorp Historical | Alpena Banking Corporation Historical | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Interest Income | |||||||||||||||||
Loans, including fees | $ | 3,401 | $ | 1,096 | $ | (117 | ) | $ | 4,380 | (K) | |||||||
Investments: | |||||||||||||||||
Securities available for sale | 669 | 195 | ― | 864 | |||||||||||||
Other | ― | 14 | ― | 14 | |||||||||||||
Total interest income | 4,070 | 1,305 | (117 | ) | 5,258 | ||||||||||||
Interest Expense | |||||||||||||||||
Deposits | 378 | 62 | (37 | ) | 403 | (L) | |||||||||||
Borrowings | 130 | — | ― | 130 | |||||||||||||
Total interest expense | 508 | 62 | (37 | ) | 533 | ||||||||||||
Net interest income before provision for loan losses | 3,562 | 1,243 | (80 | ) | 4,725 | ||||||||||||
Provision for Loan Losses | 16 | — | — | 16 | |||||||||||||
Net interest income after provision for loan losses | 3,546 | 1,243 | (80 | ) | 4,709 | ||||||||||||
Other Income | |||||||||||||||||
Service charges and other fees | 369 | 93 | — | 462 | |||||||||||||
Net gain (loss) on sale of real estate owned and other repossessed assets | (26 | ) | (34 | ) | ― | (60 | ) | ||||||||||
Insurance and brokerage commissions | 224 | — | — | 224 | |||||||||||||
Other | 114 | 100 | — | 214 | |||||||||||||
Total other income | 681 | 160 | — | 841 | |||||||||||||
Operating Expenses | |||||||||||||||||
Compensation and employee benefits | 2,219 | 632 | — | 2,851 | |||||||||||||
FDIC insurance premiums | 91 | — | — | 91 | |||||||||||||
Amortization of intangible assets | 40 | — | 253 | 293 | (M) | ||||||||||||
Advertising | 72 | — | ― | 72 | |||||||||||||
Occupancy and equipment | 456 | 140 | (53 | ) | 543 | (N) | |||||||||||
Data processing service bureau | 146 | — | ― | 146 | |||||||||||||
Professional fees | 294 | — | ― | 294 | |||||||||||||
Collection activity | 29 | — | ― | 29 | |||||||||||||
Real estate owned & other repossessed assets | 29 | 11 | ― | 40 | |||||||||||||
Other | 535 | 470 | — | 1,005 | |||||||||||||
Total operating expenses | 3,911 | 1,253 | 200 | 5,364 | |||||||||||||
Income (loss) before income tax expense | 316 | 150 | (280 | ) | 186 | ||||||||||||
Income tax expense | — | 46 | — | 63 | (O) | ||||||||||||
Net income (loss) | $ | 316 | $ | 104 | $ | (280 | ) | $ | 123 | ||||||||
Earnings per share | |||||||||||||||||
Basic | $ | 0.11 | $ | 0.19 | $ | 0.06 | |||||||||||
Diluted | $ | 0.11 | $ | 0.19 | $ | 0.06 | |||||||||||
Average shares outstanding | |||||||||||||||||
Basic | 2,884,049 | 533,700 | 3,727,014 | ||||||||||||||
Diluted | 2,884,049 | 533,700 | 3,727,014 |
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1 – Basis of Presentation
The unaudited pro forma combined financial information has been prepared using the purchase method of accounting, giving effect to the Merger as if the transactions had occurred as of the beginning of the earliest period presented. The Merger is a “reorganization” for federal income tax purposes, and First Federal Bancorp and Alpena shareholders generally will not recognize, for federal income tax purposes, any gain or loss on the Merger, or gain or loss on the receipt of shares of First Federal Bancorp common stock for their shares of Alpena.
The unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial position had the Merger been consummated at June 30, 2014, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. The Merger, which was completed on August 8, 2014, provided for the issuance of 1.549 shares of First Federal Bancorp common stock in exchange for each share of Alpena common stock.
The Merger was accounted for as an acquisition by First Federal Bancorp using the purchase method of accounting. Accordingly, the assets and liabilities of Alpena were recorded at their respective fair values.
Note 2 – Purchase Price Allocation
The pro forma adjustments include the purchase accounting entries to record the Merger. The deficit of the purchase price in comparison to the fair value of the assets acquired, net of deferred taxes, is recorded as a bargain purchase gain in the income statement. Estimated fair value adjustments included in the pro forma financial statements are based upon available information, and certain assumptions considered reasonable, and may be revised as additional information becomes available. For purposes of this pro forma analysis, fair value adjustments are amortized or accreted using a combination of straight-line and sum-of-the-years-digits methodologies over the estimated average remaining lives.
When actual amortization or accretion is recorded for periods following the closing of the Merger, the level yield method will be used where appropriate. Tax expense related to the net fair value adjustments is calculated at the statutory 34% tax rate. The allocation of the purchase price is as follows:
Purchase Price Allocation
(in thousands, except share and per share amounts)
Pro Forma Purchase Price | ||
Alpena outstanding common shares as of effective date of the Merger | 544,200 | |
Share conversion (1.549 conversion ratio) | 1.549 | |
Total pro forma shares | 842,965 | |
Price per share, based on First Federal Bancorp’s price of $5.59 at August 8, 2014 | $ 5.59 | |
Total pro forma purchase price | $ 4,712 |
Alpena Net Assets at Fair Value | ||
Assets | ||
Cash and cash equivalents | $ 8,698 | |
Securities | 23,010 | |
Loans - net | 33,079 | |
Property and equipment | 1,679 | |
Foreclosed real estate | 136 | |
Intangible assets | 1,392 | |
Other assets | 685 | |
Total assets | $ 68,679 | |
Liabilities | ||
Deposits | $ 61,617 | |
Other liabilities | 469 | |
Total liabilities | $62,086 | |
Net assets | $ 6,593 | |
Preliminary bargain purchase gain | $(1,881) |
Note 3 – Pro Forma Adjustments
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All fair value adjustments were calculated using a 34% tax rate to arrive at deferred tax asset or liability adjustments. All adjustments are based on current assumptions and valuations, which are subject to change.
Note A - | This adjustment includes $219 after-tax expenses expected to be paid by Bank of Alpena prior to the merger consummation. First Federal of Northern Michigan expects to incur pre-tax merger related costs of approximately $340 prior to and after the merger is consummated, which is not reflected. |
Note B - | Elimination of Bank of Alpena’s allowance for loan losses. Purchased loans acquired in a business combination are recorded at fair value and the recorded allowance of the company acquired is not carried over. |
Note C - | A fair value adjustment to total loans to reflect credit deterioration in Alpena’s loan portfolio in the amount of $2.0 million which represents a credit mark of 5.8% on Bank of Alpena’s outstanding loan portfolio. Individual loan files were reviewed extensively by management to determine an overall credit mark on outstanding loans. The management of Alpena Banking Corporation identified impaired loans of $2.3 million as of June 30, 2014. The loan file review performed by First Federal Bancorp confirmed that the population of impaired loans was complete. By definition, impaired loans of the target are classified as purchased credit impaired based on the guidance in ASC 310-30 and will be accounted for accordingly. The unaudited pro forma financial information assumes that future losses would equal the credit mark so no adjustment has been made in future years. |
Note D - | A fair value adjustment to total loans reflect differences in interest rates in the amount of $352,000, which was based primarily on an analysis of current market interest rates, credit spreads, loan types, maturity dates and potential prepayments. The fair value adjustment will be amortized into loan interest income over the estimated lives of the affected loans using a level yield methodology. Further assumes the fair value would be recognized over a three-year period. |
Note E - | A fair value adjustment to Premises and Equipment reflects the fair market value of either acquired buildings or buildings owned by First Federal Bancorp which are expected to be consolidated and sold following consummation of the Merger. |
Note F- | First Federal Bancorp’s estimate of the fair value of the core deposit intangible asset of $1,392 was estimated by using a discounted cash flow approach. This approach calculates the present value of Bank of Alpena’s core deposit expense compared to the expense associated with an alternative funding source over an expected estimated life. The core deposit intangible will be amortized into noninterest expense over a ten-year period using the sum-of-the-years digit methodology. |
Note G - | Adjustment of $259,000 to reflect deferred tax assets associated with the adjustments to record the assets and liabilities of Alpena Banking Corporation at fair value based on First Federal Bancorp’s statutory tax rate of 34%. |
Note H - | A fair value adjustment to time deposits to reflect differences in interest rates in the amount of $73,000, which was based primarily on an analysis of current market interest rates and maturity dates. The fair value adjustment will be accreted into interest expense over the estimated lives of the affected time deposits using a level-yield methodology. Further assumes the fair value will be recognized over a two-year period. |
Note I - | Stockholders’ equity was adjusted by a net $2.385 million to reflect a $4.712 million credit for the equity component of merger consideration and a $7.097 million debit to eliminate historical equity of Alpena Banking Corporation pursuant to ASC 805, thereby representing a conversion of all Alpena Banking Corporation’s shares into First Federal Bancorp’s common shares on a 1.549 conversion ratio basis. |
Note J - | Amount represents implied bargain purchase gain at the consummation of the Merger based on the difference in the fair value of equity received and the pro forma adjustments applied to the equity received by the stockholders of Alpena Banking Corporation. |
Note K - | Interest income on loans has been adjusted to reflect the amortization of the interest rate related fair value adjustment described in Note D. For the credit mark on the loan portfolio, further assumes that future losses would equal the credit mark, so no adjustment has been recognized in future periods. For the interest rate-related fair value adjustment on the loan portfolio, further assumes the fair value adjustment would be recognized over a five-year period. |
Note L - | Interest expense on deposits has been adjusted to reflect the amortization of the interest rate related fair value adjustment described in Note I. |
Note M - | Amortization of intangible assets has been adjusted to reflect the amortization of the core deposit intangible asset described in Note G. |
Note N - | Occupancy and equipment has been adjusted to reflect the decrease in depreciation expense on premises and equipment described in Note E. |
Note O - | Income tax expense has been adjusted to reflect income statement related adjustments at an effective tax rate of 34%. |