NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company” or “Bar Harbor”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Bar Harbor Bankshares is a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include the accounts of the Company, its wholly-owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Bank’s consolidated subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless U.S. GAAP requires otherwise.
In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to U.S. GAAP have been omitted.
The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, 2016 previously filed with the Securities and Exchange Commission. In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.
As a result of the Lake Sunapee Group acquisition, the Company has the following new significant and critical accounting policy regarding acquired loans:
Acquired Loans:
Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases or increases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.
Recently Adopted Accounting Principles
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required
currently, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. As allowed by the ASU, the Company’s adoption was prospective, therefore, prior periods have not been adjusted. The adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise. In 2017, the adoption of ASU No. 2016-09 resulted in an insignificant decrease to the provision for income taxes primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock.
In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company elected to adopt the provisions of ASU No. 2017-08 as of March 31, 2017, which had no impact on the Company’s Consolidated Financial Statements.
Future Application of Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). Current revenue recognition guidance in U.S. GAAP consists of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The common revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company does not expect the new guidance to have a material impact on revenue most
closely associated with financial instruments, including interest income. The Company is currently performing an overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to U.S. GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require these lease
agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of condition. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current U.S. GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs (e.g., Salaries and Benefits) arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item(e.g., Other Noninterest Expense) that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided
not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other post-retirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
NOTE 2.
ACQUISITION
Lake Sunapee Bank Group
On January 13, 2017, the Company completed its acquisition of Lake Sunapee Bank Group (“Lake Sunapee”). Lake Sunapee, as a holding company, had
one
banking subsidiary (“Lake Sunapee Bank”) that had
33
full service branches located throughout New Hampshire and Vermont. As a result of the transaction, Lake Sunapee Bank Group merged into Bar Harbor Bankshares, and Lake Sunapee Bank merged into Bar Harbor Bank. This business combination expanded the Company's geographic footprint and increased market share in its New England based franchise. The goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to the operations of Lake Sunapee Bank Group.
On the acquisition date, Lake Sunapee had
8.38 million
common shares outstanding, which were exchanged for
4.16 million
of the Company's common shares based on a
0.4970
exchange ratio as defined in the merger agreement. The merger qualified as a reorganization for federal income tax purposes, and as a result, Lake Sunapee common shares exchanged for the Company's common shares were transferred on a tax-free basis. Bar Harbor Bankshares common stock issued in this exchange was valued at
$43.69
per share based on the closing price posted on January 13, 2017 resulting in a consideration value of
$181.92 million
. The Company also paid
$27 thousand
to Lake Sunapee shareholders in lieu of the issuance of fractional shares. Total consideration paid at closing reflected the increase in Bar Harbor Bankshare's stock price since the time of the announcement.
The results of Lake Sunapee's operations are included in the Company's Consolidated Statement of Income from the date of acquisition. The assets and liabilities in the Lake Sunapee acquisition were recorded at their fair value based on management’s best estimate using information available as of the date of acquisition.
Consideration paid, and fair values of Lake Sunapee’s assets acquired and liabilities assumed, along with the resulting goodwill, are summarized in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As Acquired
|
|
Fair Value Adjustments
|
|
|
|
As Recorded at Acquisition
|
Consideration paid:
|
|
|
|
|
|
|
|
|
Bar Harbor Bankshares common stock issued to Lake Sunapee Bank Group stockholders (4,163,853 shares)
|
|
|
|
|
|
|
|
$
|
181,919
|
|
Cash paid for fractional shares
|
|
|
|
|
|
|
|
27
|
|
Total consideration paid
|
|
|
|
|
|
|
|
181,946
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
40,970
|
|
|
$
|
(1,406
|
)
|
|
(a)
|
|
$
|
39,564
|
|
Investment securities
|
|
156,960
|
|
|
(1,381
|
)
|
|
(b)
|
|
155,579
|
|
Loans
|
|
1,217,928
|
|
|
(9,728
|
)
|
|
(c)
|
|
1,208,199
|
|
Premises and equipment
|
|
22,561
|
|
|
(351
|
)
|
|
(d)
|
|
22,210
|
|
Core deposit intangible
|
|
—
|
|
|
7,786
|
|
|
(e)
|
|
7,786
|
|
Other assets
|
|
102,300
|
|
|
(50,419
|
)
|
|
(f)
|
|
51,879
|
|
Deposits
|
|
(1,149,865
|
)
|
|
(746
|
)
|
|
(g)
|
|
(1,150,611
|
)
|
Borrowings
|
|
(232,261
|
)
|
|
(16
|
)
|
|
(h)
|
|
(232,277
|
)
|
Deferred taxes, net
|
|
(1,921
|
)
|
|
10,217
|
|
|
(i)
|
|
8,296
|
|
Other liabilities
|
|
(19,924
|
)
|
|
(4,087
|
)
|
|
(j)
|
|
(24,011
|
)
|
Total identifiable net assets
|
|
$
|
136,748
|
|
|
$
|
(50,131
|
)
|
|
|
|
$
|
86,614
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
$
|
95,332
|
|
Explanation of Certain Fair Value Adjustments
|
|
a.
|
Represents in-process payments that were made on the date of acquisition that were not recorded on Lake Sunapee's general ledger until after acquisition.
|
|
|
b.
|
Represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.
|
|
|
c.
|
Represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. The adjustments also includes the reversal of Lake Sunapee Bank's historic allowance for loan losses. Loans that met the criteria and are being accounted for in accordance with ASC 310-30, Loans and Securities Acquired with Deteriorated Credit Quality, had a book value of
$23.34 million
and have a fair value
$18.45 million
. Non-impaired loans accounted for under ASC 310-10, Overall, had a book value of
$1.20 billion
and have a fair value of
$1.188 billion
. ASC 310-30 loans have a
$1.09 million
fair value adjustment discount that is accretable in earnings over the weighted average life of
three years
using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected flows. ASC 310-10 loans have a
$11.40 million
fair value adjustment discount that is amortized into expense over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility.
|
|
|
d.
|
Represents the adjustment of the book value of buildings and equipment, to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets.
|
|
|
e.
|
Represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized using a straight-line method over the average life of the deposit base, which is estimated to be
twelve years
.
|
|
|
f.
|
Primarily represents the write-off of historical goodwill and unamortized intangibles recorded by Lake Sunapee from prior acquisitions that are not carried over to the Company's balance sheet. These adjustments are not
|
accretable into earnings in the statement of income. Also represents the value of customer list intangibles which are accretable into earnings in the statement of income.
|
|
g.
|
Represents adjustments made to time deposits due to the weighted average contractual interest rates exceeding the cost of similar funding at the time of acquisition. The amount will be amortized using a straight-line method over the estimated useful life of
one year
.
|
|
|
h.
|
Represents the present value difference between cash flows of current debt instruments using contractual rates and those of similar borrowings on the date of acquisition. The adjustment will be amortized over the remaining
four
year weighted average contractual life.
|
|
|
i.
|
Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.
|
|
|
j.
|
Primarily represents the impact of change in control effects on post-retirement liabilities assumed by the Company, which are not accretable into earnings in the statement of income.
|
Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value for collateral dependent loans with deteriorated credit quality, we analyzed the underlying collateral of the loans assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was
no
carryover of the seller’s allowance for credit losses associated with the loans that were acquired in the acquisition as the loans were initially recorded at fair value.
Information about the acquired loan portfolio subject to ASC 310-30 as of January 13, 2017 is, as follows (in thousands):
|
|
|
|
|
|
ASC 310-30 Loans
|
Gross contractual receivable amounts at acquisition
|
$
|
23,338
|
|
Contractual cash flows not expected to be collected (nonaccretable discount)
|
(3,801
|
)
|
Expected cash flows at acquisition
|
19,537
|
|
Interest component of expected cash flows (accretable discount)
|
(1,089
|
)
|
Fair value of acquired loans
|
$
|
18,448
|
|
Direct acquisition and integration costs were expensed as incurred, and totaled
$5.6 million
during the
six
months ending
June 30, 2017
and were $
492
thousand for the same period of
2016
. For the three months ending June 30, 2017 direct acquisition and integration costs totaled
$2.5 million
and were
$492 thousand
for the same period of 2016.
Pro Forma Information (unaudited)
The following table presents selected unaudited pro forma financial information reflecting the acquisition of Lake Sunapee Bank Group assuming the acquisition was completed as of January 1, 2016. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the acquisition. These adjustments would have been different if they had been recorded on January 1, 2016, and they do not include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and Lake Sunapee had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. Pro forma basic and diluted earnings per common share were calculated using the Company's actual weighted-average shares outstanding for the periods presented plus
4.16 million
shares issued as a result of the acquisition. The unaudited pro forma information is based on the actual financial statements of the Company and Lake Sunapee for the periods shown until the date of acquisition, at which time Lake Sunapee operations became included in the Company's financial statements. The Company has determined it is impractical to report the amounts of revenue and earnings of the acquired entity since the acquisition date. Due to the integration of its operations with those of the organization, the Company does not record revenue and earnings separately for these operations.
The unaudited pro forma information, for the six months ended
June 30, 2017
and
2016
, set forth below reflects adjustments related to amortization and accretion of purchase accounting fair value adjustments and an estimated tax rate of
37.57%
. Direct acquisition expenses incurred by the Company during
2017
, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.
Information in the following table is shown in thousands, except earnings per share:
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|
|
|
|
|
|
|
|
|
|
|
Pro Forma (unaudited)
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
Net interest income
|
|
$
|
46,834
|
|
|
$
|
45,318
|
|
Non-interest income
|
|
13,116
|
|
|
17,259
|
|
Net income
|
|
15,693
|
|
|
14,670
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
Basic
|
|
$
|
1.02
|
|
|
$
|
0.96
|
|
Diluted
|
|
$
|
1.01
|
|
|
$
|
0.95
|
|
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored enterprises
|
|
$
|
6,937
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
6,973
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
US Government-sponsored enterprises
|
|
456,840
|
|
|
3,344
|
|
|
4,133
|
|
|
456,051
|
|
US Government agency
|
|
77,869
|
|
|
720
|
|
|
527
|
|
|
78,062
|
|
Private label
|
|
744
|
|
|
174
|
|
|
7
|
|
|
911
|
|
Obligations of states and political subdivisions thereof
|
|
144,850
|
|
|
2,869
|
|
|
1,434
|
|
|
146,285
|
|
Corporate bonds
|
|
29,774
|
|
|
308
|
|
|
18
|
|
|
30,064
|
|
Total securities available for sale
|
|
$
|
717,014
|
|
|
$
|
7,451
|
|
|
$
|
6,119
|
|
|
$
|
718,346
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored enterprises
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
US Government-sponsored enterprises
|
|
330,635
|
|
|
2,682
|
|
|
4,865
|
|
|
328,452
|
|
US Government agency
|
|
76,722
|
|
|
797
|
|
|
613
|
|
|
76,906
|
|
Private label
|
|
936
|
|
|
207
|
|
|
11
|
|
|
1,132
|
|
Obligations of states and political subdivisions thereof
|
|
123,832
|
|
|
1,941
|
|
|
3,407
|
|
|
122,366
|
|
Corporate bonds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total securities available for sale
|
|
$
|
532,125
|
|
|
$
|
5,627
|
|
|
$
|
8,896
|
|
|
$
|
528,856
|
|
The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at
June 30, 2017
are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
Amortized
|
|
Fair
|
(In thousands)
|
|
Cost
|
|
Value
|
Within 1 year
|
|
$
|
3,595
|
|
|
$
|
3,615
|
|
Over 1 year to 5 years
|
|
19,509
|
|
|
19,714
|
|
Over 5 years to 10 years
|
|
72,053
|
|
|
73,287
|
|
Over 10 years
|
|
621,857
|
|
|
621,730
|
|
Total securities available for sale
|
|
$
|
717,014
|
|
|
$
|
718,346
|
|
Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months
|
|
Over Twelve Months
|
|
Total
|
(In thousands)
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored enterprises
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government-sponsored enterprises
|
|
3,161
|
|
|
198,257
|
|
|
972
|
|
|
27,076
|
|
|
4,133
|
|
|
225,333
|
|
US Government agency
|
|
391
|
|
|
37,729
|
|
|
136
|
|
|
5,774
|
|
|
527
|
|
|
43,503
|
|
Private label
|
|
—
|
|
|
7
|
|
|
7
|
|
|
271
|
|
|
7
|
|
|
278
|
|
Obligations of states and political subdivisions thereof
|
|
957
|
|
|
33,058
|
|
|
477
|
|
|
7,930
|
|
|
1,434
|
|
|
40,988
|
|
Corporate bonds
|
|
18
|
|
|
4,025
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
4,025
|
|
Total securities available for sale
|
|
$
|
4,527
|
|
|
$
|
273,076
|
|
|
$
|
1,592
|
|
|
$
|
41,051
|
|
|
$
|
6,119
|
|
|
$
|
314,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored enterprises
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government-sponsored enterprises
|
|
4,369
|
|
|
197,914
|
|
|
496
|
|
|
10,120
|
|
|
4,865
|
|
|
208,034
|
|
US Government agency
|
|
472
|
|
|
36,941
|
|
|
141
|
|
|
4,263
|
|
|
613
|
|
|
41,204
|
|
Private label
|
|
—
|
|
|
107
|
|
|
11
|
|
|
312
|
|
|
11
|
|
|
419
|
|
Obligations of states and political subdivisions thereof
|
|
3,252
|
|
|
76,803
|
|
|
155
|
|
|
3,916
|
|
|
3,407
|
|
|
80,719
|
|
Corporate bonds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total securities available for sale
|
|
$
|
8,093
|
|
|
$
|
311,765
|
|
|
$
|
803
|
|
|
$
|
18,611
|
|
|
$
|
8,896
|
|
|
$
|
330,376
|
|
Securities Impairment:
As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. For the three and six months ended June 30, 2017 and 2016 the Company did not record any other-than-temporary impairment (“OTTI”) losses.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
Estimated credit losses as of March 31,
|
$
|
1,697
|
|
|
$
|
2,793
|
|
Reductions for securities paid off during the period
|
—
|
|
|
1,096
|
|
Estimated credit losses at end of the period
|
$
|
1,697
|
|
|
$
|
1,697
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Estimated credit losses as of prior year-end,
|
$
|
1,697
|
|
|
$
|
3,180
|
|
Reductions for securities paid off during the period
|
—
|
|
|
1,483
|
|
Estimated credit losses at end of the period
|
$
|
1,697
|
|
|
$
|
1,697
|
|
Visa Class B Common Shares
The Company was a member of the Visa USA payment network and was issued Class B shares in connection with the Visa Reorganization and the Visa Inc. initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of Visa stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its statements of condition at
zero
value for all reporting periods since 2008. At June 30, 2017, the Company owned
11,623
of Visa Class B shares with a then current conversion ratio to Visa Class A shares of
1.648
(or
19,158
Visa Class A shares). Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.
For securities with unrealized losses, the following information was considered in determining that the impairments were not other-than-temporary:
Debt Securities
The Company expects to recover its amortized cost basis on all debt securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of
June 30, 2017
, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.
The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS were not other-than-temporarily impaired at
June 30, 2017
:
US Government-sponsored enterprises
At
June 30, 2017
,
283
out of the total
797
securities in the Company’s portfolios of AFS US Government sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented
1.8%
of the amortized cost of securities in unrealized loss positions.The Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) guarantee the contractual cash flows of all of the Company’s US government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.
US Government agencies
At
June 30, 2017
,
65
out of the total
208
securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented
1.2%
of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.
Private-label
At June 30, 2017,
nine
of the total
28
securities in the Company’s portfolio of AFS private-label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented
2.5%
of the amortized cost of securities in unrealized loss positions. Based upon the foregoing considerations, and the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.
Obligations of states and political subdivisions thereof
At
June 30, 2017
,
81
of the total
273
securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented
3.4%
of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were
no
material underlying credit downgrades during the quarter. All securities are performing.
Corporate bonds
At
June 30, 2017
,
two
out of
13
securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents
0.4%
of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.
NOTE 4. LOANS
The Company’s loan portfolio is comprised of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans includes single and multi-family, commercial construction and land, and other commercial real estate classes. Commercial and industrial loans includes loans to commercial businesses, agricultural and other loans to farmers, and tax exempt loans. Residential real estate loans consists of mortgages for
1
to
4
family housing. Consumer loans include home equity loans, indirect auto and other installment lending.
The Company’s lending activities are principally conducted in Maine, New Hampshire, and Vermont.
Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from Lake Sunapee Bank Group. The following is a summary of total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Business
Activities Loans
|
|
Acquired
Loans
|
|
Total
|
|
Business
Activities Loans
|
|
Acquired
Loans
|
|
Total
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
27,428
|
|
|
$
|
16,467
|
|
|
$
|
43,895
|
|
|
$
|
14,695
|
|
|
$
|
—
|
|
|
$
|
14,695
|
|
Other commercial real estate
|
|
403,326
|
|
|
291,363
|
|
|
694,689
|
|
|
403,424
|
|
|
—
|
|
|
403,424
|
|
Total Commercial Real Estate:
|
|
430,754
|
|
|
307,830
|
|
|
738,584
|
|
|
418,119
|
|
|
—
|
|
|
418,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
158,434
|
|
|
80,067
|
|
|
238,501
|
|
|
103,586
|
|
|
—
|
|
|
103,586
|
|
Agricultural and other loans to farmers
|
|
31,459
|
|
|
—
|
|
|
31,459
|
|
|
31,808
|
|
|
—
|
|
|
31,808
|
|
Tax exempt
|
|
38,258
|
|
|
41,784
|
|
|
80,042
|
|
|
15,846
|
|
|
—
|
|
|
15,846
|
|
Total Commercial and Industrial:
|
|
228,151
|
|
|
121,851
|
|
|
350,002
|
|
|
151,240
|
|
|
—
|
|
|
151,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans:
|
|
658,905
|
|
|
429,681
|
|
|
1,088,586
|
|
|
569,359
|
|
|
—
|
|
|
569,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
549,578
|
|
|
611,254
|
|
|
1,160,832
|
|
|
506,612
|
|
|
—
|
|
|
506,612
|
|
Total Residential Real Estate:
|
|
549,578
|
|
|
611,254
|
|
|
1,160,832
|
|
|
506,612
|
|
|
—
|
|
|
506,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
47,762
|
|
|
68,707
|
|
|
116,469
|
|
|
46,921
|
|
|
—
|
|
|
46,921
|
|
Other consumer
|
|
7,693
|
|
|
3,067
|
|
|
10,760
|
|
|
6,172
|
|
|
—
|
|
|
6,172
|
|
Total Consumer:
|
|
55,455
|
|
|
71,774
|
|
|
127,229
|
|
|
53,093
|
|
|
—
|
|
|
53,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans:
|
|
$
|
1,263,938
|
|
|
$
|
1,112,709
|
|
|
$
|
2,376,647
|
|
|
$
|
1,129,064
|
|
|
$
|
—
|
|
|
$
|
1,129,064
|
|
The carrying amount of the acquired loans at
June 30, 2017
totaled
$1.113 billion
. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of
$15.6 million
(and a note balance of
$21.1 million
). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of
$1.097 billion
.
The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
3,194
|
|
|
$
|
—
|
|
Acquisitions
|
|
—
|
|
|
—
|
|
Reclassification from nonaccretable difference for loans with improved cash flows
|
|
1,745
|
|
|
—
|
|
Accretion
|
|
(372
|
)
|
|
—
|
|
Balance at end of period
|
|
$
|
4,567
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisitions
|
|
3,398
|
|
|
—
|
|
Reclassification from nonaccretable difference for loans with improved cash flows
|
|
1,745
|
|
|
—
|
|
Accretion
|
|
(576
|
)
|
|
—
|
|
Balance at end of period
|
|
$
|
4,567
|
|
|
$
|
—
|
|
The following is a summary of past due loans at
June 30, 2017
and
December 31, 2016
:
Business Activities Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days or Greater Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total Loans
|
|
Past Due >
90 days and
Accruing
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
637
|
|
|
$
|
637
|
|
|
$
|
26,791
|
|
|
$
|
27,428
|
|
|
$
|
—
|
|
Other commercial real estate
|
|
640
|
|
|
200
|
|
|
635
|
|
|
1,475
|
|
|
401,851
|
|
|
403,326
|
|
|
—
|
|
Total Commercial Real Estate:
|
|
640
|
|
|
200
|
|
|
1,272
|
|
|
2,112
|
|
|
428,642
|
|
|
430,754
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
3,816
|
|
|
29
|
|
|
159
|
|
|
4,004
|
|
|
154,430
|
|
|
158,434
|
|
|
—
|
|
Agricultural and other loans to farmers
|
|
84
|
|
|
105
|
|
|
—
|
|
|
189
|
|
|
31,270
|
|
|
31,459
|
|
|
—
|
|
Tax exempt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38,258
|
|
|
38,258
|
|
|
—
|
|
Total Commercial and Industrial:
|
|
3,900
|
|
|
134
|
|
|
159
|
|
|
4,193
|
|
|
223,958
|
|
|
228,151
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans:
|
|
4,540
|
|
|
334
|
|
|
1,431
|
|
|
6,305
|
|
|
652,600
|
|
|
658,905
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
587
|
|
|
3,291
|
|
|
719
|
|
|
4,597
|
|
|
544,981
|
|
|
549,578
|
|
|
—
|
|
Total Residential Real Estate:
|
|
587
|
|
|
3,291
|
|
|
719
|
|
|
4,597
|
|
|
544,981
|
|
|
549,578
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
891
|
|
|
55
|
|
|
13
|
|
|
959
|
|
|
46,803
|
|
|
47,762
|
|
|
—
|
|
Other consumer
|
|
104
|
|
|
14
|
|
|
9
|
|
|
127
|
|
|
7,566
|
|
|
7,693
|
|
|
—
|
|
Total Consumer:
|
|
995
|
|
|
69
|
|
|
22
|
|
|
1,086
|
|
|
54,369
|
|
|
55,455
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans:
|
|
$
|
6,122
|
|
|
$
|
3,694
|
|
|
$
|
2,172
|
|
|
$
|
11,988
|
|
|
$
|
1,251,950
|
|
|
$
|
1,263,938
|
|
|
$
|
—
|
|
Business Activities Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days or Greater Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total Loans
|
|
Past Due >
90 days and
Accruing
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,695
|
|
|
$
|
14,695
|
|
|
$
|
—
|
|
Other commercial real estate
|
|
195
|
|
|
554
|
|
|
1,665
|
|
|
2,414
|
|
|
401,010
|
|
|
403,424
|
|
|
—
|
|
Total Commercial Real Estate:
|
|
195
|
|
|
554
|
|
|
1,665
|
|
|
2,414
|
|
|
415,705
|
|
|
418,119
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
61
|
|
|
45
|
|
|
201
|
|
|
307
|
|
|
103,279
|
|
|
103,586
|
|
|
—
|
|
Agricultural and other loans to farmers
|
|
231
|
|
|
—
|
|
|
—
|
|
|
231
|
|
|
31,577
|
|
|
31,808
|
|
|
—
|
|
Tax exempt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,846
|
|
|
15,846
|
|
|
—
|
|
Total Commercial and Industrial:
|
|
292
|
|
|
45
|
|
|
201
|
|
|
538
|
|
|
150,702
|
|
|
151,240
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans:
|
|
487
|
|
|
599
|
|
|
1,866
|
|
|
2,952
|
|
|
566,407
|
|
|
569,359
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
4,484
|
|
|
429
|
|
|
938
|
|
|
5,851
|
|
|
500,761
|
|
|
506,612
|
|
|
—
|
|
Total Residential Real Estate:
|
|
4,484
|
|
|
429
|
|
|
938
|
|
|
5,851
|
|
|
500,761
|
|
|
506,612
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
|
46,906
|
|
|
46,921
|
|
|
—
|
|
Other consumer
|
|
103
|
|
|
1
|
|
|
6
|
|
|
110
|
|
|
6,062
|
|
|
6,172
|
|
|
—
|
|
Total Consumer:
|
|
103
|
|
|
1
|
|
|
21
|
|
|
125
|
|
|
52,968
|
|
|
53,093
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans:
|
|
$
|
5,074
|
|
|
$
|
1,029
|
|
|
$
|
2,825
|
|
|
$
|
8,928
|
|
|
$
|
1,120,136
|
|
|
$
|
1,129,064
|
|
|
$
|
—
|
|
Acquired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days or Greater Past Due
|
|
Total Past
Due
|
|
Acquired
Credit
Impaired
|
|
Total Loans
|
|
Past Due >
90 days and
Accruing
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
300
|
|
|
$
|
16,467
|
|
|
$
|
—
|
|
Other commercial real estate
|
|
400
|
|
|
56
|
|
|
196
|
|
|
652
|
|
|
10,416
|
|
|
291,363
|
|
|
—
|
|
Total Commercial Real Estate:
|
|
421
|
|
|
56
|
|
|
196
|
|
|
673
|
|
|
10,716
|
|
|
307,830
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
459
|
|
|
246
|
|
|
33
|
|
|
738
|
|
|
1,217
|
|
|
80,067
|
|
|
6
|
|
Agricultural and other loans to farmers
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax exempt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,784
|
|
|
—
|
|
Total Commercial and Industrial:
|
|
459
|
|
|
246
|
|
|
33
|
|
|
738
|
|
|
1,217
|
|
|
121,851
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans:
|
|
880
|
|
|
302
|
|
|
229
|
|
|
1,411
|
|
|
11,933
|
|
|
429,681
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
680
|
|
|
202
|
|
|
469
|
|
|
1,351
|
|
|
3,640
|
|
|
611,254
|
|
|
—
|
|
Total Residential Real Estate:
|
|
680
|
|
|
202
|
|
|
469
|
|
|
1,351
|
|
|
3,640
|
|
|
611,254
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
793
|
|
|
13
|
|
|
—
|
|
|
806
|
|
|
42
|
|
|
68,707
|
|
|
—
|
|
Other consumer
|
|
15
|
|
|
13
|
|
|
3
|
|
|
31
|
|
|
19
|
|
|
3,067
|
|
|
—
|
|
Total Consumer:
|
|
808
|
|
|
26
|
|
|
3
|
|
|
837
|
|
|
61
|
|
|
71,774
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans:
|
|
$
|
2,368
|
|
|
$
|
530
|
|
|
$
|
701
|
|
|
$
|
3,599
|
|
|
$
|
15,634
|
|
|
$
|
1,112,709
|
|
|
$
|
6
|
|
Non Accrual Loans
The following is summary information pertaining to non-accrual loans at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Business
Activities Loans
|
|
Acquired
Loans
|
|
Total
|
|
Business
Activities Loans
|
|
Acquired
Loans
|
|
Total
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
637
|
|
|
$
|
—
|
|
|
$
|
637
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other commercial real estate
|
|
1,257
|
|
|
197
|
|
|
1,454
|
|
|
2,564
|
|
|
—
|
|
|
2,564
|
|
Total Commercial Real Estate:
|
|
1,894
|
|
|
197
|
|
|
2,091
|
|
|
2,564
|
|
|
—
|
|
|
2,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
191
|
|
|
33
|
|
|
224
|
|
|
284
|
|
|
—
|
|
|
284
|
|
Agricultural and other loans to farmers
|
|
46
|
|
|
—
|
|
|
46
|
|
|
31
|
|
|
—
|
|
|
31
|
|
Tax exempt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Commercial and Industrial:
|
|
237
|
|
|
33
|
|
|
270
|
|
|
315
|
|
|
—
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans:
|
|
2,131
|
|
|
230
|
|
|
2,361
|
|
|
2,879
|
|
|
—
|
|
|
2,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
2,313
|
|
|
469
|
|
|
2,782
|
|
|
3,419
|
|
|
—
|
|
|
3,419
|
|
Total Residential Real Estate:
|
|
2,313
|
|
|
469
|
|
|
2,782
|
|
|
3,419
|
|
|
—
|
|
|
3,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
65
|
|
|
—
|
|
|
65
|
|
|
90
|
|
|
—
|
|
|
90
|
|
Other consumer
|
|
92
|
|
|
3
|
|
|
95
|
|
|
108
|
|
|
—
|
|
|
108
|
|
Total Consumer:
|
|
157
|
|
|
3
|
|
|
160
|
|
|
198
|
|
|
—
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans:
|
|
$
|
4,601
|
|
|
$
|
702
|
|
|
$
|
5,303
|
|
|
$
|
6,496
|
|
|
$
|
—
|
|
|
$
|
6,496
|
|
Loans evaluated for impairment as of
June 30, 2017
and
December 31, 2016
were as follows:
Business Activities Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial
real estate
|
|
Commercial and
industrial
|
|
Residential
real estate
|
|
Consumer
|
|
Total
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3,916
|
|
|
$
|
479
|
|
|
$
|
1,858
|
|
|
$
|
61
|
|
|
$
|
6,314
|
|
Collectively evaluated
|
|
426,838
|
|
|
227,672
|
|
|
547,720
|
|
|
55,394
|
|
|
1,257,624
|
|
Total
|
|
$
|
430,754
|
|
|
$
|
228,151
|
|
|
$
|
549,578
|
|
|
$
|
55,455
|
|
|
$
|
1,263,938
|
|
Business Activities Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial
real estate
|
|
Commercial and
industrial
|
|
Residential
real estate
|
|
Consumer
|
|
Total
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
4,481
|
|
|
$
|
486
|
|
|
$
|
1,709
|
|
|
$
|
33
|
|
|
$
|
6,709
|
|
Collectively evaluated
|
|
413,638
|
|
|
150,754
|
|
|
504,903
|
|
|
53,060
|
|
|
1,122,355
|
|
Total
|
|
$
|
418,119
|
|
|
$
|
151,240
|
|
|
$
|
506,612
|
|
|
$
|
53,093
|
|
|
$
|
1,129,064
|
|
Acquired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial
real estate
|
|
Commercial and
industrial
|
|
Residential
real estate
|
|
Consumer
|
|
Total
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchased credit-impaired loans
|
|
10,716
|
|
|
1,217
|
|
|
3,640
|
|
|
60
|
|
|
15,633
|
|
Collectively evaluated
|
|
297,114
|
|
|
120,634
|
|
|
607,614
|
|
|
71,714
|
|
|
1,097,076
|
|
Total
|
|
$
|
307,830
|
|
|
$
|
121,851
|
|
|
$
|
611,254
|
|
|
$
|
71,774
|
|
|
$
|
1,112,709
|
|
The following is a summary of impaired loans at
June 30, 2017
and
December 31, 2016
:
Business Activities Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(In thousands)
|
|
Recorded Investment
|
|
Unpaid Principal
Balance
|
|
Related Allowance
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate other
|
|
2,522
|
|
|
2,701
|
|
|
—
|
|
Commercial other
|
|
366
|
|
|
368
|
|
|
—
|
|
Agricultural and other loans to farmers
|
|
69
|
|
|
73
|
|
|
—
|
|
Tax exempt loans
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
1,700
|
|
|
1,855
|
|
|
—
|
|
Home equity
|
|
13
|
|
|
13
|
|
|
—
|
|
Consumer other
|
|
48
|
|
|
50
|
|
|
—
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
637
|
|
|
$
|
2,562
|
|
|
$
|
59
|
|
Commercial real estate other
|
|
757
|
|
|
812
|
|
|
321
|
|
Commercial other
|
|
44
|
|
|
44
|
|
|
4
|
|
Agricultural and other loans to farmers
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax exempt loans
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
158
|
|
|
158
|
|
|
10
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,916
|
|
|
$
|
6,075
|
|
|
$
|
380
|
|
Commercial and industrial
|
|
479
|
|
|
485
|
|
|
4
|
|
Residential real estate
|
|
1,858
|
|
|
2,013
|
|
|
10
|
|
Consumer
|
|
61
|
|
|
63
|
|
|
—
|
|
Total impaired loans
|
|
$
|
6,314
|
|
|
$
|
8,636
|
|
|
$
|
394
|
|
Business Activities Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
|
Recorded Investment
|
|
Unpaid Principal
Balance
|
|
Related Allowance
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate other
|
|
2,831
|
|
|
2,919
|
|
|
—
|
|
Commercial other
|
|
130
|
|
|
130
|
|
|
—
|
|
Agricultural and other loans to farmers
|
|
139
|
|
|
139
|
|
|
—
|
|
Tax exempt loans
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
1,387
|
|
|
1,504
|
|
|
—
|
|
Home equity
|
|
16
|
|
|
16
|
|
|
—
|
|
Consumer other
|
|
2
|
|
|
2
|
|
|
—
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate other
|
|
1,650
|
|
|
3,575
|
|
|
193
|
|
Commercial other
|
|
217
|
|
|
367
|
|
|
173
|
|
Agricultural and other loans to farmers
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax exempt loans
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
322
|
|
|
322
|
|
|
49
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer other
|
|
15
|
|
|
15
|
|
|
9
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,481
|
|
|
$
|
6,494
|
|
|
$
|
193
|
|
Commercial and industrial
|
|
486
|
|
|
636
|
|
|
173
|
|
Residential real estate
|
|
1,709
|
|
|
1,826
|
|
|
49
|
|
Consumer
|
|
33
|
|
|
33
|
|
|
9
|
|
Total impaired loans
|
|
$
|
6,709
|
|
|
$
|
8,989
|
|
|
$
|
424
|
|
The following is a summary of the average recorded investment and interest income recognized on impaired loans as of
June 30, 2017
and
2016
:
Business Activities Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
(in thousands)
|
|
Average Recorded
Investment
|
|
Cash Basis Interest
Income Recognized
|
|
Average Recorded
Investment
|
|
Cash Basis Interest
Income Recognized
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate other
|
|
2,499
|
|
|
64
|
|
|
1,850
|
|
|
32
|
|
Commercial other
|
|
349
|
|
|
6
|
|
|
92
|
|
|
2
|
|
Agricultural and other loans to farmers
|
|
70
|
|
|
1
|
|
|
128
|
|
|
3
|
|
Tax exempt loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
2,130
|
|
|
21
|
|
|
1,214
|
|
|
17
|
|
Home equity
|
|
13
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Consumer other
|
|
64
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
637
|
|
|
$
|
—
|
|
|
$
|
865
|
|
|
$
|
—
|
|
Commercial real estate other
|
|
772
|
|
|
—
|
|
|
482
|
|
|
—
|
|
Commercial other
|
|
44
|
|
|
1
|
|
|
221
|
|
|
—
|
|
Agricultural and other loans to farmers
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax exempt loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
156
|
|
|
5
|
|
|
513
|
|
|
—
|
|
Home equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer other
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,908
|
|
|
$
|
64
|
|
|
$
|
3,197
|
|
|
$
|
32
|
|
Commercial and industrial
|
|
463
|
|
|
8
|
|
|
441
|
|
|
5
|
|
Residential real estate
|
|
2,286
|
|
|
26
|
|
|
1,727
|
|
|
17
|
|
Consumer
|
|
77
|
|
|
2
|
|
|
23
|
|
|
—
|
|
Total impaired loans
|
|
$
|
6,734
|
|
|
$
|
100
|
|
|
$
|
5,388
|
|
|
$
|
54
|
|
Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally
six months
. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.
The following tables include the recorded investment and number of modifications identified during the
three and six
months ended
June 30, 2017
and for the
three and six
months ended
June 30, 2016
, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. The modifications for the
three and six
months ended
June 30, 2017
were attributable to interest rate concessions, maturity date extensions, reamortization or a combination of
two
concessions. The modifications for the
three and six
months ending
June 30, 2016
were attributable to interest rate concessions, maturity date extensions or a combination of both.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
(Dollars in thousands)
|
|
Number of
Modifications
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
Commercial installment
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Agricultural and other loans to farmers
|
|
1
|
|
|
19
|
|
|
18
|
|
Commercial real estate
|
|
2
|
|
|
245
|
|
|
245
|
|
Residential real estate
|
|
1
|
|
|
118
|
|
|
117
|
|
Home equity
|
|
1
|
|
|
13
|
|
|
13
|
|
Consumer other
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
5
|
|
|
$
|
395
|
|
|
$
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
(Dollars in thousands)
|
|
Number of
Modifications
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
Commercial real estate
|
|
1
|
|
|
$
|
30
|
|
|
$
|
30
|
|
Total
|
|
1
|
|
|
$
|
30
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
(Dollars in thousands)
|
|
Number of
Modifications
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
Commercial installment
|
|
1
|
|
|
$
|
80
|
|
|
$
|
77
|
|
Agricultural and other loans to farmers
|
|
1
|
|
|
19
|
|
|
18
|
|
Commercial real estate
|
|
2
|
|
|
245
|
|
|
245
|
|
Residential real estate
|
|
3
|
|
|
692
|
|
|
682
|
|
Home equity
|
|
1
|
|
|
13
|
|
|
13
|
|
Consumer other
|
|
1
|
|
|
38
|
|
|
37
|
|
Total
|
|
9
|
|
|
$
|
1,087
|
|
|
$
|
1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
(Dollars in thousands)
|
|
Number of
Modifications
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
Commercial real estate
|
|
3
|
|
|
$
|
425
|
|
|
$
|
418
|
|
Agricultural and other loans to farmers
|
|
2
|
|
|
30
|
|
|
25
|
|
Total
|
|
5
|
|
|
$
|
455
|
|
|
$
|
443
|
|
For the
three and six
months ended
June 30, 2017
, there were
no
loans that were restructured that had subsequently defaulted during the period.
The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.
As of
June 30, 2017
, the Company maintained foreclosed residential real estate property with a fair value of
$122 thousand
. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of
June 30, 2017
and
December 31, 2016
totaled
$991 thousand
and
$2.4 million
, respectively. As of
December 31, 2016
, foreclosed residential real estate property totaled
$90 thousand
.
NOTE 5. LOAN LOSS ALLOWANCE
Activity in the allowance for loan losses for the six months ended
June 30, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Activities Loans
|
|
At or for the six months ended June 30, 2017
|
(In thousands)
|
|
Commercial
real estate
|
|
Commercial and industrial
|
|
Residential
real estate
|
|
Consumer
|
|
Total
|
Balance at beginning of period
|
|
$
|
5,145
|
|
|
$
|
1,952
|
|
|
$
|
2,721
|
|
|
$
|
601
|
|
|
$
|
10,419
|
|
Charged-off loans
|
|
(147
|
)
|
|
(189
|
)
|
|
(226
|
)
|
|
(17
|
)
|
|
(579
|
)
|
Recoveries on charged-off loans
|
|
3
|
|
|
2
|
|
|
64
|
|
|
2
|
|
|
71
|
|
Provision/(releases) for loan losses
|
|
502
|
|
|
345
|
|
|
560
|
|
|
15
|
|
|
1,422
|
|
Balance at end of period
|
|
$
|
5,503
|
|
|
$
|
2,110
|
|
|
$
|
3,119
|
|
|
$
|
601
|
|
|
$
|
11,333
|
|
Individually evaluated for impairment
|
|
380
|
|
|
4
|
|
|
10
|
|
|
—
|
|
|
394
|
|
Collectively evaluated
|
|
5,123
|
|
|
2,106
|
|
|
3,109
|
|
|
601
|
|
|
10,939
|
|
Total
|
|
$
|
5,503
|
|
|
$
|
2,110
|
|
|
$
|
3,119
|
|
|
$
|
601
|
|
|
$
|
11,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Activities Loans
|
|
At or for the six months ended June 30, 2016
|
(In thousands)
|
|
Commercial
real estate
|
|
Commercial and industrial
|
|
Residential
real estate
|
|
Consumer
|
|
Total
|
Balance at beginning of period
|
|
$
|
4,430
|
|
|
$
|
1,590
|
|
|
$
|
2,747
|
|
|
$
|
672
|
|
|
$
|
9,439
|
|
Charged-off loans
|
|
(34
|
)
|
|
(90
|
)
|
|
(122
|
)
|
|
(17
|
)
|
|
(263
|
)
|
Recoveries on charged-off loans
|
|
13
|
|
|
44
|
|
|
28
|
|
|
15
|
|
|
100
|
|
Provision/(releases) for loan losses
|
|
451
|
|
|
157
|
|
|
30
|
|
|
(23
|
)
|
|
615
|
|
Balance at end of period
|
|
$
|
4,860
|
|
|
$
|
1,701
|
|
|
$
|
2,683
|
|
|
$
|
647
|
|
|
$
|
9,891
|
|
Individually evaluated for impairment
|
|
103
|
|
|
175
|
|
|
54
|
|
|
38
|
|
|
370
|
|
Collectively evaluated
|
|
4,757
|
|
|
1,526
|
|
|
2,629
|
|
|
609
|
|
|
9,521
|
|
Total
|
|
$
|
4,860
|
|
|
$
|
1,701
|
|
|
$
|
2,683
|
|
|
$
|
647
|
|
|
$
|
9,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Loans
|
|
At or for the six months ended June 30, 2017
|
(In thousands)
|
|
Commercial
real estate
|
|
Commercial and industrial
|
|
Residential
real estate
|
|
Consumer
|
|
Total
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charged-off loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recoveries on charged-off loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Provision/(releases) for loan losses
|
|
51
|
|
|
24
|
|
|
34
|
|
|
—
|
|
|
109
|
|
Balance at end of period
|
|
$
|
51
|
|
|
$
|
24
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
109
|
|
Individually evaluated for impairment
|
|
51
|
|
|
24
|
|
|
34
|
|
|
—
|
|
|
109
|
|
Collectively evaluated
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
51
|
|
|
$
|
24
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
109
|
|
There were no loans meeting the definition of acquired for the six month period ending June 30, 2016
Loan Origination/Risk Management:
The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Bank’s board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Bank's board of directors with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing loans and potential problem loans. The Bank seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.
Credit Quality Indicators/Classified Loans:
In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from
one
through
nine
, with a higher number correlating to increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Consistent with regulatory guidelines, the Bank provides for the classification of loans which are considered to be of lesser quality as substandard, doubtful, or loss (i.e. risk rated
7
,
8
and
9
, respectively).
The following are the definitions of the Bank’s credit quality indicators:
Pass:
Loans within all classes of commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low risk of loss related to these loans that are considered pass.
Special mention:
Loans that do not expose the Bank to risk sufficient to warrant classification in one of the subsequent categories, but which possess some weaknesses, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which the lending officer may be unable to supervise properly because of: (i) lack of expertise, inadequate loan agreement; (ii) the poor condition of or lack of control over collateral; or (iii) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Bank to sufficient risks to warrant classification.
Substandard:
The Bank considers a loan substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.
Doubtful:
Loans that the Bank classifies as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).
Loss:
Loans that the Bank classifies as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.
The following tables present the Company’s loans by risk rating at
June 30, 2017
and
December 31, 2016
:
Business Activities Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
Commercial real estate other
|
|
Total commercial real estate
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
26,762
|
|
|
$
|
14,695
|
|
|
$
|
379,961
|
|
|
$
|
376,968
|
|
|
$
|
406,723
|
|
|
$
|
391,663
|
|
Special mention
|
|
29
|
|
|
—
|
|
|
6,882
|
|
|
5,868
|
|
|
6,911
|
|
|
5,868
|
|
Substandard
|
|
637
|
|
|
—
|
|
|
16,483
|
|
|
20,588
|
|
|
17,120
|
|
|
20,588
|
|
Total
|
|
$
|
27,428
|
|
|
$
|
14,695
|
|
|
$
|
403,326
|
|
|
$
|
403,424
|
|
|
$
|
430,754
|
|
|
$
|
418,119
|
|
Commercial and Industrial
Credit Risk Profile by Creditworthiness Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial other
|
|
Agricultural and other loans to farmers
|
|
Tax exempt loans
|
|
Total commercial and industrial
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
154,639
|
|
|
$
|
98,968
|
|
|
$
|
31,014
|
|
|
$
|
31,279
|
|
|
$
|
38,091
|
|
|
$
|
15,679
|
|
|
$
|
223,747
|
|
|
$
|
145,926
|
|
Special mention
|
|
2,036
|
|
|
2,384
|
|
|
181
|
|
|
251
|
|
|
167
|
|
|
167
|
|
|
2,384
|
|
|
2,802
|
|
Substandard
|
|
1,759
|
|
|
2,234
|
|
|
264
|
|
|
278
|
|
|
—
|
|
|
—
|
|
|
2,023
|
|
|
2,512
|
|
Total
|
|
$
|
158,434
|
|
|
$
|
103,586
|
|
|
$
|
31,459
|
|
|
$
|
31,808
|
|
|
$
|
38,258
|
|
|
$
|
15,846
|
|
|
$
|
228,151
|
|
|
$
|
151,240
|
|
Acquired Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
Commercial real estate other
|
|
Total commercial real estate
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
16,167
|
|
|
$
|
—
|
|
|
$
|
280,638
|
|
|
$
|
—
|
|
|
$
|
296,805
|
|
|
$
|
—
|
|
Special mention
|
|
—
|
|
|
—
|
|
|
1,558
|
|
|
—
|
|
|
1,558
|
|
|
—
|
|
Substandard
|
|
300
|
|
|
—
|
|
|
9,167
|
|
|
—
|
|
|
9,467
|
|
|
—
|
|
Total
|
|
$
|
16,467
|
|
|
$
|
—
|
|
|
$
|
291,363
|
|
|
$
|
—
|
|
|
$
|
307,830
|
|
|
$
|
—
|
|
Commercial and Industrial
Credit Risk Profile by Creditworthiness Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial other
|
|
Agricultural and other loans to farmers
|
|
Tax exempt loans
|
|
Total commercial and industrial
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
78,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,784
|
|
|
$
|
—
|
|
|
$
|
119,925
|
|
|
$
|
—
|
|
Special mention
|
|
875
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
875
|
|
|
—
|
|
Substandard
|
|
1,051
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,051
|
|
|
—
|
|
Total
|
|
$
|
80,067
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,784
|
|
|
$
|
—
|
|
|
$
|
121,851
|
|
|
$
|
—
|
|
The following table summarizes information about total loans rated Special Mention or higher as of
June 30, 2017
and
December 31, 2016
. The table below includes consumer loans that are special mention and substandard accruing that are classified in the above table as performing based on payment activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Business
Activities Loans
|
|
Acquired Loans
|
|
Total
|
|
Business
Activities Loans
|
|
Acquired Loans
|
|
Total
|
Non-accrual
|
|
$
|
4,601
|
|
|
$
|
702
|
|
|
$
|
5,303
|
|
|
$
|
2,733
|
|
|
$
|
—
|
|
|
$
|
2,733
|
|
Substandard accruing
|
|
26,113
|
|
|
10,051
|
|
|
36,164
|
|
|
20,368
|
|
|
—
|
|
|
20,368
|
|
Total classified
|
|
30,714
|
|
|
10,753
|
|
|
41,467
|
|
|
23,101
|
|
|
—
|
|
|
23,101
|
|
Special mention
|
|
9,294
|
|
|
2,433
|
|
|
11,727
|
|
|
8,669
|
|
|
—
|
|
|
8,669
|
|
Total Criticized
|
|
$
|
40,008
|
|
|
$
|
13,186
|
|
|
$
|
53,194
|
|
|
$
|
31,770
|
|
|
$
|
—
|
|
|
$
|
31,770
|
|
NOTE 6. BORROWED FUNDS
Borrowed funds at
June 30, 2017
and
December 31, 2016
are summarized, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(dollars in thousands)
|
|
Principal
|
|
Weighted
Average
Rate
|
|
Principal
|
|
Weighted
Average
Rate
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from the FHLBB
|
|
$
|
624,032
|
|
|
1.34
|
%
|
|
$
|
372,700
|
|
|
0.97
|
%
|
Other borrowings
|
|
35,174
|
|
|
0.51
|
|
|
21,780
|
|
|
0.29
|
|
Total short-term borrowings
|
|
659,206
|
|
|
1.29
|
|
|
394,480
|
|
|
0.93
|
|
Long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from the FHLBB
|
|
212,815
|
|
|
1.45
|
|
|
137,116
|
|
|
1.59
|
|
Subordinated borrowings
|
|
38,063
|
|
|
5.66
|
|
|
—
|
|
|
—
|
|
Junior subordinated borrowings
|
|
5,000
|
|
|
4.69
|
|
|
5,000
|
|
|
4.41
|
|
Total long-term borrowings
|
|
255,878
|
|
|
2.14
|
|
|
142,116
|
|
|
1.69
|
|
Total
|
|
$
|
915,084
|
|
|
1.53
|
%
|
|
$
|
536,596
|
|
|
1.13
|
%
|
Short term debt includes Federal Home Loan Bank of Boston (“FHLBB”) advances with an original maturity of less than one year. The Bank also maintains a
$1.0 million
secured line of credit with the FHLBB that bears a daily adjustable rate calculated by the FHLBB. There was
no
outstanding balance on the FHLBB line of credit for the periods ended
June 30, 2017
and
December 31, 2016
.
The Bank also had capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At
June 30, 2017
, the Bank’s available secured line of credit at the FRB was
$128.1 million
. The Bank has pledged certain loans and securities to the FRB to support this arrangement. There were
no
borrowings with the FRB for the periods ended
June 30, 2017
and
December 31, 2016
.
Long-term FHLBB advances consist of advances with a maturity of more than one year. The advances outstanding at
June 30, 2017
include callable advances totaling
$29.9 million
, and amortizing advances totaling
$691 thousand
. The advances outstanding at
December 31, 2016
include callable advances totaling
$17.0 million
, and
no
amortizing advances. All FHLBB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.
A summary of maturities of FHLBB advances as of
June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(in thousands, except rates)
|
|
Principal
|
|
Weighted
Average
Rate
|
Fixed rate advances maturing:
|
|
|
|
|
|
|
2017
|
|
$
|
609,000
|
|
|
1.32
|
%
|
2018
|
|
60,841
|
|
|
1.57
|
|
2019
|
|
104,927
|
|
|
1.63
|
|
2020
|
|
29,886
|
|
|
1.76
|
|
2021
|
|
31,470
|
|
|
0.56
|
|
2022 and thereafter
|
|
691
|
|
|
1.48
|
|
Total FHLBB advances
|
|
$
|
836,815
|
|
|
1.37
|
%
|
In April 2008, the Bank issued
fifteen
year junior subordinated notes in the amount of
$5.0 million
. These debt securities qualify as Tier 2 capital for the Company and the Bank. The subordinated debt securities are callable by the bank
after
five years
without penalty. The interest rate is three-month LIBOR plus
3.45%
. At
June 30, 2017
and
December 31, 2016
the interest rate was
4.69%
and
4.41%
, respectively.
On January 13, 2017, the Company acquired
$17.0 million
of subordinated debt in connection with the Lake Sunapee acquisition. The original subordinated debt was issued on October 29, 2014, in connection with the execution of a Subordinated Note Purchase Agreement between and among Lake Sunapee Bank Group and certain accredited investors pursuant to which Lake Sunapee Bank Group issued an aggregate of
$17.0 million
of subordinated notes (the “Notes”) to the accredited investors. The Notes have a maturity date of November 1, 2024, and will bear interest at a fixed rate of
6.75%
per annum. The Company may, at its option, beginning with the interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among all of the noteholders. The Notes are not subject to repayment at the option of the noteholders. The Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors.
Also in connection with the Lake Sunapee acquisition, the Company acquired
100%
of the common securities totaling
$600 thousand
and
$20.0 million
of Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II and NHTB Capital Trust III, which are both Connecticut statutory trusts. The Debentures were originally issued on March 30, 2014, carry a variable interest rate of 3-month LIBOR plus
2.79%
, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. NHTB Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.
NOTE 7. DEPOSITS
A summary of time deposits is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
Time less than $100,000
|
|
$
|
581,196
|
|
|
$
|
304,393
|
|
Time $100,000 or more
|
|
202,680
|
|
|
112,044
|
|
Total time deposits
|
|
$
|
783,876
|
|
|
$
|
416,437
|
|
Included in time deposits are brokered deposits of
$429.0 million
and
$237.9 million
at
June 30, 2017
and
December 31, 2016
, respectively. Included in the deposit balances contained on the balance sheet are reciprocal deposits of
$38.4 million
and
$43.1 million
at
June 30, 2017
and
December 31, 2016
, respectively.
NOTE 8. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY
The actual and required capital ratios were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Regulatory
Minimum to be
Well Capitalized
|
|
December 31, 2016
|
|
Regulatory
Minimum to be
Well Capitalized
|
Company (consolidated)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets
|
|
13.6
|
%
|
|
10.0
|
%
|
|
16.5
|
%
|
|
10.0
|
%
|
Common equity tier 1 capital to risk weighted assets
|
|
11.1
|
|
|
6.5
|
|
|
15.0
|
|
|
6.5
|
|
Tier 1 capital to risk weighted assets
|
|
12.1
|
|
|
8.0
|
|
|
15.0
|
|
|
8.0
|
|
Tier 1 capital to average assets
|
|
7.6
|
|
|
5.0
|
|
|
8.9
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets
|
|
13.6
|
%
|
|
10.0
|
%
|
|
16.7
|
%
|
|
10.0
|
%
|
Common equity tier 1 capital to risk weighted assets
|
|
12.8
|
|
|
6.5
|
|
|
15.2
|
|
|
6.5
|
|
Tier 1 capital to risk weighted assets
|
|
12.8
|
|
|
8.0
|
|
|
15.2
|
|
|
8.0
|
|
Tier 1 capital to average assets
|
|
8.3
|
|
|
5.0
|
|
|
9.1
|
|
|
5.0
|
|
At each date shown, the Company and the Bank met the conditions to be classified as “well capitalized” under the relevant regulatory framework. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.
Effective January 1, 2015, the Company and the Bank became subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk weighted assets and the Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of common equity tier 1 capital, of
2.5%
of risk-weighted assets, to be phased in over
three years
and applied to the common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of
7.0%
, a minimum Tier 1 risk-based capital ratio of
8.5%
and a minimum Total risk-based capital ratio of
10.5%
.
The required minimum conservation buffer began to be phased in incrementally, starting at
0.625%
on January 1, 2016 and increasing to
1.25%
on January 1, 2017. The buffer will increase to
1.875%
on January 1, 2018 and
2.5%
on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.
At
June 30, 2017
, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at
June 30, 2017
also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of
0.625%
.
Accumulated other comprehensive loss
Components of accumulated other comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
Other accumulated comprehensive loss, before tax:
|
|
|
|
|
|
|
Net unrealized holding gain/(loss) on AFS securities
|
|
$
|
1,332
|
|
|
$
|
(3,269
|
)
|
Net unrealized loss on effective cash flow hedging derivatives
|
|
(3,470
|
)
|
|
(2,766
|
)
|
Net unrealized holding loss on post-retirement plans
|
|
(580
|
)
|
|
(622
|
)
|
|
|
|
|
|
Income taxes related to items of accumulated other comprehensive loss:
|
|
|
|
|
|
|
Net unrealized holding gain/(loss) on AFS securities
|
|
(496
|
)
|
|
1,144
|
|
Net unrealized loss on effective cash flow hedging derivatives
|
|
1,293
|
|
|
968
|
|
Net unrealized holding loss on post-retirement plans
|
|
216
|
|
|
219
|
|
Accumulated other comprehensive loss
|
|
$
|
(1,705
|
)
|
|
$
|
(4,326
|
)
|
The following tables presents the components of other comprehensive income for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain on AFS securities:
|
|
x
|
|
|
|
|
|
|
Net unrealized gain arising during the period
|
|
$
|
3,485
|
|
|
$
|
(1,292
|
)
|
|
$
|
2,193
|
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gain on AFS securities
|
|
3,485
|
|
|
(1,292
|
)
|
|
2,193
|
|
|
|
|
|
|
|
|
Net unrealized loss on cash flow hedging derivatives:
|
|
|
|
|
|
|
|
|
|
Net unrealized loss arising during the period
|
|
(481
|
)
|
|
242
|
|
|
(239
|
)
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized gain on cash flow hedging derivatives
|
|
(481
|
)
|
|
242
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
Net unrealized holding loss on post-retirement plans:
|
|
|
|
|
|
|
|
|
|
Net unrealized gain/(loss) arising during the period
|
|
(15
|
)
|
|
18
|
|
|
3
|
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gain/(loss) on post-retirement plans
|
|
(15
|
)
|
|
18
|
|
|
3
|
|
Other comprehensive income
|
|
$
|
2,989
|
|
|
$
|
(1,032
|
)
|
|
$
|
1,957
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on AFS securities:
|
|
|
|
|
|
|
|
|
Net unrealized gains arising during the period
|
|
$
|
2,690
|
|
|
$
|
(941
|
)
|
|
$
|
1,749
|
|
Less: reclassification adjustment for gains realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gains on AFS securities
|
|
2,690
|
|
|
(941
|
)
|
|
1,749
|
|
|
|
|
|
|
|
|
Net unrealized (loss) on cash flow hedging derivatives:
|
|
|
|
|
|
|
|
|
Net unrealized (loss) arising during the period
|
|
(503
|
)
|
|
176
|
|
|
(327
|
)
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized (loss) on cash flow hedging derivatives
|
|
(503
|
)
|
|
176
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
Net unrealized holding gain on post-retirement plans:
|
|
|
|
|
|
|
|
|
|
Net unrealized gain arising during the period
|
|
7
|
|
|
(3
|
)
|
|
4
|
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gain on post-retirement plans
|
|
7
|
|
|
(3
|
)
|
|
4
|
|
Other comprehensive income
|
|
$
|
2,194
|
|
|
$
|
(768
|
)
|
|
$
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain on AFS securities:
|
|
x
|
|
|
|
|
|
|
Net unrealized gain arising during the period
|
|
$
|
4,601
|
|
|
$
|
(1,640
|
)
|
|
$
|
2,961
|
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gain on AFS securities
|
|
4,601
|
|
|
(1,640
|
)
|
|
2,961
|
|
|
|
|
|
|
|
|
Net unrealized loss on cash flow hedging derivatives:
|
|
|
|
|
|
|
|
|
|
Net unrealized loss arising during the period
|
|
(704
|
)
|
|
325
|
|
|
(379
|
)
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized gain on cash flow hedging derivatives
|
|
(704
|
)
|
|
325
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
Net unrealized holding loss on post-retirement plans:
|
|
|
|
|
|
|
|
|
|
Net unrealized gain arising during the period
|
|
42
|
|
|
(3
|
)
|
|
39
|
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gain on post-retirement plans
|
|
42
|
|
|
(3
|
)
|
|
39
|
|
Other comprehensive income
|
|
$
|
3,939
|
|
|
$
|
(1,318
|
)
|
|
$
|
2,621
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on AFS securities:
|
|
|
|
|
|
|
|
|
Net unrealized gains arising during the period
|
|
$
|
8,618
|
|
|
$
|
(3,016
|
)
|
|
$
|
5,602
|
|
Less: reclassification adjustment for gains realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gains on AFS securities
|
|
8,618
|
|
|
(3,016
|
)
|
|
5,602
|
|
|
|
|
|
|
|
|
Net unrealized (loss) on cash flow hedging derivatives:
|
|
|
|
|
|
|
|
|
Net unrealized (loss) arising during the period
|
|
(1,217
|
)
|
|
426
|
|
|
(791
|
)
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized (loss) on cash flow hedging derivatives
|
|
(1,217
|
)
|
|
426
|
|
|
(791
|
)
|
|
|
|
|
|
|
|
Net unrealized holding gain on post-retirement plans:
|
|
|
|
|
|
|
|
|
|
Net unrealized gain arising during the period
|
|
78
|
|
|
(27
|
)
|
|
51
|
|
Less: reclassification adjustment for gains (losses) realized in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized holding gain on post-retirement plans
|
|
78
|
|
|
(27
|
)
|
|
51
|
|
Other comprehensive income
|
|
$
|
7,479
|
|
|
$
|
(2,617
|
)
|
|
$
|
4,862
|
|
The following table presents the changes in each component of accumulated other comprehensive income (loss), for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Net unrealized
holding gain
on AFS Securities
|
|
Net loss on
effective cash
flow hedging derivatives
|
|
Net unrealized
holding loss
on pension plans
|
|
Total
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,357
|
)
|
|
$
|
(1,938
|
)
|
|
$
|
(367
|
)
|
|
$
|
(3,662
|
)
|
Other comprehensive gain(loss) before reclassifications
|
|
2,193
|
|
|
(239
|
)
|
|
3
|
|
|
1,957
|
|
Less: amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
2,193
|
|
|
(239
|
)
|
|
3
|
|
|
1,957
|
|
Balance at end of period
|
|
$
|
836
|
|
|
$
|
(2,177
|
)
|
|
$
|
(364
|
)
|
|
$
|
(1,705
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9,566
|
|
|
$
|
(2,085
|
)
|
|
$
|
(416
|
)
|
|
$
|
7,065
|
|
Other comprehensive gain before reclassifications
|
|
1,749
|
|
|
(327
|
)
|
|
4
|
|
|
1,426
|
|
Less: amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
1,749
|
|
|
(327
|
)
|
|
4
|
|
|
1,426
|
|
Balance at end of period
|
|
$
|
11,315
|
|
|
$
|
(2,412
|
)
|
|
$
|
(412
|
)
|
|
$
|
8,491
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,125
|
)
|
|
$
|
(1,798
|
)
|
|
$
|
(403
|
)
|
|
$
|
(4,326
|
)
|
Other comprehensive gain(loss) before reclassifications
|
|
2,961
|
|
|
(379
|
)
|
|
39
|
|
|
2,621
|
|
Less: amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
2,961
|
|
|
(379
|
)
|
|
39
|
|
|
2,621
|
|
Balance at end of period
|
|
$
|
836
|
|
|
$
|
(2,177
|
)
|
|
$
|
(364
|
)
|
|
$
|
(1,705
|
)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
5,713
|
|
|
$
|
(1,621
|
)
|
|
$
|
(463
|
)
|
|
$
|
3,629
|
|
Other comprehensive gain before reclassifications
|
|
5,602
|
|
|
(791
|
)
|
|
51
|
|
|
4,862
|
|
Less: amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
5,602
|
|
|
(791
|
)
|
|
51
|
|
|
4,862
|
|
Balance at end of period
|
|
$
|
11,315
|
|
|
$
|
(2,412
|
)
|
|
$
|
(412
|
)
|
|
$
|
8,491
|
|
The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Affected Line Item in the Statement where Net Income is Presented
|
(in thousands)
|
|
2017
|
|
2016
|
|
Realized gains on AFS securities:
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,699
|
|
|
Non-interest income
|
|
|
—
|
|
|
(595
|
)
|
|
Tax expense
|
Total reclassifications for the period
|
|
$
|
—
|
|
|
$
|
1,104
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Affected Line Item in the Statement where Net Income is Presented
|
(in thousands)
|
|
2017
|
|
2016
|
|
Realized gains on AFS securities:
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
3,135
|
|
|
Non-interest income
|
|
|
—
|
|
|
(1,097
|
)
|
|
Tax expense
|
Total reclassifications for the period
|
|
$
|
—
|
|
|
$
|
2,038
|
|
|
Net of tax
|
NOTE 9. EARNINGS PER SHARE
Earnings per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands, except per share and share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
|
$
|
6,556
|
|
|
$
|
4,311
|
|
|
$
|
10,767
|
|
|
$
|
8,717
|
|
|
|
|
|
|
|
|
|
|
Average number of basic common shares outstanding
|
|
15,393,458
|
|
|
9,031,974
|
|
|
14,934,850
|
|
|
9,022,886
|
|
Plus: dilutive effect of stock options and awards outstanding
|
|
112,800
|
|
|
97,478
|
|
|
114,467
|
|
|
102,165
|
|
Average number of diluted common shares outstanding
|
|
15,506,258
|
|
|
9,129,452
|
|
|
15,049,317
|
|
|
9,125,051
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options excluded from earnings calculation
|
|
8,347
|
|
|
113,645
|
|
|
9,045
|
|
|
120,394
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.48
|
|
|
$
|
0.72
|
|
|
$
|
0.97
|
|
Diluted
|
|
$
|
0.42
|
|
|
$
|
0.47
|
|
|
$
|
0.72
|
|
|
$
|
0.96
|
|
NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.
The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses,
both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.
Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.
Information about derivative assets and liabilities at
June 30, 2017
, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Maturity
|
|
Estimated Fair Value Asset (Liability)
|
|
|
Notional
Amount
|
|
|
|
|
(In thousands)
|
|
(In years)
|
|
(In thousands)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate caps agreements
|
|
$
|
90,000
|
|
|
5.6
|
|
$
|
950
|
|
Total cash flow hedges
|
|
90,000
|
|
|
5.6
|
|
950
|
|
|
|
|
|
|
|
|
Economic hedges:
|
|
|
|
|
|
|
|
|
Forward sale commitments
|
|
18,219
|
|
|
0.2
|
|
(231
|
)
|
Total economic hedges
|
|
18,219
|
|
|
0.2
|
|
(231
|
)
|
|
|
|
|
|
|
|
Non-hedging derivatives:
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
14,636
|
|
|
0.2
|
|
(3
|
)
|
Total non-hedging derivatives
|
|
14,636
|
|
|
0.2
|
|
(3
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,855
|
|
|
|
|
$
|
716
|
|
As of December 31, 2016, the Company had interest rate cap agreements totaling
$90 million
(notional amount), with a weighted average maturity of
6.1 years
, and an estimated fair value of
$1,748
.
Information about derivative assets and liabilities for the
three and six
months ended
June 30, 2017
and
June 30, 2016
, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate cap agreements
|
|
|
|
|
|
|
|
|
Realized in interest expense
|
|
$
|
55
|
|
|
$
|
8
|
|
|
$
|
94
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
Economic hedges:
|
|
|
|
|
|
|
|
|
|
|
Forward commitments
|
|
|
|
|
|
|
|
|
|
|
Realized loss in other non-interest income
|
|
(9
|
)
|
|
—
|
|
|
(87
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-hedging derivatives:
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
|
|
|
|
|
|
|
|
|
Realized loss in other non-interest income
|
|
(26
|
)
|
|
—
|
|
|
(24
|
)
|
|
—
|
|
Cash flow hedges
In 2014, interest rate cap agreements were purchased to limit the Bank’s exposure to rising interest rates on four rolling, three-month borrowings indexed to three month LIBOR. Under the terms of the agreements, the Bank paid total premiums of
$4,566
for the right to receive cash flow payments if 3-month LIBOR rises above the caps of
3.00%
, thus effectively ensuring interest expense on the borrowings at maximum rates of
3.00%
for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges. The fair values of the interest rate cap agreements are included in other assets on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax. The premiums paid on the interest rate cap agreements are being recognized as increases in interest expense over the duration of the agreements using the caplet method.
Economic hedges
The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings. The Company typically uses mandatory delivery contracts, which are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.
Non-hedging derivatives
The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in noninterest income in the Company’s consolidated statements of income. Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
NOTE 11. FAIR VALUE MEASUREMENTS
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.
Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of
June 30, 2017
and
December 31, 2016
, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
(In thousands)
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Fair Value
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored enterprises
|
|
$
|
—
|
|
|
$
|
6,973
|
|
|
—
|
|
|
$
|
6,973
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
US Government-sponsored enterprises
|
|
—
|
|
|
456,051
|
|
|
—
|
|
|
456,051
|
|
US Government agency
|
|
—
|
|
|
78,062
|
|
|
—
|
|
|
78,062
|
|
Private label
|
|
—
|
|
|
911
|
|
|
—
|
|
|
911
|
|
Obligations of states and political subdivisions thereof
|
|
—
|
|
|
146,285
|
|
|
—
|
|
|
146,285
|
|
Corporate bonds
|
|
—
|
|
|
30,064
|
|
|
—
|
|
|
30,064
|
|
Derivative assets
|
|
—
|
|
|
950
|
|
|
—
|
|
|
950
|
|
Derivative liabilities
|
|
—
|
|
|
—
|
|
|
(234
|
)
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
(In thousands)
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Fair Value
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored enterprises
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
—
|
|
US Government-sponsored enterprises
|
|
—
|
|
|
328,452
|
|
|
—
|
|
|
328,452
|
|
US Government agency
|
|
—
|
|
|
76,906
|
|
|
—
|
|
|
76,906
|
|
Private label
|
|
—
|
|
|
1,132
|
|
|
—
|
|
|
1,132
|
|
Obligations of states and political subdivisions thereof
|
|
—
|
|
|
122,366
|
|
|
—
|
|
|
122,366
|
|
Corporate bonds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Derivative assets
|
|
—
|
|
|
1,748
|
|
|
—
|
|
|
1,748
|
|
Securities Available for Sale:
All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.
Derivative Assets and Liabilities
Interest Rate Lock Commitments.
The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.
Forward Sale Commitments
. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, mandatory delivery forward commitments are classified as Level 3 measurements.
The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the
three and six
months ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
|
|
Interest Rate
Lock
|
|
Forward
|
(In thousands)
|
|
Commitments
|
|
Commitments
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
98
|
|
|
$
|
(55
|
)
|
Goodwill adjustment Lake Sunapee Bank Merger
|
|
(75
|
)
|
|
(167
|
)
|
Realized (loss) recognized in non-interest income
|
|
(26
|
)
|
|
(9
|
)
|
June 30, 2017
|
|
$
|
(3
|
)
|
|
$
|
(231
|
)
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisition of Lake Sunapee Bank, January 13, 2017
|
|
96
|
|
|
23
|
|
Goodwill adjustment Lake Sunapee Bank Merger
|
|
(75
|
)
|
|
(167
|
)
|
Realized (loss) recognized in non-interest income
|
|
(24
|
)
|
|
(87
|
)
|
June 30, 2017
|
|
$
|
(3
|
)
|
|
$
|
(231
|
)
|
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except ratios)
|
|
Fair Value
June 30, 2017
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Significant
Unobservable Input
Value
|
Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitment
|
|
$
|
(3
|
)
|
|
Historical trend
|
|
Closing Ratio
|
|
90
|
%
|
|
|
|
|
|
Pricing Model
|
|
Origination Costs, per loan
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Forward Commitments
|
|
(231
|
)
|
|
Quoted prices for similar loans in active markets.
|
|
Freddie Mac pricing system
|
|
Pair-off contract price
|
|
Total
|
|
$
|
(234
|
)
|
|
|
|
|
|
|
|
Non-Recurring Fair Value Measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with U.S. GAAP. The following is a summary of applicable non-recurring fair value measurements. There are
no
liabilities measured at fair value on a non-recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Three months ended June 30, 2017
|
|
Six months ended June 30, 2017
|
|
Fair Value Measurement Date as of June 30, 2017
|
(In thousands)
|
|
Level 3
Inputs
|
|
Level 3
Inputs
|
|
Total
Gains (Losses)
|
|
Total
Gains (Losses)
|
|
Level 3
Inputs
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,314
|
|
|
$
|
6,709
|
|
|
$
|
(96
|
)
|
|
(96
|
)
|
|
June 2017
|
Capitalized servicing rights
|
|
3,355
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
May 2017
|
Other real estate owned
|
|
122
|
|
|
90
|
|
|
—
|
|
|
—
|
|
|
Jan 2017 - March 2017
|
Total
|
|
$
|
9,791
|
|
|
$
|
6,804
|
|
|
$
|
(96
|
)
|
|
(96
|
)
|
|
|
Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
(in thousands, except ratios)
|
|
June 30, 2017
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Range (Weighted Average) (a)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,067
|
|
|
Fair value of collateral - appraised value
|
|
Loss severity
|
|
0% to 32%
|
|
|
|
|
|
|
|
|
Appraised value
|
|
$0 to $950
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
4,247
|
|
|
Discount cash flow
|
|
Discount rate
|
|
0% to 18%
|
|
|
|
|
|
|
|
Cash flows
|
|
$0 to $874
|
|
|
|
|
|
|
|
|
|
|
Capitalized servicing rights
|
|
3,355
|
|
|
Discounted cash flow
|
|
Constant prepayment rate (CPR)
|
|
14.33
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
7.55
|
%
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
122
|
|
|
Fair value of collateral
|
|
Appraised value
|
|
|
$122
|
|
Total
|
|
$
|
9,791
|
|
|
|
|
|
|
|
|
|
(a)
|
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2016
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Range (Weighted Average) (a)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,268
|
|
|
Fair value of collateral - appraised value
|
|
Loss severity
|
|
0% to 51%
|
|
|
|
|
|
|
|
|
Appraised value
|
|
$0 to $1,732
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
3,441
|
|
|
Discount cash flow
|
|
Discount rate
|
|
3.25% to 18.25%
|
|
|
|
|
|
|
|
Cash flows
|
|
$6 to $861
|
|
|
|
|
|
|
|
|
|
|
Capitalized servicing rights
|
|
5
|
|
|
Discounted cash flow
|
|
Constant prepayment rate (CPR)
|
|
17.09
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
7.55
|
%
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
90
|
|
|
Fair value of collateral
|
|
Appraised value
|
|
120
|
|
Total
|
|
$
|
6,804
|
|
|
|
|
|
|
|
|
|
(a)
|
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.
|
There were
no
Level 1 or Level 2 non-recurring fair value measurements for the periods ended
June 30, 2017
and
December 31, 2016
.
Impaired Loans.
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, nonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.
Capitalized loan servicing rights
.
A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.
Other real estate owned (“OREO”).
OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.
Summary of Estimated Fair Values of Financial Instruments.
The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(In thousands)
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
118,993
|
|
|
$
|
118,993
|
|
|
$
|
118,993
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities available for sale
|
|
718,364
|
|
|
718,364
|
|
|
—
|
|
|
718,364
|
|
|
—
|
|
FHLBB bank stock
|
|
44,168
|
|
|
44,168
|
|
|
—
|
|
|
44,168
|
|
|
—
|
|
Net loans
|
|
2,365,205
|
|
|
2,342,877
|
|
|
—
|
|
|
—
|
|
|
2,342,877
|
|
Accrued interest receivable
|
|
3,386
|
|
|
3,386
|
|
|
—
|
|
|
3,386
|
|
|
—
|
|
Cash surrender value of bank-owned life insurance policies
|
|
57,233
|
|
|
57,233
|
|
|
—
|
|
|
57,233
|
|
|
—
|
|
Derivative assets
|
|
950
|
|
|
950
|
|
|
—
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,213,004
|
|
|
$
|
2,190,676
|
|
|
$
|
—
|
|
|
$
|
2,190,676
|
|
|
$
|
—
|
|
Securities sold under agreements to repurchase
|
|
35,174
|
|
|
35,155
|
|
|
—
|
|
|
35,155
|
|
|
—
|
|
Federal Home Loan Bank advances
|
|
837,267
|
|
|
837,126
|
|
|
—
|
|
|
837,126
|
|
|
—
|
|
Subordinated borrowings
|
|
37,642
|
|
|
37,921
|
|
|
—
|
|
|
37,921
|
|
|
—
|
|
Junior subordinated borrowings
|
|
5,000
|
|
|
3,569
|
|
|
—
|
|
|
3,569
|
|
|
—
|
|
Derivative liabilities
|
|
(234
|
)
|
|
(234
|
)
|
|
—
|
|
|
—
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,439
|
|
|
$
|
8,439
|
|
|
$
|
8,439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities available for sale
|
|
528,856
|
|
|
528,856
|
|
|
—
|
|
|
528,856
|
|
|
—
|
|
FHLBB bank stock
|
|
25,331
|
|
|
25,331
|
|
|
—
|
|
|
25,331
|
|
|
—
|
|
Net loans
|
|
1,118,645
|
|
|
1,100,601
|
|
|
—
|
|
|
—
|
|
|
1,100,601
|
|
Accrued interest receivable
|
|
6,051
|
|
|
6,051
|
|
|
—
|
|
|
6,051
|
|
|
—
|
|
Cash surrender value of bank-owned life insurance policies
|
|
24,450
|
|
|
24,450
|
|
|
—
|
|
|
24,450
|
|
|
—
|
|
Derivative assets
|
|
1,748
|
|
|
1,748
|
|
|
—
|
|
|
1,748
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,050,300
|
|
|
$
|
1,048,932
|
|
|
$
|
—
|
|
|
$
|
1,048,932
|
|
|
$
|
—
|
|
Securities sold under agreements to repurchase
|
|
21,780
|
|
|
21,773
|
|
|
—
|
|
|
21,773
|
|
|
—
|
|
Federal Home Loan Bank advances
|
|
509,816
|
|
|
509,793
|
|
|
—
|
|
|
509,793
|
|
|
—
|
|
Subordinated borrowings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Junior subordinated borrowings
|
|
—
|
|
|
3,560
|
|
|
—
|
|
|
3,560
|
|
|
—
|
|
Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.
Cash and cash equivalents.
Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of
ninety days
or less.
FHLBB bank stock and restricted securities.
Carrying value approximates fair value based on the redemption provisions of the issuers.
Cash surrender value of life insurance policies.
Carrying value approximates fair value.
Loans, net.
The carrying value of the loans in the loan portfolio is based on the cash flows of the loans discounted over their respective loan origination rates. The origination rates are adjusted for substandard and special mention loans to factor the impact of declines in the loan’s credit standing. The fair value of the loans is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.
Accrued interest receivable.
Carrying value approximates fair value.
Deposits.
The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.
Borrowed funds.
The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.
Subordinated borrowings.
The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every
ninety days
.
Off-balance-sheet financial instruments.
Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.
NOTE 12. SUBSEQUENT EVENTS
There were no significant subsequent events between June 30, 2017 and through the date the financial statements are available to be issued.