NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts In Tables Expressed in Thousands, Except Per Share Data)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation as of
March 31, 2016
and
December 31, 2015
, the consolidated statements of income for the
three
months ended
March 31, 2016
and
2015
, the consolidated statements of comprehensive income for the
three
months ended
March 31, 2016
and
2015
, the consolidated statements of changes in shareholders' equity for the
three months ended
March 31, 2016
and
2015
, and the consolidated statements of cash flows for the
three months ended
March 31, 2016
and
2015
. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior period were reclassified to conform to the current period presentation. The income reported for the
three
months ended
March 31, 2016
is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the year ended
December 31, 2015
Annual Report on Form 10-K.
The acronyms and abbreviations identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information." The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
|
|
|
|
|
|
Acadia Trust:
|
Acadia Trust, N.A., a wholly-owned subsidiary of Camden National Corporation
|
|
FASB:
|
Financial Accounting Standards Board
|
AFS:
|
Available-for-sale
|
|
FDIC:
|
Federal Deposit Insurance Corporation
|
ALCO:
|
Asset/Liability Committee
|
|
FHLB:
|
Federal Home Loan Bank
|
ALL:
|
Allowance for loan losses
|
|
FHLBB:
|
Federal Home Loan Bank of Boston
|
AOCI:
|
Accumulated other comprehensive income (loss)
|
|
FRB:
|
Federal Reserve Bank
|
ASC:
|
Accounting Standards Codification
|
|
Freddie Mac:
|
Federal Home Loan Mortgage Corporation
|
ASU:
|
Accounting Standards Update
|
|
GAAP:
|
Generally accepted accounting principles in the United States
|
Bank:
|
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
|
|
HPFC:
|
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
|
BOLI:
|
Bank-owned life insurance
|
|
HTM:
|
Held-to-maturity
|
Board ALCO:
|
Board of Directors' Asset/Liability Committee
|
|
IRS:
|
Internal Revenue Service
|
BSA:
|
Bank Secrecy Act
|
|
LIBOR:
|
London Interbank Offered Rate
|
CCTA:
|
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
|
|
LTIP:
|
Long-Term Performance Share Plan
|
CDARS:
|
Certificate of Deposit Account Registry System
|
|
Management ALCO:
|
Management Asset/Liability Committee
|
CDs:
|
Certificate of deposits
|
|
MBS:
|
Mortgage-backed security
|
Company:
|
Camden National Corporation
|
|
Merger:
|
On October 16, 2015, the two-step merger of Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of Camden National Corporation, was completed
|
CSV:
|
Cash surrender value
|
|
Merger Agreement:
|
Plan of Merger, dated as of March 29, 2015, by and among Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of the Company
|
CMO:
|
Collateralized mortgage obligation
|
|
MSHA:
|
Maine State Housing Authority
|
DCRP:
|
Defined Contribution Retirement Plan
|
|
MSRs:
|
Mortgage servicing rights
|
EPS:
|
Earnings per share
|
|
MSPP:
|
Management Stock Purchase Plan
|
|
|
|
|
|
|
OTTI:
|
Other-than-temporary impairment
|
|
SBM:
|
SBM Financial, Inc., the parent company of The Bank of Maine
|
NIM:
|
Net interest margin on a fully-taxable basis
|
|
SERP:
|
Supplemental executive retirement plans
|
N.M.:
|
Not meaningful
|
|
TDR:
|
Troubled-debt restructured loan
|
NRV:
|
Net realizable value
|
|
UBCT:
|
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
|
OCC:
|
Office of the Comptroller of the Currency
|
|
U.S.:
|
United States of America
|
OCI:
|
Other comprehensive income (loss)
|
|
2003 Plan:
|
2003 Stock Option and Incentive Plan
|
OFAC:
|
Office of Foreign Assets Control
|
|
2012 Plan:
|
2012 Equity and Incentive Plan
|
OREO:
|
Other real estate owned
|
|
2013 Repurchase Program:
|
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
|
NOTE 2 – EPS
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Net income
|
|
$
|
8,334
|
|
|
$
|
5,611
|
|
Dividends and undistributed earnings allocated to participating securities
(1)
|
|
(29
|
)
|
|
(17
|
)
|
Net income available to common shareholders
|
|
$
|
8,305
|
|
|
$
|
5,594
|
|
Weighted-average common shares outstanding for basic EPS
|
|
10,259,995
|
|
|
7,431,065
|
|
Dilutive effect of stock-based awards
(2)
|
|
38,176
|
|
|
22,810
|
|
Weighted-average common and potential common shares for diluted EPS
|
|
10,298,171
|
|
|
7,453,875
|
|
Earnings per common share:
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.81
|
|
|
$
|
0.75
|
|
Diluted EPS
|
|
$
|
0.81
|
|
|
$
|
0.75
|
|
Awards excluded from the calculation of diluted EPS
(3)
:
|
|
|
|
|
Stock options
|
|
13,250
|
|
|
15,250
|
|
(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Represents the effect of the assumed exercise of stock options, vesting of restricted shares, vesting of restricted stock units, and vesting of LTIP awards that have met the performance criteria, as applicable, utilizing the treasury stock method.
(3) Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock and are considered anti-dilutive.
Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards.
Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.
NOTE 3 – SECURITIES
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities:
|
|
|
|
|
|
|
|
Obligations of U.S. government-sponsored enterprises
|
$
|
4,973
|
|
|
$
|
146
|
|
|
$
|
—
|
|
|
$
|
5,119
|
|
Obligations of states and political subdivisions
|
15,254
|
|
|
286
|
|
|
—
|
|
|
15,540
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
460,604
|
|
|
6,612
|
|
|
(617
|
)
|
|
466,599
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
308,902
|
|
|
2,126
|
|
|
(2,470
|
)
|
|
308,558
|
|
Subordinated corporate bonds
|
3,480
|
|
|
18
|
|
|
(37
|
)
|
|
3,461
|
|
Total AFS debt securities
|
793,213
|
|
|
9,188
|
|
|
(3,124
|
)
|
|
799,277
|
|
Equity securities
|
712
|
|
|
40
|
|
|
—
|
|
|
752
|
|
Total AFS securities
|
$
|
793,925
|
|
|
$
|
9,228
|
|
|
$
|
(3,124
|
)
|
|
$
|
800,029
|
|
HTM Securities:
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
87,950
|
|
|
$
|
2,816
|
|
|
$
|
(37
|
)
|
|
$
|
90,729
|
|
Total HTM securities
|
$
|
87,950
|
|
|
$
|
2,816
|
|
|
$
|
(37
|
)
|
|
$
|
90,729
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities:
|
|
|
|
|
|
|
|
Obligations of U.S. government-sponsored enterprises
|
$
|
4,971
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
5,040
|
|
Obligations of states and political subdivisions
|
17,355
|
|
|
339
|
|
|
—
|
|
|
17,694
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
419,429
|
|
|
3,474
|
|
|
(3,857
|
)
|
|
419,046
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
312,719
|
|
|
409
|
|
|
(6,271
|
)
|
|
306,857
|
|
Subordinated corporate bonds
|
1,000
|
|
|
—
|
|
|
(4
|
)
|
|
996
|
|
Total AFS debt securities
|
755,474
|
|
|
4,291
|
|
|
(10,132
|
)
|
|
749,633
|
|
Equity securities
|
712
|
|
|
2
|
|
|
(9
|
)
|
|
705
|
|
Total AFS securities
|
$
|
756,186
|
|
|
$
|
4,293
|
|
|
$
|
(10,141
|
)
|
|
$
|
750,338
|
|
HTM Securities:
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
84,144
|
|
|
$
|
1,564
|
|
|
$
|
(61
|
)
|
|
$
|
85,647
|
|
Total HTM securities
|
$
|
84,144
|
|
|
$
|
1,564
|
|
|
$
|
(61
|
)
|
|
$
|
85,647
|
|
Net unrealized gains on AFS securities at
March 31, 2016
included in AOCI amounted to
$4.0 million
, net of a deferred tax liability of
$2.1 million
. Net unrealized losses on AFS securities at December 31, 2015 included in AOCI amounted to
$3.8 million
, net of a deferred tax benefit of
$2.0 million
.
During the first
three
months of 2016, the Company purchased investment securities totaling
$70.8 million
. The Company designated
$66.9 million
as AFS securities and
$3.9 million
as HTM securities.
During the first three months of 2015, the Company purchased investment securities totaling
$36.4 million
. The Company designated
$20.3 million
as AFS securities and
$16.1 million
as HTM securities.
Impaired Securities
Management periodically reviews the Company’s investment portfolio to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.
The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at
March 31, 2016
and
December 31, 2015
, by length of time that individual securities in each category have been in a continuous loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
$
|
14,453
|
|
|
$
|
(82
|
)
|
|
$
|
49,596
|
|
|
$
|
(535
|
)
|
|
$
|
64,049
|
|
|
$
|
(617
|
)
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
8,240
|
|
|
(47
|
)
|
|
145,716
|
|
|
(2,423
|
)
|
|
153,956
|
|
|
(2,470
|
)
|
Subordinated corporate bonds
|
1,963
|
|
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
1,963
|
|
|
(37
|
)
|
Total AFS securities
|
$
|
24,656
|
|
|
$
|
(166
|
)
|
|
$
|
195,312
|
|
|
$
|
(2,958
|
)
|
|
$
|
219,968
|
|
|
$
|
(3,124
|
)
|
HTM Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
2,181
|
|
|
$
|
(37
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,181
|
|
|
$
|
(37
|
)
|
Total HTM securities
|
$
|
2,181
|
|
|
$
|
(37
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,181
|
|
|
$
|
(37
|
)
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
$
|
234,897
|
|
|
$
|
(2,351
|
)
|
|
$
|
45,629
|
|
|
$
|
(1,506
|
)
|
|
$
|
280,526
|
|
|
$
|
(3,857
|
)
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
111,143
|
|
|
(1,068
|
)
|
|
147,180
|
|
|
(5,203
|
)
|
|
258,323
|
|
|
(6,271
|
)
|
Subordinated corporate bonds
|
996
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
996
|
|
|
(4
|
)
|
Equity Securities
|
615
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
615
|
|
|
(9
|
)
|
Total AFS securities
|
$
|
347,651
|
|
|
$
|
(3,432
|
)
|
|
$
|
192,809
|
|
|
$
|
(6,709
|
)
|
|
$
|
540,460
|
|
|
$
|
(10,141
|
)
|
HTM Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
5,507
|
|
|
$
|
(61
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,507
|
|
|
$
|
(61
|
)
|
Total HTM securities
|
$
|
5,507
|
|
|
$
|
(61
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,507
|
|
|
$
|
(61
|
)
|
At
March 31, 2016
and December 31, 2015, the Company held
42
and
109
investment securities with a fair value of
$222.1 million
and
$546.0 million
with unrealized losses totaling $
3.2 million
and
$10.2 million
, respectively, that were considered temporary. Of these, the Company had
29
MBS and CMO investments with a fair value of $
195.3 million
that were in an unrealized loss position totaling
$3.0 million
at March 31, 2016 and
28
MBS and CMO investments with a fair value of
$192.8 million
that were in an unrealized loss position totaling
$6.7 million
at December 31, 2015 for 12 months or more. The decline in the fair value of securities is reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall change in credit quality or other factors with the Company's investment portfolio. At
March 31, 2016
and December 31, 2015, gross unrealized losses on the Company's AFS and HTM securities were
1%
and
2%
, respectively, of the respective investment securities fair value.
The Company has the intent and ability to retain its investment securities in an unrealized loss position at
March 31, 2016
until the decline in value has recovered.
For the three months ended
March 31, 2016
and 2015, the Company did
no
t sell any investment securities.
FHLBB and FRB Stock
As of March 31, 2016 and December 31, 2015, the Company's investment in FHLBB stock was
$20.7 million
and
$20.6 million
, respectively. As of March 31, 2016 and December 31, 2015, the Company's investment in FRB stock was
$908,000
.
Securities Pledged
At
March 31, 2016
and
December 31, 2015
, securities with an amortized cost of
$557.1 million
and
$577.6 million
, respectively, and estimated fair values of
$559.6 million
and
$570.9 million
, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at
March 31, 2016
, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
AFS Securities
|
|
|
|
Due in one year or less
|
$
|
1,002
|
|
|
$
|
1,016
|
|
Due after one year through five years
|
103,817
|
|
|
105,196
|
|
Due after five years through ten years
|
111,295
|
|
|
113,903
|
|
Due after ten years
|
577,099
|
|
|
579,162
|
|
|
$
|
793,213
|
|
|
$
|
799,277
|
|
HTM Securities
|
|
|
|
Due after one year through five years
|
$
|
2,204
|
|
|
$
|
2,260
|
|
Due after five years through ten years
|
2,494
|
|
|
2,538
|
|
Due after ten years
|
83,252
|
|
|
85,931
|
|
|
$
|
87,950
|
|
|
$
|
90,729
|
|
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at
March 31, 2016
and
December 31, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Residential real estate
(1)
|
$
|
813,266
|
|
|
$
|
821,074
|
|
Commercial real estate
(1)
|
953,220
|
|
|
927,951
|
|
Commercial
(1)
|
291,684
|
|
|
297,721
|
|
Home equity
(1)
|
343,137
|
|
|
348,634
|
|
Consumer
(1)
|
17,096
|
|
|
17,953
|
|
HPFC
(1)
|
74,304
|
|
|
77,243
|
|
Deferred loan fees, net
|
(73
|
)
|
|
(370
|
)
|
Total loans
|
$
|
2,492,634
|
|
|
$
|
2,490,206
|
|
|
|
(1)
|
The loan balances are presented net of the unamortized fair value mark discount associated with the purchase accounting for acquired loans of
$12.1 million
and
$13.1 million
at March 31, 2016 and December 31, 2015, respectively.
|
The Bank’s lending activities are primarily conducted in Maine, and its footprint continues to expand into other New England states, including New Hampshire and Massachusetts. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.
HPFC provides niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. Unlike the Bank's loan portfolio, there is, generally, little to no indication of credit quality issues and/or concerns of borrowers honoring their commitments until a payment is delinquent. Generally, once a payment is delinquent, if the payment is not received shortly thereafter to bring the loan current, the loan is deemed impaired (typically within
45
days). Effective February 19, 2016, the Company closed HPFC's operations and is no longer originating loans.
The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.
There were no significant changes in the Company's ALL methodology during the
three months
ended
March 31, 2016
.
The board of directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. The Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the board of directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of
determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, consumer and HPFC. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include:
Residential Real Estate
.
Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residential properties.
Commercial Real Estate.
Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial.
Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant & equipment, or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Home Equity.
Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.
Consumer.
Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
HPFC.
HPFC is a niche lender that provides commercial lending to dentists, optometrists and veterinarians, many of which are start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral may consist of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower and the terms range from
seven
to
ten
years.
The following tables presents the activity in the ALL and select loan information by portfolio segment for the
three months ended March 31, 2016
and 2015, and for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Commercial
|
|
Home
Equity
|
|
Consumer
|
|
HPFC
|
|
Unallocated
|
|
Total
|
For The Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL for the three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
4,545
|
|
|
$
|
10,432
|
|
|
$
|
3,241
|
|
|
$
|
2,731
|
|
|
$
|
193
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
21,166
|
|
Loans charged off
|
(210
|
)
|
|
(222
|
)
|
|
(226
|
)
|
|
(128
|
)
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(801
|
)
|
Recoveries
|
40
|
|
|
9
|
|
|
52
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
104
|
|
Provision
(1)
|
141
|
|
|
161
|
|
|
231
|
|
|
18
|
|
|
2
|
|
|
317
|
|
|
—
|
|
|
870
|
|
Ending balance
|
$
|
4,516
|
|
|
$
|
10,380
|
|
|
$
|
3,298
|
|
|
$
|
2,622
|
|
|
$
|
182
|
|
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
21,339
|
|
ALL balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
512
|
|
|
$
|
158
|
|
|
$
|
214
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
307
|
|
|
$
|
—
|
|
|
$
|
1,280
|
|
Collectively evaluated for impairment
|
4,004
|
|
|
10,222
|
|
|
3,084
|
|
|
2,533
|
|
|
182
|
|
|
34
|
|
|
—
|
|
|
20,059
|
|
Total ending ALL
|
$
|
4,516
|
|
|
$
|
10,380
|
|
|
$
|
3,298
|
|
|
$
|
2,622
|
|
|
$
|
182
|
|
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
21,339
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
6,033
|
|
|
$
|
3,130
|
|
|
$
|
3,862
|
|
|
$
|
492
|
|
|
$
|
7
|
|
|
$
|
357
|
|
|
$
|
—
|
|
|
$
|
13,881
|
|
Collectively evaluated for impairment
|
805,941
|
|
|
949,351
|
|
|
288,202
|
|
|
344,005
|
|
|
17,182
|
|
|
74,072
|
|
|
—
|
|
|
2,478,753
|
|
Total ending loans balance
|
$
|
811,974
|
|
|
$
|
952,481
|
|
|
$
|
292,064
|
|
|
$
|
344,497
|
|
|
$
|
17,189
|
|
|
$
|
74,429
|
|
|
$
|
—
|
|
|
$
|
2,492,634
|
|
For The Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL for the three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
4,899
|
|
|
$
|
7,951
|
|
|
$
|
3,354
|
|
|
$
|
2,247
|
|
|
$
|
281
|
|
|
$
|
—
|
|
|
$
|
2,384
|
|
|
$
|
21,116
|
|
Loans charged off
|
(113
|
)
|
|
(55
|
)
|
|
(159
|
)
|
|
(89
|
)
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
(424
|
)
|
Recoveries
|
3
|
|
|
10
|
|
|
104
|
|
|
5
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
133
|
|
Provision (credit)
(1)
|
46
|
|
|
328
|
|
|
128
|
|
|
84
|
|
|
(14
|
)
|
|
—
|
|
|
(132
|
)
|
|
440
|
|
Ending balance
|
$
|
4,835
|
|
|
$
|
8,234
|
|
|
$
|
3,427
|
|
|
$
|
2,247
|
|
|
$
|
270
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
|
$
|
21,265
|
|
ALL balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
743
|
|
|
$
|
132
|
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,092
|
|
Collectively evaluated for impairment
|
4,092
|
|
|
8,102
|
|
|
3,288
|
|
|
2,247
|
|
|
192
|
|
|
—
|
|
|
2,252
|
|
|
20,173
|
|
Total ending ALL
|
$
|
4,835
|
|
|
$
|
8,234
|
|
|
$
|
3,427
|
|
|
$
|
2,247
|
|
|
$
|
270
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
|
$
|
21,265
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
6,107
|
|
|
$
|
2,696
|
|
|
$
|
823
|
|
|
$
|
302
|
|
|
$
|
156
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,084
|
|
Collectively evaluated for impairment
|
578,366
|
|
|
654,765
|
|
|
256,940
|
|
|
274,482
|
|
|
16,443
|
|
|
—
|
|
|
—
|
|
|
1,780,996
|
|
Total ending loans balance
|
$
|
584,473
|
|
|
$
|
657,461
|
|
|
$
|
257,763
|
|
|
$
|
274,784
|
|
|
$
|
16,599
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,791,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Commercial
|
|
Home
Equity
|
|
Consumer
|
|
HPFC
|
|
Unallocated
|
|
Total
|
For The Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
4,899
|
|
|
$
|
7,951
|
|
|
$
|
3,354
|
|
|
$
|
2,247
|
|
|
$
|
281
|
|
|
$
|
—
|
|
|
$
|
2,384
|
|
|
$
|
21,116
|
|
Loans charged off
|
(801
|
)
|
|
(481
|
)
|
|
(655
|
)
|
|
(525
|
)
|
|
(154
|
)
|
|
—
|
|
|
—
|
|
|
(2,616
|
)
|
Recoveries
|
55
|
|
|
74
|
|
|
389
|
|
|
188
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
728
|
|
Provision (credit)
(1)
|
392
|
|
|
2,888
|
|
|
153
|
|
|
821
|
|
|
44
|
|
|
24
|
|
|
(2,384
|
)
|
|
1,938
|
|
Ending balance
|
$
|
4,545
|
|
|
$
|
10,432
|
|
|
$
|
3,241
|
|
|
$
|
2,731
|
|
|
$
|
193
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
21,166
|
|
ALL balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
544
|
|
|
$
|
644
|
|
|
$
|
92
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,369
|
|
Collectively evaluated for impairment
|
4,001
|
|
|
9,788
|
|
|
3,149
|
|
|
2,642
|
|
|
193
|
|
|
24
|
|
|
—
|
|
|
19,797
|
|
Total ending ALL
|
$
|
4,545
|
|
|
$
|
10,432
|
|
|
$
|
3,241
|
|
|
$
|
2,731
|
|
|
$
|
193
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
21,166
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
6,026
|
|
|
$
|
4,610
|
|
|
$
|
3,937
|
|
|
$
|
588
|
|
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,235
|
|
Collectively evaluated for impairment
|
814,591
|
|
|
923,341
|
|
|
293,784
|
|
|
348,046
|
|
|
17,879
|
|
|
77,330
|
|
|
—
|
|
|
2,474,971
|
|
Total ending loans balance
|
$
|
820,617
|
|
|
$
|
927,951
|
|
|
$
|
297,721
|
|
|
$
|
348,634
|
|
|
$
|
17,953
|
|
|
$
|
77,330
|
|
|
$
|
—
|
|
|
$
|
2,490,206
|
|
|
|
(1)
|
The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. At
March 31, 2016
and 2015, and December 31, 2015, the reserve for unfunded commitments was
$24,000
,
$23,000
and
$22,000
, respectively.
|
The following table reconciles the
three
months ended
March 31, 2016
and 2015, and year ended December 31, 2015 provision for loan losses to the provision for credit losses as presented on the consolidated statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2015
|
Provision for loan losses
|
|
$
|
870
|
|
|
$
|
440
|
|
|
$
|
1,938
|
|
Change in reserve for unfunded commitments
|
|
2
|
|
|
6
|
|
|
(2
|
)
|
Provision for credit losses
|
|
$
|
872
|
|
|
$
|
446
|
|
|
$
|
1,936
|
|
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by Credit Risk Administration. As of
March 31, 2016
, the non-residential building operators industry exposure was
11%
of the Company's total loan portfolio and
29%
of the total commercial real estate portfolio. There were
no
other industry exposures exceeding
10%
of the Company's total loan portfolio as of
March 31, 2016
.
To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate and residential real estate loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:
|
|
•
|
Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.
|
|
|
•
|
Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
|
|
|
•
|
Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
|
|
|
•
|
Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
|
|
|
•
|
Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.
|
Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.
The following table summarizes credit risk exposure indicators by portfolio segment as of the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Commercial
|
|
Home
Equity
|
|
Consumer
|
|
HPFC
|
|
Total
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
$
|
795,256
|
|
|
$
|
886,346
|
|
|
$
|
277,568
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
72,615
|
|
|
$
|
2,031,785
|
|
Performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
342,929
|
|
|
17,185
|
|
|
—
|
|
|
360,114
|
|
Special Mention (Grade 7)
|
|
3,043
|
|
|
32,330
|
|
|
7,778
|
|
|
—
|
|
|
—
|
|
|
301
|
|
|
43,452
|
|
Substandard (Grade 8)
|
|
13,675
|
|
|
33,805
|
|
|
6,718
|
|
|
—
|
|
|
—
|
|
|
1,513
|
|
|
55,711
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,568
|
|
|
4
|
|
|
—
|
|
|
1,572
|
|
Total
|
|
$
|
811,974
|
|
|
$
|
952,481
|
|
|
$
|
292,064
|
|
|
$
|
344,497
|
|
|
$
|
17,189
|
|
|
$
|
74,429
|
|
|
$
|
2,492,634
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
$
|
802,873
|
|
|
$
|
868,664
|
|
|
$
|
281,553
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,173
|
|
|
$
|
2,023,263
|
|
Performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
346,701
|
|
|
17,835
|
|
|
—
|
|
|
364,536
|
|
Special Mention (Grade 7)
|
|
3,282
|
|
|
20,732
|
|
|
7,527
|
|
|
—
|
|
|
—
|
|
|
3,179
|
|
|
34,720
|
|
Substandard (Grade 8)
|
|
14,462
|
|
|
38,555
|
|
|
8,641
|
|
|
—
|
|
|
—
|
|
|
3,978
|
|
|
65,636
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,933
|
|
|
118
|
|
|
—
|
|
|
2,051
|
|
Total
|
|
$
|
820,617
|
|
|
$
|
927,951
|
|
|
$
|
297,721
|
|
|
$
|
348,634
|
|
|
$
|
17,953
|
|
|
$
|
77,330
|
|
|
$
|
2,490,206
|
|
The Company closely monitors the performance of its loan portfolio for both the Bank and HPFC. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan may return to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt.
The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater
than
90 Days
|
|
Total
Past Due
|
|
Current
|
|
Total Loans
Outstanding
|
|
Loans > 90
Days Past
Due and
Accruing
|
|
Non-Accrual
Loans
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
965
|
|
|
$
|
719
|
|
|
$
|
4,764
|
|
|
$
|
6,448
|
|
|
$
|
805,526
|
|
|
$
|
811,974
|
|
|
$
|
—
|
|
|
$
|
6,275
|
|
Commercial real estate
|
3,077
|
|
|
1,357
|
|
|
2,369
|
|
|
6,803
|
|
|
945,678
|
|
|
952,481
|
|
|
—
|
|
|
3,044
|
|
Commercial
|
664
|
|
|
123
|
|
|
1,255
|
|
|
2,042
|
|
|
290,022
|
|
|
292,064
|
|
|
—
|
|
|
4,128
|
|
Home equity
|
568
|
|
|
221
|
|
|
1,325
|
|
|
2,114
|
|
|
342,383
|
|
|
344,497
|
|
|
—
|
|
|
1,568
|
|
Consumer
|
34
|
|
|
9
|
|
|
7
|
|
|
50
|
|
|
17,139
|
|
|
17,189
|
|
|
—
|
|
|
4
|
|
HPFC
|
624
|
|
|
320
|
|
|
—
|
|
|
944
|
|
|
73,485
|
|
|
74,429
|
|
|
—
|
|
|
357
|
|
Total
|
$
|
5,932
|
|
|
$
|
2,749
|
|
|
$
|
9,720
|
|
|
$
|
18,401
|
|
|
$
|
2,474,233
|
|
|
$
|
2,492,634
|
|
|
$
|
—
|
|
|
$
|
15,376
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
3,325
|
|
|
$
|
571
|
|
|
$
|
6,077
|
|
|
$
|
9,973
|
|
|
$
|
810,644
|
|
|
$
|
820,617
|
|
|
$
|
—
|
|
|
$
|
7,253
|
|
Commercial real estate
|
4,219
|
|
|
2,427
|
|
|
1,584
|
|
|
8,230
|
|
|
919,721
|
|
|
927,951
|
|
|
—
|
|
|
4,529
|
|
Commercial
|
267
|
|
|
550
|
|
|
1,002
|
|
|
1,819
|
|
|
295,902
|
|
|
297,721
|
|
|
—
|
|
|
4,489
|
|
Home equity
|
643
|
|
|
640
|
|
|
1,505
|
|
|
2,788
|
|
|
345,846
|
|
|
348,634
|
|
|
—
|
|
|
1,933
|
|
Consumer
|
112
|
|
|
7
|
|
|
118
|
|
|
237
|
|
|
17,716
|
|
|
17,953
|
|
|
—
|
|
|
118
|
|
HPFC
|
165
|
|
|
—
|
|
|
—
|
|
|
165
|
|
|
77,165
|
|
|
77,330
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
8,731
|
|
|
$
|
4,195
|
|
|
$
|
10,286
|
|
|
$
|
23,212
|
|
|
$
|
2,466,994
|
|
|
$
|
2,490,206
|
|
|
$
|
—
|
|
|
$
|
18,322
|
|
Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms was
$184,000
and
$143,000
for the three months ended
March 31, 2016
and
2015
, respectively.
TDRs:
The Company takes a conservative approach with credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs, typically, involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will remain a TDR until paid in full, or until the loan is again restructured at current market rates and no concessions are granted.
The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate, or if the loan is currently collateral-dependent, using the NRV, which was obtained through independent appraisals and internal evaluations. The following is a summary of TDRs, by portfolio segment, and the associated specific reserve included within the ALL as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Specific Reserve
|
|
|
March 31,
2016
|
|
December 31, 2015
|
|
March 31,
2016
|
|
December 31, 2015
|
|
March 31,
2016
|
|
December 31, 2015
|
Residential real estate
|
|
22
|
|
|
22
|
|
|
$
|
3,343
|
|
|
$
|
3,398
|
|
|
$
|
336
|
|
|
$
|
544
|
|
Commercial real estate
|
|
4
|
|
|
6
|
|
|
1,109
|
|
|
1,459
|
|
|
—
|
|
|
48
|
|
Commercial
|
|
7
|
|
|
9
|
|
|
325
|
|
|
399
|
|
|
1
|
|
|
11
|
|
Home equity
|
|
1
|
|
|
1
|
|
|
20
|
|
|
21
|
|
|
—
|
|
|
—
|
|
Total
|
|
34
|
|
|
38
|
|
|
$
|
4,797
|
|
|
$
|
5,277
|
|
|
$
|
337
|
|
|
$
|
603
|
|
At
March 31, 2016
, the Company had performing and non-performing TDRs with a recorded investment balance of
$4.6 million
and
$227,000
, respectively. At December 31, 2015, the Company had performing and non-performing TDRs with a recorded investment balance of
$4.8 million
and
$446,000
, respectively. As of
March 31, 2016
and December 31, 2015, the Company did not have any commitments to lend additional funds to borrowers with loans classified as TDRs.
There were
no
loan modifications that occurred during the
three
months ended
March 31, 2016
or 2015 that qualify as TDRs.
For the
three months ended
March 31, 2016
and 2015,
no
loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.
Impaired Loans:
Impaired loans consist of non-accrual and TDR loans that are individually evaluated for impairment in accordance with the Company's policy. The following is a summary of impaired loan balances and the associated allowance by portfolio segment as of and for three months ended March 31, 2016 and 2015, and as of and for the year-ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
3,137
|
|
|
$
|
3,137
|
|
|
$
|
512
|
|
|
$
|
3,156
|
|
|
$
|
27
|
|
Commercial real estate
|
540
|
|
|
538
|
|
|
158
|
|
|
1,256
|
|
|
—
|
|
Commercial
|
321
|
|
|
334
|
|
|
214
|
|
|
239
|
|
|
—
|
|
Home equity
|
303
|
|
|
303
|
|
|
89
|
|
|
303
|
|
|
—
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HPFC
|
357
|
|
|
383
|
|
|
307
|
|
|
230
|
|
|
—
|
|
Ending balance
|
4,658
|
|
|
4,695
|
|
|
1,280
|
|
|
5,184
|
|
|
27
|
|
Without an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
2,896
|
|
|
3,832
|
|
|
—
|
|
|
2,954
|
|
|
2
|
|
Commercial real estate
|
2,590
|
|
|
3,327
|
|
|
—
|
|
|
2,643
|
|
|
11
|
|
Commercial
|
3,541
|
|
|
3,996
|
|
|
—
|
|
|
3,664
|
|
|
4
|
|
Home equity
|
189
|
|
|
452
|
|
|
—
|
|
|
218
|
|
|
—
|
|
Consumer
|
7
|
|
|
10
|
|
|
—
|
|
|
7
|
|
|
—
|
|
HPFC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
9,223
|
|
|
11,617
|
|
|
—
|
|
|
9,486
|
|
|
17
|
|
Total impaired loans
|
$
|
13,881
|
|
|
$
|
16,312
|
|
|
$
|
1,280
|
|
|
$
|
14,670
|
|
|
$
|
44
|
|
March 31, 2015:
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
4,342
|
|
|
$
|
4,341
|
|
|
$
|
743
|
|
|
$
|
4,409
|
|
|
$
|
29
|
|
Commercial real estate
|
256
|
|
|
266
|
|
|
132
|
|
|
86
|
|
|
—
|
|
Commercial
|
233
|
|
|
233
|
|
|
139
|
|
|
199
|
|
|
—
|
|
Home equity
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
139
|
|
|
140
|
|
|
78
|
|
|
140
|
|
|
—
|
|
HPFC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
4,970
|
|
|
4,980
|
|
|
1,092
|
|
|
4,834
|
|
|
29
|
|
Without an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
1,765
|
|
|
2,289
|
|
|
—
|
|
|
1,774
|
|
|
2
|
|
Commercial real estate
|
2,440
|
|
|
2,748
|
|
|
—
|
|
|
3,102
|
|
|
8
|
|
Commercial
|
590
|
|
|
754
|
|
|
—
|
|
|
503
|
|
|
4
|
|
Home equity
|
302
|
|
|
505
|
|
|
—
|
|
|
303
|
|
|
—
|
|
Consumer
|
17
|
|
|
37
|
|
|
—
|
|
|
17
|
|
|
—
|
|
HPFC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
5,114
|
|
|
6,333
|
|
|
—
|
|
|
5,699
|
|
|
14
|
|
Total impaired loans
|
$
|
10,084
|
|
|
$
|
11,313
|
|
|
$
|
1,092
|
|
|
$
|
10,533
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
3,191
|
|
|
$
|
3,191
|
|
|
$
|
544
|
|
|
$
|
6,064
|
|
|
$
|
112
|
|
Commercial real estate
|
1,825
|
|
|
1,857
|
|
|
644
|
|
|
1,753
|
|
|
—
|
|
Commercial
|
156
|
|
|
156
|
|
|
92
|
|
|
945
|
|
|
2
|
|
Home equity
|
303
|
|
|
303
|
|
|
89
|
|
|
900
|
|
|
—
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
195
|
|
|
—
|
|
HPFC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
5,475
|
|
|
5,507
|
|
|
1,369
|
|
|
9,857
|
|
|
114
|
|
Without an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
2,835
|
|
|
4,353
|
|
|
—
|
|
|
2,175
|
|
|
8
|
|
Commercial real estate
|
2,785
|
|
|
3,426
|
|
|
—
|
|
|
2,719
|
|
|
65
|
|
Commercial
|
3,781
|
|
|
4,325
|
|
|
—
|
|
|
1,412
|
|
|
17
|
|
Home equity
|
285
|
|
|
688
|
|
|
—
|
|
|
369
|
|
|
—
|
|
Consumer
|
74
|
|
|
150
|
|
|
—
|
|
|
20
|
|
|
—
|
|
HPFC
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
9,760
|
|
|
12,942
|
|
|
—
|
|
|
6,695
|
|
|
90
|
|
Total impaired loans
|
$
|
15,235
|
|
|
$
|
18,449
|
|
|
$
|
1,369
|
|
|
$
|
16,552
|
|
|
$
|
204
|
|
The impaired loan information presented above as of and for the three months ended March 31, 2015 and year ended December 31, 2015 was revised to disclose only those impaired loans that are individually evaluated for impairment in accordance with the Company's policy, which includes (i) loans with a principal balance greater than
$250,000
or more and are classified as substandard or doubtful and are on non-accrual status and (ii) all TDRs. Previously, the Company's impaired loan disclosures included certain non-accrual loans which were collectively evaluated under ASC 450-20. The revision of prior period information had no impact on the Company's ALL, provision for loan losses, or its asset quality ratios as of and for the three months ended March 31, 2015 and year ended December 31, 2015.
Loan Sales:
For the three months ended
March 31, 2016
and 2015, the Company sold
$38.9 million
and
$4.8 million
, respectively, of fixed rate residential mortgage loans on the secondary market that resulted in gains on the sale of loans (net of costs) of
$819,000
and
$129,000
, respectively.
At
March 31, 2016
and December 31, 2015, the Company had certain residential mortgage loans with a principal balance of
$16.5 million
and
$10.8 million
, respectively, designated as held for sale. The Company has elected the fair value option of accounting for its loans held for sale and at March 31, 2016 and December 31, 2015 recorded an unrealized gain of
$139,000
and
$133,000
, respectively. For the three months ended March 31, 2016 and 2015, the Company recorded within non-interest income on its consolidated statements of income a change in unrealized gains of
$6,000
for each period.
OREO:
The Company records its properties obtained through foreclosure or deed-in-lieu of foreclosure as OREO properties on the consolidated statements of condition at NRV.
At March 31, 2016
, the Company had
four
residential and
five
commercial real estate properties with a carrying value of
$273,000
and
$955,000
, respectively, within OREO. At December 31, 2015, the Company had
two
residential real estate properties and
seven
commercial properties with a carrying value of
$241,000
and
$1.0 million
, respectively, within OREO.
In-Process Foreclosure Proceedings:
At
March 31, 2016
and
December 31, 2015
, the Company had
$3.6 million
and
$2.9 million
, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process, representing
43%
and
32%
, respectively, of non-accrual loans within the Company's residential, consumer and home equity portfolios. The Company continues to be focused on working these consumer mortgage loans through the foreclosure process to resolution; however, the foreclosure process, typically, will take
18
to
24
months due to the State of Maine foreclosure laws.
FHLB Advances:
FHLB advances are those borrowings from the FHLBB greater than 90 days. FHLB advances are collateralized by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one- to four-family properties, certain commercial real estate loans, certain pledged investment securities and other qualified assets. The carrying value of residential real estate and commercial loans pledged as collateral was
$1.1 billion
at
March 31, 2016
and December 31, 2015.
Refer to Note 3 and 9 of the consolidated financial statements for discussion of securities pledged as collateral.
NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has recognized goodwill and certain identifiable intangible assets in connection with certain business combinations in prior years.
Goodwill as of
March 31, 2016
and
December 31, 2015
for each reporting unit is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Banking
|
|
Financial
Services
|
|
Total
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
91,753
|
|
|
$
|
7,474
|
|
|
$
|
99,227
|
|
Accumulated impairment losses
|
—
|
|
|
(3,570
|
)
|
|
(3,570
|
)
|
Reported goodwill at December 31, 2015
|
91,753
|
|
|
3,904
|
|
|
95,657
|
|
2016 measurement-period adjustments
|
(390
|
)
|
|
—
|
|
|
(390
|
)
|
Reported goodwill at March 31, 2016
|
$
|
91,363
|
|
|
$
|
3,904
|
|
|
$
|
95,267
|
|
On October 16, 2015, the Company completed its acquisition of SBM, as previously reported. In the first quarter of 2016, the Company made certain measurement-period adjustments to its initial purchase accounting that decreased goodwill by
$390,000
. These measurement-period adjustments increased the previously reported loan balance by
$211,000
, increased acquired interest receivable and other assets by $
157,000
, and increased acquired deferred tax assets
$22,000
. The measurement-period adjustments have no impact on current or future years' net income and were presented and disclosed prospectively as of March 31, 2016 in accordance with ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
.
At March 31, 2016, the Company's accounting for the acquired loans and deferred tax assets was not yet complete and balances disclosed and presented within its Annual Report on Form 10-K for the year ended December 31, 2015, as adjusted by the aforementioned measurement-period adjustments, are provisional amounts.
The changes in core deposit and trust relationship intangible assets for the
three months ended March 31, 2016
are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit Intangible
|
|
Trust Relationship Intangible
|
|
Total
|
|
Accumulated Amortization
|
|
Net
|
|
Total
|
|
Accumulated Amortization
|
|
Net
|
Balance at December 31, 2015
|
$
|
23,908
|
|
|
$
|
(15,392
|
)
|
|
$
|
8,516
|
|
|
$
|
753
|
|
|
$
|
(602
|
)
|
|
$
|
151
|
|
2016 amortization
|
—
|
|
|
(457
|
)
|
|
(457
|
)
|
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
Balance at March 31, 2016
|
$
|
23,908
|
|
|
$
|
(15,849
|
)
|
|
$
|
8,059
|
|
|
$
|
753
|
|
|
$
|
(621
|
)
|
|
$
|
132
|
|
Total carrying value of other intangible assets at December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
$
|
8,667
|
|
Total carrying value of other intangible assets at March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
$
|
8,191
|
|
The following table reflects the expected amortization schedule for intangible assets over the period of estimated economic benefit (assuming no additional intangible assets are created or impaired):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit
Intangible
|
|
Trust
Relationship
Intangible
|
|
Total
|
2016
|
$
|
1,371
|
|
|
$
|
56
|
|
|
$
|
1,427
|
|
2017
|
1,735
|
|
|
76
|
|
|
1,811
|
|
2018
|
725
|
|
|
—
|
|
|
725
|
|
2019
|
705
|
|
|
—
|
|
|
705
|
|
2020
|
682
|
|
|
—
|
|
|
682
|
|
Thereafter
|
2,841
|
|
|
—
|
|
|
2,841
|
|
Total
|
$
|
8,059
|
|
|
$
|
132
|
|
|
$
|
8,191
|
|
NOTE 6 – REGULATORY CAPITAL REQUIREMENTS
The Company and Bank are subject to various regulatory capital requirements administered by the FRB and the OCC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
The Company and the Bank are required to maintain certain levels of capital based on risk-adjusted assets. These capital requirements represent quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank's capital classification is also subject to qualitative judgments by our regulators about components, risk weightings and other factors. The quantitative measures established to ensure capital adequacy require us to maintain minimum amounts and ratios of total, Tier I capital, and common equity Tier I to risk-weighted assets, and of Tier I capital to average assets, or leverage ratio. These guidelines apply to the Company on a consolidated basis. Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of
8.0%
, a minimum Tier I risk-based capital ratio of
6.0%
, a minimum common equity Tier I risk-based capital ratio of
4.5%
, and a minimum leverage ratio of
4.0%
in order to be "adequately capitalized." In addition to these requirements, banking organization must maintain a
2.5%
capital conservation buffer consisting of common Tier I equity, subject to a transition schedule with a full phase-in by 2019. Effective January 1, 2016, the Company and the Bank were required to establish a capital conservation buffer of
0.625%
, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to risk-weighted assets they must maintain to avoid limits on capital distributions and certain bonus payments to executive officers and similar employees.
The Company and the Bank's risk-based capital ratios exceeded regulatory guidelines at
March 31, 2016
and December 31, 2015. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer
|
|
Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
|
|
December 31,
2015
|
|
Minimum Regulatory Capital Required for Capital Adequacy
|
|
Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
|
|
|
Amount
|
|
Ratio
|
|
|
|
Amount
|
|
Ratio
|
|
|
Camden National Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
$
|
341,422
|
|
|
13.08
|
%
|
|
8.63
|
%
|
|
N/A
|
|
|
$
|
335,740
|
|
|
12.98
|
%
|
|
8.00
|
%
|
|
N/A
|
|
Tier I risk-based capital ratio
|
|
305,058
|
|
|
11.69
|
%
|
|
6.63
|
%
|
|
N/A
|
|
|
299,552
|
|
|
11.58
|
%
|
|
6.00
|
%
|
|
N/A
|
|
Common equity Tier I risk-based capital ratio
|
|
270,792
|
|
|
10.37
|
%
|
|
5.13
|
%
|
|
N/A
|
|
|
269,350
|
|
|
10.42
|
%
|
|
4.50
|
%
|
|
N/A
|
|
Tier I leverage capital ratio
|
|
305,058
|
|
|
8.42
|
%
|
|
4.00
|
%
|
|
N/A
|
|
|
299,552
|
|
|
8.74
|
%
|
|
4.00
|
%
|
|
N/A
|
|
Camden National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
$
|
308,105
|
|
|
11.77
|
%
|
|
8.63
|
%
|
|
10.00
|
%
|
|
$
|
304,847
|
|
|
11.75
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
Tier I risk-based capital ratio
|
|
286,742
|
|
|
10.96
|
%
|
|
6.63
|
%
|
|
8.00
|
%
|
|
283,659
|
|
|
10.93
|
%
|
|
6.00
|
%
|
|
8.00
|
%
|
Common equity Tier I risk-based capital ratio
|
|
286,742
|
|
|
10.96
|
%
|
|
5.13
|
%
|
|
6.50
|
%
|
|
283,659
|
|
|
10.93
|
%
|
|
4.50
|
%
|
|
6.50
|
%
|
Tier I leverage capital ratio
|
|
286,742
|
|
|
7.97
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
283,659
|
|
|
8.33
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
In addition, the OCC requires a minimum level of
$2.5 million
of Tier I capital to be maintained at Acadia Trust. As of
March 31, 2016
and December 31, 2015, Acadia Trust met all of its capital requirements.
Although the subordinated debentures are recorded as a liability on the Company's consolidated statements of condition, the Company is permitted, in accordance with regulatory guidelines, to include, subject to certain limits, the junior subordinated debentures in our calculation of risk-based capital. At
March 31, 2016
and December 31, 2015,
$43.0 million
of the junior subordinated debentures were included in Tier I and total risk-based capital for the Company. Additionally, the Company's
$15.0 million
of subordinated debentures qualify as Tier II capital and were included in total risk-based capital for the Company at March 31, 2016 and December 31, 2015.
NOTE 7 – EMPLOYEE BENEFIT PLANS
The Company sponsors unfunded, non-qualified SERPs for certain officers and provides medical and life insurance to certain eligible retired employees. The components of net period benefit cost for the periods ended
March 31, 2016
and
2015
were as follows:
Supplemental Executive Retirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
Net periodic benefit cost
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
77
|
|
|
$
|
77
|
|
Interest cost
|
|
108
|
|
|
106
|
|
Recognized net actuarial loss
|
|
55
|
|
|
54
|
|
Recognized prior service cost
|
|
2
|
|
|
5
|
|
Net period benefit cost
(1)
|
|
$
|
242
|
|
|
$
|
242
|
|
(1) Presented within the consolidated statements of income within salaries and employee benefits.
Other Postretirement Benefit Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Net periodic benefit cost
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
15
|
|
|
$
|
15
|
|
Interest cost
|
|
38
|
|
|
29
|
|
Recognized net actuarial loss
|
|
8
|
|
|
6
|
|
Amortization of prior service credit
|
|
(6
|
)
|
|
(6
|
)
|
Net period benefit cost
(1)
|
|
$
|
55
|
|
|
$
|
44
|
|
(1) Presented within the consolidated statements of income within salaries and employee benefits.
NOTE 8 – STOCK-BASED COMPENSATION PLANS
For the three months ended March 31, 2016, the Company granted share-based awards, subject to certain terms and conditions, to certain officers, executive officers, and directors of the Company, Bank and Acadia Trust. All share-based awards granted were issued under the 2012 Plan. The following outlines the details, and terms and conditions of the material awards granted during the three months ended March 31, 2016:
|
|
•
|
5,793
restricted stock awards were granted to executive officers under the 2016-2018 LTIP, at a fair value of
$43.30
per share, based on the closing market price of the Company's common stock on January 4, 2016. The restricted stock awards vest pro-rata over a
three
year period. The holders of the restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights.
|
|
|
•
|
A total of
7,165
restricted stock awards and restricted stock units were granted at a fair value of
$40.80
per share, based on the closing market price of the Company’s common stock on the March 17, 2016 grant date. The restricted stock awards vest pro-rata over a
five
-year period, while the restricted stock units vest pro-rata over a
three
-year period subject to the achievement of certain performance measures. The holders of the restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights.
|
|
|
•
|
10,676
shares of the Company's common stock were purchased under the MSPP at a one-third discount, based on the closing market price of the Company's common stock on the February 23, 2016 grant date of
$38.11
(
6,954
shares) and the March 17, 2016 grant date of
$40.80
(
3,722
shares), in lieu of the officers and executive officers annual incentive bonus. The shares fully vest after
two
years of service from the grant date.
|
|
|
•
|
2,730
deferred stock awards were issued to certain executive officers under the DCRP. Of the
2,730
awards granted,
1,161
vested immediately on the grant date, the remainder will vest pro-rata until the recipient reaches age
65
. The stock awards have been determined to have a fair value of
$40.55
per unit, based on the closing market price of the Company's common stock on the March 15, 2016 grant date.
|
NOTE 9 – REPURCHASE AGREEMENTS
The Company can raise additional liquidity by entering into repurchase agreements at its discretion. In a security repurchase agreement transaction, the Company will generally sell a security, agreeing to repurchase either the same or substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded as interest expense on the consolidated statement of income. The securities underlying the agreements are delivered to counterparties as security for the repurchase obligations. Since the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transactions does not meet the criteria to be classified as a sale, and is therefore considered a secured borrowing transaction for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement, the Company is subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, the Company either deals with established firms when entering into these transactions or with customers whose agreements stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by the Company's safekeeping agents.
The table below sets forth information regarding the Company’s repurchase agreements accounted for as secured borrowings and types of collateral as of March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 - 90 Days
|
|
Greater than 90 Days
|
|
Total
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Customer Repurchase Agreements:
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
538
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
538
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
107,589
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107,589
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
101,299
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101,299
|
|
Total Customer Repurchase Agreements
|
|
209,426
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
209,426
|
|
Wholesale Repurchase Agreements:
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,032
|
|
|
22,032
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,009
|
|
|
8,009
|
|
Total Wholesale Repurchase Agreements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,041
|
|
|
30,041
|
|
Total Repurchase Agreements
(1)
|
|
$
|
209,426
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,041
|
|
|
$
|
239,467
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Customer Repurchase Agreements:
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
556
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
95,967
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
95,967
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
88,466
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88,466
|
|
Total Customer Repurchase Agreements
|
|
184,989
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
184,989
|
|
Wholesale Repurchase Agreements:
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,016
|
|
|
22,016
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,036
|
|
|
8,036
|
|
Total Wholesale Repurchase Agreements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,052
|
|
|
30,052
|
|
Total Repurchase Agreements
(1)
|
|
$
|
184,989
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,052
|
|
|
$
|
215,041
|
|
|
|
(1)
|
Total repurchase agreements are presented within other borrowed funds on the consolidated statements of condition.
|
Certain customers held CDs totaling
$915,000
and
$914,000
with the Bank at
March 31, 2016
and
December 31, 2015
, respectively, that were collateralized by CMO and MBS securities that were overnight repurchase agreements.
Certain counterparties monitor collateral, and may request additional collateral to be posted from time to time.
NOTE 10 – FAIR VALUE MEASUREMENT AND DISCLOSURE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset.
The fair value hierarchy for valuation of an asset or liability is as follows:
Level 1:
Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.
Level 2:
Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3:
Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Financial Instruments Recorded at Fair Value on a Recurring Basis
Loans Held For Sale:
The fair value of loans held for sale is determined using quoted secondary market prices or executed sales agreements and is classified as Level 2.
AFS Securities
: The fair value of debt AFS securities is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities are classified as Level 2.
The fair value of equity AFS securities is reported utilizing market prices based on recent trading activity. The equity securities are traded on inactive markets and are classified as Level 2.
Derivatives
: The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of
March 31, 2016
and
December 31, 2015
, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.
The fair value of interest rate lock commitments is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of
March 31, 2016
and
December 31, 2015
, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Data
(Level 2)
|
|
Company
Determined
Fair Value
(Level 3)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
$
|
16,632
|
|
|
$
|
—
|
|
|
$
|
16,632
|
|
|
$
|
—
|
|
AFS securities:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government-sponsored enterprises
|
5,119
|
|
|
—
|
|
|
5,119
|
|
|
—
|
|
Obligations of states and political subdivisions
|
15,540
|
|
|
—
|
|
|
15,540
|
|
|
—
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
466,599
|
|
|
—
|
|
|
466,599
|
|
|
—
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
308,558
|
|
|
—
|
|
|
308,558
|
|
|
—
|
|
Subordinated corporate bonds
|
3,461
|
|
|
—
|
|
|
3,461
|
|
|
—
|
|
Equity securities
|
752
|
|
|
—
|
|
|
752
|
|
|
—
|
|
Customer loan swaps
|
9,426
|
|
|
—
|
|
|
9,426
|
|
|
—
|
|
Interest rate lock commitments
|
431
|
|
|
—
|
|
|
431
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt interest rate swaps
|
11,934
|
|
|
—
|
|
|
11,934
|
|
|
—
|
|
Forecasted interest rate swaps
|
1,110
|
|
|
—
|
|
|
1,110
|
|
|
—
|
|
Customer loan swaps
|
9,426
|
|
|
—
|
|
|
9,426
|
|
|
—
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
$
|
10,958
|
|
|
$
|
—
|
|
|
$
|
10,958
|
|
|
$
|
—
|
|
AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government-sponsored enterprises
|
5,040
|
|
|
—
|
|
|
5,040
|
|
|
—
|
|
Obligations of states and political subdivisions
|
17,694
|
|
|
—
|
|
|
17,694
|
|
|
—
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
419,046
|
|
|
—
|
|
|
419,046
|
|
|
—
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
306,857
|
|
|
—
|
|
|
306,857
|
|
|
—
|
|
Subordinated corporate bonds
|
996
|
|
|
—
|
|
|
996
|
|
|
—
|
|
Equity securities
|
705
|
|
|
—
|
|
|
705
|
|
|
—
|
|
Customer loan swaps
|
3,166
|
|
|
—
|
|
|
3,166
|
|
|
—
|
|
Interest rate lock commitments
|
139
|
|
|
—
|
|
|
139
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt interest rate swaps
|
9,229
|
|
|
—
|
|
|
9,229
|
|
|
—
|
|
Forecasted interest rate swaps
|
576
|
|
|
—
|
|
|
576
|
|
|
—
|
|
Customer loan swaps
|
3,166
|
|
|
—
|
|
|
3,166
|
|
|
—
|
|
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the
three months ended March 31, 2016
. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.
Collateral-Dependent Impaired Loans
: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company's policy is to individually evaluate for impairment loans with a principal balance greater than
$250,000
or more and are classified as substandard or doubtful and are on non-accrual status. Once the population of loans is identified for individual impairment assessment, the Company measures these loans for impairment by comparing NRV, which is the fair value of the collateral, less estimated costs to sell, to the carrying value of the loan. If the NRV of the loan is less than the carrying value of the loan, then a loss is recognized as part of the ALL to adjust the loan's carrying value to NRV. Accordingly, certain collateral-dependent impaired loans are subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions.
MSRs
: The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value of a tranche exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Other assumptions include delinquency rates, servicing cost inflation and annual unit loan cost. MSRs are classified within Level 2 of the fair value hierarchy.
Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Non-Recurring Basis
The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO and goodwill and other intangible assets.
OREO
:
OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at NRV, which is the fair value of the real estate, less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ALL upon transfer to OREO. Upon acquisition of a property, a current appraisal is used or an internal valuation is prepared to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and are classified as Level 3.
Goodwill and Other Intangible Assets
: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment of either reporting unit's goodwill occur, the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income. The Company conducts an annual impairment test of goodwill in the fourth quarter each year, or more frequently as necessary. There have been no indications or triggering events during for the
three
months ended March 31, 2016 for which management believes that it is more likely than not that goodwill is impaired.
The Company's core deposit intangible assets represent the estimated value of acquired customer relationships and are amortized on a straight-line basis over the estimated life of those relationships. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If necessary, management will test the core deposit intangibles for impairment by comparing its carrying value to the expected undiscounted cash flows of the assets. If the undiscounted cash flows of the intangible assets exceed its carrying value then the intangible assets are deemed to be fully recoverable and not impaired. However, if the undiscounted cash flows of the intangible assets are less than its carrying value than an impairment charge is recorded to mark the carrying value of the intangible assets to fair value. There were no events or changes in circumstances occurred for the
three
months ended March 31, 2016 that indicated the carrying amount may not be recoverable.
The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Data
(Level 2)
|
|
Company
Determined
Fair Value
(Level 3)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
$
|
1,091
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,091
|
|
MSRs
(1)
|
1,523
|
|
|
—
|
|
|
1,523
|
|
|
—
|
|
Non-financial assets:
|
|
|
|
|
|
|
|
OREO
|
1,228
|
|
|
—
|
|
|
—
|
|
|
1,228
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
$
|
1,971
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,971
|
|
MSRs
(1)
|
440
|
|
|
—
|
|
|
440
|
|
|
—
|
|
Non-financial assets:
|
|
|
|
|
|
|
|
|
|
|
OREO
|
1,304
|
|
|
—
|
|
|
—
|
|
|
1,304
|
|
(1) Represents MSRs deemed to be impaired and a valuation allowance established to carry at fair value.
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at
March 31, 2016
and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Methodology
|
|
Unobservable input
|
|
Discount Range
(Weighted-Average)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
Partially charged-off
|
$
|
131
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment of appraisal
|
|
0%
|
(0%)
|
|
|
|
|
|
Estimated selling costs
|
|
0 - 10%
|
(9%)
|
Specifically reserved
|
960
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment of appraisal
|
|
0 - 50%
|
(14%)
|
|
|
|
|
|
Estimated selling costs
|
|
0 - 10%
|
(7%)
|
OREO
|
1,228
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment of appraisal
|
|
0 - 73%
|
(23%)
|
|
|
|
|
|
Estimated selling cost
|
|
10%
|
(10%)
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
Partially charged-off
|
$
|
399
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment
of appraisal
|
|
0%
|
(0%)
|
|
|
|
|
|
Estimated selling costs
|
|
0 - 10%
|
(7%)
|
Specifically reserved
|
1,572
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment
of appraisal
|
|
0 - 57%
|
(45%)
|
|
|
|
|
|
Estimated selling costs
|
|
10%
|
(10%)
|
OREO
|
1,304
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment
of appraisal
|
|
0 - 43%
|
(18%)
|
|
|
|
|
|
Estimated selling costs
|
|
10%
|
(10%)
|
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments.
Cash and Due from Banks
: The carrying amounts reported in the consolidated statements of condition approximate fair value.
HTM securities
: The fair value is estimated utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value is classified as Level 2.
Loans
: For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Interest Receivable and Payable
: The carrying amounts reported in the consolidated statements of condition approximate fair value.
Deposits
: The fair value of demand, interest 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.
Borrowings
: The carrying amounts of short-term borrowings from the FHLB, securities sold under repurchase agreements, notes payable and other short-term borrowings approximate fair value. The fair values of long-term borrowings and commercial repurchase agreements are based on the discounted cash flows using current rates for advances of similar remaining maturities.
Subordinated Debentures
: The fair values of are based on quoted prices from similar instruments in inactive markets.
The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Prices
(Level 2)
|
|
Company
Determined
Market
Prices
(Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
72,201
|
|
|
$
|
72,201
|
|
|
$
|
72,201
|
|
|
$
|
—
|
|
|
$
|
—
|
|
AFS securities
|
800,029
|
|
|
800,029
|
|
|
—
|
|
|
800,029
|
|
|
—
|
|
HTM securities
|
87,950
|
|
|
90,729
|
|
|
—
|
|
|
90,729
|
|
|
—
|
|
Loans held for sale
|
16,632
|
|
|
16,632
|
|
|
—
|
|
|
16,632
|
|
|
—
|
|
Residential real estate loans
(1)
|
807,458
|
|
|
827,116
|
|
|
—
|
|
|
—
|
|
|
827,116
|
|
Commercial real estate loans
(1)
|
942,101
|
|
|
945,232
|
|
|
—
|
|
|
—
|
|
|
945,232
|
|
Commercial loans
(1)(2)
|
362,854
|
|
|
366,453
|
|
|
—
|
|
|
—
|
|
|
366,453
|
|
Home equity loans
(1)
|
341,875
|
|
|
345,834
|
|
|
—
|
|
|
—
|
|
|
345,834
|
|
Consumer loans
(1)
|
17,007
|
|
|
18,136
|
|
|
—
|
|
|
—
|
|
|
18,136
|
|
MSRs
(3)
|
1,574
|
|
|
2,050
|
|
|
—
|
|
|
2,050
|
|
|
—
|
|
Interest receivable
|
8,785
|
|
|
8,785
|
|
|
—
|
|
|
8,785
|
|
|
—
|
|
Customer loan swaps
|
9,426
|
|
|
9,426
|
|
|
—
|
|
|
9,426
|
|
|
—
|
|
Interest rate lock commitments
|
431
|
|
|
431
|
|
|
—
|
|
|
431
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
2,674,832
|
|
|
$
|
2,677,503
|
|
|
$
|
—
|
|
|
$
|
2,677,503
|
|
|
$
|
—
|
|
FHLB advances
|
55,000
|
|
|
56,097
|
|
|
—
|
|
|
56,097
|
|
|
—
|
|
Commercial repurchase agreements
|
30,041
|
|
|
30,920
|
|
|
—
|
|
|
30,920
|
|
|
—
|
|
Other borrowed funds
|
515,432
|
|
|
516,633
|
|
|
|
|
|
516,633
|
|
|
—
|
|
Subordinated debentures
|
58,638
|
|
|
40,800
|
|
|
—
|
|
|
40,800
|
|
|
—
|
|
Interest payable
|
641
|
|
|
641
|
|
|
—
|
|
|
641
|
|
|
—
|
|
Junior subordinated debt interest rate swaps
|
11,934
|
|
|
11,934
|
|
|
—
|
|
|
11,934
|
|
|
—
|
|
Forecasted interest rate swaps
|
1,110
|
|
|
1,110
|
|
|
—
|
|
|
1,110
|
|
|
—
|
|
Customer loan swaps
|
9,426
|
|
|
9,426
|
|
|
—
|
|
|
9,426
|
|
|
—
|
|
|
|
(1)
|
The presented carrying amount is net of the allocated ALL.
|
|
|
(2)
|
Includes the HPFC loan portfolio.
|
|
|
(3)
|
Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.
|
The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Prices
(Level 2)
|
|
Company
Determined
Market
Prices
(Level 3)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
79,488
|
|
|
$
|
79,488
|
|
|
$
|
79,488
|
|
|
$
|
—
|
|
|
$
|
—
|
|
AFS securities
|
750,338
|
|
|
750,338
|
|
|
—
|
|
|
750,338
|
|
|
—
|
|
HTM securities
|
84,144
|
|
|
85,647
|
|
|
—
|
|
|
85,647
|
|
|
—
|
|
Loans held for sale
|
10,958
|
|
|
10,958
|
|
|
—
|
|
|
10,958
|
|
|
—
|
|
Residential real estate loans
(1)
|
808,180
|
|
|
820,774
|
|
|
—
|
|
|
—
|
|
|
820,774
|
|
Commercial real estate loans
(1)
|
922,257
|
|
|
911,316
|
|
|
—
|
|
|
—
|
|
|
911,316
|
|
Commercial loans
(1)(2)
|
371,684
|
|
|
371,854
|
|
|
—
|
|
|
—
|
|
|
371,854
|
|
Home equity loans
(1)
|
349,215
|
|
|
348,963
|
|
|
—
|
|
|
—
|
|
|
348,963
|
|
Consumer loans
(1)
|
17,704
|
|
|
18,163
|
|
|
—
|
|
|
—
|
|
|
18,163
|
|
MSRs
(3)
|
2,161
|
|
|
2,947
|
|
|
—
|
|
|
2,947
|
|
|
—
|
|
Interest receivable
|
7,985
|
|
|
7,985
|
|
|
—
|
|
|
7,985
|
|
|
—
|
|
Customer loan swaps
|
3,166
|
|
|
3,166
|
|
|
—
|
|
|
3,166
|
|
|
—
|
|
Interest rate lock commitments
|
139
|
|
|
139
|
|
|
—
|
|
|
139
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
2,726,379
|
|
|
$
|
2,726,300
|
|
|
$
|
—
|
|
|
$
|
2,726,300
|
|
|
$
|
—
|
|
FHLB advances
|
55,000
|
|
|
56,001
|
|
|
—
|
|
|
56,001
|
|
|
—
|
|
Commercial repurchase agreements
|
30,052
|
|
|
30,931
|
|
|
—
|
|
|
30,931
|
|
|
—
|
|
Other borrowed funds
|
428,711
|
|
|
428,778
|
|
|
—
|
|
|
428,778
|
|
|
—
|
|
Subordinated debentures
|
58,599
|
|
|
42,950
|
|
|
—
|
|
|
42,950
|
|
|
—
|
|
Interest payable
|
641
|
|
|
641
|
|
|
—
|
|
|
641
|
|
|
—
|
|
Junior subordinated debt interest rate swaps
|
9,229
|
|
|
9,229
|
|
|
—
|
|
|
9,229
|
|
|
—
|
|
Forecasted interest rate swaps
|
576
|
|
|
576
|
|
|
—
|
|
|
576
|
|
|
—
|
|
Customer loan swaps
|
3,166
|
|
|
3,166
|
|
|
—
|
|
|
3,166
|
|
|
—
|
|
|
|
(1)
|
The presented carrying amount is net of the allocated ALL.
|
|
|
(2)
|
Includes the HPFC loan portfolio.
|
|
|
(3)
|
Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.
|
NOTE 11 – COMMITMENTS, CONTINGENCIES
AND DERIVATIVES
Legal Contingencies
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position as a whole.
Reserves are established for legal claims only when losses associated with the claims are judged to be probable and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.
As of
March 31, 2016
and December 31, 2015, the Company did
no
t have any material loss contingencies for which accruals were provided for and/or disclosure was deemed necessary.
Financial Instruments
In the normal course of business, the Company is a party to both on and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated statements of condition.
The following is a summary of the contractual and notional amounts of the Company’s financial instruments:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Lending-Related Instruments:
|
|
|
|
|
|
Loan origination commitments and unadvanced lines of credit:
|
|
|
|
|
|
Home equity
|
$
|
484,537
|
|
|
$
|
464,701
|
|
Commercial and commercial real estate
|
78,875
|
|
|
94,791
|
|
Residential
|
31,554
|
|
|
16,256
|
|
Letters of credit
|
4,218
|
|
|
4,468
|
|
Other commitments
|
534
|
|
|
433
|
|
Derivative Financial Instruments:
|
|
|
|
|
Customer loan swaps
|
$
|
319,630
|
|
|
$
|
285,888
|
|
Forecasted interest rate swaps
|
50,000
|
|
|
50,000
|
|
Junior subordinated debt interest rate swaps
|
43,000
|
|
|
43,000
|
|
Interest rate lock commitments
|
34,220
|
|
|
20,735
|
|
Lending-Related Instruments
The contractual amounts of the Company’s lending-related financial instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These instruments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.
Derivative Financial Instruments
The Company uses derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. The Company controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures. Additionally, as part of Company's normal mortgage origination process, it provides the borrower with the option to lock their interest rate based on current market prices. During the period from commitment date to the loan closing date, the Company is subject to the risk of interest rate change. In an effort to mitigate such risk the Company may enter into forward delivery sales commitments, typically on a "best-efforts" basis, with certain approved investors.
Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.
The Company has designated its interest rate swaps on its junior subordinated debentures and its interest rate swaps on forecasted 30-day FHLBB borrowings as cash flow hedges. The change in the fair value of the Company's cash flow hedges is accounted within OCI, net of tax. Quarterly, in conjunction with financial reporting, the Company assesses each cash flow hedge for ineffectiveness. To the extent any significant ineffectiveness is identified, this amount is recorded within the consolidated statements of income. Furthermore, the Company will reclassify the gain or loss on the effective portion of the cash flow hedge from OCI into interest within the consolidated statements of income in the period the hedged transaction affects earnings.
The change in fair value of the Company's other derivative instruments, not designated and qualifying as hedges, are accounted for within the consolidated statements of income.
Junior Subordinated Debt Interest Rate Swaps:
The Company, from time to time, will enter into an interest rate swap agreement with a counterparty to manage interest rate risk associated with its variable rate borrowings. The Company’s interest rate swap arrangements contain provisions that require the Company to post cash collateral with the counterparty for contracts that are in a net liability position based on their fair values and the Company’s credit rating. If the interest rate swaps are in a net asset position based on their fair value, the counterparty is required to post collateral to the Company. The collateral posted by the Company (or counterparty) is not readily available and has been presented within cash and due from banks on the consolidated statements of condition. At March 31, 2016 and December 31, 2015, the Company had a notional amount of
$43.0 million
in variable-for-fixed interest rate swap agreements on its junior subordinated debentures and
$13.0 million
of cash as collateral to the counterparty at March 31, 2016.
The details of the interest rate swap agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Notional
Amount
|
|
Trade
Date
|
|
Maturity Date
|
|
Variable Index
Received
|
|
Fixed Rate
Paid
|
|
Fair Value
(1)
|
|
Fair Value
(1)
|
$
|
10,000
|
|
|
3/18/2009
|
|
6/30/2021
|
|
3-Month USD LIBOR
|
|
5.09%
|
|
$
|
(1,299
|
)
|
|
$
|
(1,038
|
)
|
10,000
|
|
|
7/8/2009
|
|
6/30/2029
|
|
3-Month USD LIBOR
|
|
5.84%
|
|
(3,233
|
)
|
|
(2,537
|
)
|
10,000
|
|
|
5/6/2010
|
|
6/30/2030
|
|
3-Month USD LIBOR
|
|
5.71%
|
|
(3,218
|
)
|
|
(2,477
|
)
|
5,000
|
|
|
3/14/2011
|
|
3/30/2031
|
|
3-Month USD LIBOR
|
|
4.35%
|
|
(1,687
|
)
|
|
(1,301
|
)
|
8,000
|
|
|
5/4/2011
|
|
7/7/2031
|
|
3-Month USD LIBOR
|
|
4.14%
|
|
(2,497
|
)
|
|
(1,876
|
)
|
$
|
43,000
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,934
|
)
|
|
$
|
(9,229
|
)
|
(1) Presented within accrued interest and other liabilities on the consolidated statements of condition.
|
For the
three months ended
March 31, 2016
or 2015, the Company did
no
t record any ineffectiveness on these cash flow hedges within the consolidated statements of income.
Net payments to the counterparty for the
three months ended
March 31, 2016
and 2015 were
$316,000
and
$343,000
and have been classified as cash flows from operating activities in the consolidated statements of cash flows.
Forecasted Interest Rate Swaps:
In the first quarter of 2015, the Bank entered into
two
interest rate swap arrangements with a counterparty on
two
tranches of 30-day FHLBB advances with a total notional amount of
$50.0 million
. Each derivative arrangement commenced on February 25, 2016, with one contract set to expire on February 25, 2018 and the other on February 25, 2019. The Bank entered into these forward-starting interest rate swaps to mitigate its interest rate exposure on borrowings in a rising interest rate environment. The Bank has designated each arrangement as a cash flow hedge in accordance with GAAP, and, therefore, the change in unrealized gains or losses on the derivative instruments is recorded within AOCI, net of tax. Also, quarterly, in conjunction with financial reporting, the Company assesses each derivative instrument for ineffectiveness. To the extent any significant ineffectiveness is identified this amount would be recorded within the consolidated statements of income. For the
three months ended
March 31, 2016
, the Company did
no
t record any ineffectiveness within the consolidated statements of income.
The Bank's arrangement with the counterparty requires it to post cash collateral for contracts in a net liability position based on their fair values and the Bank's credit rating. If the interest rate swaps are in a net asset position based on their fair value, the counterparty is required to post collateral to the Company. The collateral posted by the Company (or counterparty) is not readily available and is presented within cash and due from banks on the consolidated statements of condition. At
March 31, 2016
, the Bank posted cash collateral with the counterparty of
$1.3 million
to the counterparty.
The details of the interest rate swap agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Notional
Amount
|
|
Trade
Date
|
|
Maturity Date
|
|
Variable Index
Received
|
|
Fixed Rate
Paid
|
|
Fair Value
(1)
|
|
Fair Value
(1)
|
$
|
25,000
|
|
|
2/25/2015
|
|
2/25/2018
|
|
1-Month
USD LIBOR
|
|
1.54%
|
|
$
|
(413
|
)
|
|
$
|
(230
|
)
|
25,000
|
|
|
2/25/2015
|
|
2/25/2019
|
|
1-Month
USD LIBOR
|
|
1.74%
|
|
(697
|
)
|
|
(346
|
)
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,110
|
)
|
|
$
|
(576
|
)
|
(1) Presented within accrued interest and other liabilities on the consolidated statements of condition.
|
|
|
Net payments to the counterparty for the
three months ended
March 31, 2016
were
$49,000
and have been classified as cash flows from operating activities in the consolidated statements of cash flows.
Customer Loan Swaps:
The Company will enter into interest rate swaps with its commercial customers, from time to time, to provide them with a means to lock into a long-term fixed rate, while simultaneously the Company enters into an arrangement with a counterparty to swap the fixed rate to a variable rate to allow it to effectively manage its interest rate exposure.
The Company's customer loan level derivative program is not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company’s interest rate risk or present any material exposure to the Company's consolidated statements of income. The Company records its customer loan swaps at fair value and presents such on a gross basis within other assets and accrued interest and other liabilities on the consolidated statements of condition.
The following table presents the total positions, notional and fair value of the Company's customer loans swaps with its commercial customers and the corresponding interest rate swap agreements with counterparty for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Number of Positions
|
|
Notional
|
|
Fair Value
|
|
Number of Positions
|
|
Notional
|
|
Fair Value
|
Receive fixed, pay variable
(1)
|
|
32
|
|
|
$
|
159,815
|
|
|
$
|
9,426
|
|
|
28
|
|
|
$
|
142,944
|
|
|
$
|
3,166
|
|
Pay fixed, received variable
(2)
|
|
32
|
|
|
159,815
|
|
|
(9,426
|
)
|
|
28
|
|
|
142,944
|
|
|
(3,166
|
)
|
(1) Presented within other assets on the consolidated statements of condition.
|
(2) Presented within accrued interest and other liabilities on the consolidated statements of condition.
|
The Company seeks to mitigate its customer counterparty credit risk exposure through its loan policy and underwriting process, which includes credit approval limits, monitoring procedures, and obtaining collateral, where appropriate. The Company seeks to mitigate its institutional counterparty credit risk exposure by limiting the institutions for which it will enter into interest swap arrangements through an approved listing by the Company's board of directors. The Company's arrangement with an institutional counterparty requires it to post collateral for contracts in a net liability position based on their fair values and the Bank's credit rating or receive collateral for contracts in a net asset position. At
March 31, 2016
, the Company posted cash collateral with the counterparty of
$10.8 million
. The collateral posted by the Company (or counterparty) is not readily available and is presented within cash and due from banks on the consolidated statements of condition.
Interest Rate Locks Commitments:
As part of originating residential and commercial loans, the Company may enter into rate lock agreements with customers and may issue commitment letters to customers, which are considered interest rate lock commitments. At
March 31, 2016
and
December 31, 2015
, our pipeline of mortgage loans with interest rate lock commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Notional
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
Mortgage interest rate locks
(1)
|
|
$
|
34,220
|
|
|
$
|
431
|
|
|
$
|
20,735
|
|
|
$
|
139
|
|
(1) Presented within other assets on the consolidated statements of condition.
|
For the three months ended March 31, 2016 and 2015 the unrealized gains from the change in fair value on the Company's mortgage interest rate locks reported within mortgage banking income, net, on consolidated statements of income was
$292,000
and
$2,000
, respectively.
The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
For The
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Derivatives designated as cash flow hedges
|
|
|
|
|
Net change in unrealized losses on cash flow hedging derivatives, net of tax
(effective portion)
|
|
$
|
(2,105
|
)
|
|
$
|
(1,172
|
)
|
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense (effective portion), gross
|
|
$
|
(365
|
)
|
|
$
|
(343
|
)
|
The Company expects approximately
$2.1 million
(pre-tax) to be reclassified to interest expense from OCI, related to the Company’s cash flow hedges, in the next twelve months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of March 31, 2016.
NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
(Topic 606):
Deferral of the Effective Date.
The ASU was issued to defer the effective date of Update 2014-09,
Revenue from Contracts with Customers
(Topic 606), for all entities by one year. ASU 2014-09 was issued to clarify the principles for recognizing revenue and to develop a common revenue standard. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company continues to evaluate the potential impact of ASU 2014-09, as updated by ASU 2015-14, but currently does not expect the ASU to have a material effect on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Income Statement - Financial Instruments - Overall
(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Liabilities.
The ASU was issued to enhance the reporting model for financial instruments to provide the users of financial statements with more useful information for decisions. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only one of the six amendments, otherwise it is not permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities (including operating leases) on the balance sheet and disclosing key information about leasing arrangements. Current lease accounting does not require the inclusion of operating leases in the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, early application is permitted. The Company expects the ASU will have a material effect on its consolidated financial statements and is currently evaluating the impact.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation
(Topic 718):
Improvements to Employee Share-Based Payment Accounting.
The ASU was issued to simplify accounting for share-based payment transactions, including income tax consequences, classification of awards, and classification on the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, early adoption is permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.