NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 (the "Company") as of March 31, 2020 and December 31, 2019, the consolidated statements of income for the three months ended March 31, 2020 and 2019, the consolidated statements of comprehensive income for the three months ended March 31, 2020 and 2019, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2020 and 2019, and the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019. The consolidated financial statements include the accounts of the Company and Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company (which includes the consolidated accounts of Healthcare Professional Funding Corporation ("HPFC"), Property A, Inc. and Property P, Inc.). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Bank in a fiduciary capacity, through Camden National Wealth Management, a division of the Bank, are not assets of the Company and, therefore, are not included in the consolidated statements of condition. The Company also owns 100% of the common stock of Camden Capital Trust A and Union Bankshares Capital Trust I. These entities are unconsolidated subsidiaries of the Company. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not impact net income or shareholders' equity as previously reported. Net income reported for the three months ended March 31, 2020, 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 Company's Annual Report on Form 10-K for the year ended December 31, 2019.
The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.
|
|
|
|
|
|
AFS:
|
Available-for-sale
|
|
HPFC:
|
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
|
ALCO:
|
Asset/Liability Committee
|
|
HTM:
|
Held-to-maturity
|
ALL:
|
Allowance for loan losses
|
|
IRS:
|
Internal Revenue Service
|
AOCI:
|
Accumulated other comprehensive income (loss)
|
|
LIBOR:
|
London Interbank Offered Rate
|
ASC:
|
Accounting Standards Codification
|
|
LTIP:
|
Long-Term Performance Share Plan
|
ASU:
|
Accounting Standards Update
|
|
Management ALCO:
|
Management Asset/Liability Committee
|
Bank:
|
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
|
|
MBS:
|
Mortgage-backed security
|
BOLI:
|
Bank-owned life insurance
|
|
MSPP:
|
Management Stock Purchase Plan
|
Board ALCO:
|
Board of Directors' Asset/Liability Committee
|
|
N/A:
|
Not applicable
|
CCTA:
|
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
|
|
N.M.:
|
Not meaningful
|
CDs:
|
Certificate of deposits
|
|
OCC:
|
Office of the Comptroller of the Currency
|
Company:
|
Camden National Corporation
|
|
OCI:
|
Other comprehensive income (loss)
|
CMO:
|
Collateralized mortgage obligation
|
|
OREO:
|
Other real estate owned
|
DCRP:
|
Defined Contribution Retirement Plan
|
|
OTTI:
|
Other-than-temporary impairment
|
EPS:
|
Earnings per share
|
|
SERP:
|
Supplemental executive retirement plans
|
FASB:
|
Financial Accounting Standards Board
|
|
Tax Act:
|
Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017
|
FDIC:
|
Federal Deposit Insurance Corporation
|
|
TDR:
|
Troubled-debt restructured loan
|
FHLB:
|
Federal Home Loan Bank
|
|
UBCT:
|
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
|
FHLBB:
|
Federal Home Loan Bank of Boston
|
|
U.S.:
|
United States of America
|
FRB:
|
Federal Reserve System Board of Governors
|
|
2003 Plan:
|
2003 Stock Option and Incentive Plan
|
FRBB:
|
Federal Reserve Bank of Boston
|
|
2012 Plan:
|
2012 Equity and Incentive Plan
|
GAAP:
|
Generally accepted accounting principles in the United States
|
|
|
|
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in 2020
The Company adopted and updated its accounting policy for the following accounting standard(s) that became effective January 1, 2020 and were applied to the Company's three months ended March 31, 2020 interim consolidated financial statements:
Goodwill. The Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), effective January 1, 2020. In accordance with ASU 2017-04, the Company will recognize an impairment of goodwill to the extent the carrying value of a reporting unit exceeds its fair value ("Step 1"). ASU 2017-04 eliminated the need to calculate the implied fair value of goodwill for a reporting unit and recognize an impairment to the extent the carrying value exceeded its implied fair value ("Step 2"). The Company adopted ASU 2017-04 prospectively. Upon adoption, ASU 2017-04 did not have a material impact on the Company's consolidated financial statements. Under the new accounting guidance the Company is more likely to record an impairment of goodwill, as there are now less requirements.
As described within the Company's Annual Report on Form 10-K for the year ended December 31, 2019, the Company last evaluated goodwill for impairment as of November 30, 2019 and determined goodwill was not impaired. In light of the COVID-19 pandemic and its impact on global, national and local markets and economy, the Company assessed if a triggering event that would require an interim goodwill impairment assessment occurred as of March 31, 2020. Through its assessment, the Company determined that a triggering event had not occurred as of March 31, 2020. The Company will continue to monitor the impact and effects of the pandemic on its business and assess goodwill for impairment should a triggering event occur.
Accounting Standards Issued
The following are recently issued accounting pronouncements that have yet to be adopted by the Company:
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), updated by ASU No. 2018-19 - Financial Instruments - Credit Losses (Topic 326): Codification improvements to Topic 326 ("ASU 2018-19"), and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"). The FASB issued ASU 2016-13, commonly referred to as “CECL,” to require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.
On March 27, 2020, the Coronavirus, Relief, and Economic Security Act ("CARES Act") was signed into law in response to the COVID-19 pandemic. Under Section 4014 of the CARES Act, the Company is permitted to delay its compliance with CECL until the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic that the President of the United States declared on March 15, 2020 terminates, or (2) December 31, 2020. The Company intends to delay the implementation of CECL until December 31, 2020, unless earlier implementation is required. The Company opted to delay its compliance with CECL so it could devote its resources to serve its customers impacted by the pandemic and support the roll-out of the various federal relief programs introduced by the CARES Act, such as the Paycheck Protection Program. When adopted, the Company will adopt CECL using a modified-retrospective approach as of January 1, 2020, which is the original effective date of the standard for the Company, and will record a cumulative-effect adjustment to retained earnings.
The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and HTM debt securities. CECL also applies to certain off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees and other similar investments. In addition, ASU 2016-13 made changes to the accounting for AFS debt securities, and a company will no longer immediately write-down a security for any impairment deemed to be a credit loss. Instead, a company will be required to present credit losses on AFS debt securities as an allowance on investments if it does not intend to sell the impaired security or it is not more-likely-than-not required to sell the impaired security before recovery of its amortized cost basis.
The Company assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation, and to identify new internal controls over enhanced accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, as well as assessing models for default and loss estimates. The Company is currently working to finalize its third party independent review of the Company's model, mechanics and certain key assumptions, internal CECL policy, and internal control framework.
The Company has completed the development of its process for estimation of the allowance for loan losses and off-balance sheet exposures. To estimate the allowance for loan losses, the Company will primarily utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and will include the impact of forecasted economic conditions. To estimate the off-balance sheet credit exposures, which are primarily unfunded loan commitments, the Company will apply certain assumptions, including, but not limited to, a funding assumption and expected loss rate.
The Company has performed parallel calculations as of December 31, 2019 and March 31, 2020 comparing the ALL calculated under current accounting guidance, commonly referred to as the “incurred model,” to the ACL calculated under CECL. Had CECL been adopted as of January 1, 2020, the Company estimates that its ACL would have increased $2.0 to $4.0 million over the ALL reported as of December 31, 2019, and increased $2.5 to $8.7 million over the ALL reported as of March 31, 2020.
In March 2020, the regulatory banking agencies issued an interim final rule that allows banking institutions that implement CECL during 2020 to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. As an alternative, banking institutions may elect to forego the provided relief under the interim final rule, and may use the regulatory capital transition rule issued by the regulatory banking agencies in February 2019 that provided a three-year phase in option, effective upon adoption of CECL. The Company is currently assessing its options at this time, and will make its election during the 2020 calendar quarter in which it adopts CECL.
NOTE 3 – INVESTMENTS
AFS and HTM Investments
The following table summarizes the amortized cost and estimated fair values of AFS and HTM investments, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Investments (carried at fair value):
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
123,893
|
|
|
$
|
3,324
|
|
|
$
|
(337
|
)
|
|
$
|
126,880
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
472,508
|
|
|
15,618
|
|
|
(77
|
)
|
|
488,049
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
324,929
|
|
|
9,698
|
|
|
(12
|
)
|
|
334,615
|
|
Subordinated corporate bonds
|
|
10,546
|
|
|
116
|
|
|
(75
|
)
|
|
10,587
|
|
Total AFS investments
|
|
$
|
931,876
|
|
|
$
|
28,756
|
|
|
$
|
(501
|
)
|
|
$
|
960,131
|
|
HTM Investments (carried at amortized cost):
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,300
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
1,358
|
|
Total HTM investments
|
|
$
|
1,300
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
1,358
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Investments (carried at fair value):
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
115,632
|
|
|
$
|
2,779
|
|
|
$
|
(328
|
)
|
|
$
|
118,083
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
462,593
|
|
|
3,398
|
|
|
(2,605
|
)
|
|
463,386
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
325,200
|
|
|
3,183
|
|
|
(2,478
|
)
|
|
325,905
|
|
Subordinated corporate bonds
|
|
10,553
|
|
|
191
|
|
|
—
|
|
|
10,744
|
|
Total AFS investments
|
|
$
|
913,978
|
|
|
$
|
9,551
|
|
|
$
|
(5,411
|
)
|
|
$
|
918,118
|
|
HTM Investments (carried at amortized cost):
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,302
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
Total HTM investments
|
|
$
|
1,302
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
The net unrealized gain on AFS investments reported within AOCI at March 31, 2020, was $22.2 million, net of a deferred tax liability of $6.1 million. The net unrealized gain on AFS investments reported within AOCI at December 31, 2019, was $3.3 million, net of a deferred tax liability of $890,000.
Impaired AFS and HTM Investments:
Quarterly, management reviews the Company’s AFS and HTM investments 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, and 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 on AFS and HTM investments that were in a continuous loss position that was considered temporary, by length of time that an individual security in each category has been in a continuous loss position as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
(In thousands, except number of holdings)
|
|
Number of
Holdings
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
168
|
|
|
$
|
20,029
|
|
|
$
|
(337
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,029
|
|
|
$
|
(337
|
)
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
144
|
|
|
7,626
|
|
|
(34
|
)
|
|
1,638
|
|
|
(43
|
)
|
|
9,264
|
|
|
(77
|
)
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
86
|
|
|
5,180
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
5,180
|
|
|
(12
|
)
|
Subordinated corporate bonds
|
|
8
|
|
|
4,925
|
|
|
(75
|
)
|
|
—
|
|
|
—
|
|
|
4,925
|
|
|
(75
|
)
|
Total AFS investments
|
|
406
|
|
|
$
|
37,760
|
|
|
$
|
(458
|
)
|
|
$
|
1,638
|
|
|
$
|
(43
|
)
|
|
$
|
39,398
|
|
|
$
|
(501
|
)
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
11
|
|
|
$
|
30,459
|
|
|
$
|
(328
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,459
|
|
|
$
|
(328
|
)
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
59
|
|
|
162,964
|
|
|
(1,850
|
)
|
|
63,633
|
|
|
(755
|
)
|
|
226,597
|
|
|
(2,605
|
)
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
35
|
|
|
66,549
|
|
|
(733
|
)
|
|
68,614
|
|
|
(1,745
|
)
|
|
135,163
|
|
|
(2,478
|
)
|
Total AFS investments
|
|
105
|
|
|
$
|
259,972
|
|
|
$
|
(2,911
|
)
|
|
$
|
132,247
|
|
|
$
|
(2,500
|
)
|
|
$
|
392,219
|
|
|
$
|
(5,411
|
)
|
At March 31, 2020 and December 31, 2019, unrealized losses within the AFS and HTM investment portfolios were reflective of current interest rates in excess of the yield received on debt investments, and were not indicative of an overall change in credit quality or other factors. At March 31, 2020 and December 31, 2019, gross unrealized losses on the Company's AFS and HTM investments were 1% of their respective fair values.
At March 31, 2020, the Company had the intent and ability to retain its debt investments in an unrealized loss position until the decline in value has recovered.
Sale of AFS Investments:
For the three months ended March 31, 2020 and 2019, the Company did not sell any AFS investments.
AFS and HTM Investments Pledged:
At March 31, 2020 and December 31, 2019, AFS and HTM investments with an amortized cost of $712.4 million and $709.0 million and estimated fair values of $735.3 million and $712.4 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 the Company's AFS and HTM investments by contractual maturity at March 31, 2020, 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.
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
AFS Investments
|
|
|
|
|
Due in one year or less
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
|
76,517
|
|
|
78,367
|
|
Due after five years through ten years
|
|
215,515
|
|
|
223,272
|
|
Due after ten years
|
|
639,844
|
|
|
658,492
|
|
Total
|
|
$
|
931,876
|
|
|
$
|
960,131
|
|
HTM Investments
|
|
|
|
|
Due in one year or less
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
|
511
|
|
|
532
|
|
Due after five years through ten years
|
|
789
|
|
|
826
|
|
Due after ten years
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,300
|
|
|
$
|
1,358
|
|
Other Investments
The following table summarizes the cost and estimated fair values of the Company's investment in equity securities, FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value /
Carrying Value
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities - bank stock (carried at fair value)
|
|
$
|
544
|
|
|
$
|
1,130
|
|
|
$
|
—
|
|
|
$
|
1,674
|
|
FHLBB (carried at cost)
|
|
8,008
|
|
|
—
|
|
|
—
|
|
|
8,008
|
|
FRB (carried at cost)
|
|
5,374
|
|
|
—
|
|
|
—
|
|
|
5,374
|
|
Total other investments
|
|
$
|
13,926
|
|
|
$
|
1,130
|
|
|
$
|
—
|
|
|
$
|
15,056
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities - bank stock (carried at fair value)
|
|
$
|
544
|
|
|
$
|
1,130
|
|
|
$
|
—
|
|
|
$
|
1,674
|
|
FHLBB (carried at cost)
|
|
6,601
|
|
|
—
|
|
|
—
|
|
|
6,601
|
|
FRB (carried at cost)
|
|
5,374
|
|
|
—
|
|
|
—
|
|
|
5,374
|
|
Total other investments
|
|
$
|
12,519
|
|
|
$
|
1,130
|
|
|
$
|
—
|
|
|
$
|
13,649
|
|
For the three months ended March 31, 2020 and 2019, the Company recognized an unrealized gain of $0 and $243,000, respectively, due to the change in fair value of its bank stock equity securities, which was presented within other income on the consolidated statements of income.
The Company did not record any OTTI on its FHLBB and FRB stock for the three months ended March 31, 2020 and 2019.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2020
|
|
December 31,
2019
|
Residential real estate
|
|
$
|
1,064,212
|
|
|
$
|
1,070,374
|
|
Commercial real estate
|
|
1,299,860
|
|
|
1,243,397
|
|
Commercial
|
|
444,830
|
|
|
421,108
|
|
Home equity
|
|
306,226
|
|
|
312,779
|
|
Consumer
|
|
24,377
|
|
|
25,772
|
|
HPFC
|
|
18,257
|
|
|
21,593
|
|
Total loans
|
|
$
|
3,157,762
|
|
|
$
|
3,095,023
|
|
The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination costs for the dates indicated:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2020
|
|
December 31,
2019
|
Net unamortized fair value mark discount on acquired loans
|
|
$
|
(2,346
|
)
|
|
$
|
(2,593
|
)
|
Net unamortized loan origination costs
|
|
3,115
|
|
|
3,111
|
|
Total
|
|
$
|
769
|
|
|
$
|
518
|
|
The Company's lending activities are primarily conducted in Maine, but also include loan production offices in Massachusetts and New Hampshire. The Company originates single- 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.
The HPFC loan portfolio is an acquired loan portfolio. It consists of 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. In 2016, the Company closed HPFC's operations and is no longer originating HPFC loans.
In the normal course of business, the Bank makes loans to certain officers, directors and their associated companies, under terms that are consistent with the Company's lending policies and regulatory requirements and that do not involve more than the normal risk of collectability or present other unfavorable features. At March 31, 2020 and December 31, 2019, outstanding loans to certain officers, directors and their associated companies was less than 5% of the Company's shareholders' equity.
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, including consideration of the effect and impact of the COVID-19 pandemic; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.
As discussed in Note 2, the Company did not adopt ASU 2016-04, commonly referred to as "CECL", in the first quarter of 2020. The Company's ALL, as presented, has been determined in accordance with its policies and procedures described within its Annual Report on Form 10-K for the year ended December 31, 2019. In light of the COVID-19 pandemic, the Company adjusted its economic qualitative factor ("Q-factor") to estimate the impact of the health crisis on its loan portfolio, based on information available as of March 31, 2020. The Q-factor adjustment resulted in an $800,000 increase in the ALL as of March 31, 2020. The Company will continue to adjust its economic Q-factor in coming quarters, as appropriate, as additional economic data becomes available and/or should the Company experience credit deterioration within its loan portfolio. There were no other significant changes to the Company's ALL methodology during the three months ended March 31, 2020.
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. 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 manage the portfolio proactively 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 the following:
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, including for investment purposes.
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 and equipment, and/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 include 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. Prior to the Company's closing of HPFC's operations in 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were 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 consists 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.
The following presents the activity in the ALL and select loan information by portfolio segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Commercial
|
|
Home
Equity
|
|
Consumer
|
|
HPFC
|
|
Total
|
At or For The Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL for the three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,842
|
|
|
$
|
12,414
|
|
|
$
|
3,769
|
|
|
$
|
2,423
|
|
|
$
|
507
|
|
|
$
|
216
|
|
|
$
|
25,171
|
|
Loans charged off
|
|
(96
|
)
|
|
(50
|
)
|
|
(253
|
)
|
|
(34
|
)
|
|
(57
|
)
|
|
—
|
|
|
(490
|
)
|
Recoveries
|
|
2
|
|
|
4
|
|
|
53
|
|
|
4
|
|
|
5
|
|
|
—
|
|
|
68
|
|
Provision (credit)(1)
|
|
149
|
|
|
1,006
|
|
|
545
|
|
|
87
|
|
|
18
|
|
|
(33
|
)
|
|
1,772
|
|
Ending balance
|
|
$
|
5,897
|
|
|
$
|
13,374
|
|
|
$
|
4,114
|
|
|
$
|
2,480
|
|
|
$
|
473
|
|
|
$
|
183
|
|
|
$
|
26,521
|
|
ALL balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
324
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
447
|
|
Collectively evaluated for impairment
|
|
5,573
|
|
|
13,340
|
|
|
4,114
|
|
|
2,391
|
|
|
473
|
|
|
183
|
|
|
26,074
|
|
Total ending ALL
|
|
$
|
5,897
|
|
|
$
|
13,374
|
|
|
$
|
4,114
|
|
|
$
|
2,480
|
|
|
$
|
473
|
|
|
$
|
183
|
|
|
$
|
26,521
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3,286
|
|
|
$
|
400
|
|
|
$
|
299
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,355
|
|
Collectively evaluated for impairment
|
|
1,060,926
|
|
|
1,299,460
|
|
|
444,531
|
|
|
305,856
|
|
|
24,377
|
|
|
18,257
|
|
|
3,153,407
|
|
Total ending loans balance
|
|
$
|
1,064,212
|
|
|
$
|
1,299,860
|
|
|
$
|
444,830
|
|
|
$
|
306,226
|
|
|
$
|
24,377
|
|
|
$
|
18,257
|
|
|
$
|
3,157,762
|
|
At or For The Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL for the three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,071
|
|
|
$
|
11,654
|
|
|
$
|
3,620
|
|
|
$
|
2,796
|
|
|
$
|
234
|
|
|
$
|
337
|
|
|
$
|
24,712
|
|
Loans charged off
|
|
(11
|
)
|
|
(65
|
)
|
|
(236
|
)
|
|
(10
|
)
|
|
(14
|
)
|
|
—
|
|
|
(336
|
)
|
Recoveries
|
|
2
|
|
|
4
|
|
|
62
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
75
|
|
Provision (credit)(1)
|
|
91
|
|
|
245
|
|
|
170
|
|
|
241
|
|
|
32
|
|
|
(29
|
)
|
|
750
|
|
Ending balance
|
|
$
|
6,153
|
|
|
$
|
11,838
|
|
|
$
|
3,616
|
|
|
$
|
3,027
|
|
|
$
|
259
|
|
|
$
|
308
|
|
|
$
|
25,201
|
|
ALL balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
553
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
927
|
|
Collectively evaluated for impairment
|
|
5,600
|
|
|
11,811
|
|
|
3,616
|
|
|
2,680
|
|
|
259
|
|
|
308
|
|
|
24,274
|
|
Total ending ALL
|
|
$
|
6,153
|
|
|
$
|
11,838
|
|
|
$
|
3,616
|
|
|
$
|
3,027
|
|
|
$
|
259
|
|
|
$
|
308
|
|
|
$
|
25,201
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
4,736
|
|
|
$
|
410
|
|
|
$
|
223
|
|
|
$
|
895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,264
|
|
Collectively evaluated for impairment
|
|
1,012,706
|
|
|
1,258,064
|
|
|
390,759
|
|
|
323,074
|
|
|
20,733
|
|
|
30,842
|
|
|
3,036,178
|
|
Total ending loans balance
|
|
$
|
1,017,442
|
|
|
$
|
1,258,474
|
|
|
$
|
390,982
|
|
|
$
|
323,969
|
|
|
$
|
20,733
|
|
|
$
|
30,842
|
|
|
$
|
3,042,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Commercial
|
|
Home
Equity
|
|
Consumer
|
|
HPFC
|
|
Total
|
At or For The Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,071
|
|
|
$
|
11,654
|
|
|
$
|
3,620
|
|
|
$
|
2,796
|
|
|
$
|
234
|
|
|
$
|
337
|
|
|
$
|
24,712
|
|
Loans charged off
|
|
(462
|
)
|
|
(300
|
)
|
|
(1,167
|
)
|
|
(412
|
)
|
|
(301
|
)
|
|
(71
|
)
|
|
(2,713
|
)
|
Recoveries
|
|
16
|
|
|
49
|
|
|
225
|
|
|
1
|
|
|
19
|
|
|
—
|
|
|
310
|
|
Provision (credit)(1)
|
|
217
|
|
|
1,011
|
|
|
1,091
|
|
|
38
|
|
|
555
|
|
|
(50
|
)
|
|
2,862
|
|
Ending balance
|
|
$
|
5,842
|
|
|
$
|
12,414
|
|
|
$
|
3,769
|
|
|
$
|
2,423
|
|
|
$
|
507
|
|
|
$
|
216
|
|
|
$
|
25,171
|
|
ALL balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
364
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
463
|
|
Collectively evaluated for impairment
|
|
5,478
|
|
|
12,384
|
|
|
3,769
|
|
|
2,354
|
|
|
507
|
|
|
216
|
|
|
24,708
|
|
Total ending ALL
|
|
$
|
5,842
|
|
|
$
|
12,414
|
|
|
$
|
3,769
|
|
|
$
|
2,423
|
|
|
$
|
507
|
|
|
$
|
216
|
|
|
$
|
25,171
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3,384
|
|
|
$
|
402
|
|
|
$
|
319
|
|
|
$
|
373
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,478
|
|
Collectively evaluated for impairment
|
|
1,066,990
|
|
|
1,242,995
|
|
|
420,789
|
|
|
312,406
|
|
|
25,772
|
|
|
21,593
|
|
|
3,090,545
|
|
Total ending loans balance
|
|
$
|
1,070,374
|
|
|
$
|
1,243,397
|
|
|
$
|
421,108
|
|
|
$
|
312,779
|
|
|
$
|
25,772
|
|
|
$
|
21,593
|
|
|
$
|
3,095,023
|
|
|
|
(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, 2020 and 2019, and December 31, 2019, the reserve for unfunded commitments was $24,000, $16,000 and $21,000, respectively.
|
The following reconciles the provision for loan losses to the provision for credit losses as presented on the consolidated statements of income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Year Ended December 31,
2019
|
(In thousands)
|
|
2020
|
|
2019
|
|
Provision for loan losses
|
|
$
|
1,772
|
|
|
$
|
750
|
|
|
$
|
2,862
|
|
Change in reserve for unfunded commitments
|
|
3
|
|
|
(6
|
)
|
|
(1
|
)
|
Provision for credit losses
|
|
$
|
1,775
|
|
|
$
|
744
|
|
|
$
|
2,861
|
|
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 identify credit concentrations effectively, 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. As of March 31, 2020, the Company's total exposure to the lessors of nonresidential buildings' industry was 13% of total loans and 32% of total commercial real estate loans. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of March 31, 2020.
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, residential real estate, and HPFC 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 summarizes credit risk exposure indicators by portfolio segment as of the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Commercial
|
|
Home
Equity
|
|
Consumer
|
|
HPFC
|
|
Total
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
$
|
1,057,552
|
|
|
$
|
1,254,201
|
|
|
$
|
439,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,410
|
|
|
$
|
2,768,801
|
|
Performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
304,131
|
|
|
24,372
|
|
|
—
|
|
|
328,503
|
|
Special Mention (Grade 7)
|
|
469
|
|
|
31,028
|
|
|
1,424
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
32,998
|
|
Substandard (Grade 8)
|
|
6,191
|
|
|
14,631
|
|
|
3,768
|
|
|
—
|
|
|
—
|
|
|
770
|
|
|
25,360
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,095
|
|
|
5
|
|
|
—
|
|
|
2,100
|
|
Total
|
|
$
|
1,064,212
|
|
|
$
|
1,299,860
|
|
|
$
|
444,830
|
|
|
$
|
306,226
|
|
|
$
|
24,377
|
|
|
$
|
18,257
|
|
|
$
|
3,157,762
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
$
|
1,062,825
|
|
|
$
|
1,196,683
|
|
|
$
|
415,870
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,667
|
|
|
$
|
2,696,045
|
|
Performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
310,653
|
|
|
25,748
|
|
|
—
|
|
|
336,401
|
|
Special Mention (Grade 7)
|
|
473
|
|
|
31,753
|
|
|
2,544
|
|
|
—
|
|
|
—
|
|
|
89
|
|
|
34,859
|
|
Substandard (Grade 8)
|
|
7,076
|
|
|
14,961
|
|
|
2,694
|
|
|
—
|
|
|
—
|
|
|
837
|
|
|
25,568
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,126
|
|
|
24
|
|
|
—
|
|
|
2,150
|
|
Total
|
|
$
|
1,070,374
|
|
|
$
|
1,243,397
|
|
|
$
|
421,108
|
|
|
$
|
312,779
|
|
|
$
|
25,772
|
|
|
$
|
21,593
|
|
|
$
|
3,095,023
|
|
The Company closely monitors the performance of its loan portfolio. 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 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, generally at least six months. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
1,778
|
|
|
$
|
320
|
|
|
$
|
2,445
|
|
|
$
|
4,543
|
|
|
$
|
1,059,669
|
|
|
$
|
1,064,212
|
|
|
$
|
—
|
|
|
$
|
3,499
|
|
Commercial real estate
|
|
1,207
|
|
|
1,460
|
|
|
478
|
|
|
3,145
|
|
|
1,296,715
|
|
|
1,299,860
|
|
|
—
|
|
|
646
|
|
Commercial
|
|
1,315
|
|
|
388
|
|
|
602
|
|
|
2,305
|
|
|
442,525
|
|
|
444,830
|
|
|
—
|
|
|
748
|
|
Home equity
|
|
1,140
|
|
|
430
|
|
|
1,743
|
|
|
3,313
|
|
|
302,913
|
|
|
306,226
|
|
|
—
|
|
|
2,098
|
|
Consumer
|
|
58
|
|
|
31
|
|
|
5
|
|
|
94
|
|
|
24,283
|
|
|
24,377
|
|
|
—
|
|
|
4
|
|
HPFC
|
|
21
|
|
|
144
|
|
|
252
|
|
|
417
|
|
|
17,840
|
|
|
18,257
|
|
|
—
|
|
|
322
|
|
Total
|
|
$
|
5,519
|
|
|
$
|
2,773
|
|
|
$
|
5,525
|
|
|
$
|
13,817
|
|
|
$
|
3,143,945
|
|
|
$
|
3,157,762
|
|
|
$
|
—
|
|
|
$
|
7,317
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
2,297
|
|
|
$
|
627
|
|
|
$
|
2,598
|
|
|
$
|
5,522
|
|
|
$
|
1,064,852
|
|
|
$
|
1,070,374
|
|
|
$
|
—
|
|
|
$
|
4,096
|
|
Commercial real estate
|
|
267
|
|
|
1,720
|
|
|
544
|
|
|
2,531
|
|
|
1,240,866
|
|
|
1,243,397
|
|
|
—
|
|
|
1,122
|
|
Commercial
|
|
548
|
|
|
—
|
|
|
417
|
|
|
965
|
|
|
420,143
|
|
|
421,108
|
|
|
—
|
|
|
420
|
|
Home equity
|
|
681
|
|
|
238
|
|
|
1,459
|
|
|
2,378
|
|
|
310,401
|
|
|
312,779
|
|
|
—
|
|
|
2,130
|
|
Consumer
|
|
108
|
|
|
31
|
|
|
23
|
|
|
162
|
|
|
25,610
|
|
|
25,772
|
|
|
—
|
|
|
24
|
|
HPFC
|
|
—
|
|
|
243
|
|
|
288
|
|
|
531
|
|
|
21,062
|
|
|
21,593
|
|
|
—
|
|
|
364
|
|
Total
|
|
$
|
3,901
|
|
|
$
|
2,859
|
|
|
$
|
5,329
|
|
|
$
|
12,089
|
|
|
$
|
3,082,934
|
|
|
$
|
3,095,023
|
|
|
$
|
—
|
|
|
$
|
8,156
|
|
Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms is estimated to have been $79,000 and $109,000 for the three months ended March 31, 2020 and 2019, 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. TDRs 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 net realizable value, 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 for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Specific Reserve
|
(In thousands, except number of contracts)
|
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2020
|
|
December 31, 2019
|
Residential real estate
|
|
21
|
|
|
22
|
|
|
$
|
2,692
|
|
|
$
|
2,869
|
|
|
$
|
324
|
|
|
$
|
364
|
|
Commercial real estate
|
|
2
|
|
|
2
|
|
|
338
|
|
|
338
|
|
|
34
|
|
|
30
|
|
Commercial
|
|
2
|
|
|
2
|
|
|
118
|
|
|
123
|
|
|
—
|
|
|
—
|
|
Consumer and home equity
|
|
1
|
|
|
1
|
|
|
299
|
|
|
299
|
|
|
89
|
|
|
69
|
|
Total
|
|
26
|
|
|
27
|
|
|
$
|
3,447
|
|
|
$
|
3,629
|
|
|
$
|
447
|
|
|
$
|
463
|
|
At March 31, 2020, the Company had performing and non-performing TDRs with a recorded investment balance of $3.0 million and $438,000, respectively. At December 31, 2019, the Company had performing and non-performing TDRs with a recorded investment balance of $3.0 million and $636,000, respectively.
In response to the COVID-19 pandemic, the Company worked with businesses and consumers to provide temporary debt payment relief. The Company's payment relief program provided principal and/or interest payment deferrals of 30 to 180 days for businesses and 90 to 180 days for consumers. For loans modified due to the COVID-19 pandemic, the Company may apply the following accounting treatment in this order:
|
|
1.
|
Should a loan modification (i) meet the criteria set forth in Section 4013 of the CARES Act and (ii) the Company elects to apply, then the Company may account for the loan modification in accordance with Section 4013 of the CARES Act. Section 4013 of the CARES Act suspended TDR designation for loan modifications related to the COVID-19 pandemic. In order for the loan modification to qualify under Section 4013 of the CARES Act, the loan must not have been more than 30 days past due as of December 31, 2019. This guidance is applicable for loan modifications beginning on March 1, 2020 and ending on the earlier of (1) December 31, 2020, or (2) the date that is 60 days after the date the national emergency concerning the COVID-19 pandemic declared by the President on March 13, 2020 under the National Emergencies Act terminates.
|
|
|
2.
|
Should a loan modification (i) not meet the criteria set forth in Section 4013 of the CARES Act or (ii) the Company elects to not apply, but the loan modification (a) meets the criteria provided in the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)," issued by the banking agencies on April 7, 2020, and (b) the Company elects to apply this guidance, then the Company may account for the loan modification in accordance with the interagency guidance. Under this guidance, if the loan was no more than 30 days past due at the time the loan modification program was implemented, the modification was short-term in duration (generally, less than six months), and the modification was related to the COVID-19 pandemic, then it may be presumed that the borrower is not experiencing financial difficulty, and, therefore, that the modification does not qualify as a TDR.
|
|
|
3.
|
Should a loan modification (i) not meet the criteria set forth in Section 4013 of the CARES Act or the interagency guidance described above, or (ii) the Company elects not to apply the guidance, then the Company would assess the loan modification under its existing accounting policies (GAAP).
|
There were no loan modifications that qualify as TDRs that occurred for the three months ended March 31, 2020 and 2019.
For the three months ended March 31, 2020 and 2019, 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 loans and TDRs 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 the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
(In thousands)
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
2,220
|
|
|
$
|
2,220
|
|
|
$
|
324
|
|
|
$
|
2,307
|
|
|
$
|
24
|
|
Commercial real estate
|
|
128
|
|
|
128
|
|
|
34
|
|
|
128
|
|
|
1
|
|
Commercial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Home equity
|
|
318
|
|
|
318
|
|
|
89
|
|
|
318
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HPFC
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
2,666
|
|
|
2,666
|
|
|
447
|
|
|
2,753
|
|
|
25
|
|
Without an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
1,066
|
|
|
1,247
|
|
|
—
|
|
|
1,028
|
|
|
3
|
|
Commercial real estate
|
|
272
|
|
|
431
|
|
|
—
|
|
|
273
|
|
|
3
|
|
Commercial
|
|
299
|
|
|
665
|
|
|
—
|
|
|
309
|
|
|
2
|
|
Home equity
|
|
52
|
|
|
190
|
|
|
—
|
|
|
54
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HPFC
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
1,689
|
|
|
2,533
|
|
|
—
|
|
|
1,664
|
|
|
8
|
|
Total impaired loans
|
|
$
|
4,355
|
|
|
$
|
5,199
|
|
|
$
|
447
|
|
|
$
|
4,417
|
|
|
$
|
33
|
|
March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
3,454
|
|
|
$
|
3,454
|
|
|
$
|
553
|
|
|
$
|
3,462
|
|
|
$
|
30
|
|
Commercial real estate
|
|
131
|
|
|
131
|
|
|
27
|
|
|
131
|
|
|
1
|
|
Commercial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
278
|
|
|
—
|
|
Home equity
|
|
828
|
|
|
828
|
|
|
347
|
|
|
573
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HPFC
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
|
4,413
|
|
|
4,413
|
|
|
927
|
|
|
4,444
|
|
|
31
|
|
Without an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
1,282
|
|
|
1,406
|
|
|
—
|
|
|
1,286
|
|
|
10
|
|
Commercial real estate
|
|
279
|
|
|
455
|
|
|
—
|
|
|
539
|
|
|
3
|
|
Commercial
|
|
223
|
|
|
286
|
|
|
—
|
|
|
226
|
|
|
2
|
|
Home equity
|
|
67
|
|
|
265
|
|
|
—
|
|
|
96
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HPFC
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
|
1,851
|
|
|
2,412
|
|
|
—
|
|
|
2,147
|
|
|
15
|
|
Total impaired loans
|
|
$
|
6,264
|
|
|
$
|
6,825
|
|
|
$
|
927
|
|
|
$
|
6,591
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Year Ended
|
(In thousands)
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
2,395
|
|
|
$
|
2,395
|
|
|
$
|
364
|
|
|
$
|
2,989
|
|
|
$
|
110
|
|
Commercial real estate
|
|
128
|
|
|
128
|
|
|
30
|
|
|
130
|
|
|
11
|
|
Commercial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
292
|
|
|
—
|
|
Home equity
|
|
318
|
|
|
318
|
|
|
69
|
|
|
522
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
HPFC
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
|
2,841
|
|
|
2,841
|
|
|
463
|
|
|
3,933
|
|
|
121
|
|
Without an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
989
|
|
|
1,116
|
|
|
—
|
|
|
1,258
|
|
|
21
|
|
Commercial real estate
|
|
274
|
|
|
433
|
|
|
—
|
|
|
381
|
|
|
13
|
|
Commercial
|
|
319
|
|
|
685
|
|
|
—
|
|
|
238
|
|
|
7
|
|
Home equity
|
|
55
|
|
|
192
|
|
|
—
|
|
|
115
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
HPFC
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending Balance
|
|
1,637
|
|
|
2,426
|
|
|
—
|
|
|
1,993
|
|
|
41
|
|
Total impaired loans
|
|
$
|
4,478
|
|
|
$
|
5,267
|
|
|
$
|
463
|
|
|
$
|
5,926
|
|
|
$
|
162
|
|
Loan Sales:
For the three months ended March 31, 2020 and 2019, the Company sold $69.2 million and $28.0 million, respectively, of fixed rate residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $1.5 million and $826,000, respectively.
At March 31, 2020 and December 31, 2019, the Company had certain residential mortgage loans with a principal balance of $28.4 million and $11.9 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, 2020 and December 31, 2019, recorded an unrealized loss of $626,000 and $61,000, respectively. For the three months ended March 31, 2020 and 2019, the net change in unrealized losses (gains) on loans held for sale recorded within mortgage banking income, net, on the Company's consolidated statements of income was $565,000 and ($4,000), respectively.
The Company has forward delivery commitments with a secondary market investor on each of its loans held for sale at March 31, 2020 and December 31, 2019. Refer to Note 8 for further discussion of the Company's forward delivery commitments.
In-Process Foreclosure Proceedings:
At March 31, 2020 and December 31, 2019, the Company had $1.4 million and $1.3 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process. 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 $1.4 billion at March 31, 2020 and December 31, 2019.
Refer to Notes 3 and 6 of the consolidated financial statements for discussion of securities pledged as collateral.
NOTE 5 – BORROWINGS
The following summarizes the Company's short-term and long-term borrowed funds as presented on the consolidated statements of condition for the dates indicated:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2020
|
|
December 31,
2019
|
Short-Term Borrowings:
|
|
|
|
|
|
|
Customer repurchase agreements
|
|
$
|
265,997
|
|
|
$
|
237,984
|
|
FHLBB borrowings
|
|
50,000
|
|
|
25,000
|
|
Overnight borrowings
|
|
10,725
|
|
|
5,825
|
|
Total short-term borrowings
|
|
$
|
326,722
|
|
|
$
|
268,809
|
|
Long-Term Borrowings:
|
|
|
|
|
|
|
FHLBB borrowings
|
|
$
|
35,000
|
|
|
$
|
10,000
|
|
Total long-term borrowings
|
|
$
|
35,000
|
|
|
$
|
10,000
|
|
NOTE 6 – 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 a 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 within interest on borrowings on the consolidated statements of income. The securities underlying the agreements are delivered to counterparties as collateral for the repurchase obligations. Because the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transaction 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 for the dates indicated:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2020
|
|
December 31,
2019
|
Customer Repurchase Agreements(1)(2):
|
|
|
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
$
|
147,529
|
|
|
$
|
118,969
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
116,852
|
|
|
117,654
|
|
Obligations of states and political subdivisions
|
|
1,616
|
|
|
1,361
|
|
Total
|
|
$
|
265,997
|
|
|
$
|
237,984
|
|
|
|
(1)
|
Presented within short-term borrowings on the consolidated statements of condition.
|
|
|
(2)
|
All customer repurchase agreements mature continuously or overnight for the dates indicated.
|
At March 31, 2020 and December 31, 2019, certain customers held CDs totaling $1.0 million, 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 7 – COMMITMENTS AND CONTINGENCIES
Commitments
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 Company's contractual off-balance sheet commitments for the dates indicated:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2020
|
|
December 31,
2019
|
Commitments to extend credit
|
|
$
|
764,368
|
|
|
$
|
734,649
|
|
Standby letters of credit
|
|
5,002
|
|
|
5,211
|
|
Total
|
|
$
|
769,370
|
|
|
$
|
739,860
|
|
The Company’s commitments to extend credit from its lending activities 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 commitments 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. Of the total commitments to extend credit, $272.5 million and $274.6 million were unconditionally cancellable by the Company at March 31, 2020 and December 31, 2019, respectively.
Standby letters of credit are conditional commitments issued to guarantee the performance of a borrower to a third party. In the event of nonperformance by the borrower, the Company would be required to fund the commitment and would be entitled to the underlying collateral, if applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate. The maximum potential future payments are limited to the contractual amount of the commitment.
Legal Contingencies
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened litigation, claims investigations and legal and administrative cases and proceedings. 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 statements.
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. Assessments of litigation exposure are difficult because they involve inherently unpredictable factors including, but not limited to: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. 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. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.
As of March 31, 2020 and December 31, 2019, the Company did not have any material loss contingencies that were provided for and/or that are required to be disclosed.
NOTE 8 – DERIVATIVES AND HEDGING
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 associated with these derivative financial instruments through collateral, credit approvals and monitoring procedures.
Derivative financial instruments are carried at fair value on the consolidated statements of condition. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it has been designated as a hedge for accounting purposes, and, if so, the type of hedge it has been designated as. The changes in fair value of the Company's derivative instruments not designated as hedges are accounted for within the consolidated statements of income.
Quarterly, in conjunction with financial reporting, each cash flow hedge is assessed for ineffectiveness. To the extent ineffectiveness is identified, this amount is recorded within the consolidated statements of income. The gain or loss on the effective portion of the cash flow hedge is reclassified from AOCI into interest within the consolidated statements of income in the period the hedged transaction affects earnings.
Derivatives Not Designated as Hedges
Customer Loan Swaps
The Company will enter into interest rate swaps with its commercial customers to provide them with a means to lock into a long-term fixed rate, while simultaneously entering into an arrangement with a counterparty to swap the fixed rate to a variable rate to manage its interest rate exposure effectively. 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 its consolidated statements of income. Customer loan swaps are presented 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 each party for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except number of positions)
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Presentation on Consolidated Statements of Condition
|
|
Number of Positions
|
|
Notional Amount
|
|
Fair Value
|
|
Number of Positions
|
|
Notional Amount
|
|
Fair Value
|
Receive fixed, pay variable
|
|
Accrued interest and other liabilities
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
10
|
|
|
$
|
45,243
|
|
|
$
|
(514
|
)
|
Receive fixed, pay variable
|
|
Other assets
|
|
85
|
|
|
408,545
|
|
|
45,220
|
|
|
75
|
|
|
366,351
|
|
|
17,756
|
|
Pay fixed, receive variable
|
|
(Accrued interest and other liabilities) / other assets
|
|
85
|
|
|
408,545
|
|
|
(45,220
|
)
|
|
85
|
|
|
411,594
|
|
|
(17,242
|
)
|
Total
|
|
|
|
170
|
|
|
$
|
817,090
|
|
|
$
|
—
|
|
|
170
|
|
|
$
|
823,188
|
|
|
$
|
—
|
|
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 mitigates its institutional counterparty credit risk exposure by limiting the institutions for which it will enter into interest swap arrangements through an approved listing by its Board of Directors.
The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Company's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its customer loan swap contracts in a net liability position based on their aggregate fair value and the Company's credit rating. The Company may also receive cash collateral for contracts in a net asset position as requested. At March 31, 2020 and December 31, 2019 the Company posted $46.2 million and $18.4 million, respectively, of cash to the counterparty as collateral on its customer loan swap contracts which was presented within other assets on the consolidated statements of condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.
Fixed-Rate Mortgage Interest Rate Lock Commitments
As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company intends to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative. The Company's pipeline of mortgage loans with fixed-rate interest rate lock commitments for which it intends to sell the loan upon origination was as follows for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
(In thousands)
|
|
Presentation on Consolidated Statements of Condition
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Fixed-rate mortgage interest rate locks
|
|
Other assets
|
|
$
|
91,943
|
|
|
$
|
2,241
|
|
|
$
|
27,087
|
|
|
$
|
480
|
|
Fixed-rate mortgage interest rate locks
|
|
Accrued interest and other liabilities
|
|
36,538
|
|
|
(264
|
)
|
|
2,519
|
|
|
(18
|
)
|
Total
|
|
|
|
$
|
128,481
|
|
|
$
|
1,977
|
|
|
$
|
29,606
|
|
|
$
|
462
|
|
For the three months ended March 31, 2020 and 2019, the net unrealized gain from the change in fair value on the Company's fixed-rate mortgage rate locks reported within mortgage banking income, net, on the consolidated statements of income was $1.5 million and $181,000, respectively.
Forward Delivery Commitments
The Company typically enters into a forward delivery commitment with a secondary market investor, which has been approved by the Company within its normal governance process, at the onset of the loan origination process. The Company may enter into these arrangements with the secondary market investors on a "best effort" or "mandatory delivery" basis. The Company's normal practice is typically to enter into these arrangements on a "best effort" basis. The Company enters into these arrangements with the secondary market investors to manage its interest rate exposure. The Company accounts for the forward delivery commitment as a derivative upon origination of a loan identified as held for sale.
The Company's forward delivery commitments on loans held for sale for the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
(In thousands)
|
|
Presentation on Consolidated Statements of Condition
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Forward delivery commitments ("best effort")
|
|
Other Assets
|
|
$
|
26,786
|
|
|
$
|
1,185
|
|
|
$
|
10,846
|
|
|
$
|
312
|
|
Forward delivery commitments ("best effort")
|
|
Accrued interest and other liabilities
|
|
1,570
|
|
|
(30
|
)
|
|
1,069
|
|
|
(15
|
)
|
Total
|
|
|
|
$
|
28,356
|
|
|
$
|
1,155
|
|
|
$
|
11,915
|
|
|
$
|
297
|
|
For the three months ended March 31, 2020 and 2019, the net unrealized gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net, on the consolidated statements of income was $858,000 and $83,000, respectively.
Derivatives Designated as Hedges
Interest Rate Swap on Loans
In 2019, the Company entered into a $100.0 million interest rate swap contract with a counterparty to manage interest rate risk associated with its variable-rate loans. The Company has entered into a master netting arrangement with its institutional counterparty and settles payments monthly on a net basis.
The arrangement with the institutional counterparty requires it to post collateral for its interest rate swaps on loans and borrowings when they are in a net liability position based on their fair values. If the interest rate swaps are in a net asset position based on their fair values, the counterparty will post collateral to the Company as requested. At March 31, 2020, the institutional counterparty posted $3.8 million of cash as collateral on its interest rate swaps on loans and borrowings, which was presented within interest-bearing deposits in other banks as restricted cash with a matching liability within accrued interest and other liabilities on the consolidated statements of condition. At December 31, 2019, the counterparty posted $560,000 as collateral on its interest rate swap on loans. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.
The details of the interest rate swap for the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Trade
Date
|
|
Maturity Date
|
|
Variable Index
Paid
|
|
Fixed Rate
Received
|
|
Presentation on Consolidated
Statements of Condition
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
6/12/2019
|
|
6/10/2024
|
|
1-Month
USD LIBOR
|
|
1.693%
|
|
Other assets
|
|
$
|
100,000
|
|
|
$
|
5,591
|
|
|
$
|
100,000
|
|
|
$
|
483
|
|
For the three months ended March 31, 2020, the Company did not record any ineffectiveness within the consolidated statements of income.
Net payments received from the institutional counterparty for the three months ended March 31, 2020 were $52,000, and were classified as cash flows from operating activities within the consolidated statements of cash flows.
Interest Rate Swaps on Borrowings
In March 2020, the Company entered into two $50.0 million interest rate swap arrangements with an institutional counterparty to mitigate interest rate risk. The Company has entered into a master netting arrangement with the institutional counterparty and settles payments on a net basis, monthly for the Federal Funds Effective Rate swap and quarterly for the 3-Month USD LIBOR swap.
The arrangement with the institutional counterparty requires it to post collateral for its interest rate swaps on loans and borrowings when they are in a net liability position based on their fair values. If the interest rate swaps are in a net asset position based on their fair values, the counterparty will post collateral to the Company as requested. Collateral posted to the institutional counterparty or received is settled net with the interest rate swap on loans discussed above.
The details of the Company's interest rate swaps on borrowings for the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
March 31, 2020
|
Trade
Date
|
|
Maturity Date
|
|
Variable Index
Received
|
|
Fixed Rate
Paid
|
|
Presentation on Consolidated
Statements of Condition
|
|
Notional
Amount
|
|
Fair
Value
|
3/2/2020
|
|
3/1/2023
|
|
Fed Funds Effective Rate
|
|
0.705%
|
|
Accrued interest and other liabilities
|
|
$
|
50,000
|
|
|
$
|
(853
|
)
|
3/26/2020
|
|
3/26/2030
|
|
3-Month
USD LIBOR
|
|
0.857%
|
|
Accrued interest and other liabilities
|
|
50,000
|
|
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
(1,615
|
)
|
For the three months ended March 31, 2020, the Company did not record any ineffectiveness within the consolidated statements of income.
Junior Subordinated Debt Interest Rate Swaps
The Company entered into five interest rate swap agreements with an institutional counterparty to manage interest rate risk associated with the Company's variable rate borrowings. The Company entered into a master netting arrangement with its institutional counterparty and settles payments quarterly on a net basis. The interest rate swap arrangements contain provisions that require the Company to post cash or other assets as collateral with the counterparty for contracts that are in a net liability position based on their aggregate fair value and the Company’s credit rating. If the interest rate swaps are in a net asset position based on their aggregate fair value, the institutional counterparty will post collateral to the Company as requested. At March 31, 2020 and December 31, 2019, the Company posted $13.3 million and $8.8 million, respectively, of cash as collateral to the institutional counterparty, which was presented within other assets on the consolidated statements of financial condition. Refer
to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.
The details of the junior subordinated debt interest rate swaps for the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Trade
Date
|
|
Maturity
Date
|
|
Variable Index
Received
|
|
Fixed Rate
Paid
|
|
Presentation on Consolidated
Statements of Condition
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
3/18/2009
|
|
6/30/2021
|
|
3-Month USD LIBOR
|
|
5.09%
|
|
Accrued interest and other liabilities
|
|
$
|
10,000
|
|
|
$
|
(396
|
)
|
|
$
|
10,000
|
|
|
$
|
(299
|
)
|
7/8/2009
|
|
6/30/2029
|
|
3-Month USD LIBOR
|
|
5.84%
|
|
Accrued interest and other liabilities
|
|
10,000
|
|
|
(3,494
|
)
|
|
10,000
|
|
|
(2,318
|
)
|
5/6/2010
|
|
6/30/2030
|
|
3-Month USD LIBOR
|
|
5.71%
|
|
Accrued interest and other liabilities
|
|
10,000
|
|
|
(3,686
|
)
|
|
10,000
|
|
|
(2,384
|
)
|
3/14/2011
|
|
3/30/2031
|
|
3-Month USD LIBOR
|
|
4.35%
|
|
Accrued interest and other liabilities
|
|
5,000
|
|
|
(1,993
|
)
|
|
5,000
|
|
|
(1,279
|
)
|
5/4/2011
|
|
7/7/2031
|
|
3-Month USD LIBOR
|
|
4.14%
|
|
Accrued interest and other liabilities
|
|
8,000
|
|
|
(3,073
|
)
|
|
8,000
|
|
|
(1,907
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
43,000
|
|
|
$
|
(12,642
|
)
|
|
$
|
43,000
|
|
|
$
|
(8,187
|
)
|
For the three months ended March 31, 2020 and 2019, the Company did not 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, 2020 and 2019 were $240,000 and $152,000, respectively, and were classified as cash flows from operating activities in the Company's consolidated statements of cash flows.
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,
|
(In thousands)
|
|
2020
|
|
2019
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
Effective portion of unrealized losses recognized within OCI during the period, net of tax
|
|
$
|
(902
|
)
|
|
$
|
(925
|
)
|
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, gross
|
|
$
|
240
|
|
|
$
|
119
|
|
Net reclassification adjustment for effective portion of cash flow hedges included in interest income, gross
|
|
$
|
(52
|
)
|
|
$
|
—
|
|
The Company expects approximately $577,000 to be reclassified from AOCI, related to the Company’s cash flow hedges, in the next 12 months, decreasing net interest income on the consolidated statements of income. This reclassification is due to anticipated payments that will be made on the swaps based upon the forward curve as of March 31, 2020.
NOTE 9 – BALANCE SHEET OFFSETTING
The Company does not offset the carrying value for derivative instruments or repurchase agreements on the consolidated statements of condition. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be pledged or received is monitored and adjusted as necessary. Refer to Note 6 for further discussion of repurchase agreements and Note 8 for further discussion of derivative instruments.
The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its financial position, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount Not Offset in the Consolidated Statements of Condition
|
|
|
(In thousands)
|
|
Gross Amount Recognized in the Consolidated Statements of Condition
|
|
Gross Amount Offset in the Consolidated Statements of Condition
|
|
Net Amount Presented in the Consolidated Statements of Condition
|
|
Financial Instruments Pledged (Received)(1)
|
|
Cash Collateral Pledged (Received)(1)
|
|
Net Amount
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loan swaps - commercial customer(2)
|
|
$
|
45,220
|
|
|
$
|
—
|
|
|
$
|
45,220
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,220
|
|
Interest rate swap on loans(3)
|
|
5,591
|
|
|
—
|
|
|
5,591
|
|
|
—
|
|
|
(5,435
|
)
|
|
156
|
|
Total
|
|
$
|
50,811
|
|
|
$
|
—
|
|
|
$
|
50,811
|
|
|
$
|
—
|
|
|
$
|
(5,435
|
)
|
|
$
|
45,376
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loan swaps - dealer bank
|
|
$
|
45,220
|
|
|
$
|
—
|
|
|
$
|
45,220
|
|
|
$
|
—
|
|
|
$
|
45,220
|
|
|
—
|
|
Junior subordinated debt interest rate swaps
|
|
12,642
|
|
|
—
|
|
|
12,642
|
|
|
—
|
|
|
12,642
|
|
|
—
|
|
Interest rate swaps on borrowings(3)
|
|
1,615
|
|
|
—
|
|
|
1,615
|
|
|
—
|
|
|
1,615
|
|
|
—
|
|
Total
|
|
$
|
59,477
|
|
|
$
|
—
|
|
|
$
|
59,477
|
|
|
$
|
—
|
|
|
$
|
59,477
|
|
|
$
|
—
|
|
Customer repurchase agreements
|
|
$
|
265,997
|
|
|
$
|
—
|
|
|
$
|
265,997
|
|
|
$
|
265,997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loan swaps - commercial customer(2)
|
|
17,756
|
|
|
—
|
|
|
17,756
|
|
|
—
|
|
|
—
|
|
|
17,756
|
|
Interest rate swap on loans
|
|
483
|
|
|
—
|
|
|
483
|
|
|
—
|
|
|
(483
|
)
|
|
—
|
|
Total
|
|
$
|
18,239
|
|
|
$
|
—
|
|
|
$
|
18,239
|
|
|
$
|
—
|
|
|
$
|
(483
|
)
|
|
$
|
17,756
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loan swaps - dealer bank
|
|
$
|
17,242
|
|
|
$
|
—
|
|
|
$
|
17,242
|
|
|
$
|
—
|
|
|
$
|
17,242
|
|
|
$
|
—
|
|
Junior subordinated debt interest rate swaps
|
|
$
|
8,187
|
|
|
$
|
—
|
|
|
$
|
8,187
|
|
|
$
|
—
|
|
|
$
|
8,187
|
|
|
$
|
—
|
|
Customer loan swaps - commercial customer(2)
|
|
514
|
|
|
—
|
|
|
514
|
|
|
—
|
|
|
—
|
|
|
514
|
|
Total
|
|
$
|
25,943
|
|
|
$
|
—
|
|
|
$
|
25,943
|
|
|
$
|
—
|
|
|
$
|
25,429
|
|
|
$
|
514
|
|
Customer repurchase agreements
|
|
$
|
237,984
|
|
|
$
|
—
|
|
|
$
|
237,984
|
|
|
$
|
237,984
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.
|
(2) The Company manages its net exposure on its commercial customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices.
|
|
(3)
|
Interest rate swap contracts were completed with same dealer bank. The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis for all contracts.
|
NOTE 10 – 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 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 the Company and Bank to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common
equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, or the 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 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 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 organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank effectively to maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The Company and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses and to engage in share repurchases based on the amount of the shortfall and the institution's "eligible retained income" (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income).
The Company and Bank's risk-based capital ratios exceeded regulatory guidelines, including the capital conservation buffer, at March 31, 2020 and December 31, 2019, and the Bank's capital ratios met the requirements for it to be considered "well capitalized" under prompt correct action provisions for each period. There were no changes to the Company or Bank's capital ratios that occurred subsequent to March 31, 2020, that would change the Company or Bank's regulatory capital categorization. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
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,
2019
|
|
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer
|
|
Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
|
|
Amount
|
|
Ratio
|
|
|
Camden National Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
$
|
458,376
|
|
|
13.81
|
%
|
|
10.50
|
%
|
|
N/A
|
|
|
$
|
455,702
|
|
|
14.44
|
%
|
|
10.50
|
%
|
|
N/A
|
|
Tier 1 risk-based capital ratio
|
|
416,831
|
|
|
12.56
|
%
|
|
8.50
|
%
|
|
N/A
|
|
|
415,511
|
|
|
13.16
|
%
|
|
8.50
|
%
|
|
N/A
|
|
Common equity Tier 1 risk-based capital ratio
|
|
373,831
|
|
|
11.27
|
%
|
|
7.00
|
%
|
|
N/A
|
|
|
372,511
|
|
|
11.80
|
%
|
|
7.00
|
%
|
|
N/A
|
|
Tier 1 leverage capital ratio
|
|
416,831
|
|
|
9.53
|
%
|
|
4.00
|
%
|
|
N/A
|
|
|
415,511
|
|
|
9.55
|
%
|
|
4.00
|
%
|
|
N/A
|
|
Camden National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
$
|
432,673
|
|
|
13.08
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
|
$
|
423,540
|
|
|
13.45
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
Tier 1 risk-based capital ratio
|
|
406,129
|
|
|
12.28
|
%
|
|
8.50
|
%
|
|
8.00
|
%
|
|
398,349
|
|
|
12.65
|
%
|
|
8.50
|
%
|
|
8.00
|
%
|
Common equity Tier 1 risk-based capital ratio
|
|
406,129
|
|
|
12.28
|
%
|
|
7.00
|
%
|
|
6.50
|
%
|
|
398,349
|
|
|
12.65
|
%
|
|
7.00
|
%
|
|
6.50
|
%
|
Tier 1 leverage capital ratio
|
|
406,129
|
|
|
9.33
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
398,349
|
|
|
9.19
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
In 2015, the Company issued $15.0 million of subordinated debentures, and in 2006 and 2008, it issued $43.0 million of junior subordinated debentures in connection with the issuance of trust preferred securities. Although the subordinated debentures and the junior subordinated debentures are recorded as liabilities on the Company's consolidated statements of condition, the Company is permitted, in accordance with applicable regulation, to include, subject to certain limits, each within its calculation of risk-based capital. At March 31, 2020 and December 31, 2019, $15.0 million of subordinated debentures were included as Tier 2 capital and were included in the calculation of the Company's total risk-based capital, and, at March 31, 2020 and December 31, 2019, $43.0 million of the junior subordinated debentures were included in Tier 1 and total risk-based capital for the Company. The Company's $15.0 million of subordinated debentures are subject to phase-out of 20% annually beginning on its six year anniversary, and 20% a year thereafter until it is fully phases out.
The Company and Bank's regulatory capital and risk-weighted assets fluctuate due to normal business, including profits and losses generated by the Company and Bank as well as changes to their asset mix. Of particular significance are changes within the Company and Bank's loan portfolio mix due to the differences in regulatory risk-weighting between retail and commercial loans. Furthermore, the Company and Bank's regulatory capital and risk-weighted assets are subject to change due to changes in GAAP and regulatory capital standards. The Company and Bank proactively monitor their regulatory capital and risk-weighted assets, and the impact of changes to their asset mix, and impact of proposed and pending changes as a result of new and/or amended GAAP standards and regulatory changes.
NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
March 31, 2020
|
(In thousands)
|
|
Pre-Tax
Amount
|
|
Tax (Expense)
Benefit
|
|
After-Tax
Amount
|
AFS Securities:
|
|
|
|
|
|
|
Unrealized holdings gains
|
|
$
|
24,115
|
|
|
$
|
(5,185
|
)
|
|
$
|
18,930
|
|
Net unrealized gains
|
|
24,115
|
|
|
(5,185
|
)
|
|
18,930
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
Net decrease in fair value
|
|
(1,149
|
)
|
|
247
|
|
|
(902
|
)
|
Less: effective portion reclassified into interest expense(1)
|
|
(240
|
)
|
|
52
|
|
|
(188
|
)
|
Less: effective portion reclassified into interest income(2)
|
|
52
|
|
|
(12
|
)
|
|
40
|
|
Net decrease in fair value
|
|
(961
|
)
|
|
207
|
|
|
(754
|
)
|
Postretirement Plans:
|
|
|
|
|
|
|
Net actuarial gain
|
|
175
|
|
|
(37
|
)
|
|
138
|
|
Less: Amortization of net prior service credits(3)
|
|
6
|
|
|
(1
|
)
|
|
5
|
|
Net gain on postretirement plans
|
|
169
|
|
|
(36
|
)
|
|
133
|
|
Other comprehensive income
|
|
$
|
23,323
|
|
|
$
|
(5,014
|
)
|
|
$
|
18,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
March 31, 2019
|
(In thousands)
|
|
Pre-Tax
Amount
|
|
Tax (Expense)
Benefit
|
|
After-Tax
Amount
|
AFS Securities:
|
|
|
|
|
|
|
Unrealized holdings gains
|
|
$
|
13,884
|
|
|
$
|
(2,985
|
)
|
|
$
|
10,899
|
|
Net unrealized gains
|
|
13,884
|
|
|
(2,985
|
)
|
|
10,899
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
Net decrease in fair value
|
|
(1,178
|
)
|
|
253
|
|
|
(925
|
)
|
Less: effective portion reclassified into interest expense(1)
|
|
(119
|
)
|
|
25
|
|
|
(94
|
)
|
Net decrease in fair value
|
|
(1,059
|
)
|
|
228
|
|
|
(831
|
)
|
Postretirement Plans:
|
|
|
|
|
|
|
Net actuarial gain
|
|
67
|
|
|
(14
|
)
|
|
53
|
|
Less: Amortization of net prior service credits(3)
|
|
6
|
|
|
(1
|
)
|
|
5
|
|
Net gain on postretirement plans
|
|
61
|
|
|
(13
|
)
|
|
48
|
|
Other comprehensive income
|
|
$
|
12,886
|
|
|
$
|
(2,770
|
)
|
|
$
|
10,116
|
|
|
|
(1)
|
Reclassified into interest on borrowings and/or subordinated debentures on the consolidated statements of income.
|
|
|
(2)
|
Reclassified into interest and fees on loans on the consolidated statements of income.
|
|
|
(3)
|
Reclassified into compensation and related benefits and other expense on the consolidated statements of income.
|
The following table presents the changes in each component of AOCI for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Net Unrealized Gains (Losses) on AFS Securities(1)
|
|
Net Unrealized Losses on Cash Flow Hedges(1)
|
|
Defined Benefit Postretirement Plans(1)
|
|
AOCI(1)
|
Balance at December 31, 2018
|
|
$
|
(17,826
|
)
|
|
$
|
(4,437
|
)
|
|
$
|
(2,157
|
)
|
|
$
|
(24,420
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
10,899
|
|
|
(925
|
)
|
|
53
|
|
|
10,027
|
|
Less: Amounts reclassified from AOCI
|
|
—
|
|
|
(94
|
)
|
|
5
|
|
|
(89
|
)
|
Other comprehensive income (loss)
|
|
10,899
|
|
|
(831
|
)
|
|
48
|
|
|
10,116
|
|
Balance at March 31, 2019
|
|
$
|
(6,927
|
)
|
|
$
|
(5,268
|
)
|
|
$
|
(2,109
|
)
|
|
$
|
(14,304
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
3,250
|
|
|
$
|
(6,048
|
)
|
|
$
|
(3,470
|
)
|
|
$
|
(6,268
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
18,930
|
|
|
(902
|
)
|
|
138
|
|
|
18,166
|
|
Less: Amounts reclassified from AOCI
|
|
—
|
|
|
(148
|
)
|
|
5
|
|
|
(143
|
)
|
Other comprehensive income (loss)
|
|
18,930
|
|
|
(754
|
)
|
|
133
|
|
|
18,309
|
|
Balance at March 31, 2020
|
|
$
|
22,180
|
|
|
$
|
(6,802
|
)
|
|
$
|
(3,337
|
)
|
|
$
|
12,041
|
|
|
|
(1)
|
All amounts are net of tax.
|
NOTE 12 – REVENUE FROM CONTRACTS WITH CUSTOMERS
A portion of the Company's non-interest income is derived from contracts with customers, and as such, the revenue recognized depicts the transfer of promised goods or services to its customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company considers the terms of the contract and all relevant facts and circumstances when applying this guidance.
The Company has disaggregated its revenue from contracts with customers into categories based on the nature of the revenue. The categorization of revenues from contracts with customer within the scope of ASC 606 closely aligns with the presentation revenue categories presented within non-interest income on the consolidated statements of income. The following table presents the revenue streams with the scope of ASC 606 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
Income Statement Line Item
|
|
2020
|
|
2019
|
Debit card interchange income
|
|
Debit card income
|
|
$
|
2,141
|
|
|
$
|
2,010
|
|
Services charges on deposit accounts
|
|
Service charges on deposit accounts
|
|
2,012
|
|
|
2,023
|
|
Fiduciary services income
|
|
Income from fiduciary services
|
|
1,502
|
|
|
1,392
|
|
Investment program income
|
|
Brokerage and insurance commissions
|
|
657
|
|
|
585
|
|
Other non-interest income
|
|
Other income
|
|
383
|
|
|
383
|
|
Total non-interest income within the scope of ASC 606
|
|
|
|
6,695
|
|
|
6,393
|
|
Total non-interest income not in scope of ASC 606
|
|
|
|
4,708
|
|
|
2,996
|
|
Total non-interest income
|
|
|
|
$
|
11,403
|
|
|
$
|
9,389
|
|
In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and services are generally explicitly identified in the associated contracts.
NOTE 13 – 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 periodic benefit cost for the periods ended March 31, 2020 and 2019, were as follows:
Supplemental Executive Retirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Three Months Ended
March 31,
|
Net periodic pension cost
|
|
Income Statement Presentation
|
|
2020
|
|
2019
|
Service cost
|
|
Salaries and employee benefits
|
|
$
|
116
|
|
|
$
|
99
|
|
Interest cost
|
|
Other expenses
|
|
115
|
|
|
131
|
|
Recognized net actuarial loss
|
|
Other expenses
|
|
156
|
|
|
61
|
|
Total
|
|
|
|
$
|
387
|
|
|
$
|
291
|
|
Other Postretirement Benefit Plan:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Three Months Ended
March 31,
|
Net periodic postretirement benefit cost
|
|
Income Statement Presentation
|
|
2020
|
|
2019
|
Service cost
|
|
Salaries and employee benefits
|
|
$
|
7
|
|
|
$
|
12
|
|
Interest cost
|
|
Other expenses
|
|
31
|
|
|
37
|
|
Recognized net actuarial loss
|
|
Other expenses
|
|
19
|
|
|
6
|
|
Amortization of prior service credit
|
|
Other expenses
|
|
(6
|
)
|
|
(6
|
)
|
Total
|
|
|
|
$
|
51
|
|
|
$
|
49
|
|
NOTE 14 – 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,
|
(In thousands, except number of shares and per share data)
|
|
2020
|
|
2019
|
Net income
|
|
$
|
13,493
|
|
|
$
|
14,273
|
|
Dividends and undistributed earnings allocated to participating securities(1)
|
|
(28
|
)
|
|
(28
|
)
|
Net income available to common shareholders
|
|
$
|
13,465
|
|
|
$
|
14,245
|
|
Weighted-average common shares outstanding for basic EPS
|
|
15,103,176
|
|
|
15,592,141
|
|
Dilutive effect of stock-based awards(2)
|
|
44,042
|
|
|
41,985
|
|
Weighted-average common and potential common shares for diluted EPS
|
|
15,147,218
|
|
|
15,634,126
|
|
Earnings per common share:
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.89
|
|
|
$
|
0.91
|
|
Diluted EPS
|
|
$
|
0.89
|
|
|
$
|
0.91
|
|
Awards excluded from the calculation of diluted EPS(3):
|
|
|
|
|
Stock options
|
|
1,000
|
|
|
1,000
|
|
|
|
(1)
|
Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
|
|
|
(2)
|
Represents the assumed dilutive effect of unexercised and/or unvested stock options, restricted shares, restricted share units and contingently issuable performance-based awards 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, therefore, 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 15 – 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 on an individual loan basis using quoted secondary market prices and is classified as Level 2.
Debt Securities: The fair value of investments in debt 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 is classified as Level 2.
Equity Securities: The fair value of equity securities in bank stock is reported utilizing market prices based on recent trading activity and dealer quotes. These 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, 2020 and December 31, 2019, 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 the Company's fixed-rate interest rate lock commitments were determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, adjusted for the Company's pull-through rate estimate (i.e. estimate of loans within its loan pipeline that will ultimately complete the origination process and be funded). The Company has classified its fixed-rate interest rate lock commitments as Level 2, as the quoted secondary market prices are the more significant input, and, although the Company's internal pull-through rate estimate is a Level 3 estimate, it is less significant to the ultimate valuation.
The fair value of the Company's forward delivery commitments is determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, and the locked and agreed to price with the secondary market investor. The Company has classified its fixed-rate interest rate lock commitments as Level 2.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Fair
Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Data
(Level 2)
|
|
Company
Determined
Fair Value
(Level 3)
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
27,730
|
|
|
$
|
—
|
|
|
$
|
27,730
|
|
|
$
|
—
|
|
AFS investments:
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
126,880
|
|
|
—
|
|
|
126,880
|
|
|
—
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
488,049
|
|
|
—
|
|
|
488,049
|
|
|
—
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
334,615
|
|
|
—
|
|
|
334,615
|
|
|
—
|
|
Subordinated corporate bonds
|
|
10,587
|
|
|
—
|
|
|
10,587
|
|
|
—
|
|
Equity securities - bank stock
|
|
1,674
|
|
|
—
|
|
|
1,674
|
|
|
—
|
|
Customer loan swaps
|
|
45,220
|
|
|
—
|
|
|
45,220
|
|
|
—
|
|
Interest rate swap on loans
|
|
5,591
|
|
|
—
|
|
|
5,591
|
|
|
—
|
|
Fixed-rate mortgage interest rate lock commitments
|
|
2,241
|
|
|
—
|
|
|
2,241
|
|
|
—
|
|
Forward delivery commitments
|
|
1,185
|
|
|
—
|
|
|
1,185
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt interest rate swaps
|
|
12,642
|
|
|
—
|
|
|
12,642
|
|
|
—
|
|
Customer loan swaps
|
|
45,220
|
|
|
—
|
|
|
45,220
|
|
|
—
|
|
Interest rate swap on borrowings
|
|
1,615
|
|
|
—
|
|
|
1,615
|
|
|
—
|
|
Fixed-rate mortgage interest rate lock commitments
|
|
264
|
|
|
—
|
|
|
264
|
|
|
—
|
|
Forward delivery commitments
|
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
11,854
|
|
|
$
|
—
|
|
|
$
|
11,854
|
|
|
$
|
—
|
|
AFS investments:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
118,083
|
|
|
—
|
|
|
118,083
|
|
|
—
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
463,386
|
|
|
—
|
|
|
463,386
|
|
|
—
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
325,905
|
|
|
—
|
|
|
325,905
|
|
|
—
|
|
Subordinated corporate bonds
|
|
10,744
|
|
|
—
|
|
|
10,744
|
|
|
—
|
|
Equity securities - bank stock
|
|
1,674
|
|
|
—
|
|
|
1,674
|
|
|
—
|
|
Customer loan swaps
|
|
17,756
|
|
|
—
|
|
|
17,756
|
|
|
—
|
|
Interest rate swap on loans
|
|
483
|
|
|
—
|
|
|
483
|
|
|
—
|
|
Fixed-rate mortgage interest rate lock commitments
|
|
480
|
|
|
—
|
|
|
480
|
|
|
—
|
|
Forward delivery commitments
|
|
312
|
|
|
—
|
|
|
312
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt interest rate swaps
|
|
8,187
|
|
|
—
|
|
|
8,187
|
|
|
—
|
|
Customer loan swaps
|
|
17,756
|
|
|
—
|
|
|
17,756
|
|
|
—
|
|
Fixed-rate mortgage interest rate lock commitments
|
|
18
|
|
|
—
|
|
|
18
|
|
|
—
|
|
Forward delivery commitments
|
|
15
|
|
|
—
|
|
|
15
|
|
|
—
|
|
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, 2020. 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 evaluate individually for impairment loans with a principal balance of $500,000 or more, that 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 net realizable value, which is the fair value of the collateral, less estimated costs to sell, to the carrying value of the loan. If the net realizable value 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 net realizable value. 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.
Servicing Assets: 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 two significant unobservable inputs, namely loan prepayment assumptions and the discount rate used, to calculate the fair value of each tranche, and, as such, the Company has classified the model within Level 3 of the fair value hierarchy. At March 31, 2020 and December 31, 2019, the mortgage servicing assets were not carried at fair value.
Non-Financial Instruments 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, goodwill and core deposit intangible assets.
OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at net realizable value, 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 Core Deposit 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 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 the three months ended March 31, 2020, for which management believes that it is more likely than not that goodwill is impaired. Refer to Note 2 for further discussion.
The Company's core deposit intangible assets represent the estimated value of acquired customer relationships and are amortized 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. There were no events or changes in circumstances for the three months ended March 31, 2020, 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 for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Fair
Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Data
(Level 2)
|
|
Company
Determined
Fair Value
(Level 3)
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110
|
|
Non-financial assets:
|
|
|
|
|
|
|
|
|
OREO
|
|
94
|
|
|
—
|
|
|
—
|
|
|
94
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Non-financial assets:
|
|
|
|
|
|
|
|
|
OREO
|
|
$
|
94
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
94
|
|
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Methodology
|
|
Unobservable Input
|
|
Discount
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
|
Partially charged-off
|
|
$
|
110
|
|
|
Market approach appraisal of
collateral
|
|
Management adjustment of
appraisal
|
|
0%
|
(0%)
|
|
|
|
|
|
|
Estimated selling costs
|
|
10%
|
(10%)
|
OREO
|
|
$
|
94
|
|
|
Market approach appraisal of
collateral
|
|
Management adjustment of
appraisal
|
|
18%
|
(18%)
|
|
|
|
|
|
|
Estimated selling cost
|
|
13%
|
(13%)
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
OREO
|
|
$
|
94
|
|
|
Market approach appraisal of
collateral
|
|
Management adjustment of
appraisal
|
|
18%
|
(18%)
|
|
|
|
|
|
|
Estimated selling cost
|
|
13%
|
(13%)
|
The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Carrying
Amount
|
|
Fair Value
|
|
Readily
Available
Market
Prices
(Level 1)
|
|
Observable
Market
Prices
(Level 2)
|
|
Company
Determined
Market
Prices
(Level 3)
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM securities
|
|
$
|
1,300
|
|
|
$
|
1,358
|
|
|
$
|
—
|
|
|
$
|
1,358
|
|
|
$
|
—
|
|
Residential real estate loans(1)
|
|
1,058,315
|
|
|
1,070,839
|
|
|
—
|
|
|
—
|
|
|
1,070,839
|
|
Commercial real estate loans(1)
|
|
1,286,486
|
|
|
1,246,184
|
|
|
—
|
|
|
—
|
|
|
1,246,184
|
|
Commercial loans(1)(2)
|
|
458,790
|
|
|
455,364
|
|
|
—
|
|
|
—
|
|
|
455,364
|
|
Home equity loans(1)
|
|
303,746
|
|
|
292,371
|
|
|
—
|
|
|
—
|
|
|
292,371
|
|
Consumer loans(1)
|
|
23,904
|
|
|
22,034
|
|
|
—
|
|
|
—
|
|
|
22,034
|
|
Servicing assets
|
|
903
|
|
|
1,418
|
|
|
—
|
|
|
—
|
|
|
1,418
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
595,061
|
|
|
$
|
598,911
|
|
|
$
|
—
|
|
|
$
|
598,911
|
|
|
$
|
—
|
|
Short-term borrowings
|
|
326,722
|
|
|
326,678
|
|
|
—
|
|
|
326,678
|
|
|
—
|
|
Long-term borrowings
|
|
35,000
|
|
|
34,923
|
|
|
—
|
|
|
34,923
|
|
|
—
|
|
Subordinated debentures
|
|
59,155
|
|
|
44,327
|
|
|
—
|
|
|
44,327
|
|
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
HTM securities
|
|
$
|
1,302
|
|
|
$
|
1,359
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
|
$
|
—
|
|
Residential real estate loans(1)
|
|
1,064,532
|
|
|
1,066,544
|
|
|
—
|
|
|
—
|
|
|
1,066,544
|
|
Commercial real estate loans(1)
|
|
1,230,983
|
|
|
1,196,297
|
|
|
—
|
|
|
—
|
|
|
1,196,297
|
|
Commercial loans(1)(2)
|
|
438,716
|
|
|
431,892
|
|
|
—
|
|
|
—
|
|
|
431,892
|
|
Home equity loans(1)
|
|
310,356
|
|
|
293,565
|
|
|
—
|
|
|
—
|
|
|
293,565
|
|
Consumer loans(1)
|
|
25,265
|
|
|
23,355
|
|
|
—
|
|
|
—
|
|
|
23,355
|
|
Servicing assets
|
|
877
|
|
|
1,496
|
|
|
—
|
|
|
—
|
|
|
1,496
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
595,549
|
|
|
$
|
594,881
|
|
|
$
|
—
|
|
|
$
|
594,881
|
|
|
$
|
—
|
|
Short-term borrowings
|
|
268,809
|
|
|
268,631
|
|
|
—
|
|
|
268,631
|
|
|
—
|
|
Long-term borrowings
|
|
10,000
|
|
|
10,002
|
|
|
—
|
|
|
10,002
|
|
|
—
|
|
Subordinated debentures
|
|
59,080
|
|
|
50,171
|
|
|
—
|
|
|
50,171
|
|
|
—
|
|
|
|
(1)
|
The presented carrying amount is net of the allocated ALL.
|
|
|
(2)
|
Includes the HPFC loan portfolio.
|
Excluded from the summary were financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.
The Company considers its financial instruments' current use to be the highest and best use of the instruments.
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to March 31, 2020, global, national and local economies and financial markets have continued to be negatively impacted by the effects of the worldwide COVID-19 pandemic. The Company is actively working through this unprecedented situation. The impact the pandemic may have on the Company’s consolidated financial statements is unknown at this time.