NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Acronyms and Abbreviations. The acronyms and abbreviations identified below are used in the notes to the consolidated financial statements. The following is provided to aid the reader and provide a reference page when reviewing the notes to the consolidated financial statements.
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AFS:
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Available-for-sale
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FRBB:
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Federal Reserve Bank of Boston
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ALCO:
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Asset/Liability Committee
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GAAP:
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Generally accepted accounting principles in the United States
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ACL:
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Allowance for credit losses
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GDP:
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Gross domestic product
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AOCI:
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Accumulated other comprehensive income (loss)
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HPFC:
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Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
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ASC:
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Accounting Standards Codification
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HTM:
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Held-to-maturity
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ASU:
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Accounting Standards Update
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IRS:
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Internal Revenue Service
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Bank:
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Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
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LGD:
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Loss given default
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BOLI:
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Bank-owned life insurance
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LIBOR:
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London Interbank Offered Rate
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Board ALCO:
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Board of Directors' Asset/Liability Committee
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LTIP:
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Long-Term Performance Share Plan
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CARES Act:
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Coronavirus Aid, Relief, and Economic Security Act, issued by the Federal government in response to COVID-19 in March 2020
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Management ALCO:
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Management Asset/Liability Committee
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CCTA:
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Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
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MBS:
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Mortgage-backed security
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CDs:
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Certificate of deposits
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MSPP:
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Management Stock Purchase Plan
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CECL:
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Current Expected Credit Losses
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N/A:
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Not applicable
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Company:
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Camden National Corporation
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N.M.:
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Not meaningful
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CMO:
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Collateralized mortgage obligation
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OCC:
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Office of the Comptroller of the Currency
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CUSIP:
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Committee on Uniform Securities Identification Procedures
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OCI:
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Other comprehensive income (loss)
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DCRP:
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Defined Contribution Retirement Plan
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OREO:
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Other real estate owned
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EPS:
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Earnings per share
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OTTI:
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Other-than-temporary impairment
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FASB:
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Financial Accounting Standards Board
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PD:
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Probability of default
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FDIC:
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Federal Deposit Insurance Corporation
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SBA:
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U.S. Small Business Administration
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FHLB:
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Federal Home Loan Bank
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SBA PPP:
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U.S. Small Business Administration Paycheck Protection Program
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FHLBB:
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Federal Home Loan Bank of Boston
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SERP:
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Supplemental executive retirement plans
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FHLMC:
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Federal Home Loan Mortgage Corporation
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TDR:
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Troubled-debt restructured loan
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FNMA:
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Federal National Mortgage Association
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UBCT:
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Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
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FRB:
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Federal Reserve System Board of Governors
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U.S.:
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United States of America
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General Business. Camden National Corporation, a Maine corporation (the "Company"), is the bank holding company for Camden National Bank (the "Bank") and is headquartered in Camden, Maine. The primary business of the Company is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company, through the Bank, offers commercial and consumer banking products and services, and through Camden Financial Consultants, a division of the Bank, and Camden National Wealth Management, a department of the Bank, offers brokerage and insurance services as well as investment management and fiduciary services. The Bank's deposits are insured by the FDIC, subject to regulatory limits.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and the Bank (which includes the consolidated accounts of HPFC and Property A, Inc. as of and for the year ended December 31, 2020, 2019 and 2018, and HPFC, Property A, Inc. and Property P, Inc. as of and for the year ended December 31, 2019 and 2018). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Bank in a fiduciary capacity, through Camden National Wealth Management, 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 CCTA and UBCT. These entities are unconsolidated subsidiaries of the Company.
Reclassifications. Certain reclassifications have been made to prior year amounts, without impact to net income or total shareholders' equity, to conform to the current year's presentation.
Use of Estimates. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could vary from these estimates as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including the ACL, including the allowance for loan losses, off-balance sheet credit exposures, and AFS and HTM debt securities (effective for periods on or after January 1, 2020, upon adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), as amended), the accounting for business combinations including subsequent impairment analyses for goodwill and other intangible assets, accounting for income taxes, postretirement benefits, and asset impairment assessments, including the assessment of OTTI of investment securities (for periods prior to January 1, 2020).
Subsequent Events. The Company has evaluated events and transactions subsequent to December 31, 2020 for potential recognition or disclosure as required by GAAP.
Significant Concentration of Credit Risk. The Company makes loans primarily to customers in Maine, Massachusetts and New Hampshire. Although it has a diversified loan portfolio, a large portion of the Company's loans are secured by commercial or residential real estate and are subject to real estate market volatility within these states. Furthermore, the debtors' ability to honor their contracts is highly dependent upon other economic factors throughout Maine, Massachusetts and New Hampshire. The Company does not generally engage in non-recourse lending and typically will require the principals of any commercial borrower to obligate themselves personally on the loan.
Cash, Cash Equivalents and Restricted Cash. For the purposes of reporting, cash and cash equivalents consist of cash on hand and amounts due from banks. During the first quarter of 2020, the Company was required by the FRB to maintain cash reserves equal to a percentage of deposits. In response to the COVID-19 pandemic, in March 2020, the FRB reduced reserve requirement ratios to 0%, effectively eliminating cash reserve requirements for the reserve maintenance period beginning March 26, 2020.
Certain cash balances will be designated as restricted as required by certain contracts with unrelated third parties.
Investments. Debt investments for which the Company has the positive intent and ability to hold to maturity are classified as HTM and recorded at amortized cost on the consolidated statements of condition.
Debt investments that are not classified as HTM or trading are classified as AFS and are carried at fair value on the Company's consolidated statements of condition with subsequent changes to fair value recorded within AOCI, net of tax.
Trading securities and equity investments with a readily determinable fair value are carried at fair value on the Company's consolidated statements of condition, with the change in fair value recognized between periods recognized within net income on the consolidated statements of income. Effective January 1, 2018, the Company adopted ASU No. 2016-01, Income Statement - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities ("ASU 2016-01"), and recorded a cumulative-effect adjustment of $198,000 to reclassify the unrealized gain, net of tax, on the
Company's equity securities with a readily determinable fair value as of January 1, 2018, previously designated as AFS, from AOCI to retained earnings.
Purchase premiums and discounts are recognized in interest income on the consolidated statements of income using the interest method over the period to maturity or issuer call option date, if earlier, and are recorded on the trade date.
Upon sale of an investment security, the realized gain or loss on the sale is recognized within non-interest income on the consolidated statements of income. The cost basis of our investments sold is determined using the specific identification method.
ACL on (or Write-off of) AFS Debt Securities (effective January 1, 2020). Upon adoption of ASU 2016-13, effective January 1, 2020, but has been applied to reporting periods on or after October 1, 2020, management now assesses its AFS debt securities in an unrealized loss position for the following: (i) whether it intends to sell the security, or (ii) it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income. For AFS debt securities that do not meet either of the two criteria, management evaluates whether the decline in fair value resulted from credit losses or other factors. In making this assessment, management considers the following: (i) the extent to which fair value is less than amortized cost, (ii) credit rating of the security, (iii) macroeconomic trends of the industry specific to the security, and (iv) any other adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on AFS debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. When assessing an AFS debt security for credit loss, securities with identical CUSIPs are pooled together to assess for impairment using the average cost basis. Any impairment that has not been recorded through an allowance is recognized in OCI.
A change in the ACL on AFS debt securities or write-off of an AFS debt security, which may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
As of December 31, 2020 and January 1, 2020 (i.e. ASU 2016-13 adoption), there was no allowance carried on the Company's AFS debt securities. Refer to Note 2 of the consolidated financial statements for further discussion.
ACL on (or Write-off of) HTM Debt Securities (effective January 1, 2020). The Company adopted ASU 2016-13, which is commonly referred to as "CECL" (i.e. current expected credit losses), effective January 1, 2020, but has been applied to reporting periods on or after October 1, 2020. ASU 2016-13 requires companies to estimate expected credit losses on its HTM debt securities and carry an allowance for such. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, which may include, but is not limited to, credit ratings, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry, and vintage.
The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, the Company will utilize external third party loss forecast models as the sole source of municipal default and loss rates. As with the loan portfolio, cash flows are modeled over a reasonable and supportable forecast period and then revert to the long-term average economic conditions on a straight line basis. Management may exercise discretion to make adjustments based on various qualitative factors.
An HTM debt security is written-off in the period in which a determination is made that all or a portion of the financial asset is uncollectible. Any previously recorded allowance, if any, is reversed and then the amortized cost basis is written-down to the amount deemed to be collectible, if any.
A change in the ACL on HTM debt securities or write-off of an HTM debt security, which may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losses on the consolidated statements of income.
As of December 31, 2020 and January 1, 2020, there was no allowance carried on the Company’s HTM debt securities. Refer to Note 2 of the consolidated financial statements for further discussion.
OTII Assessment (periods prior to January 1, 2020). For periods prior to the adoption of ASU No. 2016-13, effective January 1, 2020, management conducted a quarterly review and evaluation of its AFS and HTM debt investments to determine if the decline in fair value of any security appeared to be other-than-temporary. The factors considered included, but were not
limited to: the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, the credit ratings of the security or issuer, whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.
For its AFS and HTM debt investments that it did not intend to sell and was not more-likely-than-not required to sell before recovery of its amortized cost basis, the other-than-temporary decline in the fair value of the debt security related to: (i) credit loss was recognized in non-interest income on the consolidated statements of income; and (ii) other factors was recognized in AOCI, net of tax. Debt securities it intended to sell or was more-likely-than-not required to sell before recovery of amortized cost, an OTTI was recorded equal to the entire difference between the debt investment's amortized cost basis and its fair value within non-interest income on the consolidated statements of income.
FHLBB and FRBB Stock. The Company, through the Bank, is a member of the FHLBB and FRBB, and, as a member, is required to hold a certain amount of FHLBB and FRB common stock. These equity stocks are non-marketable and are outside the scope of ASU 2016-01, and are reported at cost within other investments on the consolidated statements of condition. The Company evaluates its FHLBB and FRB common stock for impairment based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Loans Held for Sale. The Company has elected the fair value option for loans classified as held for sale on the consolidated statements of condition. Designation of loans as held for sale is determined based on intent and is, typically, completed as the loans are underwritten. The fair value for loans held for sale is determined using quoted secondary market prices. Management consistently evaluates the Company's loan portfolio in conjunction with asset/liability management practices, and will opt to sell certain residential mortgage loans to manage the Company's interest rate exposure and for other business purposes, including generating fee income through mortgage sale gains.
Originated Loans and Acquired Loans. Loans held for investment are reported at amortized cost adjusted for any partial charge-offs and net of any deferred loan fees or costs. For originated loans, interest income is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.
As of acquisition date, each acquired loan is reported at fair value. For acquired loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value.
For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income.
A loan is classified as non-accrual generally when it becomes 90 days past due as to interest or principal payments, or sooner if management considers such action to be prudent. All previously accrued but unpaid interest on non-accrual loans is reversed from interest income in the period in which the loan is considered delinquent and the amortization of any unamortized net deferred origination loan fees/costs stops. Interest payments received on non-accrual loans, including impaired loans, are applied as a reduction of principal. A loan remains on non-accrual status until all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Should a loan transition from non-accrual status back to accrual status, the unrecognized interest earned during the period the loan was on non-accrual status and unamortized deferred origination fees and costs are recognized over the remaining contractual life of the loan using the level-yield method.
ACL on Loans. On March 27, 2020, the CARES Act was signed into law in response to COVID-19. Under Section 4014 of the CARES Act, the Company was permitted to delay its compliance with ASU 2016-13, commonly referred to as "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 terminated, or (2) December 31, 2020. The Company delayed its compliance with CECL as permitted under the CARES Act and adopted CECL on December 31, 2020, effective January 1, 2020, but applied to reporting periods on or after October 1, 2020 using a modified-prospective approach. As a result, the allowance for credit losses for annual and interim periods before October 1, 2020 continue to be reported under prior accounting guidance, commonly referred to as the "incurred loss model." Upon adoption, a cumulative-effect adjustment of $2.8 million was recorded reducing retained earnings, with a corresponding adjustment of $233,000 increasing the ACL on loans, an adjustment of $3.3 million increasing other liabilities for the ACL on off-balance sheet credit exposures, and an adjustment of $769,000 increasing deferred tax assets.
The ACL on loans calculation under CECL and the incurred loss methodology is based on the amortized cost basis of a loan, which is comprised of the unpaid principal balance of the loan, net deferred loan fees (costs), acquired premium (discount), and any write-downs previously taken on the loan.
The ACL on loans is increased by charges to provision for credit losses and reduced by charge-offs, net of recoveries. Management evaluates the appropriateness of the ACL on loans quarterly. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change from period to period. The ACL on loans is presented on the consolidated statements of condition.
Loans past due 30 days or more are considered delinquent. In general, secured loans that are delinquent for 90 consecutive days are placed on non-accrual status, and, under CECL, may be subject to individual loss assessment in accordance with established internal policy. Under the incurred loss model, these loans were subject to impairment and/or loss assessment in accordance with established internal policy. In general, unsecured loans that are delinquent for 90 consecutive days are charged off.
In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a TDR, with the exception of those loans deferred and/or modified in accordance with the provisions of the CARES Act or regulatory guidance in response to COVID-19. Modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. An allowance is established on a loan classified as a TDR if the present value of expected future cash flows (or, alternatively, the observable market price of the loan or the fair value of the collateral if the loan is collateral-dependent) is less than the recorded investment of the loan. Non-accrual loans that are restructured as TDRs remain on non-accrual status for a period of at least six months to demonstrate that the borrower can meet the restructured terms. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a non-accrual loan. Loans classified as TDRs remain classified as such for the life of the loan, except in limited circumstances, when it is determined that the borrower is performing under the modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable market rate for a comparable new loan at the time of the restructuring.
In response to COVID-19, the Company worked with businesses and consumers to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. For loans temporarily modified due to COVID-19, under the CARES Act and regulatory guidance, the Company applied the following accounting treatment in this order:
1.The Company may account for a loan modification in accordance with Section 4013 of the CARES Act if the loan modification (i) meets the criteria set forth in Section 4013 of the CARES Act and (ii) the Company elects to apply 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 (i) December 31, 2020, or (ii) 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 Section 4013 of the CARES Act, 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 COVID-19, 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.
In December 2020, the President signed the Consolidated Appropriations Act of 2021 into law, which provided additional relief to consumers and businesses impacted by COVID-19. The act extended the provisions within the CARES Act that
provided TDR accounting relief to the earlier of: (i) December 31, 2021 or (ii) 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.
Under CECL, the ACL on loans reduces the loan portfolio to the net amount expected to be collected, and represents the expected losses over the life of all loans at the reporting date. The allowance incorporates forward-looking information and applies a reversion methodology beyond the reasonable and supportable forecast.
The ACL on loans reflects the risk of loss on the loan portfolio. To appropriately measure expected credit losses, management disaggregates the loan portfolio into pools of similar risk characteristics. The Company utilizes a discounted cash flow approach to calculate the expected loss for each segment. Within the discounted cash flow model, a probability of default (“PD”) and loss given default (“LGD”) assumption is applied to calculate the expected loss for each segment. PD is the probability the asset will default within a given timeframe and LGD is the percentage of the assets not expected to be collected due to default. PD and LGD data are derived from internal historical default and loss experience as well as the use of external data where there are not statistically meaningful loss events for a loan segment.
The primary macroeconomic drivers used within the discounted cash flow model include forecasts of Maine Unemployment, changes in Maine and National GDP, as well as changes in Maine Retail Trade and Housing Price Index. Management will monitor and assess its macroeconomic drivers at least annually to determine if or that they continue to be the most predictive indicator of losses within the Company’s loan portfolio, and these macroeconomic drivers may change from time to time.
To determine its reasonable and supportable forecast, management may leverage macroeconomic forecasts obtained from various reputable sources, which may include the Federal Open Market Committee forecast and/or other publicly available forecasts from well recognized, leading economists or firms. The Company’s reasonable and supportable forecast period generally ranges from one to three years, depending on the facts and circumstances of the current state of the economy, portfolio segment and management’s judgement of what can be reasonably supported. The model reversion period generally ranges from one to six years, and it also depends on the current state of the economy and management’s judgments of such.
The ACL on loans is calculated over a loan’s contractual life. For term loans, the contractual life is calculated based on the maturity date. For commercial revolving loans with no stated maturity date, the contractual life is calculated based on the internal review date. For all other revolving loans, the contractual life is based on either the estimated maturity date or a default date. The contractual term does not include expected extension, renewals or modifications.
Upon adoption of CECL, effective January 1, 2020, but applied to reporting periods on or after October 1, 2020, the loan portfolio has been segmented as follows based on the various risk profiles of the Company's loans:
•The commercial loan portfolio has been segmented between (i) commercial real estate, which is collateralized by real estate, and (ii) commercial, which is typically utilized for general business purposes. Commercial real estate is further segmented between non owner-occupied (i.e. investment properties) and owner-occupied properties.
•Retail loans are a homogenous group, generally consisting of standardized products that are smaller in amount and distributed over a large number of individual borrowers. The group is segmented into three categories – residential real estate, home equity and consumer.
Contractual terms must be adjusted for prepayments to arrive at expected cash flows. The Company models term loans using an annualized prepayment. When the Company has a specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually. For revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the cash flow.
The ACL on loans evaluation also considers various qualitative factors, such as: (i) actual or expected changes in economic trends and conditions, (ii) changes in the value of underlying collateral for loans, (iii) changes to lending policies, underwriting standards and/or management personnel performing such functions, (iv) delinquency and other credit quality trends, (v) credit risk concentrations, if any, (vi) changes to the nature of the Company's business impacting the loan portfolio, (vii) and other external factors, that may include, but are not limited to, results of internal loan reviews, examinations by bank regulatory agencies, or other such events such as a natural disaster.
Certain loans are tested individually for estimated credit losses, including those (i) greater than $500,000 that are classified as substandard or doubtful and are on non-accrual, (ii) a troubled debt restructuring or (iii) that have unique characteristics.
Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.
Management may also adjust its assumptions to account for differences between expected and actual losses from period to period. The variability of management’s assumptions could alter the level of the allowance for credit losses and may have a material impact on future results of operations and financial condition. The loss estimation models and methods used to determine the allowance for credit losses are continually refined and enhanced.
Incurred Loss Methodology. For annual and interim reporting periods prior to October 1, 2020, the Company estimated the allowance for loan losses using the incurred loss methodology.
In determining the appropriate allowance, the Company used a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio. The methodology included three elements: (1) identification of loss allocations for certain specific loans, (2) loss allocation factors for certain loan types based on credit risk and loss experience, and (3) general loss allocations for other qualitative and economic factors.
The allocations for specific loans were determined based on loans that have a principal balance of $500,000 or more that were classified as substandard or doubtful and were on non-accrual status. Such loans were classified as impaired and an allowance was established when the discounted expected future cash flows (or collateral value or observable market price) of the impaired loan was lower than the recorded investment of that loan. Loans that did not meet the above criteria were separated into risk pools by portfolio segment and risk ratings. The Company would then evaluate each risk pool collectively for impairment through loss allocation factors.
The Company uses a risk rating system for certain loan segments to determine the credit quality of these loan pools and applied the related loss allocation factors. In assessing the risk rating of a particular loan, the Company considers, among other factors, the obligor’s debt capacity, financial condition, the level of the obligor’s earnings, the amount and sources of repayment, the performance with respect to loan terms, the adequacy of collateral, the level and nature of contingent liabilities, management strength, and the industry in which the obligor operates. These factors are based on an evaluation of historical information, as well as subjective assessment and interpretation of current conditions. Emphasizing one factor over another, or considering additional factors that may be relevant in determining the risk rating of a particular loan but which are not an explicit part of the Company's methodology, could impact the risk rating assigned to that loan.
The Company would at least annually, and more frequently as deemed prudent by management, reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect the analysis of loss experience. Portfolios of more homogeneous populations of loans including home equity and consumer loans are analyzed as groups taking into account delinquency rates and other economic conditions that may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. The Company also considers regulatory guidance, historical loss ranges, portfolio composition, and other changes in the portfolio. An additional allocation is determined based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors.
Accrued Interest. Upon adoption of CECL, effective as of January 1, 2020, the Company made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances within other assets on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the allowance for credit losses, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income.
The Company has a robust policy in place to write-off accrued interest when a loan is placed on non-accrual. Accrued interest is written-off by reversing previously recorded interest income. For loans, write-off typically occurs when a loan has been in default for 90 days or more. Accrued interest on non-accrual loans was written off during the year ended December 31, 2020, by reversing interest income. Historically, the Company has not experienced uncollectible accrued interest receivable on investment debt securities.
Goodwill and Core Deposit Intangible Assets. Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization but rather is evaluated at least annually for impairment, or as events and circumstances dictate, at the reporting unit level, and for which the Company has determined it has a single reporting unit. Any impairment is charged to non-interest expense on the consolidated statements of income.
The Company evaluates goodwill for impairment annually as of November 30th, or more frequently as warranted by external and/or internal factors. The Company may utilize a qualitative analysis and/or a quantitative analysis to evaluate
goodwill for impairment. The Company has the option to by-pass the qualitative analysis for any given year and perform the quantitative analysis.
Using a qualitative analysis to assess goodwill for impairment, the Company will consider various factors to determine if it is more-likely-than-not that its carrying value of its reporting unit exceeds its fair value. These factors include, but are not limited to, the overall macro-economic environment; industry economic and regulatory environment; and company specific factors, including, but not limited to, performance, Company common stock share price, competition and/or significant changes in senior management. Should the Company determine it is more-likely-than-not that the carrying value of its reporting unit exceeds its fair value, then it would then perform the next step of the goodwill impairment test, which is a quantitative analysis. If the Company were to determine it is not more-likely-than-not that the carrying value of its reporting unit exceeds its fair value, the Company would have completed its goodwill impairment evaluation and concluded goodwill was not impaired.
After performing the qualitative analysis and determining it is more-likely-than-not that the carrying value of its reporting unit exceeds its fair value or if the Company by-passed the qualitative analysis, it would perform a quantitative analysis to determine if the carrying value of its reporting unit exceeds its fair value. The Company may use various valuation techniques such as a discounted cash flow model, a comparative market transaction multiple approach and/or other valuation methods, to determine the reporting unit's fair value. Effective January 1, 2020, the Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (TOPIC 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), and accordingly will now recognize an impairment of goodwill to the extent the carrying value of a reporting unit exceeds its fair value. 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 of goodwill exceeded its implied fair value. ASU 2017-04 was applied prospectively as of the effective date.
For periods prior to adoption of ASU 2017-04, if the reporting unit's fair value exceeded its carrying value, then goodwill was not impaired and no further assessment was required. However, if the reporting unit's fair value was less than its carrying value, then it was required to derive an implied fair value of goodwill for the reporting unit. If the reporting unit's implied fair value of goodwill exceeded its carrying value, then goodwill was not impaired. However, if the reporting unit's implied fair value of goodwill was less than its carrying value, an impairment charge was recorded to reduce goodwill to its calculated implied fair value.
The Company completed its testing for impairment of goodwill for the year ended December 31, 2020, 2019 and 2018 and concluded goodwill was not impaired. Refer to Note 4 of the consolidated financial statements for further details.
Core deposit intangible assets represents the estimated value of acquired customer relationships and is amortized on a straight-line basis over the estimated life of those relationships. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If necessary, management will test the core deposit intangibles for impairment by comparing their carrying value to the expected undiscounted cash flows of the assets. If the undiscounted cash flows of the intangible assets exceed their carrying value then the intangible assets are deemed to be fully recoverable and not impaired. However, if the undiscounted cash flows of the intangible assets are less than their carrying value then management must compare the fair value of the intangible assets to its carrying value. If the fair value of the intangible assets exceeds their carrying value then the intangible assets are not impaired. If the fair value of the intangible assets is less than its carrying value then an impairment charge is recorded to mark the carrying value of the intangible assets to fair value. For the year ended December 31, 2020, 2019 or 2018, there were no events or changes in circumstances that indicated the carrying amount may not be recoverable.
BOLI. BOLI represents the cash surrender value of life insurance policies on the lives of certain active and retired employees where the Company is the beneficiary and is recorded as an asset on the consolidated statements of condition. Increases in the cash surrender values of the policies, as well as death benefits received, net of any cash surrender value, are recorded in non-interest income on the consolidated statements of income, and are not subject to income taxes. The Company reviews the financial strength of the insurance carriers prior to the purchase of life insurance policies and no less than annually thereafter. A life insurance policy with any individual carrier is limited to 15% of Tier 1 capital (as defined for regulatory purposes) and the total cash surrender value of life insurance policies is limited to 25% of Tier 1 capital.
Premises and Equipment. Premises and equipment purchased in normal course are stated at cost less accumulated depreciation, while premises and equipment obtained through the acquisition of a company or branch acquisition are stated at their estimated fair values as of the acquisition date less accumulated depreciation that occurred subsequent to the acquisition date.
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of the term of the respective lease or the estimated life of the improvement. Land is carried at cost.
Repairs and maintenance costs that are not an improvement or do not extend the estimated useful life of the asset are expensed as incurred.
Software costs, including cloud-based software licenses that qualify as internal-use software, are stated at cost less accumulated amortization within other assets on the consolidated statements of condition. Amortization expense is calculated using the straight-line method over the estimated useful lives of the related assets. Cloud-based software costs that do not qualify as internal-use software are capitalized as service contracts within other assets on the consolidated statements of condition and expensed ratably over the term of the contract period.
OREO. OREO properties acquired through foreclosure or deed-in-lieu of foreclosure are recorded initially at estimated fair value less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ACL on loans 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. Any subsequent declines in the fair value of a property are recorded as a valuation allowance on the asset. Any subsequent increases in the fair value of a property are recorded as reductions of the valuation allowance, but not below zero. At December 31, 2020 and 2019, OREO properties were carried within other assets on the consolidated statements of condition at $236,000 and $94,000, respectively.
Upon a sale of an OREO property, any excess of the carrying value over the sale proceeds is recognized as a loss on sale. Any excess of sale proceeds over the carrying value of the OREO property is first applied as a recovery to the valuation allowance, if any, with the remainder being recognized as a gain on sale. The recognized gain or loss upon sale of OREO property is recognized within other real estate owned and collection costs, net on the consolidated statements of income.
Operating expenses, including legal and other direct expenses, and changes in the valuation allowance relating to foreclosed assets are included in other real estate owned and collection costs, net on the consolidated statements of income.
Mortgage Banking. Residential real estate mortgage loans are originated for purposes of being (i) held for investment and (ii) held for sale into the secondary market. The transfer of these financial assets is accounted for as a sale when control over the asset has been surrendered. Control is deemed to be surrendered when (i) the asset has been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset, and (iii) the Company does not maintain effective control over the transferred asset through an agreement to repurchase it before its maturity. The Company records the gain on sale of the financial asset within mortgage banking income, net on the consolidated statements of income, net of direct and indirect costs incurred to originate the loan.
Servicing assets are recognized as separate assets when servicing rights are acquired through the sale of residential mortgage loans with servicing rights retained. Capitalized servicing rights are initially recorded at fair value and reported within other assets on the consolidated statements of condition and recognized as income within mortgage banking income, net on the consolidated statements of income. Servicing rights are amortized in proportion to, and over the period of, the estimated future servicing of the underlying mortgages (typically, the contractual life of the mortgage). The amortization of mortgage servicing rights is recorded as a reduction of income within non-interest income on the consolidated statements of income.
Servicing assets are evaluated for impairment quarterly based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment of the servicing assets is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. If it is later determined that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded increasing income, but not below zero.
Servicing fee income is recorded for fees earned for servicing loans for investors. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income within non-interest income on the consolidated statements of income when earned.
Short-Term and Long-Term Borrowings. Short-term borrowings are those that upon origination are scheduled to mature within one year. The Company's short-term borrowings may include, but are not limited to, FHLBB overnight and FHLBB advances, customer repurchase agreements, federal funds purchased, and line of credit advances.
Long-term borrowings are those that upon origination are scheduled to mature in one or more years. The Company's long-term borrowings may include, but are not limited to, FHLBB advances, subordinated debentures, and wholesale repurchase agreements.
The Company is required to post collateral for certain borrowings, for which it generally posts loans and/or investment securities as collateral.
Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax implications attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current information suggests that it is not more-likely than-not that the Company will not be able to realize the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company assesses quarterly whether or not a valuation allowance on its deferred tax assets is necessary. If it is more- likely-than-not that the Company will not be able to realize the benefit of the deferred tax assets, then a valuation allowance is established on the deferred tax asset not expected to be realized. At December 31, 2020 and 2019, the Company did not carry a valuation allowance on its deferred tax assets.
The Company accounts for its windfall tax benefits and shortfalls within income tax expense on the consolidated statements of income as a discrete period item in the period generated.
EPS. Basic EPS excludes dilution and is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if certain securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the Company. Diluted EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding for the period, plus an incremental number of common-equivalent shares computed using the treasury stock method.
Unvested share-based payment awards which include the right to receive non-forfeitable dividends are considered to participate with common stock in undistributed earnings for purposes of computing EPS. Restricted share grants and management stock purchase grants are considered participating securities for this purpose. Accordingly, the Company is required to calculate basic and diluted EPS using the two-class method. The calculation of EPS using the two-class method (i) excludes any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities from the numerator and (ii) excludes the dilutive impact of the participating securities from the denominator.
Postretirement Plans. The Company sponsors various retirement plans for current and former employees, including a SERP for certain officers of the Company and a postretirement health care and life insurance plan to certain eligible retired employees. The SERP and postretirement benefit plans are unfunded and have no plan assets, and the Company has recorded a liability on the consolidated statements of condition.
For the SERP, benefit obligations are estimated using the projected unit credit method. Under this method, each participant's benefits are attributed to years of service, taking into consideration future salary increases and the SERP's benefit allocation formula. Thus, the estimated total pension to which each participant is expected to become entitled to at retirement is broken down into units, each associated with a year of past or future credited service. For the SERP, an individual's estimated attributed benefit for valuation purposes related to a particular separation date is the benefit described under the SERP based on credited service as of the measurement date, but determined using the projected salary that would be used in the calculation estimate of the benefit on the expected separation date.
The Company has obligations with various active and retired employees related to certain postretirement benefits. The obligations are based on the employee's date of hire and years of service through retirement, with the associated cost recognized over the requisite service period. Under the plan, the postretirement benefit amount the Company will pay for any given year for an individual is capped. Furthermore, the Company's obligation exists until the participant qualifies for Medicare. The accrual methodology results in an accrued amount at the full eligibility date equal to the then present value of all of the future benefits expected to be paid.
Net periodic benefits cost (credit) includes service costs and interest costs based on the assumed discount rate, amortization of prior service costs due to plan amendments and/or amortization of actuarial gains or losses. As prior service costs and actuarial gains or losses are amortized, they are reclassified from AOCI on the consolidated statements of condition into other expenses on the consolidated statements of income. The amortization of actuarial gains and losses is determined using the 10% corridor minimum amortization approach and is taken over the average remaining future working lifetime of the plan participants.
Revenue from Contracts with Customers. The Company receives a portion of its non-interest income from contracts with customers, which is accounted for in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). Refer to Note 16 of the consolidated financial statements for further details.
Stock-Based Compensation. The fair value of restricted stock awards, restricted stock units and stock options is determined on the grant date. For restricted stock awards and units, compensation is recognized ratably over the requisite service period equal to the fair value of the award. For stock option awards, the fair value is determined using the Black-Scholes option-pricing model. Compensation expense for stock option awards is recognized ratably over the requisite service period equal to the fair value of the award. For performance-based share awards, the Company estimates the degree to which performance conditions will be met to determine the number of shares that will vest and the related compensation expense. Compensation expense is adjusted in the period such estimates change.
The Company does not assume an estimated forfeiture rate on its nonvested share-based awards in its reporting of share-based compensation expense. Should a share-based award be forfeited, the Company would reverse all associated compensation expense previously recorded on the nonvested shares.
Off-Balance Sheet Credit Exposures. In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded as loans when they are funded.
ACL on Off-Balance Sheet Credit Exposures. The Company established an ACL on off-balance sheet credit exposures by recording a liability for expected credit losses on certain unfunded loan commitments and standby letters of credit. Prior to the adoption of CECL, effective January 1, 2020, but has been applied to reporting periods on or after October 1, 2020, the ACL on off-balance sheet credit exposures represented management's best estimate of probable inherent losses on unfunded loan commitments and standby letters of credit.
Upon adoption of CECL, the ACL on off-balance sheet credit exposures, excluding those that are unconditionally cancellable by the Company, estimates the expected losses on the unfunded commitments and standby letters of credit at each reporting date. To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio. An estimated funding rate is then applied to the qualifying unfunded loan commitments and standby letters of credit using the Company’s own historical experience to estimate the expected funded for each loan segment as of the reporting date. Once the expected funded amount for each loan segment is determined, the CECL loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on off-balance sheet credit exposures as of the reporting date.
The ACL on off-balance sheet credit exposures is presented within accrued interest and other liabilities on the consolidated statements of condition. A charge (credit) to provision for credit losses on the consolidated statements of income is made to account for the change in the ACL on off-balance sheet exposures between reporting periods. Refer to Note 11 of the consolidated financial statements for further details as of each reporting period.
Derivative Financial Instruments Designated as Hedges. The Company recognizes all derivatives in the consolidated statements of condition at fair value. On the date the Company enters into the derivative contract, the Company designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in OCI and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading
instruments are recorded at fair value with changes in fair value recorded in earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.
The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") in the fourth quarter of 2018. ASU 2017-12 required the Company to apply the requirements to existing hedging relationships on the date of adoption, and the effect of the adoption on retained earnings was reflected as of January 1, 2018. The guidance did not have an impact on the Company's derivatives that qualified as hedges on the date of adoption, and, thus, no adjustment was made to beginning retained earnings. In conjunction with the adoption of ASU 2017-12, the Company made the transition election to reclassify $92.0 million in book value of securities from HTM to AFS that qualified.
Segment Reporting. Operating segments are the components of an entity for which separate financial information is available and evaluated regularly by the chief operating decision-maker in order to allocate resources and assess performance. The Company's chief operating decision-maker assesses consolidated financial results to make operating and strategic decisions, assess performance, and allocate resources. Therefore, the Company has determined that its business is conducted in one reportable segment and represents the consolidated financial statements of the Company.
Recent Accounting Pronouncements Adopted:
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"), ASU No. 2019-04, Codification Improvements to Topic 326 ("ASU 2019-04"), ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05") and ASU No. 2019-11, Codification Improvements to Topic 326 ("ASU 2019-11"). The FASB issued ASU 2016-13 to require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The Company adopted ASU 2016-13 and the related updates to the standard on December 31, 2020, effective January 1, 2020, but applied to reporting periods on or after October 1, 2020. Refer to the aforementioned sections Investments, ACL on Loans, Accrued Interest and ACL on Off-Balance Sheet Credit Exposures for further details surrounding the adoption of ASU 2016-13 and its related updates.
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The FASB issued ASU 2019-12 to simplify the accounting for income taxes by removing certain technical exceptions and by clarifying and amending certain areas. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, and as such the Company adopted effective January 1, 2021. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.
Recent Accounting Pronouncements Issued but not yet Adopted:
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform ("ASU 2020-04"), updated by ASU No. 2021-01, Reference Rate Reform (Topic 848) Scope ("ASU 2021-01"). The FASB issued ASU 2020-04 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that are affected by reference rate reform, if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. ASU 2021-01 was subsequently issued to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.
ASU 2020-04 and ASU 2020-01 are effective as of March 12, 2020 through December 31, 2022, with adoption permitted prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company, which has not yet adopted the amendments in these updates, has assembled a cross-functional project team that is currently reviewing contracts and existing processes in order to assess the risks and potential impact to the Company of the transition away from LIBOR to a new reference rate.
NOTE 2 – INVESTMENTS
Trading Securities
Trading securities are reported on the Company's consolidated statements of condition at fair value. As of December 31, 2020 and 2019, the fair value of the Company's trading securities were $4.2 million and $3.8 million, respectively. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company’s Executive Deferred Compensation Plan and Director Deferred Compensation Plan.
AFS Debt Securities
AFS debt securities are reported on the Company's consolidated statements of condition at fair value. The following table summarizes the amortized cost, estimated fair value and unrealized gains (losses) of AFS debt securities as of the dates indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
119,608
|
|
|
$
|
7,627
|
|
|
$
|
(115)
|
|
|
$
|
127,120
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
547,396
|
|
|
19,796
|
|
|
(574)
|
|
|
566,618
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
399,937
|
|
|
10,652
|
|
|
(135)
|
|
|
410,454
|
|
Subordinated corporate bonds
|
|
11,533
|
|
|
186
|
|
|
(98)
|
|
|
11,621
|
|
Total AFS debt securities
|
|
$
|
1,078,474
|
|
|
$
|
38,261
|
|
|
$
|
(922)
|
|
|
$
|
1,115,813
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
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 debt securities
|
|
$
|
913,978
|
|
|
$
|
9,551
|
|
|
$
|
(5,411)
|
|
|
$
|
918,118
|
|
As of December 31, 2020, there was no allowance carried on AFS debt securities in accordance with ASU 2016-13.
Net unrealized gains on AFS debt securities reported within AOCI at December 31, 2020, were $29.3 million, net of a deferred tax liability of $8.0 million. Net unrealized gains on AFS debt securities reported within AOCI at December 31, 2019, were $3.3 million, net of a deferred tax liability of $890,000, respectively.
The following table details the Company’s sales of AFS debt securities for the periods indicated below:
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|
|
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|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Proceeds from sales of AFS debt securities(1)
|
|
$
|
—
|
|
|
$
|
207,001
|
|
|
$
|
56,155
|
|
Gross realized gains
|
|
—
|
|
|
1,427
|
|
|
32
|
|
Gross realized losses
|
|
—
|
|
|
(1,532)
|
|
|
(695)
|
|
|
|
|
|
|
|
|
(1) For the year ended December 31, 2019 and 2018, the Company had not previously recorded any OTTI on AFS debt securities sold.
The following table presents the Company's AFS debt securities with gross unrealized losses, for which an ACL has not been recorded at December 31, 2020, segregated by the length of time the securities have been in a continuous loss position:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
1
|
|
$
|
2,404
|
|
|
$
|
(115)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,404
|
|
|
$
|
(115)
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
15
|
|
61,222
|
|
|
(568)
|
|
|
980
|
|
|
(6)
|
|
|
62,202
|
|
|
(574)
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
9
|
|
39,107
|
|
|
(135)
|
|
|
—
|
|
|
—
|
|
|
39,107
|
|
|
(135)
|
|
Subordinated corporate bonds
|
|
5
|
|
4,902
|
|
|
(98)
|
|
|
—
|
|
|
—
|
|
|
4,902
|
|
|
(98)
|
|
Total AFS debt securities
|
|
30
|
|
$
|
107,635
|
|
|
$
|
(916)
|
|
|
$
|
980
|
|
|
$
|
(6)
|
|
|
$
|
108,615
|
|
|
$
|
(922)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 debt securities
|
|
105
|
|
$
|
259,972
|
|
|
$
|
(2,911)
|
|
|
$
|
132,247
|
|
|
$
|
(2,500)
|
|
|
$
|
392,219
|
|
|
$
|
(5,411)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, the unrealized losses on Company's AFS debt securities have not been recognized into income because management does not intend to sell and it is not more-likely-than-not it will be required to sell any of the AFS debt securities before recovery of its amortized cost basis, and the unrealized losses were largely due to changes in interest rates and other market conditions and not reflective of credit events. The issuers continue to make timely principal and interest payments on the bonds.
The amortized cost and estimated fair values of AFS debt securities by contractual maturity at December 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
|
Due in one year or less
|
|
$
|
5,472
|
|
|
$
|
5,495
|
|
Due after one year through five years
|
|
59,769
|
|
|
61,338
|
|
Due after five years through ten years
|
|
248,035
|
|
|
263,889
|
|
Due after ten years
|
|
765,198
|
|
|
785,091
|
|
|
|
$
|
1,078,474
|
|
|
$
|
1,115,813
|
|
HTM Debt Securities
HTM debt securities are reported on the Company's consolidated statements of condition at amortized cost. The following table summarizes the amortized cost, estimated fair value and unrealized gains (losses) of HTM debt securities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,297
|
|
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
1,411
|
|
Total HTM debt securities
|
|
$
|
1,297
|
|
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
1,411
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,302
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
Total HTM debt securities
|
|
$
|
1,302
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
As of December 31, 2020, there was no allowance carried on HTM debt securities, and none of the Company's HTM debt securities were in an unrealized loss position.
As of December 31, 2020, the Company’s HTM debt securities portfolio was made up of three investment grade municipal debt securities, of which two securities also carried credit enhancements. The HTM debt securities portfolio was comprised solely of high credit quality (rated AA or higher) state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-zero credit loss. As a result, the Company determined that the expected credit loss on its HTM portfolio was immaterial, and therefore, an allowance was not recorded at December 31, 2020.
As of December 31, 2020, none of the Company's HTM debt securities were past due or on non-accrual status. The Company did not recognize any interest income on non-accrual HTM debt securities during the year ended December 31, 2020. At December 31, 2020 and 2019, total accrued interest receivable on HTM debt securities, which has been excluded from reported amortized cost basis on HTM debt securities, was $10,000 and reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
The amortized cost and estimated fair values of HTM debt securities by contractual maturity at December 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
|
510
|
|
|
547
|
|
Due after five years through ten years
|
|
787
|
|
|
864
|
|
Due after ten years
|
|
—
|
|
|
—
|
|
|
|
$
|
1,297
|
|
|
$
|
1,411
|
|
AFS and HTM Debt securities OTTI. For annual and interim reporting periods prior to October 1, 2020, management reviewed the Company’s AFS and HTM investments quarterly 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 were 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 was in a loss position, for example, were applied in determining OTTI. Once a decline in value was determined to be other-than-temporary, the cost basis of the security was permanently reduced and a corresponding charge to earnings was recognized.
At 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 December 31, 2019, gross unrealized losses on the Company's AFS and HTM debt securities were 1%. At December 31, 2019, the Company had the intent and ability to retain its debt investments that were in an unrealized loss position until the decline in value recovered.
AFS and HTM Debt Securities Pledged. At December 31, 2020 and 2019, AFS and HTM debt securities with an amortized cost of $485.0 million and $709.0 million, respectively, and estimated fair values of $507.1 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.
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
FHLBB (carried at cost)
|
|
$
|
6,168
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,168
|
|
FRB (carried at cost)
|
|
5,374
|
|
|
—
|
|
|
—
|
|
|
5,374
|
|
Total other investments
|
|
$
|
11,542
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,542
|
|
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
|
|
During the year ended December 31, 2020, the Company's bank stock equity securities were redeemed by the issuer, as part of a merger agreement, and the Company received proceeds of $1.7 million from the redemption. For the year ended December 31, 2020, the Company realized a gain on its bank stock equity securities of $1.2 million, of which $38,000 was recognized as a realized gain during 2020, $928,000 and $(50,000) were recognized as unrealized gains in 2019 and 2018, respectively. The gains, which were due to the change in fair value of the equity securities, were presented within other income on the consolidated statements of income.
The Company did not record any impairment on its FHLBB and FRB stock for the year ended December 31, 2020 and 2019.
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS
The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Commercial Loans:
|
|
|
|
|
Commercial real estate(1)
|
|
$
|
1,369,470
|
|
|
$
|
1,243,397
|
|
Commercial
|
|
381,494
|
|
|
442,701
|
|
SBA PPP
|
|
135,095
|
|
|
—
|
|
|
|
|
|
|
Total commercial loans
|
|
1,886,059
|
|
|
1,686,098
|
|
Retail Loans:
|
|
|
|
|
Residential real estate
|
|
1,054,798
|
|
|
1,070,374
|
|
Home equity
|
|
258,573
|
|
|
312,779
|
|
Consumer
|
|
20,392
|
|
|
25,772
|
|
Total retail loans
|
|
1,333,763
|
|
|
1,408,925
|
|
Total loans
|
|
$
|
3,219,822
|
|
|
$
|
3,095,023
|
|
(1) Commercial real estate was segmented into non owner-occupied properties and owner-occupied properties upon adoption of CECL, effective January 1, 2020. At December 31, 2020, total commercial real estate - non owner-occupied loans and owner-occupied loans were $1.1 billion and $271.5 million, respectively.
The loan balances for each portfolio segment presented above are net of their respective net unamortized fair value mark discount on acquired loans and net unamortized loan origination costs for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Net unamortized fair value mark discount on acquired loans
|
|
$
|
(1,291)
|
|
|
$
|
(2,593)
|
|
Net unamortized loan origination costs(1)
|
|
856
|
|
|
3,111
|
|
Total
|
|
$
|
(435)
|
|
|
$
|
518
|
|
(1) The decrease in net unamortized loan origination costs from December 31, 2019 to December 31, 2020, was primarily driven by origination fees capitalized for SBA PPP loans during 2020. As of December 31, 2020, unamortized loan fees on originated SBA PPP loans were $2.2 million.
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 Company participated in SBA PPP loan funding to qualifying businesses during 2020. Through December 31, 2020, the Company originated 3,034 SBA PPP loans totaling $244.8 million to qualifying businesses across our markets in need of financial support due to the COVID-19 pandemic. This program provided qualifying businesses a specialized low interest rate loan by the U.S. Treasury Department and is administered by the SBA. The SBA PPP loan provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs, as well as certain other costs up to pre-established limits. In December 2020, as part of the Consolidated Appropriations Act of 2021, another round of SBA PPP loan funding was authorized by the Federal government in response to the continued impact of the COVID-19 pandemic on certain businesses. In January 2021, the Company, again, began lending under the SBA PPP loan program.
In the normal course of business, the Company 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 do not involve more than the normal risk of collectability or present other unfavorable features. At December 31, 2020 and 2019, outstanding loans to certain officers, directors and their associated companies were less than 5% of the Company's shareholders' equity.
ACL on Loans
Under CECL, effective January 1, 2020, the ACL on loans is management's estimate of expected credit losses within its loan portfolio as of each reporting date.
The Board of Directors monitors credit risk through: (i) the Directors' Credit Committee, which reviews large credit exposures, monitors 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 allowance for loan loss methodology under the incurred loss accounting methodology for December 31, 2019 and periods prior to; and (ii) the Audit Committee, effective January 1, 2020, which has approval authority and oversight responsibility for ACL adequacy and methodology, including the ACL on loans.
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, and maintain the integrity of the loan rating system. Effective for annual and interim periods beginning January 1, 2020, the adequacy of the ACL, including the ACL on loans, is overseen by the Management Provision Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Risk, Compliance, and Commercial and Retail Banking. The Management Provision Committee is further supported by other management-level committees to ensure the adequacy of the ACL. The Management Provision Committee supports the oversight efforts of the director-level committees discussed in the paragraph above 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 ACL on loans, the Company disaggregates its loans into portfolio segments. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. As of December 31, 2020, the Company's loan portfolio segments, as determined based on the unique risk characteristics of each, include the following:
Commercial Real Estate - Non Owner-Occupied and Owner-Occupied. 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. Maximum 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.
SBA PPP. SBA PPP loans are unsecured, fully-guaranteed commercial loans backed by the SBA, issued to qualifying small businesses as part of federal stimulus issued in response to the COVID-19 pandemic. Loans made under the program have terms of two or five years and are to be used by the borrower to offset certain payroll and other operating costs, such as rent and utilities. The loan and accrued interest, or a portion thereof, is eligible for forgiveness by the SBA should the qualifying small business meet certain conditions. These loans were originated under the guidance of the SBA, which has been subject to change.
In late-December 2020, another round of SBA PPP loans was announced as part of the Consolidated Appropriations Act of 2021. The terms and structure of this program are similar to those issued under the CARES Act. The Company continues to participate in SBA PPP lending to customers and borrowers in need of funding due to the COVID-19 pandemic.
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 residences, including for investment purposes.
Home Equity. Home equity loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.
Consumer. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower
qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable. Consumer loans may be secured or unsecured.
For annual and interim reporting periods prior to October 1, 2020, the Company's loan portfolio was segmented into commercial real estate, commercial, residential real estate, home equity and consumer.
The following table presents the activity in the ACL on loans at and for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Non Owner-Occupied
|
|
Owner- Occupied
|
|
Commercial
|
|
SBA PPP
|
|
Residential Real Estate
|
|
Home Equity
|
|
Consumer
|
|
Total
|
Beginning balance, December 31, 2019
|
|
$
|
10,924
|
|
|
$
|
1,490
|
|
|
$
|
3,985
|
|
|
$
|
—
|
|
|
$
|
5,842
|
|
|
$
|
2,423
|
|
|
$
|
507
|
|
|
$
|
25,171
|
|
Impact of adopting CECL(1)
|
|
(668)
|
|
|
(90)
|
|
|
1,548
|
|
|
—
|
|
|
(1,129)
|
|
|
792
|
|
|
(220)
|
|
|
233
|
|
Loans charged off
|
|
(82)
|
|
|
(21)
|
|
|
(1,130)
|
|
|
—
|
|
|
(121)
|
|
|
(317)
|
|
|
(167)
|
|
|
(1,838)
|
|
Recoveries
|
|
107
|
|
|
13
|
|
|
572
|
|
|
—
|
|
|
292
|
|
|
33
|
|
|
67
|
|
|
1,084
|
|
Provision (credit) for loan losses
|
|
11,497
|
|
|
1,440
|
|
|
1,728
|
|
|
69
|
|
|
(1,410)
|
|
|
(315)
|
|
|
206
|
|
|
13,215
|
|
Ending balance, December 31, 2020
|
|
$
|
21,778
|
|
|
$
|
2,832
|
|
|
$
|
6,703
|
|
|
$
|
69
|
|
|
$
|
3,474
|
|
|
$
|
2,616
|
|
|
$
|
393
|
|
|
$
|
37,865
|
|
(1) Effective January 1, 2020, the Company adopted ASU 2016-13, commonly referred to as "CECL." Refer to Note 1 for further details.
The ACL on loans at December 31, 2020, was $37.9 million, an increase of $12.7 million, or 50%, since December 31, 2019. The increase was driven by the adoption of CECL, effective January 1, 2020, and the impact of the COVID-19 pandemic on expected credit losses. At December 31, 2020, the ACL on loans estimate used a reasonable and supportable forecast period of one year across all of its loan segments. At December 31, 2020, the reasonable and supportable forecast used to estimate the ACL on loans used the following loss drivers by loan segment: (i) commercial real estate - non owner-occupied used Maine Unemployment and Maine Retail Trade, (ii) commercial real estate - owner-occupied used Maine Unemployment and Maine GDP, (iii) commercial used Maine Unemployment and National GDP, (iv) residential real estate used Maine Unemployment and Maine House Price Index, (v) home equity used Maine Unemployment and Maine House Price Index and (vi) consumer used Maine Unemployment and National GDP. Though the SBA PPP loans are fully guaranteed by the SBA, the Company applied an insignificant expected credit loss factor to its SBA PPP loan segment based on its past historical experience with similar loans and guarantees. Furthermore, qualitative factors, as described within Note 1 of the consolidated financial statements, were used to estimate the ACL on loans at December 31, 2020. The Company's qualitative factors at December 31, 2020, included consideration of the level of uncertainty surrounding the COVID-19 pandemic. At December 31, 2020, the ACL on loans estimate used a reversion period of one year for each loan segment.
The increase in the ACL on loans at December 31, 2020 compared to December 31, 2019, for the commercial real estate loan segments and commercial loan segment was driven by change in current and forecasted economic conditions between periods and the elevated risk within certain industries within these loan segments due to the COVID-19 pandemic. The decrease in ACL on loans allocated to the residential real estate loan segment primarily reflects the increase in housing demand driving elevated home prices across the Company's markets as northern New England, and Maine in particular, has benefited as people living in urban areas have moved into more rural markets in response to the COVID-19 pandemic.
The following table presents activity in the allowance for loan losses and select loan information by portfolio segment, under the incurred loss methodology, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial Real Estate
|
|
Commercial
|
|
|
|
Residential Real Estate
|
|
Home Equity
|
|
Consumer
|
|
Total
|
At or For the Year Ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
11,654
|
|
|
$
|
3,957
|
|
|
|
|
$
|
6,071
|
|
|
$
|
2,796
|
|
|
$
|
234
|
|
|
$
|
24,712
|
|
Loans charged off
|
|
(300)
|
|
|
(1,238)
|
|
|
|
|
(462)
|
|
|
(412)
|
|
|
(301)
|
|
|
(2,713)
|
|
Recoveries
|
|
49
|
|
|
225
|
|
|
|
|
16
|
|
|
1
|
|
|
19
|
|
|
310
|
|
Provision (credit) for loan losses
|
|
1,011
|
|
|
1,041
|
|
|
|
|
217
|
|
|
38
|
|
|
555
|
|
|
2,862
|
|
Ending balance
|
|
$
|
12,414
|
|
|
$
|
3,985
|
|
|
|
|
$
|
5,842
|
|
|
$
|
2,423
|
|
|
$
|
507
|
|
|
$
|
25,171
|
|
Allowance balance attributable loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
30
|
|
|
$
|
—
|
|
|
|
|
$
|
364
|
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
463
|
|
Collectively evaluated for impairment
|
|
12,384
|
|
|
3,985
|
|
|
|
|
5,478
|
|
|
2,354
|
|
|
507
|
|
|
24,708
|
|
Total ending allowance
|
|
$
|
12,414
|
|
|
$
|
3,985
|
|
|
|
|
$
|
5,842
|
|
|
$
|
2,423
|
|
|
$
|
507
|
|
|
$
|
25,171
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
402
|
|
|
$
|
319
|
|
|
|
|
$
|
3,384
|
|
|
$
|
373
|
|
|
$
|
—
|
|
|
$
|
4,478
|
|
Collectively evaluated for impairment
|
|
1,242,995
|
|
|
442,382
|
|
|
|
|
1,066,990
|
|
|
312,406
|
|
|
25,772
|
|
|
3,090,545
|
|
Total loan balances
|
|
$
|
1,243,397
|
|
|
$
|
442,701
|
|
|
|
|
$
|
1,070,374
|
|
|
$
|
312,779
|
|
|
$
|
25,772
|
|
|
$
|
3,095,023
|
|
At or For the Year Ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
11,863
|
|
|
$
|
4,622
|
|
|
|
|
$
|
5,086
|
|
|
$
|
2,367
|
|
|
$
|
233
|
|
|
$
|
24,171
|
|
Loans charged off
|
|
(512)
|
|
|
(991)
|
|
|
|
|
(173)
|
|
|
(476)
|
|
|
(96)
|
|
|
(2,248)
|
|
Recoveries
|
|
28
|
|
|
1,771
|
|
|
|
|
90
|
|
|
44
|
|
|
11
|
|
|
1,944
|
|
Provision (credit) for loan losses
|
|
275
|
|
|
(1,445)
|
|
|
|
|
1,068
|
|
|
861
|
|
|
86
|
|
|
845
|
|
Ending balance
|
|
$
|
11,654
|
|
|
$
|
3,957
|
|
|
|
|
$
|
6,071
|
|
|
$
|
2,796
|
|
|
$
|
234
|
|
|
$
|
24,712
|
|
Allowance balance attributable loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
23
|
|
|
$
|
53
|
|
|
|
|
$
|
586
|
|
|
$
|
162
|
|
|
$
|
—
|
|
|
$
|
824
|
|
Collectively evaluated for impairment
|
|
11,631
|
|
|
3,904
|
|
|
|
|
5,485
|
|
|
2,634
|
|
|
234
|
|
|
23,888
|
|
Total ending allowance
|
|
$
|
11,654
|
|
|
$
|
3,957
|
|
|
|
|
$
|
6,071
|
|
|
$
|
2,796
|
|
|
$
|
234
|
|
|
$
|
24,712
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
930
|
|
|
$
|
786
|
|
|
|
|
$
|
4,762
|
|
|
$
|
442
|
|
|
$
|
6
|
|
|
$
|
6,926
|
|
Collectively evaluated for impairment
|
|
1,268,603
|
|
|
414,650
|
|
|
|
|
988,104
|
|
|
327,321
|
|
|
20,618
|
|
|
3,019,296
|
|
Total loan balances
|
|
$
|
1,269,533
|
|
|
$
|
415,436
|
|
|
|
|
$
|
992,866
|
|
|
$
|
327,763
|
|
|
$
|
20,624
|
|
|
$
|
3,026,222
|
|
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 December 31, 2020, the Company's total exposure to the lessors of nonresidential buildings' industry was 14% of total loans and 32% of total commercial real estate loans. There were no other industry concentrations exceeding 10% of the Company's total loan portfolio as of December 31, 2020.
COVID-19 Loan Deferral Program
In response to the COVID-19 pandemic, the Company worked with businesses and consumers to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less.
All loans granted temporary payment relief during 2020 by the Company complied with the terms of the CARES Act, which was signed into law in March 2020, or bank regulator guidance, and thus were not individually assessed, designated or accounted for as TDRs. Refer to Note 1 for further details about the accounting treatment under the CARES Act.
Should the Company issue or extend temporary debt relief to customers due to COVID-19 hardships during 2021, such may be provided under bank regulator guidance issued in 2020 in response to COVID-19 or the Consolidated Appropriations Act of 2021, which extended the provisions within the CARES Act that provided TDR accounting relief to the earlier of: (i) December 31, 2021 or (ii) 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 terminates.
The Company's loans impacted by the COVID-19 pandemic and operating under temporary short-term payment deferral arrangements for a period of 180 days or less were as follows for the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
(In thousands, except number of units)
|
|
Units
|
|
Amortized
Cost
|
|
% of
Total Loans
|
Commercial
|
|
25
|
|
|
$
|
19,866
|
|
|
0.6
|
%
|
Retail
|
|
28
|
|
|
6,669
|
|
|
0.2
|
%
|
Total
|
|
53
|
|
|
$
|
26,535
|
|
|
0.8
|
%
|
Credit Quality Indicators
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 real estate - non owner-occupied and owner-occupied, commercial and residential real estate portfolio segments 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 ACL on loans:
•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.
Loans that were granted temporary debt relief due to the COVID-19 pandemic were not automatically downgraded into lower credit risk ratings. The Company will continue to actively monitor these loans for indications of deterioration as the deferral period matures, which could result in future downgrades.
The Company periodically reassesses asset quality indicators to reflect appropriately 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.
Based on the most recent analysis performed, the risk category of loans by portfolio segment by vintage, reported under the CECL methodology, was as follows as of the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Revolving Loans
Amortized Cost Basis
|
|
Revolving Loans
Converted to Term
|
|
Total
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - non owner-occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
$
|
138,010
|
|
|
$
|
224,148
|
|
|
$
|
144,552
|
|
|
$
|
119,409
|
|
|
$
|
157,588
|
|
|
$
|
264,253
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,047,960
|
|
Special mention (Grade 7)
|
|
5,739
|
|
|
—
|
|
|
—
|
|
|
4,256
|
|
|
3,497
|
|
|
847
|
|
|
—
|
|
|
—
|
|
|
14,339
|
|
Substandard (Grade 8)
|
|
24
|
|
|
125
|
|
|
2,070
|
|
|
405
|
|
|
1,522
|
|
|
31,530
|
|
|
—
|
|
|
—
|
|
|
35,676
|
|
Doubtful (Grade 9)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial real estate - non owner-occupied
|
|
143,773
|
|
|
224,273
|
|
|
146,622
|
|
|
124,070
|
|
|
162,607
|
|
|
296,630
|
|
|
—
|
|
|
—
|
|
|
1,097,975
|
|
Commercial real estate - owner-occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
35,948
|
|
|
29,217
|
|
|
48,312
|
|
|
47,065
|
|
|
25,507
|
|
|
76,098
|
|
|
—
|
|
|
—
|
|
|
262,147
|
|
Special mention (Grade 7)
|
|
—
|
|
|
—
|
|
|
4,584
|
|
|
—
|
|
|
—
|
|
|
1,513
|
|
|
—
|
|
|
—
|
|
|
6,097
|
|
Substandard (Grade 8)
|
|
—
|
|
|
—
|
|
|
891
|
|
|
462
|
|
|
—
|
|
|
1,898
|
|
|
—
|
|
|
—
|
|
|
3,251
|
|
Doubtful (Grade 9)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial real estate - owner occupied
|
|
35,948
|
|
|
29,217
|
|
|
53,787
|
|
|
47,527
|
|
|
25,507
|
|
|
79,509
|
|
|
—
|
|
|
—
|
|
|
271,495
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
53,966
|
|
|
72,863
|
|
|
40,688
|
|
|
25,478
|
|
|
15,788
|
|
|
51,869
|
|
|
72,425
|
|
|
37,026
|
|
|
370,103
|
|
Special mention (Grade 7)
|
|
—
|
|
|
22
|
|
|
313
|
|
|
4,924
|
|
|
117
|
|
|
400
|
|
|
—
|
|
|
867
|
|
|
6,643
|
|
Substandard (Grade 8)
|
|
187
|
|
|
1,012
|
|
|
211
|
|
|
51
|
|
|
42
|
|
|
2,081
|
|
|
65
|
|
|
1,099
|
|
|
4,748
|
|
Doubtful (Grade 9)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial
|
|
54,153
|
|
|
73,897
|
|
|
41,212
|
|
|
30,453
|
|
|
15,947
|
|
|
54,350
|
|
|
72,490
|
|
|
38,992
|
|
|
381,494
|
|
SBA PPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
135,095
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135,095
|
|
Special mention (Grade 7)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Substandard (Grade 8)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Doubtful (Grade 9)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total SBA PPP
|
|
135,095
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135,095
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1-6)
|
|
339,834
|
|
|
183,877
|
|
|
119,426
|
|
|
79,159
|
|
|
57,269
|
|
|
266,324
|
|
|
3,028
|
|
|
—
|
|
|
1,048,917
|
|
Special mention (Grade 7)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
398
|
|
|
—
|
|
|
—
|
|
|
398
|
|
Substandard (Grade 8)
|
|
—
|
|
|
—
|
|
|
176
|
|
|
487
|
|
|
—
|
|
|
4,820
|
|
|
—
|
|
|
—
|
|
|
5,483
|
|
Doubtful (Grade 9)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total residential real estate
|
|
339,834
|
|
|
183,877
|
|
|
119,602
|
|
|
79,646
|
|
|
57,269
|
|
|
271,542
|
|
|
3,028
|
|
|
—
|
|
|
1,054,798
|
|
Home equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
855
|
|
|
9,415
|
|
|
17,281
|
|
|
3,478
|
|
|
1,339
|
|
|
17,664
|
|
|
194,065
|
|
|
12,480
|
|
|
256,577
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
207
|
|
|
1,241
|
|
|
548
|
|
|
1,996
|
|
Total home equity
|
|
855
|
|
|
9,415
|
|
|
17,281
|
|
|
3,478
|
|
|
1,339
|
|
|
17,871
|
|
|
195,306
|
|
|
13,028
|
|
|
258,573
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
6,572
|
|
|
6,525
|
|
|
3,096
|
|
|
1,359
|
|
|
378
|
|
|
1,780
|
|
|
678
|
|
|
—
|
|
|
20,388
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Total consumer
|
|
6,572
|
|
|
6,525
|
|
|
3,096
|
|
|
1,359
|
|
|
382
|
|
|
1,780
|
|
|
678
|
|
|
—
|
|
|
20,392
|
|
Total Loans
|
|
$
|
716,230
|
|
|
$
|
527,204
|
|
|
$
|
381,600
|
|
|
$
|
286,533
|
|
|
$
|
263,051
|
|
|
$
|
721,682
|
|
|
$
|
271,502
|
|
|
$
|
52,020
|
|
|
$
|
3,219,822
|
|
The following table summarizes credit risk exposure indicators by portfolio segment, under the incurred loss methodology, as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial Real Estate
|
|
Commercial
|
|
|
|
Residential Real Estate
|
|
Home Equity
|
|
Consumer
|
|
Total
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (Grades 1 – 6)
|
|
$
|
1,196,683
|
|
|
$
|
436,537
|
|
|
|
|
$
|
1,062,825
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,696,045
|
|
Performing
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
310,653
|
|
|
25,748
|
|
|
336,401
|
|
Special Mention (Grade 7)
|
|
31,753
|
|
|
2,633
|
|
|
|
|
473
|
|
|
—
|
|
|
—
|
|
|
34,859
|
|
Substandard (Grade 8)
|
|
14,961
|
|
|
3,531
|
|
|
|
|
7,076
|
|
|
—
|
|
|
—
|
|
|
25,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
2,126
|
|
|
24
|
|
|
2,150
|
|
Total
|
|
$
|
1,243,397
|
|
|
$
|
442,701
|
|
|
|
|
$
|
1,070,374
|
|
|
$
|
312,779
|
|
|
$
|
25,772
|
|
|
$
|
3,095,023
|
|
Past Due and Non-Accrual Loans
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 will 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.
All loans that were granted temporary payment relief due to the COVID-19 pandemic were current with payments in accordance with the terms of the CARES Act or bank regulatory guidance at the time of initial relief. At December 31, 2020, the payment status for loans that continued to operate under a payment deferral arrangement were reported based on payment status at the time the deferral was granted to the borrower.
The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) 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
|
|
90 Days or Greater Past Due
|
|
Total Past Due
|
|
Current
|
|
Total Loans Outstanding
|
|
Loans > 90 Days Past Due and Accruing
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - non owner-occupied
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
173
|
|
|
$
|
223
|
|
|
$
|
1,097,752
|
|
|
$
|
1,097,975
|
|
|
$
|
—
|
|
|
|
Commercial real estate - owner-occupied
|
|
99
|
|
|
—
|
|
|
47
|
|
|
146
|
|
|
271,349
|
|
|
271,495
|
|
|
—
|
|
|
|
Commercial
|
|
430
|
|
|
—
|
|
|
857
|
|
|
1,287
|
|
|
380,207
|
|
|
381,494
|
|
|
—
|
|
|
|
SBA PPP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135,095
|
|
|
135,095
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
1,406
|
|
|
1,103
|
|
|
2,535
|
|
|
5,044
|
|
|
1,049,754
|
|
|
1,054,798
|
|
|
—
|
|
|
|
Home equity
|
|
335
|
|
|
173
|
|
|
1,416
|
|
|
1,924
|
|
|
256,649
|
|
|
258,573
|
|
|
—
|
|
|
|
Consumer
|
|
92
|
|
|
67
|
|
|
4
|
|
|
163
|
|
|
20,229
|
|
|
20,392
|
|
|
—
|
|
|
|
Total
|
|
$
|
2,362
|
|
|
$
|
1,393
|
|
|
$
|
5,032
|
|
|
$
|
8,787
|
|
|
$
|
3,211,035
|
|
|
$
|
3,219,822
|
|
|
$
|
—
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
267
|
|
|
$
|
1,720
|
|
|
$
|
544
|
|
|
$
|
2,531
|
|
|
$
|
1,240,866
|
|
|
$
|
1,243,397
|
|
|
$
|
—
|
|
|
|
Commercial
|
|
548
|
|
|
243
|
|
|
705
|
|
|
1,496
|
|
|
441,205
|
|
|
442,701
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
2,297
|
|
|
627
|
|
|
2,598
|
|
|
5,522
|
|
|
1,064,852
|
|
|
1,070,374
|
|
|
—
|
|
|
|
Home equity
|
|
681
|
|
|
238
|
|
|
1,459
|
|
|
2,378
|
|
|
310,401
|
|
|
312,779
|
|
|
—
|
|
|
|
Consumer
|
|
108
|
|
|
31
|
|
|
23
|
|
|
162
|
|
|
25,610
|
|
|
25,772
|
|
|
—
|
|
|
|
Total
|
|
$
|
3,901
|
|
|
$
|
2,859
|
|
|
$
|
5,329
|
|
|
$
|
12,089
|
|
|
$
|
3,082,934
|
|
|
$
|
3,095,023
|
|
|
$
|
—
|
|
|
|
The following table presents the amortized cost basis of loans on non-accrual status (including non-accruing TDRs) by portfolio segment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
Non-Accrual Loans With an Allowance
|
|
Non-Accrual Loans Without an Allowance
|
|
Total Non-Accrual Loans
|
|
Total Non-Accrual Loans
|
Commercial real estate(1)
|
|
$
|
450
|
|
|
$
|
62
|
|
|
$
|
512
|
|
|
$
|
—
|
|
Commercial
|
|
1,549
|
|
|
58
|
|
|
1,607
|
|
|
784
|
|
Residential real estate
|
|
3,136
|
|
|
341
|
|
|
3,477
|
|
|
4,096
|
|
Home equity
|
|
1,961
|
|
|
35
|
|
|
1,996
|
|
|
2,130
|
|
Consumer
|
|
4
|
|
|
—
|
|
|
4
|
|
|
24
|
|
Total
|
|
$
|
7,100
|
|
|
$
|
496
|
|
|
$
|
7,596
|
|
|
$
|
7,034
|
|
(1) Commercial real estate was segmented into non owner-occupied and owner-occupied upon adoption of CECL, effective January 1, 2020. At December 31, 2020, commercial real estate - non owner-occupied and owner-occupied non-accrual balances with an allowance were $351,000 and $99,000, respectively, and commercial real estate - non owner-occupied and owner-occupied non-accrual balances without an allowance were $15,000 and $47,000, respectively.
The following table presents the amortized cost basis of collateral-dependent non-accrual loans (including non-accruing TDRs) by portfolio segment and collateral type, as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
|
Collateral Type
|
|
Total Collateral -Dependent Non-Accrual Loans
|
(In thousands)
|
|
Real Estate
|
|
General Business Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
689
|
|
|
$
|
689
|
|
Residential real estate
|
|
248
|
|
|
—
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
248
|
|
|
$
|
689
|
|
|
$
|
937
|
|
Collateral-dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.
Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms for the year ended December 31, 2020, 2019, and 2018 is estimated to have been $335,000, $420,000, and $600,000, respectively.
The Company's policy is to reverse previously recorded interest income when a loan is placed on non-accrual, as such, the Company did not record any interest income on its non-accrual for the year ended December 31, 2020. An immaterial amount of accrued interest on non-accrual loans was written-off during the year ended December 31, 2020, by reversing interest income. At December 31, 2020 and 2019, total accrued interest receivable on loans, which has been excluded from reported amortized cost basis on loans, was $10.2 million and $7.4 million, respectively, and reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
TDRs
The Company takes a conservative approach with credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs, typically, involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will remain a TDR until paid in full, or until the loan is again restructured at current market rates and no concessions are granted.
The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate or, if the loan is currently collateral-dependent, using 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 ACL for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Specific Reserve
|
(In thousands, except number of contracts)
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Commercial real estate(1)
|
|
2
|
|
|
2
|
|
|
$
|
328
|
|
|
$
|
338
|
|
|
$
|
37
|
|
|
$
|
30
|
|
Commercial
|
|
2
|
|
|
2
|
|
|
100
|
|
|
123
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
21
|
|
|
22
|
|
|
2,638
|
|
|
2,869
|
|
|
364
|
|
|
364
|
|
Consumer and home equity
|
|
—
|
|
|
1
|
|
|
—
|
|
|
299
|
|
|
—
|
|
|
69
|
|
Total
|
|
25
|
|
|
27
|
|
|
$
|
3,066
|
|
|
$
|
3,629
|
|
|
$
|
401
|
|
|
$
|
463
|
|
(1) Commercial real estate was segmented into non owner-occupied and owner-occupied upon adoption of CECL, effective January 1, 2020. At December 31, 2020, all commercial real estate TDRs were classified as owner-occupied.
At December 31, 2020, the Company had performing and non-performing TDRs with a recorded investment balance of $2.8 million and $248,000, 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.
The following represents loan modifications that qualify as TDRs that occurred during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Contracts
|
|
Pre-Modification
Outstanding
Recorded Investment
|
|
Post-Modification
Outstanding
Recorded Investment
|
|
Specific Reserve
|
(In thousands, except number of contracts)
|
|
For the Year Ended December 31,
|
|
For the Year Ended December 31,
|
|
For the Year Ended December 31,
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and maturity concession
|
|
—
|
|
|
2
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
231
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
254
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
50
|
|
Payment deferral
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
166
|
|
|
—
|
|
|
—
|
|
|
166
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
—
|
|
|
2
|
|
|
3
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
397
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
420
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
95
|
|
As of December 31, 2020, the Company did not have any other commitments to lend additional funds to borrowers with loans classified as TDRs.
For the year ended December 31, 2020 and 2019, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted. For the year ended December 31, 2018, one home equity loan with a recorded investment of $299,000 at December 31, 2018 was modified as a TDR within the previous 12 months for which the borrower subsequently defaulted. At December 31, 2018, the Company carried a specific reserve on this redefaulted TDR of $162,000.
Impaired Loans
For periods prior to the adoption of CECL, impaired loans consisted of non-accrual loans and TDRs that were 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 Year Ended
|
(In thousands)
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
With related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
128
|
|
|
$
|
128
|
|
|
$
|
30
|
|
|
$
|
130
|
|
|
$
|
11
|
|
Commercial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
292
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
2,395
|
|
|
2,395
|
|
|
364
|
|
|
2,989
|
|
|
110
|
|
Home equity
|
|
318
|
|
|
318
|
|
|
69
|
|
|
522
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
2,841
|
|
|
2,841
|
|
|
463
|
|
|
3,933
|
|
|
121
|
|
Without related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
274
|
|
|
433
|
|
|
—
|
|
|
381
|
|
|
13
|
|
Commercial
|
|
319
|
|
|
685
|
|
|
—
|
|
|
238
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
989
|
|
|
1,116
|
|
|
—
|
|
|
1,258
|
|
|
21
|
|
Home equity
|
|
55
|
|
|
192
|
|
|
—
|
|
|
115
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Ending balance
|
|
1,637
|
|
|
2,426
|
|
|
—
|
|
|
1,993
|
|
|
41
|
|
Total impaired loans
|
|
$
|
4,478
|
|
|
$
|
5,267
|
|
|
$
|
463
|
|
|
$
|
5,926
|
|
|
$
|
162
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
With related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
131
|
|
|
$
|
131
|
|
|
$
|
23
|
|
|
$
|
1,969
|
|
|
$
|
11
|
|
Commercial
|
|
556
|
|
|
556
|
|
|
53
|
|
|
111
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
3,471
|
|
|
3,471
|
|
|
586
|
|
|
3,591
|
|
|
127
|
|
Home equity
|
|
318
|
|
|
318
|
|
|
162
|
|
|
250
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
4,476
|
|
|
4,476
|
|
|
824
|
|
|
5,921
|
|
|
138
|
|
Without related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
799
|
|
|
975
|
|
|
—
|
|
|
2,269
|
|
|
13
|
|
Commercial
|
|
230
|
|
|
293
|
|
|
—
|
|
|
1,379
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
1,291
|
|
|
1,415
|
|
|
—
|
|
|
1,524
|
|
|
34
|
|
Home equity
|
|
124
|
|
|
305
|
|
|
—
|
|
|
195
|
|
|
—
|
|
Consumer
|
|
6
|
|
|
13
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Ending balance
|
|
2,450
|
|
|
3,001
|
|
|
—
|
|
|
5,368
|
|
|
55
|
|
Total impaired loans
|
|
$
|
6,926
|
|
|
$
|
7,477
|
|
|
$
|
824
|
|
|
$
|
11,289
|
|
|
$
|
193
|
|
In-Process Foreclosure Proceedings
At December 31, 2020 and 2019, the Company had $1.5 million and $1.3 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process. Due to the COVID-19 pandemic, the Company has been abiding by state issued mandates requiring a temporary moratorium on foreclosures. The Company will continue to work these consumer mortgage loans through the foreclosure process once the moratorium is lifted, which typically takes 18 to 24 months.
NOTE 4 – GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
Goodwill
At December 31, 2020 and 2019, the carrying value of goodwill was $94.7 million. There were no changes in the carrying value of goodwill for the year ended December 31, 2020 or 2019.
The Company performs its annual goodwill impairment assessment as of November 30th, and at interim periods if indicators of potential impairment exist. In the second quarter of 2020, the Company determined that the COVID-19 pandemic and its impact on global, national and local markets and economy, as well as its impact on the Company's year-to-date consolidated financial results, was a "triggering event" in accordance with ASC 350-20, Goodwill, and an interim goodwill impairment assessment was completed. A quantitative assessment was performed using various valuation methodologies as of May 31, 2020. Through its assessment, the Company concluded that the indicated fair value of its single reporting unit exceeded its carrying value, and, thus goodwill was not impaired as of May 31, 2020. Later in the year, the Company performed its annual goodwill impairment test as of November 30, 2020, using a qualitative analysis and determined goodwill was not impaired.
The Company completed its annual goodwill impairment test as of November 30, 2019 and 2018 and determined goodwill was not impaired.
Accumulated goodwill impairment was $3.6 million as of December 31, 2020, 2019 and 2018.
Core Deposit Intangible Assets
The gross carrying amount and accumulated amortization of core deposit intangible assets were as follows at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Core deposit intangible assets
|
|
$
|
6,451
|
|
|
$
|
(3,608)
|
|
|
$
|
2,843
|
|
|
$
|
6,451
|
|
|
$
|
(2,926)
|
|
|
$
|
3,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020, 2019 and 2018, the Company recorded amortization expense of $682,000, $705,000 and $725,000, respectively.
The following table reflects the amortization expense for core deposit intangible assets over the period of estimated economic benefit:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Core Deposit
Intangible
|
2021
|
|
$
|
655
|
|
2022
|
|
625
|
|
2023
|
|
592
|
|
2024
|
|
556
|
|
2025
|
|
415
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
2,843
|
|
NOTE 5 – PREMISES AND EQUIPMENT
Details of premises and equipment, at cost, for the periods indicated, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Buildings and leasehold improvements
|
|
$
|
46,054
|
|
|
$
|
46,856
|
|
Furniture, fixtures and equipment
|
|
19,916
|
|
|
18,915
|
|
Land and land improvements
|
|
9,238
|
|
|
9,198
|
|
Total cost
|
|
75,208
|
|
|
74,969
|
|
Accumulated depreciation and amortization
|
|
(35,324)
|
|
|
(33,133)
|
|
Net premises and equipment
|
|
$
|
39,884
|
|
|
$
|
41,836
|
|
At December 31, 2020 and 2019, the Company had capitalized software costs of $2.3 million and related accumulated depreciation expense of $2.2 million and $2.1 million, respectively, and was presented within other assets on the consolidated statements of condition.
Depreciation and amortization expense for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
For The Year Ended
December 31,
|
Fixed Asset Type
|
|
Income Statement Line Item
|
|
2020
|
|
2019
|
|
2018
|
Furniture and equipment
|
|
Furniture, equipment and data processing
|
|
$
|
2,113
|
|
|
$
|
2,132
|
|
|
$
|
1,938
|
|
Premises
|
|
Net occupancy costs
|
|
1,593
|
|
|
1,593
|
|
|
1,609
|
|
Software
|
|
Furniture, equipment and data processing
|
|
122
|
|
|
166
|
|
|
218
|
|
Total
|
|
|
|
$
|
3,828
|
|
|
$
|
3,891
|
|
|
$
|
3,765
|
|
The Company did not have any material gains or losses from the sale of premises and equipment for the year ended December 31, 2020, 2019 or 2018.
NOTE 6 – LEASES
Effective January 1, 2019, the Company adopted the new lease accounting standard, ASU 2016-02, using the modified retrospective method. As such, for reporting periods beginning on or after January 1, 2019, leases are recognized, presented and disclosed in accordance with ASU 2016-02, while periods prior to the adoption date were not adjusted and are reported in accordance with ASC 840, Leases ("ASC 840"). Refer to Note 1 for further details.
The Company enters into noncancellable lease arrangements primarily for its office buildings and branches. Certain lease arrangements contain clauses requiring increasing rental payments over the lease term, which may be linked to an index (commonly the Consumer Price Index) or contractually stipulated. Many of these lease arrangements provide the Company with the option to renew the lease arrangement after the initial lease term. These options are included in determining the lease term used to establish the right-of-use assets and lease liabilities, when it is reasonably certain the Company will exercise its renewal option. As most of the Company's leases do not have a readily determinable implicit rate, the incremental borrowing rate is primarily used to determine the discount rate for purposes of measuring the right-of-use assets and lease liabilities. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company entered into a lease arrangement with two of its employees as landlords. The lease was renewed for a period of five years, expiring in 2024, at which time a five-year extension period is available at the option of the Company. The lease arrangement contains certain termination clauses whereby the Company has the right to terminate the lease arrangement, as well as a right to terminate the lease after two years with the required notice without penalty.
The Company entered into a lease agreement in 2019 to rent office space as a sub-tenant from another company in which a Company Director serves as the Chairman and Chief Executive Officer of the other company. The term of the lease is through 2022.
The following right-of-use assets and lease liabilities have been reported within other assets and other liabilities on the consolidated statements of condition as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
Consolidated Statements of Condition
Line Item
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
Right-of-use assets
|
|
Other Assets
|
|
$
|
13,608
|
|
|
$
|
4,951
|
|
|
$
|
18,559
|
|
|
$
|
13,002
|
|
|
$
|
1,502
|
|
|
$
|
14,504
|
|
Lease liabilities
|
|
Other Liabilities
|
|
11,845
|
|
|
4,928
|
|
|
16,773
|
|
|
13,059
|
|
|
1,665
|
|
|
14,724
|
|
In accordance with ASC 842, the components of lease expense for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Lease Cost:
|
|
|
|
|
Operating lease cost(1)
|
|
$
|
1,663
|
|
|
$
|
1,480
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
223
|
|
|
110
|
|
Interest on lease liabilities(2)
|
|
151
|
|
|
68
|
|
Total finance lease cost
|
|
374
|
|
|
178
|
|
Total lease cost(3)
|
|
$
|
2,037
|
|
|
$
|
1,658
|
|
(1) Includes immaterial short-term and variable lease costs, but excludes common area maintenance costs.
(2) Includes immaterial variable lease costs.
(3) Reported within net occupancy costs on the consolidated statements of income.
For the year ended December 31, 2018, rent expense, excluding common area maintenance expense, was $1.3 million.
Supplemental cash flow information and non-cash activity related to leases was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,434
|
|
|
$
|
1,394
|
|
Operating cash flows from finance leases
|
|
151
|
|
|
68
|
|
Financing cash flows from finance leases
|
|
142
|
|
|
106
|
|
Right-of-use assets obtained in exchange for new lease obligations:
|
|
|
|
|
Operating leases(1)
|
|
$
|
2,002
|
|
|
$
|
14,030
|
|
Finance leases(1)
|
|
3,668
|
|
|
1,612
|
|
(1) For the year ended December 31, 2019, includes $10.5 million of operating leases and $1.6 million of finance leases recorded upon adoption of ASU 2016-02.
Supplemental information related to leases was as follows as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Weighted average remaining lease term (years):
|
|
|
|
|
Operating leases
|
|
15.4 years
|
|
15.2 years
|
Finance leases
|
|
27.0 years
|
|
22.4 years
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
3.40
|
%
|
|
3.39
|
%
|
Finance leases
|
|
3.44
|
%
|
|
4.00
|
%
|
The following summarizes the remaining scheduled future minimum lease payments for operating and finance leases as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating Leases
|
|
Finance Leases
|
2021
|
|
$
|
1,329
|
|
|
$
|
306
|
|
2022
|
|
1,310
|
|
|
309
|
|
2023
|
|
1,192
|
|
|
312
|
|
2024
|
|
1,151
|
|
|
314
|
|
2025
|
|
926
|
|
|
317
|
|
Thereafter
|
|
9,374
|
|
|
6,179
|
|
Total minimum lease payments
|
|
15,282
|
|
|
7,737
|
|
Less: amount representing interest(1)
|
|
3,437
|
|
|
2,809
|
|
Present value of net minimum lease payments(2)
|
|
$
|
11,845
|
|
|
$
|
4,928
|
|
(1) Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate.
(2) Reflects the liability reported within other liabilities on the consolidated statements of condition.
The following summarizes expected future minimum lease payments, in accordance with ASC 840, as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating
|
|
Capital
|
2019
|
|
$
|
1,420
|
|
|
$
|
179
|
|
2020
|
|
941
|
|
|
179
|
|
2021
|
|
726
|
|
|
182
|
|
2022
|
|
539
|
|
|
184
|
|
2023
|
|
434
|
|
|
184
|
|
Thereafter
|
|
1,268
|
|
|
1,592
|
|
Total minimum lease payments
|
|
$
|
5,328
|
|
|
2,500
|
|
Less: amount representing interest(1)
|
|
|
|
920
|
|
Present value of net minimum lease payments(2)
|
|
|
|
$
|
1,580
|
|
(1) Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate at lease inception.
(2) Reflects the liability reported within long-term borrowings on the consolidated statements of condition at December 31, 2018.
NOTE 7 – MORTGAGE BANKING
Loans Sold
For the year ended December 31, 2020, 2019 and 2018, the Company sold $625.5 million, $271.8 million and $205.9 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $15.3 million, $6.4 million, and $5.5 million, respectively.
Loans Held for Sale
At December 31, 2020 and 2019, the Company had identified and designated loans with an unpaid principal balance of $40.5 million and $11.9 million, respectively, as held for sale. The Company has elected the fair value option of accounting for its loans designated as held for sale, and, at December 31, 2020 and 2019, the unrealized gain (loss) recorded was $1.1 million and ($61,000), respectively. The unrealized gain or loss on its loans held for sale portfolio was driven by changes in market interest rates and not due to deteriorated credit quality as this risk is mitigated by the short duration between the time of loan closing and transfer of the financial assets to the secondary market investor. Included within the Company's mortgage banking income, net on the consolidated statements of income for the year ended December 31, 2020, 2019 and 2018 was the change in unrealized gains (losses) on loans held for sale of $1.1 million, ($150,000) and $52,000, respectively.
The Company mitigates its interest rate exposure on its loans designated as held for sale through forward delivery commitments with certain approved secondary market investors at the onset of the mortgage origination process, typically on a "best-efforts" basis. For the year ended December 31, 2020, 2019 and 2018, net unrealized (losses) gains from the change in fair value on its forward delivery commitments were ($182,000), $282,000, and ($127,000), respectively. Refer to Note 12 for further discussion of the Company's forward delivery commitments.
Servicing Assets
At December 31, 2020 and 2019, the Company's unpaid principal balances on its servicing assets were $401.6 million and $227.8 million, respectively.
For the year ended December 31, 2020, 2019 and 2018, the Company recorded servicing fee income for its servicing assets of $1.0 million, $898,000 and $949,000, respectively, which was presented in mortgage banking income, net on the consolidated statements of income.
The Company's servicing assets, net of a valuation allowance, at December 31, 2020 and 2019 was $2.2 million and $877,000, respectively. Servicing assets, net of a valuation allowance, are presented in other assets on the consolidated statements of condition.
The Company obtains third party valuations of its servicing assets portfolio quarterly. The servicing assets valuation is based on loan level data stratified by note rate of the underlying loans to determine its amortization and fair value. A discounted cash flow model is used to value each servicing asset strata and it incorporates current market assumption commonly used by buyers of these types of mortgage production in U.S. servicing markets. The calculated valuation using the discounted cash flow method is then compared to recent servicing trades on portfolios with similar characteristics in the U.S. The valuation model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. At December 31, 2020 and 2019, the prepayment assumption used within the valuation model was 19.0% and 14.4%, respectively, and the discount rate was 10.1% and 11.2%. At December 31, 2020, the estimated effect of a 10% and 20% increase to the prepayment assumption was a decrease of $140,000 and $268,000, respectively, to the valuation of the servicing assets. At December 31, 2020, the estimated effect of a 100 and 200 basis point increase to the discount rate assumption was a decrease of $68,000 and $133,000, respectively, to the valuation of the servicing assets. Other assumptions include, but are not limited to, delinquency rates, foreclosure rates, and loan servicing cost.
The following summarizes servicing assets capitalized and amortized, along with the activity in the related valuation allowance as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Servicing Assets:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
877
|
|
|
$
|
831
|
|
|
$
|
1,025
|
|
Capitalized servicing right fees upon sale(1)
|
|
1,763
|
|
|
263
|
|
|
—
|
|
Amortization charged against mortgage servicing fee income(2)
|
|
(419)
|
|
|
(216)
|
|
|
(200)
|
|
Valuation adjustment
|
|
(25)
|
|
|
(1)
|
|
|
6
|
|
Balance at end of year
|
|
$
|
2,196
|
|
|
$
|
877
|
|
|
$
|
831
|
|
Valuation Allowance:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
(2)
|
|
|
$
|
(1)
|
|
|
$
|
(7)
|
|
(Increase) decrease in impairment reserve
|
|
(25)
|
|
|
(1)
|
|
|
6
|
|
Balance at end of year
|
|
$
|
(27)
|
|
|
$
|
(2)
|
|
|
$
|
(1)
|
|
Fair value, beginning of year
|
|
$
|
1,496
|
|
|
$
|
1,677
|
|
|
$
|
1,766
|
|
Fair value, end of year
|
|
$
|
2,447
|
|
|
$
|
1,496
|
|
|
$
|
1,677
|
|
(1) Associated income was reported within mortgage banking income, net on the consolidated statements of income.
(2) Associated amortization expense was reported within mortgage banking income, net on the consolidated statements of income.
Servicer Net Worth and Liquidity Requirements
The Bank, as a servicer of loans, must maintain certain net worth and liquidity requirements for certain agencies and certain secondary market investors.
As lender and servicer of Federal Housing Authority ("FHA") loans, the Bank is required to maintain a minimum net worth of $1.0 million plus 1.0% of total FHA loans exceeding $25.0 million ("minimum net worth required") and maintain liquid assets equal to at least 20.0% of its minimum net worth required.
The Bank is required to maintain a minimum net worth of $2.5 million plus 25 basis points of the unpaid principal balance of serviced loans and must meet the minimum regulatory capital requirement to be classified as "well capitalized" by both FNMA and FHLMC.
Should the Bank fail to maintain the net worth and liquidity requirements above, the secondary market investor may take remedial action and the Company may lose the right to service the loans, which may result in an impairment of its servicing assets and/or loss of revenue.
At December 31, 2020 and 2019, the Bank met all of the aforementioned minimum net worth, regulatory capital, and liquidity requirements. Refer to Note 14 for further details of the Company and Bank's regulatory capital requirements at December 31, 2020 and 2019.
NOTE 8 – DEPOSITS
The following is a summary of the scheduled maturities of CDs, including retail and brokered deposits, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
1 year or less
|
|
$
|
243,232
|
|
|
$
|
474,530
|
|
Over 1 year to 2 years
|
|
54,533
|
|
|
61,100
|
|
Over 2 years to 3 years
|
|
21,068
|
|
|
21,682
|
|
Over 3 years to 4 years
|
|
18,267
|
|
|
14,211
|
|
Over 4 years to 5 years
|
|
17,448
|
|
|
18,993
|
|
Over 5 years
|
|
3,118
|
|
|
5,033
|
|
Total
|
|
$
|
357,666
|
|
|
$
|
595,549
|
|
CDs issued in amounts that meet or exceed the FDIC insurance limit of $250,000 totaled $91.6 million and $176.0 million at December 31, 2020 and 2019, respectively.
The Company has pledged assets as collateral covering certain deposits in the amount of $322.0 million and $471.2 million at December 31, 2020 and 2019, respectively.
The amount of overdraft deposits that were reclassified as loans at December 31, 2020 and 2019 was $520,000 and $889,000, respectively.
At December 31, 2020 and 2019, the Company, in the normal course of business, had deposits from certain officers, directors and their associated companies totaling $52.9 million and $20.7 million, respectively.
NOTE 9 – BORROWINGS
The following table summarizes the Company's short-term borrowings, long-term borrowings and subordinated debentures as presented on the consolidated statements of condition for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
Contractual Maturity
|
|
December 31,
2019
|
(Dollars in thousands)
|
|
Outstanding Balance
|
|
Weighted
Average
Contractual Rate
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Outstanding Balance
|
|
Weighted
Average
Contractual Rate
|
Short-Term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBB borrowings
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
|
Customer repurchase agreements
|
|
162,439
|
|
|
|
|
162,439
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
237,984
|
|
|
|
FHLBB and correspondent bank overnight borrowings
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
162,439
|
|
|
0.34
|
%
|
|
$
|
162,439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
268,809
|
|
|
1.28
|
%
|
Long-Term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLBB borrowings
|
|
$
|
25,000
|
|
|
0.98
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
1.87
|
%
|
Total long-term borrowings
|
|
$
|
25,000
|
|
|
0.98
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
1.87
|
%
|
Subordinated Debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures(1)
|
|
$
|
15,000
|
|
|
5.50
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
14,749
|
|
|
5.50
|
%
|
CCTA(2)
|
|
36,083
|
|
|
1.64
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,083
|
|
|
36,083
|
|
|
3.36
|
%
|
UBCT(2)
|
|
8,248
|
|
|
1.66
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,248
|
|
|
8,248
|
|
|
3.41
|
%
|
Total subordinated debentures
|
|
$
|
59,331
|
|
|
2.62
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,000
|
|
|
$
|
44,331
|
|
|
$
|
59,080
|
|
|
3.90
|
%
|
(1) The outstanding balance of subordinated debentures was presented net of debt issuance costs of $0 and $251,000 at December 31, 2020 and 2019, respectively.
(2) The Company has interest rate swap contracts on certain borrowings. Refer to Note 12 for further discussion of derivative instruments.
FHLBB Borrowings
The terms of the Company's outstanding FHLBB borrowings, including overnight funding, were as follows as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Stated Maturity
|
|
Outstanding Balance
|
|
Weighted Average Contractual Rate
|
|
|
Outstanding Balance
|
|
Weighted Average Contractual Rate
|
January 2020
|
|
$
|
—
|
|
|
—
|
%
|
|
|
$
|
30,825
|
|
|
1.79
|
%
|
April 2020
|
|
—
|
|
|
—
|
%
|
|
|
10,000
|
|
|
1.87
|
%
|
March 2025
|
|
25,000
|
|
|
0.98
|
%
|
|
|
—
|
|
|
—
|
%
|
Total
|
|
$
|
25,000
|
|
|
|
|
|
$
|
40,825
|
|
|
|
The Company's outstanding FHLBB borrowings at December 31, 2020 and 2019 did not contain any call options. However, in February 2021, the Company terminated its $25.0 million FHLBB borrowing contract, with a maturity date in 2025, and incurred a one-time prepayment penalty of $514,000.
FHLBB borrowings 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 $1.3 billion and $1.4 billion at December 31, 2020 and 2019. The carrying value of investment securities pledged as collateral at the FHLBB was $38,000 and $150,000 at December 31, 2020 and 2019, respectively.
Subordinated Debentures
The Company issued $15.0 million of subordinated debt on October 8, 2015, which qualifies as Tier 2 regulatory capital. The interest rate on the subordinated debt is 5.50% per annum, fixed for the ten-year term and payable semi-annually on April 15 and October 15 each year. The Company can redeem the subordinated debt at par starting on October 15, 2020 plus accrued and unpaid interest, or earlier if (i) they no longer qualify as Tier 2 capital for regulatory capital purposes; (ii) a change in law that prevents the Company from deducting interest payable for U.S. federal income tax purposes, or (iii) the Company is required to register as an investment company pursuant to the Investment Company Act of 1940. The subordinated debt is scheduled to mature on October 15, 2025, however in March 2021, the Company announced its intent to call the subordinated debt in full at par, plus accrued and unpaid interest, on April 16, 2021. At December 31, 2020, the Company's $15.0 million of subordinated debt provided $12.0 million of Tier 2 capital, or 37 basis points of the Total risk-based capital ratio. The Company's Total risk-based capital ratio will exceed regulatory requirements, including the capital conservation buffer, after the exercise of the call option.
The Company incurred certain costs associated with the issuance of $15.0 million of subordinated debt. The Company capitalized these costs and they have been presented within subordinated debentures on the consolidated statements of condition. At December 31, 2020 and 2019, net debt issuance costs were $0 and $251,000, respectively. Debt issuance costs amortize over the expected life of the related debt. For the year ended December 31, 2020 and 2019 the amortization expense for debt issuance costs were $251,000 and $115,000, respectively, and were recognized as an increase to interest expense within the consolidated statements of income.
In April 2006, the Company formed CCTA, which issued and sold trust preferred securities to the public. The Company received $36.1 million from the issuance of the trust preferred securities in return for junior subordinated debentures issued by the Company to CCTA. The Company owns all of the $1.1 million of outstanding common securities of CCTA and was presented within other assets on the consolidated statements of condition. The contract interest rate of the trust preferred securities is three-month LIBOR plus 140 basis points. At December 31, 2020 and 2019, the interest rate on the trust preferred securities was 1.64% and 3.36%, respectively. The proceeds from the offering were used to repurchase Company common stock under the tender offer completed in May 2006. The trust preferred securities, which pay interest quarterly at the same rate as the junior subordinated debentures held by CCTA, are mandatorily redeemable on June 30, 2036, or may be redeemed by CCTA at par at any time.
In connection with an acquisition in 2008, the Company assumed $8.0 million of trust preferred securities, held through a Delaware trust affiliate, UBCT. In 2006, an aggregate principal amount of $8.2 million of 30-year junior subordinated debt securities were issued to UBCT. The Company owns all of the $248,000 of outstanding common securities of UBCT, and was presented within other assets on the consolidated statements of condition. The Company is obligated to pay interest on their principal sum quarterly. The contract interest rate of the trust preferred securities is the average three-month LIBOR plus 1.42%. At December 31, 2020 and 2019, the interest rate on the trust preferred securities was 1.66% and 3.41%, respectively. The debt securities mature on April 7, 2036, but may be redeemed by the Company at par, in whole or in part, on any interest payment date. The debt securities may also be redeemed by the Company in whole or in part, within 90 days of the occurrence of certain special redemption events.
CCTA and UBCT are Delaware statutory trusts created for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Company. The junior subordinated debentures are the sole assets of the trusts. The Company is the owner of all of the common securities of CCTA and UBCT and fully and unconditionally guarantees each trust’s securities obligations. In accordance with GAAP, CCTA and UBCT are treated as unconsolidated subsidiaries. The common stock investment in the statutory trusts is included in other assets on the consolidated statements of condition. At December 31, 2020, $43.0 million of the trust preferred securities were included in the Company’s total Tier 1 capital and amounted to 9.6% of Tier 1 capital of the Company.
The Company has a notional amount of $53.0 million in interest rate swap agreements on its junior subordinated debentures, which includes a $10.0 million forward-starting interest rate swap with an effective date of June 30, 2021. Further discussion on the terms and accounting for the interest rate swap agreements is included within Note 12 of the consolidated financial statements.
Interest expense on the subordinated debentures, including the effective portion of the associated interest rate swaps on these debt instruments reclassified from OCI into earnings, totaled $3.5 million, $3.3 million, and $3.4 million for the year ended December 31, 2020, 2019 and 2018, respectively. Refer to Note 12 of the consolidated financial statements for information pertaining to the reclassification of OCI into earnings on the interest rate swaps.
Credit Lines
At December 31, 2020, the Company has the following lines of credit available to it, for which it had no outstanding balances:
•The Bank had an available line of credit with the FHLBB of $9.9 million at December 31, 2020 and 2019. This line of credit serves as overdraft protection should the Company overdraw its account with the FHLBB. The interest rate for this line of credit is set daily by the FHLBB.
•The Company has an unsecured $10.0 million line of credit with PNC Bank that has a maturity date of December 17, 2021 for which the interest rate is LIBOR-based and is set daily by PNC Bank.
•The Company, through the Bank, has an unsecured $50.0 million line of credit with PNC Bank for which the interest rate is set daily by PNC Bank.
•The Company, through the Bank, has a secured line of credit of $54.2 million through the FRB's Discount Window for which the interest rate is set by the FRB daily. At December 31, 2020, the Bank pledged commercial loans with a carrying value of $80.8 million and investment securities of $4,000.
NOTE 10 – REPURCHASE AGREEMENTS
The Company can raise additional liquidity by entering into repurchase agreements at its discretion. In a security repurchase agreement transaction, the Company will generally sell a security, agreeing to repurchase either the same or substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded as interest expense on the consolidated statements of income. The securities underlying the agreements are delivered to counterparties as security for the repurchase obligations. Since the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transactions do not meet the criteria to be classified as sales, and are therefore considered secured borrowing transactions 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, allocated by source of collateral, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Customer Repurchase Agreements(1)(2):
|
|
|
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
$
|
90,015
|
|
|
$
|
117,654
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
70,902
|
|
|
118,969
|
|
Obligations of states and political subdivisions
|
|
1,522
|
|
|
1,361
|
|
Total
|
|
$
|
162,439
|
|
|
$
|
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.
Certain customers held CDs totaling $1.0 million at December 31, 2020 and 2019, 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 11 – 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
Commitments to extend credit
|
|
$
|
723,986
|
|
|
$
|
734,649
|
|
Standby letters of credit
|
|
4,735
|
|
|
5,211
|
|
Total
|
|
$
|
728,721
|
|
|
$
|
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.
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.
The Company establishes an ACL on off-balance sheet credit exposures on its contractual off-balance sheet commitments, except those that are unconditionally cancellable by the Company, of $2.6 million and $21,000 as of December 31, 2020 and 2019, respectively. At December 31, 2020, the ACL on off-balance sheet credit exposures was accounted for and reported using the CECL accounting methodology, and at December 31, 2019, it was accounted for and reported under using the incurred loss accounting methodology. The ACL on off-balance sheet credit exposures was presented within accrued interest and other liabilities on the consolidated statements of condition.
For the year ended December 31, 2020, 2019 and 2018, the provision (credit) for credit losses on off-balance sheet credit exposures was ($797,000), ($1,000) and $2,000, respectively.
Refer to Note 1 of the consolidated financial statements for further discussion of the Company's accounting policy for the ACL on off-balance sheet credit exposures, including the impact upon adoption of CECL.
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.
For the year ended December 31, 2020, the Company settled a lawsuit for $1.2 million to avoid the burden and expense of litigation, and the expense was recorded within other expenses on the consolidated statements of income.
The Company did not have any material loss contingencies that were provided for and/or that are required to be disclosed as of December 31, 2020 and 2019.
NOTE 12 – 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.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same line item on the consolidated statements of income as the earnings effect of the hedged item (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). Any initial fair value of hedge components that are excluded from the assessment of effectiveness are recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same line item on the consolidated statements of income as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of OCI. For the year ended December 31, 2020, 2019 and 2018, the Company did not have any hedge components that were excluded from the assessment of effectiveness.
Quarterly, in conjunction with financial reporting, each cash flow hedge is assessed to determine it continues to be highly effective.
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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2020
|
|
2019
|
(In thousands, except number of positions)
|
|
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
|
|
80
|
|
|
376,290
|
|
|
39,627
|
|
|
75
|
|
|
366,351
|
|
|
17,756
|
|
Pay fixed, receive variable
|
|
Accrued interest and other liabilities
|
|
80
|
|
|
376,290
|
|
|
(39,627)
|
|
|
85
|
|
|
411,594
|
|
|
(17,242)
|
|
Total
|
|
|
|
160
|
|
|
$
|
752,580
|
|
|
$
|
—
|
|
|
170
|
|
|
$
|
823,188
|
|
|
$
|
—
|
|
The Company mitigates 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, as well as by posting cash or other financial assets from or to the counterparty.
The Company has entered into a master netting arrangement with its institutional 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 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 December 31, 2020 and 2019, the Company posted $44.2 million and $18.4 million, respectively, of cash as collateral and it was presented within other assets on the consolidated statements of condition. Refer to Note 13 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.
Fixed Rate Mortgage Interest Rate Locks 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2020
|
|
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
|
|
$
|
58,574
|
|
|
$
|
608
|
|
|
$
|
27,087
|
|
|
$
|
480
|
|
Fixed rate mortgage interest rate locks
|
|
Accrued interest and other liabilities
|
|
28,346
|
|
|
(248)
|
|
|
2,519
|
|
|
(18)
|
|
Total
|
|
|
|
$
|
86,920
|
|
|
$
|
360
|
|
|
$
|
29,606
|
|
|
$
|
462
|
|
For the year ended December 31, 2020, 2019 and 2018, the net unrealized (loss) 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 ($102,000), $395,000, and ($218,000), 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 has been 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
Presentation on Consolidated
Statements of Condition
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
Forward delivery commitments ("best effort")
|
|
Other assets
|
|
$
|
24,951
|
|
|
$
|
311
|
|
|
$
|
10,846
|
|
|
$
|
312
|
|
Forward delivery commitments ("best effort")
|
|
Accrued interest and other liabilities
|
|
15,548
|
|
|
(196)
|
|
|
1,069
|
|
|
(15)
|
|
Total
|
|
|
|
$
|
40,499
|
|
|
$
|
115
|
|
|
$
|
11,915
|
|
|
$
|
297
|
|
For the year ended December 31, 2020, 2019 and 2018, the net unrealized gain (loss) 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 were ($182,000), $282,000, and ($127,000), respectively.
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap on Loans
On June 12, 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 institutional counterparty will post collateral to the Company as requested. At December 31, 2020, the institutional counterparty posted $4.3 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 institutional counterparty posted $560,000 of cash as collateral on its interest rate swap on loans, 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. Refer to Note 13 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
2020
|
|
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
|
|
|
$
|
5,169
|
|
|
$
|
100,000
|
|
|
$
|
483
|
|
|
|
|
|
For the year ended December 31, 2020 and 2019, net payments received from (paid to) the institutional counterparty were $1.0 million and ($214,000), respectively, and were classified as cash flows from operating activities in the Company's consolidated statements of cash flow.
Interest Rate Swap 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 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 potion based on their fair values, the counterparty will post collateral to the Company as requested. Collateral posted to the institutional counterparty or received is net settled with the interest rate swap on loans discussed above.
The details of the Company's interest rate swaps on borrowings for the date indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
December 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
|
|
|
$
|
(680)
|
|
3/26/2020
|
|
3/26/2030
|
|
3-Month USD LIBOR
|
|
0.857%
|
|
Accrued interest and other liabilities
|
|
50,000
|
|
|
(33)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
(713)
|
|
Net payments to the institutional counterparty for the year ended December 31, 2020 were $232,000, and were classified as cash flows from operating activities within the consolidated statements of cash flow.
Junior Subordinated Debt Interest Rate Swaps
In July 2020, the Company entered into a $10.0 million forward-starting interest rate swap with an effective date of June 30, 2021, that will effectively replace its $10.0 million interest rate swap that is scheduled to mature on June 30, 2021. The Company has entered into this new interest rate swap agreement, as well as its existing 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 December 31, 2020 and 2019, the Company posted $13.3 million and $8.8 million, respectively, of cash as collateral to the institutional counterparty, which is presented within other assets on the consolidated statements of condition. Refer to Note 13 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
2020
|
|
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
|
|
3.69%
|
|
Accrued interest and other liabilities
|
|
$
|
10,000
|
|
|
$
|
(174)
|
|
|
$
|
10,000
|
|
|
$
|
(299)
|
|
7/8/2009
|
|
6/30/2029
|
|
3-Month USD LIBOR
|
|
4.44%
|
|
Accrued interest and other liabilities
|
|
10,000
|
|
|
(3,095)
|
|
|
10,000
|
|
|
(2,318)
|
|
5/6/2010
|
|
6/30/2030
|
|
3-Month USD LIBOR
|
|
4.31%
|
|
Accrued interest and other liabilities
|
|
10,000
|
|
|
(3,245)
|
|
|
10,000
|
|
|
(2,384)
|
|
3/14/2011
|
|
3/30/2031
|
|
3-Month USD LIBOR
|
|
4.35%
|
|
Accrued interest and other liabilities
|
|
5,000
|
|
|
(1,739)
|
|
|
5,000
|
|
|
(1,279)
|
|
5/4/2011
|
|
7/7/2031
|
|
3-Month USD LIBOR
|
|
4.14%
|
|
Accrued interest and other liabilities
|
|
8,000
|
|
|
(2,659)
|
|
|
8,000
|
|
|
(1,907)
|
|
7/16/2020
|
|
6/30/2036
|
|
3-Month USD LIBOR
|
|
0.83%
|
|
Other assets
|
|
10,000
|
|
|
562
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,000
|
|
|
$
|
(10,350)
|
|
|
$
|
43,000
|
|
|
$
|
(8,187)
|
|
Net payments to the institutional counterparty for the year ended December 31, 2020, 2019 and 2018 were $1.4 million, $738,000 and $889,000, respectively, and were classified as cash flows from operating activities in the consolidated statements of cash flows.
The table below presents the effect of cash flow hedge accounting on AOCI for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI on Derivatives, Net of Tax
|
|
Location of Gain (Loss) Reclassified
from AOCI into Income
|
|
Amount of Gain (Loss) Reclassified from AOCI into Income, Gross
|
|
|
For the Year Ended
December 31,
|
|
|
For the Year Ended
December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
Derivatives in Cash Flow Hedge Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
954
|
|
|
$
|
(2,334)
|
|
|
$
|
837
|
|
|
Interest and fees on loans
|
|
$
|
1,006
|
|
|
$
|
(214)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
(130)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Interest on borrowings
|
|
(102)
|
|
|
32
|
|
|
58
|
|
|
|
|
|
|
|
|
|
Interest on subordinated debentures
|
|
(1,371)
|
|
|
(739)
|
|
|
(889)
|
|
Total
|
|
$
|
954
|
|
|
$
|
(2,334)
|
|
|
$
|
837
|
|
|
Total
|
|
$
|
(597)
|
|
|
$
|
(921)
|
|
|
$
|
(831)
|
|
The table below presents the effect of cash flow hedge accounting on the consolidated statements of income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain (Loss) Recognized in Income
|
|
|
For the Year Ended
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(Dollars in thousands)
|
|
Interest and fees on loans
|
|
Interest on deposits
|
|
Interest on borrowings
|
|
Interest on subordinated debentures
|
|
Interest and fees on loans
|
|
Interest on borrowings
|
|
Interest on subordinated debentures
|
|
Interest on borrowings
|
|
Interest on subordinated debentures
|
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded
|
|
$
|
134,000
|
|
|
$
|
15,544
|
|
|
1,837
|
|
|
$
|
3,512
|
|
|
$
|
143,399
|
|
|
$
|
3,621
|
|
|
$
|
3,266
|
|
|
$
|
7,456
|
|
|
$
|
3,415
|
|
Gain (loss) on cash flow hedging relationships
|
Interest rate contracts:
|
Amount of gain (loss) reclassified from AOCI into income
|
|
1,006
|
|
|
(130)
|
|
|
(102)
|
|
|
(1,371)
|
|
|
(214)
|
|
|
32
|
|
|
(739)
|
|
|
58
|
|
|
(889)
|
|
The Company expects approximately $1.4 million of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of December 31, 2020.
NOTE 13 – 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 10 for further discussion of repurchase agreements and Note 12 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 consolidated statements of condition, 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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loan swaps - commercial customer(2)
|
|
$
|
39,627
|
|
|
$
|
—
|
|
|
$
|
39,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,627
|
|
Interest rate swap on loans(3)
|
|
5,169
|
|
|
—
|
|
|
5,169
|
|
|
—
|
|
|
(5,033)
|
|
|
136
|
|
Junior subordinated debt interest rate swaps(3)
|
|
562
|
|
|
—
|
|
|
562
|
|
|
—
|
|
|
(562)
|
|
|
—
|
|
Total
|
|
$
|
45,358
|
|
|
$
|
—
|
|
|
$
|
45,358
|
|
|
$
|
—
|
|
|
$
|
(5,595)
|
|
|
$
|
39,763
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer loan swaps - dealer bank(3)
|
|
$
|
39,627
|
|
|
$
|
—
|
|
|
39,627
|
|
|
$
|
—
|
|
|
$
|
39,627
|
|
|
$
|
—
|
|
Junior subordinated debt interest rate swaps(3)
|
|
10,912
|
|
|
—
|
|
|
10,912
|
|
|
—
|
|
|
10,912
|
|
|
—
|
|
Interest rate swaps on borrowings(3)
|
|
713
|
|
|
—
|
|
|
713
|
|
|
—
|
|
|
713
|
|
|
—
|
|
Total
|
|
$
|
51,252
|
|
|
$
|
—
|
|
|
$
|
51,252
|
|
|
$
|
—
|
|
|
$
|
51,252
|
|
|
$
|
—
|
|
Customer repurchase agreements
|
|
$
|
162,439
|
|
|
$
|
—
|
|
|
$
|
162,439
|
|
|
$
|
162,439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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(3)
|
|
$
|
17,242
|
|
|
$
|
—
|
|
|
17,242
|
|
|
$
|
—
|
|
|
$
|
17,242
|
|
|
$
|
—
|
|
Junior subordinated debt interest rate swaps(3)
|
|
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) The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis.
NOTE 14 – SHAREHOLDERS' EQUITY
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, the greater of (i) net income for the preceding four
quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the
preceding four quarters).
The Company and Bank's risk-based capital ratios exceeded regulatory requirements, including the capital conservation buffer, at December 31, 2020 and 2019, and the Bank's capital ratios met the requirements for the Bank to be considered "well capitalized" under prompt corrective action provisions for each period. There were no changes to the Company or Bank's capital ratios that occurred subsequent to December 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer
|
|
Minimum Regulatory Provision To Be "Well Capitalized"
|
|
December 31,
2019
|
|
Minimum Regulatory Capital Required For Capital Adequacy plus Capital Conservation Buffer
|
|
Minimum Regulatory Provision To Be "Well Capitalized"
|
|
|
Amount
|
|
Ratio
|
|
|
|
Amount
|
|
Ratio
|
|
|
Camden National Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
$
|
498,290
|
|
|
15.40
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
|
$
|
455,702
|
|
|
14.44
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
Tier 1 risk-based capital ratio
|
|
445,858
|
|
|
13.78
|
%
|
|
8.50
|
%
|
|
6.00
|
%
|
|
415,511
|
|
|
13.16
|
%
|
|
8.50
|
%
|
|
6.00
|
%
|
Common equity Tier 1 risk-based capital ratio(1)
|
|
402,858
|
|
|
12.45
|
%
|
|
7.00
|
%
|
|
N/A
|
|
372,511
|
|
|
11.80
|
%
|
|
7.00
|
%
|
|
N/A
|
Tier 1 leverage capital ratio(1)
|
|
445,858
|
|
|
9.13
|
%
|
|
4.00
|
%
|
|
N/A
|
|
415,511
|
|
|
9.55
|
%
|
|
4.00
|
%
|
|
N/A
|
Camden National Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
$
|
460,611
|
|
|
14.28
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
|
$
|
423,540
|
|
|
13.45
|
%
|
|
10.50
|
%
|
|
10.00
|
%
|
Tier 1 risk-based capital ratio
|
|
420,294
|
|
|
13.03
|
%
|
|
8.50
|
%
|
|
8.00
|
%
|
|
398,349
|
|
|
12.65
|
%
|
|
8.50
|
%
|
|
8.00
|
%
|
Common equity Tier 1 risk-based capital ratio
|
|
420,294
|
|
|
13.03
|
%
|
|
7.00
|
%
|
|
6.50
|
%
|
|
398,349
|
|
|
12.65
|
%
|
|
7.00
|
%
|
|
6.50
|
%
|
Tier 1 leverage capital ratio
|
|
420,294
|
|
|
8.64
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
398,349
|
|
|
9.19
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
(1) “Minimum Regulatory Provisions To Be ‘Well Capitalized’” are not formally defined under applicable banking regulations for bank holding companies.
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 as of December 31, 2020 and 2019, the Company is permitted, in accordance with applicable regulation, to include, subject to certain limits, each within its calculation of risk-based capital. At December 31, 2020 and 2019, $12.0 million and $15.0 million, respectively, 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 December 31, 2020 and 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 October 2020, and 20% annually thereafter, until it is fully phased out by 2024.
In March 2021, the Company announced its intent to call the subordinated debt in full at par, plus accrued and unpaid interest, on April 16, 2021. At December 31, 2020, the Company's $15.0 million of subordinated debt provided $12.0 million of Tier 2 capital, or 37 basis points of the Total risk-based capital ratio. The Company's Total risk-based capital ratio will exceed regulatory requirements, including the capital conservation buffer, after the exercise of the call option.
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.
Dividends
The primary source of funds available to the Company for the payment of dividends to its shareholders is dividends paid to the Company by its subsidiary, the Bank. The Bank is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that a bank subsidiary may distribute. Under OCC regulations, the Bank generally may not declare a dividend in excess of the Bank's undivided profits or, absent OCC approval, if the total amount of dividends declared by the Bank in any calendar year exceeds the total of the Bank's net income for the current year plus its retained net income for the prior two years.
For the year ended December 31, 2020, 2019, and 2018, the Bank declared dividends for payment to the Company in the amount of $39.4 million, $36.9 million, and $28.1 million, respectively. For the year ended December 31, 2020, 2019 and 2018, the Company declared $19.8 million, $18.9 million and $18.0 million, respectively, in dividends payable to its shareholders.
Common Stock Repurchase
In September 2013, the Company's Board of Directors authorized the 2013 Repurchase Plan which allowed for the repurchase of up to 375,000 shares of the Company’s outstanding common stock. During the year ended December 31, 2018, the Company purchased the remaining 750 shares of its common stock and completed its repurchase of the total allotment of 375,000 shares at a weighted-average price of $26.57. The 2013 Repurchase Plan has since terminated.
In January 2019, the Company's Board of Directors authorized the purchase of up to 775,000 shares of the Company's common stock, representing approximately 5.0% of the Company's issued and outstanding shares of common stock as of December 31, 2018. For the year ended December 31, 2019, the Company purchased 488,052 shares of its common stock at a weighted-average price of $42.61. This program has since terminated.
In January 2020, the Company's Board of Directors authorized the repurchase of up to 750,000 shares of the Company's common stock, representing approximately 5.0% of the Company's issued and outstanding shares of common stock as of December 31, 2019. This program replaced the 2019 program and was open for 12 months. For the year ended December 31, 2020, the Company purchased 274,354 shares of its common stock at a weighted-average price of $35.36. The program subsequently terminated in January 2021.
In February 2021, the Company's Board of Directors authorized the repurchase of up to 750,000 shares of the Company's common stock, representing approximately 5.0% of the Company's issued and outstanding shares of common stock as of December 31, 2020. This program replaces the 2020 program and will continue until the earlier of: (1) authorized number of shares are repurchased, (2) 12 months, or (3) the Company's Board of Directors terminates the program.
NOTE 15 – 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 Year Ended
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(In thousands)
|
|
Pre-Tax
Amount
|
|
Tax (Expense)
Benefit
|
|
After-Tax
Amount
|
|
Pre-Tax
Amount
|
|
Tax (Expense)
Benefit
|
|
After-Tax
Amount
|
|
Pre-Tax
Amount
|
|
Tax (Expense)
Benefit
|
|
After-Tax
Amount
|
AFS Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss)
|
|
$
|
33,198
|
|
|
$
|
(7,138)
|
|
|
$
|
26,060
|
|
|
$
|
26,743
|
|
|
$
|
(5,750)
|
|
|
$
|
20,993
|
|
|
$
|
(10,846)
|
|
|
$
|
2,332
|
|
|
$
|
(8,514)
|
|
Less: reclassification adjustment for net realized (loss) gain(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(105)
|
|
|
22
|
|
|
(83)
|
|
|
(663)
|
|
|
142
|
|
|
(521)
|
|
Net unrealized gain (loss)
|
|
33,198
|
|
|
(7,138)
|
|
|
26,060
|
|
|
26,848
|
|
|
(5,772)
|
|
|
21,076
|
|
|
(10,183)
|
|
|
2,190
|
|
|
(7,993)
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in fair value
|
|
1,214
|
|
|
(260)
|
|
|
954
|
|
|
(2,973)
|
|
|
639
|
|
|
(2,334)
|
|
|
1,066
|
|
|
(229)
|
|
|
837
|
|
Less: reclassified AOCI gain (loss) into interest expense(2)
|
|
(1,603)
|
|
|
345
|
|
|
(1,258)
|
|
|
(707)
|
|
|
151
|
|
|
(556)
|
|
|
(831)
|
|
|
179
|
|
|
(652)
|
|
Less: reclassified AOCI gain (loss) into interest income(3)
|
|
1,006
|
|
|
(216)
|
|
|
790
|
|
|
(214)
|
|
|
47
|
|
|
(167)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net increase (decrease) in fair value
|
|
1,811
|
|
|
(389)
|
|
|
1,422
|
|
|
(2,052)
|
|
|
441
|
|
|
(1,611)
|
|
|
1,897
|
|
|
(408)
|
|
|
1,489
|
|
Postretirement Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
|
(1,282)
|
|
|
277
|
|
|
(1,005)
|
|
|
(1,918)
|
|
|
412
|
|
|
(1,506)
|
|
|
1,743
|
|
|
(375)
|
|
|
1,368
|
|
Less: Amortization of net actuarial loss(4)
|
|
(701)
|
|
|
151
|
|
|
(550)
|
|
|
(271)
|
|
|
59
|
|
|
(212)
|
|
|
(613)
|
|
|
131
|
|
|
(482)
|
|
Less: Amortization of net prior service credits(4)
|
|
24
|
|
|
(5)
|
|
|
19
|
|
|
24
|
|
|
(5)
|
|
|
19
|
|
|
24
|
|
|
(5)
|
|
|
19
|
|
Net loss on postretirement plans
|
|
(605)
|
|
|
131
|
|
|
(474)
|
|
|
(1,671)
|
|
|
358
|
|
|
(1,313)
|
|
|
2,332
|
|
|
(501)
|
|
|
1,831
|
|
Other comprehensive income
|
|
$
|
34,404
|
|
|
$
|
(7,396)
|
|
|
$
|
27,008
|
|
|
$
|
23,125
|
|
|
$
|
(4,973)
|
|
|
$
|
18,152
|
|
|
$
|
(5,954)
|
|
|
$
|
1,281
|
|
|
$
|
(4,673)
|
|
(1) Reclassified into net (loss) gain on sale of securities on the consolidated statements of income.
(2) Reclassified into interest on deposits, borrowings and subordinated debentures on the consolidated statements of income.
(3) Reclassified into interest and fees on loans on the consolidated statements of income.
(4) Reclassified into salaries and employee benefits and other expenses on the consolidated statements of income. Refer to Note 18 of the consolidated financial statements for further details.
The following table presents the changes in each component of AOCI for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Net Unrealized (Losses) Gains on AFS Debt Securities(1)
|
|
Net Unrealized (Losses) Gains on Cash Flow Hedges(1)
|
|
Defined Benefit Postretirement Plans(1)
|
|
AOCI(1)
|
Balance at December 31, 2017
|
|
$
|
(10,300)
|
|
|
$
|
(5,926)
|
|
|
$
|
(3,988)
|
|
|
$
|
(20,214)
|
|
Other comprehensive (loss) gain before reclassifications
|
|
(8,514)
|
|
|
837
|
|
|
1,368
|
|
|
(6,309)
|
|
Less: Amounts reclassified from AOCI
|
|
(521)
|
|
|
(652)
|
|
|
(463)
|
|
|
(1,636)
|
|
Other comprehensive (loss) income
|
|
(7,993)
|
|
|
1,489
|
|
|
1,831
|
|
|
(4,673)
|
|
Net amount reclassified to AOCI related to adoption of ASU 2016-01 and ASU 2017-12
|
|
467
|
|
|
—
|
|
|
—
|
|
|
467
|
|
Balance at December 31, 2018
|
|
(17,826)
|
|
|
(4,437)
|
|
|
(2,157)
|
|
|
(24,420)
|
|
Other comprehensive income (loss) before reclassifications
|
|
20,993
|
|
|
(2,334)
|
|
|
(1,506)
|
|
|
17,153
|
|
Less: Amounts reclassified from AOCI
|
|
(83)
|
|
|
(723)
|
|
|
(193)
|
|
|
(999)
|
|
Other comprehensive income (loss)
|
|
21,076
|
|
|
(1,611)
|
|
|
(1,313)
|
|
|
18,152
|
|
Balance at December 31, 2019
|
|
3,250
|
|
|
(6,048)
|
|
|
(3,470)
|
|
|
(6,268)
|
|
Other comprehensive income (loss) before reclassifications
|
|
26,060
|
|
|
954
|
|
|
(1,005)
|
|
|
26,009
|
|
Less: Amounts reclassified from AOCI
|
|
—
|
|
|
(468)
|
|
|
(531)
|
|
|
(999)
|
|
Other comprehensive income (loss)
|
|
26,060
|
|
|
1,422
|
|
|
(474)
|
|
|
27,008
|
|
Balance at December 31, 2020
|
|
$
|
29,310
|
|
|
$
|
(4,626)
|
|
|
$
|
(3,944)
|
|
|
$
|
20,740
|
|
(1) All amounts are net of tax.
NOTE 16 – 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
Income Statement Line Item
|
|
2020
|
|
2019
|
|
2018
|
Debit card interchange income
|
|
Debit card income
|
|
$
|
10,420
|
|
|
$
|
9,701
|
|
|
$
|
9,067
|
|
Services charges on deposit accounts
|
|
Service charges on deposit accounts
|
|
6,697
|
|
|
8,393
|
|
|
8,253
|
|
Fiduciary services income
|
|
Income from fiduciary services
|
|
6,115
|
|
|
5,901
|
|
|
5,376
|
|
Investment program income
|
|
Brokerage and insurance commissions
|
|
2,832
|
|
|
2,625
|
|
|
2,615
|
|
Other non-interest income
|
|
Other income
|
|
1,672
|
|
|
1,710
|
|
|
1,508
|
|
Total non-interest income within the scope of ASC 606
|
|
27,736
|
|
|
28,330
|
|
|
26,819
|
|
Total non-interest income not in scope of ASC 606
|
|
22,754
|
|
|
13,783
|
|
|
11,357
|
|
Total non-interest income
|
|
$
|
50,490
|
|
|
$
|
42,113
|
|
|
$
|
38,176
|
|
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. Additional information related to each revenue stream is discussed below:
•Debit card interchange income: The Company has separate contracts with intermediaries and earns interchange revenue and incurs related expenses on debit card transactions of its deposit customers. Income earned and expenses incurred by the Company are dependent on its depositors' debit card usage, including depositor spend, transaction type and merchant. The rates earned are determined by the intermediaries. The Company determined that although the contract for which revenues are directly earned is with the intermediary rather than the depositor, that an underlying contract with each depositor is required for the generation of debit card interchange income and it is the depositors' debit card usage that drives the revenues earned and related expenses incurred. The contract with the depositor is day-to-day and can be closed by the customer or the Company at any time. As such, the Company recognizes revenue at the time of the transaction as the performance obligation has been met.
The Company's debit card interchange revenue and related expenses are presented on a gross basis as it has control of the specified service prior to transfer to the depositor through the extension of credit.
The Company pays to certain depositors cash rewards for debit card usage to promote usage and increase interchange revenue. Because the consideration paid to depositors is not for any separate or distinct service, these costs are accounted for as a reduction of debit card interchange income. For the year ended December 31, 2020, 2019 and 2018, cash rewards totaled $603,000, $554,000 and $438,000, respectively.
•Service charges on deposit accounts: Deposit-related fees, include, but are not limited to, overdraft income, service charge income, and other fees generated by the depositor relationship with the Company. For each depositor relationship, an agreement and related disclosures outline the terms of the contract between the depositor and the Bank, including the assessment of fees and fee structure for its various products. The contract is day-to-day and can be closed by the customer or the Company at any time. As such, the Company recognizes revenue at the time of the transaction as the performance obligation has been met.
•Fiduciary services income: The Company, through its wealth management and trust services department, doing business as Camden National Wealth Management, earns fees for its investment management and related services for its clients. Fees earned for its services are largely dependent on assets under management as of the last day of the month and do not contain performance clauses. Should the applicable services contract be terminated by either party, fees for services are earned up to the effective date of contract termination. As such, fiduciary services income is earned and recognized daily.
•Investment program income: Under an investment program offered by the Company, doing business as Camden Financial Consultants (“Program”), its clients are provided access to brokerage, advisory and insurance products offered through an unaffiliated third party. Certain Company employees are registered securities representatives and/or registered investment advisor representatives of the third party, operating in such capacity under Camden Financial Consultants to provide clients with brokerage, investment advisory and insurance related services. The Company receives a portion of the commissions and fees received by the unaffiliated third party brokerage firm from the sale of investment products and investment advisory services, in accordance with the terms of the contract between the two parties.
The revenues earned by the Company are net of administrative expenses and the portion retained by the unaffiliated third party brokerage firm. The Company does not have control of the specified services provided to its clients by the unaffiliated third party brokerage firm under the Program. Revenues earned from Program-related services are presented on the consolidated statements of income on a net basis.
NOTE 17 – STOCK-BASED COMPENSATION PLANS
Stock-Based Compensation
On April 29, 2003 and May 1, 2012, the shareholders of the Company approved the 2003 Stock Option and Incentive Plan ("2003 Plan") and 2012 Equity and Incentive Plan ("2012 Plan"), respectively. The maximum number of shares of stock reserved and available for issuance under each the 2003 Plan and 2012 Plan is 1.2 million shares. As shares or units are vested or options are exercised, new shares are issued out of either the 2003 or 2012 Plan. Awards may be granted in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares and dividend equivalent rights, or any combination of the preceding, and the exercise price will not be less than 100% of the fair market value on the date of grant in the case of incentive stock options, or 85% of the fair market value on the date of grant in the case of non-qualified stock options. No stock option is exercisable more than ten years after the date the stock option was granted. The exercise price of all options granted equaled the market price of the Company's stock on the date of grant, except for certain non-qualified stock options that were issued in conjunction with an acquisition.
The amount of cash used to settle stock-based compensation transactions for the year ended December 31, 2020, 2019 and 2018 was $374,000, $455,000 and $848,000, respectively.
Stock Option Awards
Stock options granted under the 2003 Plan and the 2012 Plan include both incentive stock options and non-qualified stock options. Incentive stock options and non-qualified stock options granted vest pro-rata over a five year period, or earlier if an employee retires and has met the retirement eligibility requirements of the plan, and have a contractual life of ten years.
On the date of each grant, the fair value of each award is derived using the Black-Scholes option pricing model based on assumptions made by the Company as follows:
•Dividend yield is based on the dividend rate of the Company’s stock at the date of grant.
•Risk-free interest rate is based on the U.S. Treasury bond rate with a term equaling the expected life of the granted options.
•Expected volatility is based on the historical volatility of the Company’s stock price calculated over the expected life of the option.
•Expected life represents the period of time that granted options are expected to be outstanding based on historical trends.
For the year ended December 31, 2020 and 2019, the Company did not issue any stock options. For the year ended December 31, 2018, the Company issued stock options with a grant-date fair value of $8,000. The following table presents the option pricing assumptions and the estimated fair value of the options using these assumptions for grants made for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
2018
|
Weighted-average dividend yield
|
|
2.36
|
%
|
Weighted-average risk-free interest rate
|
|
2.38
|
%
|
Weighted-average expected volatility
|
|
22.80
|
%
|
Weighted-average expected life (in years)
|
|
5.3
|
Weighted-average fair value of options granted
|
|
$
|
7.78
|
|
Compensation expense is recognized on a straight-line basis over the vesting period. For the year ended December 31, 2020, 2019 and 2018, the compensation expense recognized was $4,000, $7,000 and $10,000, respectively. The Company does not receive any tax benefit on its issuance of incentive stock options, unless upon exercise a disqualifying disposition is made. The total tax benefit to the Company upon exercise of incentive stock options for the year ended December 31, 2020, 2019 and 2018 was $7,000, $8,000, and $50,000, respectively. Additionally, for the year ended December 31, 2020, 2019 and 2018, the Company received a tax benefit upon the exercise of non-qualified stock options, of $1,000, $1,000 and $0, respectively.
Stock option activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per option data)
|
|
Number of Options
|
|
Weighted-Average
Exercise Price per Option
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at January 1, 2020
|
|
13,607
|
|
|
$
|
23.69
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(3,094)
|
|
|
18.24
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Options outstanding at December 31, 2020
|
|
10,513
|
|
|
$
|
25.29
|
|
|
3.1
|
|
$
|
117
|
|
Options exercisable at December 31, 2020
|
|
9,613
|
|
|
$
|
24.22
|
|
|
2.7
|
|
$
|
114
|
|
A summary of the status of the Company’s nonvested stock options as of December 31, 2020 and changes during the year then ended was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-Average
Grant Date
Fair Value per Option
|
Nonvested at January 1, 2020
|
1,850
|
|
|
$
|
6.48
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(950)
|
|
|
6.08
|
|
Forfeited
|
—
|
|
|
—
|
|
Nonvested at December 31, 2020
|
900
|
|
|
$
|
6.89
|
|
For the year ended December 31, 2020, 2019 and 2018, the Company received cash from the exercise of stock options of $33,000, $95,000 and $218,000 respectively.
Unrecognized compensation expense for nonvested stock options totaled $3,000 at December 31, 2020 and is expected to be recognized over the remaining weighted-average vesting period of 2.0 years. The total intrinsic value of options exercised for the year ended December 31, 2020, 2019 and 2018 was $90,000, $309,000, and $395,000, respectively.
Restricted Stock Units
Restricted stock units vest pro-rata over the requisite service period, which is typically three or five years, and may contain certain performance-based conditions. Restricted stock units issued do not participate in dividends and recipients are not entitled to vote these restricted units until they vest.
For the year ended December 31, 2020, 2019 and 2018, the Company issued restricted stock units with a grant-date fair value of $500,000, $657,000 and $887,000, respectively, to certain employees. The grant-date fair value is calculated utilizing the Company's closing market share price as of the date the awards are granted.
Compensation expense and the related income tax benefit recognized in connection with the restricted stock units was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Compensation expense
|
|
$
|
475
|
|
|
$
|
389
|
|
|
$
|
263
|
|
Income tax benefit
|
|
102
|
|
|
84
|
|
|
57
|
|
Fair value of grants vested
|
|
407
|
|
|
302
|
|
|
149
|
|
Restricted stock unit activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per unit data)
|
|
Number of Units
|
|
Weighted-Average
Grant Date
Fair Value per Unit
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic Value
|
|
Unrecognized
Compensation
|
Nonvested at January 1, 2020
|
|
36,052
|
|
|
$
|
43.92
|
|
|
|
|
|
|
|
Granted
|
|
16,181
|
|
|
30.88
|
|
|
|
|
|
|
|
Vested
|
|
(9,265)
|
|
|
43.90
|
|
|
|
|
|
|
|
Forfeited
|
|
(1,601)
|
|
|
39.79
|
|
|
|
|
|
|
|
Nonvested at December 31, 2020
|
|
41,367
|
|
|
$
|
38.98
|
|
|
3.1
|
|
$
|
1,480
|
|
|
$
|
1,196
|
|
Restricted Stock Awards
Restricted stock awards vest pro-rata over the requisite service period, which is typically three years, or earlier if a recipient retires and has met the retirement eligibility requirements of the plan. Awards issued to Company directors vest immediately, and may contain certain performance-based conditions. Nonvested restricted stock awards participate in Company dividends and recipients are entitled to vote these restricted shares during the vesting period.
For the year ended December 31, 2020, 2019 and 2018, the Company issued restricted stock awards with a grant-date fair value of $1.0 million, $724,000 and $753,000, respectively, to certain directors and employees. The grant-date fair value is calculated utilizing the Company's closing market share price as of the date the awards are granted.
Compensation expense and the related income tax benefit recognized in connection with the restricted stock awards was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Compensation expense
|
|
$
|
781
|
|
|
$
|
751
|
|
|
$
|
916
|
|
Income tax benefit
|
|
168
|
|
|
161
|
|
|
197
|
|
Fair value of grants vested
|
|
772
|
|
|
780
|
|
|
931
|
|
Restricted stock award activity for the year ended December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Number of Shares
|
|
Weighted-Average
Grant Date
Fair Value per Share
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic Value
|
|
Unrecognized
Compensation
|
Nonvested at January 1, 2020
|
|
19,287
|
|
|
$
|
41.66
|
|
|
|
|
|
|
|
Granted
|
|
31,983
|
|
|
31.35
|
|
|
|
|
|
|
|
Vested
|
|
(20,992)
|
|
|
36.76
|
|
|
|
|
|
|
|
Forfeited
|
|
(1,622)
|
|
|
41.53
|
|
|
|
|
|
|
|
Nonvested at December 31, 2020
|
|
28,656
|
|
|
$
|
33.75
|
|
|
2.2
|
|
$
|
1,025
|
|
|
$
|
646
|
|
MSPP
The Company offers the MSPP to provide an opportunity for certain employees to receive restricted shares of the Company’s common stock in lieu of a portion of their annual incentive bonus. Restricted shares issued under the MSPP are granted at a discount of the fair market value of the stock on the date of grant and they cliff vest two years after the grant date, or earlier if a recipient reaches the retirement eligibility requirements of the Plan. Should an employee forfeit his or her nonvested MSPP awards, the Company will return the lesser of the strike price paid by the employee or the fair value of the nonvested awards as of the date forfeited. Restricted stock issued under the MSPP participate in Company dividends and are entitled to vote these restricted shares during the vesting period.
For the year ended December 31, 2020, 2019 and 2018, the Company issued MSPP awards with a grant-date fair value of $83,000, $85,000 and $139,000, respectively, to certain employees.
Compensation expense and the related income tax benefit recognized in connection with the MSPP awards was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Compensation expense
|
|
$
|
71
|
|
|
$
|
95
|
|
|
$
|
104
|
|
Income tax benefit
|
|
15
|
|
|
20
|
|
|
22
|
|
Fair value of grants vested
|
|
110
|
|
|
75
|
|
|
130
|
|
MSPP award activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Number of Shares
|
|
Weighted-Average
Grant Date
Fair Value per Share
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic Value
|
|
Unrecognized
Compensation
|
Nonvested at January 1, 2020
|
|
15,015
|
|
|
$
|
12.89
|
|
|
|
|
|
|
|
Granted
|
|
11,210
|
|
|
7.39
|
|
|
|
|
|
|
|
Vested
|
|
(7,478)
|
|
|
14.72
|
|
|
|
|
|
|
|
Forfeited
|
|
(1,723)
|
|
|
10.16
|
|
|
|
|
|
|
|
Nonvested at December 31, 2020
|
|
17,024
|
|
|
$
|
8.74
|
|
|
0.8
|
|
$
|
154
|
|
|
$
|
51
|
|
For the year ended December 31, 2020, 2019 and 2018, the Company received cash from the issuance of restricted shares under the MSPP of $247,000, $250,000 and $232,000, respectively. At December 31, 2020 and 2019, cash received from certain participating employees totaled $455,000 and $472,000, respectively, and was presented within accrued interest and other liabilities on the consolidated statements of condition.
LTIP
The LTIP is intended to attract and retain executives who will contribute to the Company’s future success. The long-term performance period is a period of three consecutive years beginning on January 1 of the first year and ending on December 31 of the third year. Awards granted are 50% weighted on the attainment of certain performance targets approved by the Board of Directors and 50% weighted on meeting the requisite service period. The performance-based share units granted will vest only if the performance targets are achieved, and the amount received by the LTIP participants may vary from 0% - 200% of target, depending on the level at which performance targets are met. Failure to achieve the specific performance measures will result in all or a portion of the shares being forfeited. The service-based awards are restricted stock awards and generally vest annually pro-rata over a three year period. The associated service-based awards are disclosed within the aforementioned Restricted Stock Awards section of this note.
For the year ended December 31, 2020, 2019 and 2018, the Company issued performance-based stock awards with a grant-date fair value of $978,000, $624,000 and $663,000, respectively. The grant-date fair value is calculated utilizing the Company's closing market share price as of the date the awards are granted.
Compensation expense and the related tax benefit for the LTIP's performance-based awards was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Compensation expense
|
|
$
|
332
|
|
|
$
|
532
|
|
|
$
|
291
|
|
Related income tax benefit
|
|
71
|
|
|
114
|
|
|
63
|
|
Fair value of grants vested
|
|
—
|
|
|
344
|
|
|
284
|
|
LTIP performance-based award activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Number of Shares
|
|
Weighted-Average
Grant Date
Fair Value per Share
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic Value
|
|
Unrecognized
Compensation
|
Nonvested at January 1, 2020
|
|
27,765
|
|
|
$
|
44.26
|
|
|
|
|
|
|
|
Granted(1)
|
|
28,766
|
|
|
31.41
|
|
|
|
|
|
|
|
Vested
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
(5,137)
|
|
|
44.26
|
|
|
|
|
|
|
|
Nonvested at December 31, 2020
|
|
51,394
|
|
|
$
|
37.07
|
|
|
1.7
|
|
$
|
1,905
|
|
|
$
|
388
|
|
(1) Number of shares granted assumes payout at 200% of target.
DCRP
The DCRP is an unfunded deferred compensation plan for the benefit of certain Company executives. Annually, participants will receive a credit to an account administered by the Company of 10% of each participant’s annual base salary and bonus for the prior performance period. Annual credits to a participant’s account will be denominated in deferred stock awards (the right to receive a share of common stock of the Company upon the satisfaction of certain restrictions) based on the fair market value of the common stock of the Company on the date of grant. For all active participants vesting occurs ratably from the date of participation until the participant reaches the age of 65, at which time the participant is 100% vested. In 2018, the DCRP was amended providing the ability to tailor vesting terms for new participants.
For the year ended December 31, 2020, 2019 and 2018, the Company issued DCRP awards with a grant-date fair value of $169,000, $153,000 and $155,000, respectively. The grant-date fair value is calculated utilizing the Company's closing market share price as of the date the awards are granted.
Compensation expense and the related tax benefit recognized in connection with the DCRP was as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Compensation expense
|
|
$
|
122
|
|
|
$
|
110
|
|
|
$
|
106
|
|
Related income tax benefit
|
|
26
|
|
|
24
|
|
|
23
|
|
Fair value of grants vested
|
|
129
|
|
|
102
|
|
|
105
|
|
DCRP award activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per award data)
|
|
Number of Deferred Stock Awards
|
|
Weighted-Average
Grant Date
Fair Value per Award
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic Value
|
|
Unrecognized
Compensation
|
Nonvested at January 1, 2020
|
|
10,651
|
|
|
$
|
31.14
|
|
|
|
|
|
|
|
Granted
|
|
5,556
|
|
|
30.45
|
|
|
|
|
|
|
|
Vested
|
|
(4,306)
|
|
|
30.05
|
|
|
|
|
|
|
|
Forfeited
|
|
(6,529)
|
|
|
28.97
|
|
|
|
|
|
|
|
Nonvested at December 31, 2020
|
|
5,372
|
|
|
$
|
33.93
|
|
|
19.1
|
|
$
|
192
|
|
|
$
|
151
|
|
NOTE 18 – EMPLOYEE BENEFIT PLANS
401(k) and Profit Sharing Plan
The Company has a 401(k) and profit sharing plan and the majority of its employees participate in the plans. The Company's employees may contribute pre-tax contributions to the 401(k) plan up to the maximum amount allowed by federal tax laws. The Company makes matching contributions of up to 4% of an employee’s eligible compensation. The Company, at its discretion, may make profit sharing contributions to employees' 401(k) accounts in addition to its regular 401(k) plan matching contribution. For the year ended December 31, 2020, 2019 and 2018, these additional contributions totaled 3% of employee eligible compensation. For the year ended December 31, 2020, 2019 and 2018, expenses under the 401(k) plan matching contribution and profit sharing contributions totaled $2.9 million, $2.4 million, and $2.3 million, respectively.
SERP and Other Postretirement Benefit Plan
The Company sponsors unfunded, non-qualified SERPs for certain officers. These agreements are designed to make up the shortfall (when compared to a non-highly compensated employee) in replacing income at retirement due to IRS compensation and benefit limits under the 401(k) plan and Social Security. The SERP provides for a minimum 15-year guaranteed benefit for all vested participants. There are no new entrants to the Company's SERP.
The Company also provides medical and life insurance to certain eligible retired employees under the other postretirement benefit plan. This postretirement plan is a benefit only to certain qualifying participants. There are no new entrants to the Company's medical and health postretirement benefit plan..
The following table summarizes changes in the benefit obligation and plan assets for each postretirement benefit plan as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
Other Postretirement
Benefits
|
|
|
December 31,
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Benefit obligations:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
14,682
|
|
|
$
|
12,717
|
|
|
$
|
4,049
|
|
|
$
|
3,616
|
|
Service cost
|
|
464
|
|
|
395
|
|
|
28
|
|
|
48
|
|
Interest cost
|
|
460
|
|
|
523
|
|
|
123
|
|
|
148
|
|
Actuarial loss
|
|
911
|
|
|
1,524
|
|
|
371
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(486)
|
|
|
(477)
|
|
|
(151)
|
|
|
(157)
|
|
End of year
|
|
16,031
|
|
|
14,682
|
|
|
4,420
|
|
|
4,049
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
486
|
|
|
477
|
|
|
151
|
|
|
157
|
|
Benefits paid
|
|
(486)
|
|
|
(477)
|
|
|
(151)
|
|
|
(157)
|
|
End of year
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unfunded status at end of year(1)
|
|
$
|
16,031
|
|
|
$
|
14,682
|
|
|
$
|
4,420
|
|
|
$
|
4,049
|
|
Amounts recognized in AOCI, net of tax:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
3,090
|
|
|
$
|
2,864
|
|
|
$
|
967
|
|
|
$
|
738
|
|
Prior service credit
|
|
—
|
|
|
—
|
|
|
(113)
|
|
|
(132)
|
|
Total
|
|
$
|
3,090
|
|
|
$
|
2,864
|
|
|
$
|
854
|
|
|
$
|
606
|
|
(1) Presented within other liabilities on the consolidated statements of condition.
The accumulated benefit obligation for the SERP at December 31, 2020 and 2019 was $15.7 million and $14.2 million, respectively.
For the year ending December 31, 2021, the estimated actuarial loss on the SERP that will be amortized from AOCI into net periodic benefit cost is $778,000. All prior service costs have been fully amortized.
For the year ending December 31, 2021, the estimated actuarial loss and prior service credit on other postretirement benefits that will be amortized from AOCI into net periodic benefit cost is $116,000 and $24,000, respectively.
The components of net periodic benefit cost and other amounts recognized in OCI, before taxes, were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
Other Postretirement
Benefits
|
|
|
For the Year Ended
December 31,
|
|
For the Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost(1)
|
|
$
|
464
|
|
|
$
|
395
|
|
|
$
|
446
|
|
|
$
|
28
|
|
|
$
|
48
|
|
|
$
|
46
|
|
Interest cost(2)
|
|
460
|
|
|
523
|
|
|
488
|
|
|
123
|
|
|
148
|
|
|
132
|
|
Recognized net actuarial loss(2)
|
|
623
|
|
|
240
|
|
|
561
|
|
|
78
|
|
|
31
|
|
|
52
|
|
Amortization of prior service credit(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24)
|
|
|
(24)
|
|
|
(24)
|
|
Net periodic benefit cost
|
|
1,547
|
|
|
1,158
|
|
|
1,495
|
|
|
205
|
|
|
203
|
|
|
206
|
|
Changes in funded status recognized in OCI, before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain) arising during period
|
|
911
|
|
|
1,524
|
|
|
(1,534)
|
|
|
371
|
|
|
394
|
|
|
(209)
|
|
Reclassifications to net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net unrecognized actuarial loss
|
|
(623)
|
|
|
(240)
|
|
|
(561)
|
|
|
(78)
|
|
|
(31)
|
|
|
(52)
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
24
|
|
Total recognized in OCI, before taxes
|
|
288
|
|
|
1,284
|
|
|
(2,095)
|
|
|
317
|
|
|
387
|
|
|
(237)
|
|
Total recognized in net periodic benefit cost and OCI, before taxes
|
|
$
|
1,835
|
|
|
$
|
2,442
|
|
|
$
|
(600)
|
|
|
$
|
522
|
|
|
$
|
590
|
|
|
$
|
(31)
|
|
(1) Presented in salaries and employee benefits on the consolidated statements of income.
(2) Presented in other expenses on the consolidated statements of income.
The following assumptions were used in determining benefit obligations and net period benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
Other Postretirement
Benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Weighted-average assumptions as of end of year:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for benefit obligation
|
2.5
|
%
|
|
3.2
|
%
|
|
4.2
|
%
|
|
2.4
|
%
|
|
3.2
|
%
|
|
4.2
|
%
|
Discount rate for net periodic benefit cost
|
3.2
|
%
|
|
4.2
|
%
|
|
3.6
|
%
|
|
3.2
|
%
|
|
4.2
|
%
|
|
3.6
|
%
|
Rate of compensation increase for benefit obligation
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Rate of compensation increase for net periodic benefit cost
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Health care cost trend rate assumed for future years
|
N/A
|
|
N/A
|
|
N/A
|
|
4.5% - 6.5%
|
|
4.5% - 7.0%
|
|
5.0% - 6.0%
|
A 1.0% increase or decrease in the assumed health care cost trend rate would not materially increase or decrease the Company's accumulated postretirement benefit obligation and the related service and interest cost as of December 31, 2020.
For the year ending December 31, 2021, the expected contribution for the SERP is $536,000 and for the other postretirement benefits plan is $276,000. The expected benefit payments for the next ten years are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
SERP
|
|
Other Postretirement
Benefits
|
2021
|
|
$
|
536
|
|
|
$
|
276
|
|
2022
|
|
566
|
|
|
247
|
|
2023
|
|
526
|
|
|
235
|
|
2024
|
|
436
|
|
|
246
|
|
2025
|
|
436
|
|
|
228
|
|
Next 5 years
|
|
2,131
|
|
|
1,090
|
|
NOTE 19 – INCOME TAXES
The current and deferred components of income tax expense on the consolidated statements of income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
15,197
|
|
|
$
|
11,876
|
|
|
$
|
14,102
|
|
State
|
|
1,474
|
|
|
1,241
|
|
|
1,206
|
|
|
|
16,671
|
|
|
13,117
|
|
|
15,308
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(1,720)
|
|
|
1,230
|
|
|
(2,541)
|
|
State
|
|
(41)
|
|
|
29
|
|
|
(61)
|
|
|
|
(1,761)
|
|
|
1,259
|
|
|
(2,602)
|
|
Income tax expense
|
|
$
|
14,910
|
|
|
$
|
14,376
|
|
|
$
|
12,706
|
|
The income tax expense differs from the amount computed by applying the statutory federal income tax rate of 21.0% as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Computed tax expense
|
|
$
|
15,623
|
|
|
$
|
15,032
|
|
|
$
|
13,813
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
1,132
|
|
|
1,003
|
|
|
905
|
|
Tax exempt income
|
|
(894)
|
|
|
(738)
|
|
|
(741)
|
|
Income from life insurance
|
|
(532)
|
|
|
(509)
|
|
|
(510)
|
|
Low income housing credits
|
|
(500)
|
|
|
(430)
|
|
|
(465)
|
|
Share-based awards
|
|
33
|
|
|
(60)
|
|
|
(250)
|
|
Other
|
|
48
|
|
|
78
|
|
|
(46)
|
|
Income tax expense
|
|
$
|
14,910
|
|
|
$
|
14,376
|
|
|
$
|
12,706
|
|
Income before income taxes
|
|
$
|
74,396
|
|
|
$
|
71,579
|
|
|
$
|
65,777
|
|
Effective tax rate
|
|
20.0
|
%
|
|
20.1
|
%
|
|
19.3
|
%
|
Temporary differences between the financial statements carrying amounts and the tax bases of assets and liabilities gave rise to the following deferred tax assets and liabilities as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
Net operating loss and tax credit carryforward
|
|
$
|
9,593
|
|
|
$
|
—
|
|
|
$
|
10,421
|
|
|
$
|
—
|
|
Allowance for loan losses
|
|
8,693
|
|
|
—
|
|
|
5,416
|
|
|
—
|
|
Pension and other benefits
|
|
4,878
|
|
|
—
|
|
|
4,492
|
|
|
—
|
|
Net unrealized losses on derivative instruments
|
|
1,267
|
|
|
—
|
|
|
1,656
|
|
|
—
|
|
Deferred compensation and benefits
|
|
961
|
|
|
—
|
|
|
919
|
|
|
—
|
|
Net unrealized gains on AFS debt securities
|
|
—
|
|
|
(8,027)
|
|
|
—
|
|
|
(890)
|
|
Depreciation
|
|
—
|
|
|
(3,204)
|
|
|
—
|
|
|
(3,053)
|
|
Deferred loan origination fees
|
|
—
|
|
|
(2,111)
|
|
|
—
|
|
|
(2,119)
|
|
Other
|
|
|
|
(94)
|
|
|
|
|
(19)
|
|
Gross deferred tax assets (liabilities)
|
|
$
|
25,392
|
|
|
$
|
(13,436)
|
|
|
$
|
22,904
|
|
|
$
|
(6,081)
|
|
Valuation allowance on deferred tax assets
|
|
|
|
—
|
|
|
|
|
—
|
|
Net deferred tax assets
|
|
|
|
$
|
11,956
|
|
|
|
|
$
|
16,823
|
|
At December 31, 2020 and 2019, the Company had $44.4 million and $48.2 million, respectively, in unused federal net operating losses that were acquired in 2015. Due to Internal Revenue Code Section 382(g) limitations, the Company's use of the federal net operating losses acquired is limited to $3.9 million annually, which was determined using the applicable federal rate and the fair value of consideration paid for the acquisition at the acquisition date. The acquired federal net operating losses will expire between 2030 and 2034. The Company expects that it will be able to fully utilize the acquired allowable federal net operating losses prior to expiration, as the Company has a history of generating taxable income well in excess of the limitation.
The Company continuously monitors and assesses the need for a valuation allowance on its deferred tax assets and, at December 31, 2020 and 2019 determined that no valuation allowance was necessary.
As of December 31, 2020, the Company's federal and state income tax returns for the year ended December 31, 2019, 2018 and 2017 were open to audit by federal and state authorities.
NOTE 20 – EPS
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands, except number of shares and per share data)
|
|
2020
|
|
2019
|
|
2018
|
Net income
|
|
$
|
59,486
|
|
|
$
|
57,203
|
|
|
$
|
53,071
|
|
Dividends and undistributed earnings allocated to participating securities(1)
|
|
(149)
|
|
|
(120)
|
|
|
(148)
|
|
Net income available to common shareholders
|
|
$
|
59,337
|
|
|
$
|
57,083
|
|
|
$
|
52,923
|
|
Weighted-average common shares outstanding for basic EPS
|
|
14,985,235
|
|
|
15,407,289
|
|
|
15,571,387
|
|
Dilutive effect of stock-based awards(2)
|
|
38,532
|
|
|
45,733
|
|
|
54,916
|
|
Weighted-average common and potential common shares for diluted EPS
|
|
15,023,767
|
|
|
15,453,022
|
|
|
15,626,303
|
|
Earnings per common share:
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
3.96
|
|
|
$
|
3.70
|
|
|
$
|
3.40
|
|
Diluted EPS
|
|
$
|
3.95
|
|
|
$
|
3.69
|
|
|
$
|
3.39
|
|
Awards excluded from the calculation of diluted EPS(3):
|
|
|
|
|
|
|
Performance-based awards
|
|
1,849
|
|
|
—
|
|
|
—
|
|
Stock options
|
|
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 and 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 21 – FAIR VALUE
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
Trading Securities: The fair value of trading securities is reported using market quoted prices and has been classified as Level 1 as they are actively traded and no valuation adjustments have been applied.
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 was determined using market prices based on recent trading activity and dealer quotes. These equity securities were traded on inactive markets and classified as Level 2. During the year ended December 31, 2020, the equity securities were redeemed by the issuer and, as such, the Company did not hold any equity securities in bank stock at December 31, 2020.
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.
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 December 31, 2020 and 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 as sufficient collateral exists, mitigating the credit risk.
The fair value of the Company's fixed rate interest rate lock commitments are 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 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 are 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)
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
4,161
|
|
|
$
|
4,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
AFS debt securities:
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
127,120
|
|
|
—
|
|
|
127,120
|
|
|
—
|
|
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
|
|
566,618
|
|
|
—
|
|
|
566,618
|
|
|
—
|
|
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
|
|
410,454
|
|
|
—
|
|
|
410,454
|
|
|
—
|
|
Subordinated corporate bonds
|
|
11,621
|
|
|
—
|
|
|
11,621
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
41,557
|
|
|
—
|
|
|
41,557
|
|
|
—
|
|
Customer loan swaps
|
|
39,627
|
|
|
—
|
|
|
39,627
|
|
|
—
|
|
Junior subordinated debt interest rate swaps
|
|
562
|
|
|
—
|
|
|
562
|
|
|
—
|
|
Interest rate swap on loans
|
|
5,169
|
|
|
—
|
|
|
5,169
|
|
|
—
|
|
Fixed rate mortgage interest rate lock commitments
|
|
608
|
|
|
—
|
|
|
608
|
|
|
—
|
|
Forward delivery commitments
|
|
311
|
|
|
—
|
|
|
311
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
4,161
|
|
|
$
|
4,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Customer loan swaps
|
|
39,627
|
|
|
—
|
|
|
39,627
|
|
|
—
|
|
Junior subordinated debt interest rate swaps
|
|
10,912
|
|
|
—
|
|
|
10,912
|
|
|
—
|
|
Interest rate swap on borrowings
|
|
713
|
|
|
—
|
|
|
713
|
|
|
—
|
|
Fixed rate mortgage interest rate lock commitments
|
|
248
|
|
|
—
|
|
|
248
|
|
|
—
|
|
Forward delivery commitments
|
|
196
|
|
|
—
|
|
|
196
|
|
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
3,799
|
|
|
$
|
3,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
AFS debt securities:
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
Loans held for sale
|
|
11,854
|
|
|
—
|
|
|
11,854
|
|
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
3,799
|
|
|
$
|
3,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Customer loan swaps
|
|
17,756
|
|
|
—
|
|
|
17,756
|
|
|
—
|
|
Junior subordinated debt interest rate swaps
|
|
8,187
|
|
|
—
|
|
|
8,187
|
|
|
—
|
|
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 for the year ended December 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 Loans: Expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell. Management estimates 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 determined servicing assets are Level 3 of the fair value hierarchy.
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 ACL 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 credit 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. Through its assessments, management concluded goodwill was not impaired for the year ended December 31, 2020 or, 2019. Refer to Notes 1 and Note 4 of the consolidated financial statements for further details of the Company's goodwill impairment analyses for these periods.
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 indications or triggering events for the year ended December 31, 2020 or 2019, 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)
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing assets
|
|
$
|
1,010
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,010
|
|
Non-financial assets:
|
|
|
|
|
|
|
|
|
OREO
|
|
$
|
236
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
236
|
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing assets
|
|
$
|
1,010
|
|
|
Discounted cash flow
|
|
Weighted-average constant prepayment rate
|
|
19%
|
|
|
|
|
|
|
Weighted average discount rate
|
|
10%
|
OREO
|
|
$
|
236
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment of appraisal
|
|
5%
|
|
|
|
|
|
|
Estimated selling costs
|
|
11%
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO
|
|
$
|
94
|
|
|
Market approach appraisal of collateral
|
|
Management adjustment of appraisal
|
|
18%
|
|
|
|
|
|
|
Estimated selling costs
|
|
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)
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
HTM securities
|
|
$
|
1,297
|
|
|
$
|
1,411
|
|
|
$
|
—
|
|
|
$
|
1,411
|
|
|
$
|
—
|
|
Commercial real estate loans(1)(2)
|
|
1,344,860
|
|
|
1,307,132
|
|
|
—
|
|
|
—
|
|
|
1,307,132
|
|
Commercial loans(2)
|
|
374,791
|
|
|
372,194
|
|
|
—
|
|
|
—
|
|
|
372,194
|
|
SBA PPP loans(2)
|
|
135,026
|
|
|
137,209
|
|
|
—
|
|
|
—
|
|
|
137,209
|
|
Residential real estate loans(2)
|
|
1,051,324
|
|
|
1,066,991
|
|
|
—
|
|
|
—
|
|
|
1,066,991
|
|
Home equity loans(2)
|
|
255,957
|
|
|
253,276
|
|
|
—
|
|
|
—
|
|
|
253,276
|
|
Consumer loans(2)
|
|
19,999
|
|
|
18,102
|
|
|
—
|
|
|
—
|
|
|
18,102
|
|
Servicing assets
|
|
2,196
|
|
|
1,437
|
|
|
—
|
|
|
—
|
|
|
1,437
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
457,694
|
|
|
$
|
460,278
|
|
|
$
|
—
|
|
|
$
|
460,278
|
|
|
$
|
—
|
|
Short-term borrowings
|
|
162,439
|
|
|
162,420
|
|
|
—
|
|
|
162,420
|
|
|
—
|
|
Long-term borrowings
|
|
25,000
|
|
|
25,442
|
|
|
—
|
|
|
25,442
|
|
|
—
|
|
Subordinated debentures
|
|
58,331
|
|
|
46,475
|
|
|
—
|
|
|
46,475
|
|
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
HTM securities
|
|
$
|
1,302
|
|
|
$
|
1,359
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
|
$
|
—
|
|
Commercial real estate loans(2)
|
|
1,230,983
|
|
|
1,196,297
|
|
|
—
|
|
|
—
|
|
|
1,196,297
|
|
Commercial loans(2)
|
|
438,716
|
|
|
431,892
|
|
|
—
|
|
|
—
|
|
|
431,892
|
|
Residential real estate loans(2)
|
|
1,064,532
|
|
|
1,066,544
|
|
|
—
|
|
|
—
|
|
|
1,066,544
|
|
Home equity loans(2)
|
|
310,356
|
|
|
293,565
|
|
|
—
|
|
|
—
|
|
|
293,565
|
|
Consumer loans(2)
|
|
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) Commercial real estate loans includes non owner-occupied and owner-occupied properties.
(2) The presented carrying amount is net of the allocated ACL on loans.
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 22 – PARENT COMPANY FINANCIAL STATEMENTS
Following are the condensed statements of condition, income and cash flows for the Company's parent company:
STATEMENTS OF CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
|
Cash
|
|
$
|
35,359
|
|
|
$
|
30,561
|
|
Investment in subsidiary
|
|
558,820
|
|
|
509,149
|
|
Receivable from subsidiary
|
|
46
|
|
|
150
|
|
Other assets
|
|
23,401
|
|
|
19,290
|
|
Total assets
|
|
$
|
617,626
|
|
|
$
|
559,150
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Subordinated debentures
|
|
$
|
59,331
|
|
|
$
|
59,080
|
|
Due to subsidiary
|
|
—
|
|
|
33
|
|
Other liabilities
|
|
28,981
|
|
|
26,622
|
|
Shareholders’ equity
|
|
529,314
|
|
|
473,415
|
|
Total liabilities and shareholders’ equity
|
|
$
|
617,626
|
|
|
$
|
559,150
|
|
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Operating Income
|
|
|
|
|
|
|
Dividend income from subsidiary
|
|
$
|
39,400
|
|
|
$
|
36,900
|
|
|
$
|
28,100
|
|
Other income
|
|
103
|
|
|
1,128
|
|
|
283
|
|
Total operating income
|
|
39,503
|
|
|
38,028
|
|
|
28,383
|
|
Operating Expenses
|
|
|
|
|
|
|
Interest on borrowings
|
|
3,512
|
|
|
3,267
|
|
|
3,415
|
|
Fees to Bank
|
|
160
|
|
|
160
|
|
|
160
|
|
Other operating expenses
|
|
578
|
|
|
641
|
|
|
569
|
|
Total operating expenses
|
|
4,250
|
|
|
4,068
|
|
|
4,144
|
|
Income before equity in undistributed income of subsidiaries and income taxes
|
|
35,253
|
|
|
33,960
|
|
|
24,239
|
|
Equity in undistributed income of subsidiaries
|
|
23,299
|
|
|
22,580
|
|
|
27,971
|
|
Income before income taxes
|
|
58,552
|
|
|
56,540
|
|
|
52,210
|
|
Income tax benefit
|
|
934
|
|
|
663
|
|
|
861
|
|
Net Income
|
|
$
|
59,486
|
|
|
$
|
57,203
|
|
|
$
|
53,071
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
December 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
59,486
|
|
|
$
|
57,203
|
|
|
$
|
53,071
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Equity in undistributed income of subsidiaries
|
|
(23,299)
|
|
|
(22,579)
|
|
|
(27,971)
|
|
Increase in other assets
|
|
(5,228)
|
|
|
(2,935)
|
|
|
(1,772)
|
|
Increase (decrease) in due to subsidiaries
|
|
71
|
|
|
(109)
|
|
|
82
|
|
(Decrease) increase in other liabilities
|
|
(83)
|
|
|
4,298
|
|
|
(4,763)
|
|
Net cash provided by operating activities
|
|
30,947
|
|
|
35,878
|
|
|
18,647
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from other investments
|
|
1,712
|
|
|
—
|
|
|
214
|
|
Net cash provided by investing activities
|
|
1,712
|
|
|
—
|
|
|
214
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
1,670
|
|
|
1,683
|
|
|
1,338
|
|
Common stock repurchases
|
|
(9,689)
|
|
|
(20,795)
|
|
|
(27)
|
|
Cash dividends paid on common stock
|
|
(19,842)
|
|
|
(18,572)
|
|
|
(17,170)
|
|
Net cash used in financing activities
|
|
(27,861)
|
|
|
(37,684)
|
|
|
(15,859)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
4,798
|
|
|
(1,806)
|
|
|
3,002
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
|
30,561
|
|
|
32,367
|
|
|
29,365
|
|
Cash, cash equivalents and restricted cash at end of year
|
|
$
|
35,359
|
|
|
$
|
30,561
|
|
|
$
|
32,367
|
|
NOTE 23 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a summary of the quarterly results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(In thousands, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Interest income
|
|
$
|
40,213
|
|
|
$
|
39,178
|
|
|
$
|
38,667
|
|
|
$
|
39,142
|
|
|
$
|
42,009
|
|
|
$
|
42,437
|
|
|
$
|
42,520
|
|
|
$
|
41,552
|
|
Interest expense
|
|
8,387
|
|
|
4,639
|
|
|
4,186
|
|
|
3,681
|
|
|
10,114
|
|
|
10,864
|
|
|
10,597
|
|
|
9,313
|
|
Net interest income
|
|
31,826
|
|
|
34,539
|
|
|
34,481
|
|
|
35,461
|
|
|
31,895
|
|
|
31,573
|
|
|
31,923
|
|
|
32,239
|
|
Provision for credit losses(1)
|
|
1,775
|
|
|
9,398
|
|
|
987
|
|
|
258
|
|
|
744
|
|
|
1,173
|
|
|
730
|
|
|
214
|
|
Non-interest income
|
|
11,403
|
|
|
12,060
|
|
|
12,696
|
|
|
14,331
|
|
|
9,389
|
|
|
10,037
|
|
|
10,739
|
|
|
11,948
|
|
Non-interest expense
|
|
24,561
|
|
|
23,509
|
|
|
25,221
|
|
|
26,692
|
|
|
22,783
|
|
|
23,958
|
|
|
23,748
|
|
|
24,814
|
|
Income before income tax expense
|
|
16,893
|
|
|
13,692
|
|
|
20,969
|
|
|
22,842
|
|
|
17,757
|
|
|
16,479
|
|
|
18,184
|
|
|
19,159
|
|
Income tax expense
|
|
3,400
|
|
|
2,752
|
|
|
4,194
|
|
|
4,564
|
|
|
3,484
|
|
|
3,275
|
|
|
3,696
|
|
|
3,921
|
|
Net income
|
|
$
|
13,493
|
|
|
$
|
10,940
|
|
|
$
|
16,775
|
|
|
$
|
18,278
|
|
|
$
|
14,273
|
|
|
$
|
13,204
|
|
|
$
|
14,488
|
|
|
$
|
15,238
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.89
|
|
|
$
|
0.73
|
|
|
$
|
1.12
|
|
|
$
|
1.22
|
|
|
$
|
0.91
|
|
|
$
|
0.85
|
|
|
$
|
0.94
|
|
|
$
|
1.00
|
|
Diluted
|
|
$
|
0.89
|
|
|
$
|
0.73
|
|
|
$
|
1.11
|
|
|
$
|
1.22
|
|
|
$
|
0.91
|
|
|
$
|
0.85
|
|
|
$
|
0.94
|
|
|
$
|
0.99
|
|
(1) Effective January 1, 2020, the Company adopted the ASU 2016-13 standard to account for the ACL, including the ACL on loans, ACL on off-balance sheet credit exposures, and ACL on AFS and HTM investments. The Company delayed its adoption of ASU 2016-13 under the terms of the CARES Act and, thus, while ASU 2016-13 was adopted effective as of January 1, 2020, annual and interim reporting periods prior to October 1, 2020 are presented under the incurred loss model.