Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to

Commission File Number: 001-13349

GRAPHIC

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)

Maine

01-0393663

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

PO Box 400

82 Main Street, Bar Harbor, ME

04609-0400

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (207) 288-3314

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $2.00 per share

BHB

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definition of "large accelerated filer," "accelerated filer", "smaller reporting company", or "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer         Accelerated Filer        Non-Accelerated Filer       Smaller Reporting Company         Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes   No 

The Registrant had 15,533,659 shares of common stock, par value $2.00 per share, outstanding as of April 30, 2020.

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements (unaudited)

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

4

Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019

6

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019

7

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019

8

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

9

Notes to Unaudited Consolidated Interim Financial Statements

Note 1

Basis of Presentation

11

Note 2

Securities Available for Sale

15

Note 3

Loans

18

Note 4

Allowance for Loan Losses

31

Note 5

Borrowed Funds

36

Note 6

Deposits

38

Note 7

Capital Ratios and Shareholders' Equity

39

Note 8

Earnings per Share

42

Note 9

Derivative Financial Instruments and Hedging Activities

43

Note 10

Fair Value Measurements

48

Note 11

Revenue from Contracts with Customers

54

Note 12

Leases

56

Note 13

Subsequent Events

58

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

59

Selected Financial Data

60

Consolidated Loan and Deposit Analysis

61

Average Balances and Average Yields/Rates

62

Non-GAAP Financial Measures

63

Reconciliation of Non-GAAP Financial Measures

64

Financial Summary

66

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

71

Item 4.

Controls and Procedures

73

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

73

Item 1A.

Risk Factors

73

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

74

Item 6.

Exhibits

75

Signatures

76

Table of Contents

Bar Harbor Bankshares conducts business operations principally through Bar Harbor Bank & Trust, which may be referred to as the Bank and which is a subsidiary of Bar Harbor Bankshares. Unless the context requires otherwise, references in this report to “the Company” "our company, "our," "us," "we" and similar terms refer to Bar Harbor Bankshares and its subsidiaries, including the Bank, collectively.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission, including but not limited to those discussed in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Because of these and other uncertainties, the Company’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.

3

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PART I.          FINANCIAL INFORMATION

ITEM 1.          CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

March 31, 2020

    

December 31, 2019

Assets

 

  

 

  

Cash and due from banks

$

68,481

$

37,261

Interest-bearing deposit with the Federal Reserve Bank

 

17,174

 

19,649

Total cash and cash equivalents

 

85,655

 

56,910

Securities:

Securities available for sale, at fair value

 

626,341

 

663,230

Federal Home Loan Bank stock

 

19,897

 

20,679

Total securities

 

646,238

 

683,909

Loans:

 

  

 

  

Commercial real estate

 

948,178

 

930,661

Commercial and industrial

 

426,357

 

423,291

Residential real estate

 

1,132,328

 

1,151,857

Consumer

 

128,120

 

135,283

Total loans

 

2,634,983

 

2,641,092

Less: Allowance for loan losses

 

(15,297)

 

(15,353)

Net loans

 

2,619,686

 

2,625,739

Premises and equipment, net

 

49,978

 

51,205

Other real estate owned

 

2,205

 

2,236

Goodwill

 

119,477

 

118,649

Other intangible assets

 

8,398

 

8,641

Cash surrender value of bank-owned life insurance

 

76,400

 

75,863

Deferred tax assets, net

 

3,166

 

3,865

Other assets

 

66,139

 

42,111

Total assets

$

3,677,342

$

3,669,128

Liabilities

 

  

 

  

Deposits:

 

  

 

  

Demand

$

400,410

$

414,534

NOW

 

578,320

 

575,809

Savings

 

423,345

 

388,683

Money market

 

404,385

 

384,090

Time

 

844,097

 

932,635

Total deposits

 

2,650,557

 

2,695,751

Borrowings:

 

  

 

  

Senior

 

497,580

 

471,396

Subordinated

 

59,849

 

59,920

Total borrowings

 

557,429

 

531,316

Other liabilities

 

65,601

 

45,654

Total liabilities

 

3,273,587

 

3,272,721

The accompanying notes are an integral part of these consolidated financial statements.

4

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share data)

    

March 31, 2020

    

December 31, 2019

Shareholders’ equity

    

    

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at March 31, 2020 and December 31, 2019

 

32,857

 

32,857

Additional paid-in capital

 

189,314

 

188,536

Retained earnings

 

180,072

 

175,780

Accumulated other comprehensive income

 

6,190

 

3,911

Less: 841,029 and 870,257 shares of treasury stock at March 31, 2020 and December 31, 2019, respectively

 

(4,678)

 

(4,677)

Total shareholders’ equity

 

403,755

 

396,407

Total liabilities and shareholders’ equity

$

3,677,342

$

3,669,128

The accompanying notes are an integral part of these consolidated financial statements.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

March 31, 

(in thousands, except earnings per share data)

    

2020

    

2019

    

Interest and dividend income

Loans

$

27,987

$

26,864

Securities and other

 

5,507

 

6,363

Total interest and dividend income

 

33,494

 

33,227

Interest expense

 

  

 

  

Deposits

 

6,020

 

6,307

Borrowings

 

2,911

 

5,155

Total interest expense

 

8,931

 

11,462

Net interest income

 

24,563

 

21,765

Provision for loan losses

 

1,111

 

324

Net interest income after provision for loan losses

 

23,452

 

21,441

Non-interest income

 

  

 

  

Trust and investment management fee income

 

3,369

 

2,757

Customer service fees

 

3,112

 

2,165

Gain on sales of securities, net

 

135

 

Bank-owned life insurance income

 

537

 

542

Customer derivative income

 

588

 

Other income

 

680

 

703

Total non-interest income

 

8,421

 

6,167

Non-interest expense

 

  

 

  

Salaries and employee benefits

 

11,884

 

10,519

Occupancy and equipment

 

4,420

 

3,386

Loss on premises and equipment, net

 

92

 

Outside services

 

534

 

411

Professional services

 

672

 

544

Communication

 

289

 

235

Marketing

 

388

 

295

Amortization of intangible assets

 

256

 

207

Acquisition, restructuring and other expenses

 

103

 

Other expenses

 

3,721

 

3,027

Total non-interest expense

 

22,359

 

18,624

Income before income taxes

 

9,514

 

8,984

Income tax expense

 

1,793

 

1,703

Net income

$

7,721

$

7,281

Earnings per share:

 

  

 

  

Basic

$

0.50

$

0.47

Diluted

$

0.50

$

0.47

Weighted average common shares outstanding:

 

  

 

  

Basic

 

15,558

 

15,523

Diluted

 

15,593

 

15,587

The accompanying notes are an integral part of these consolidated financial statements.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    

Three Months Ended

    

March 31, 

(in thousands)

    

2020

    

2019

    

Net income

$

7,721

$

7,281

Other comprehensive income, before tax:

 

  

 

  

Changes in unrealized gain on securities available-for-sale

 

5,357

 

8,900

Changes in unrealized loss on hedging derivatives

 

(2,382)

 

(845)

Changes in unrealized loss on pension

 

 

Income taxes related to other comprehensive income:

 

  

 

  

Changes in unrealized gain on securities available-for-sale

 

(1,346)

 

(2,079)

Changes in unrealized loss on hedging derivatives

 

650

 

198

Changes in unrealized loss on pension

 

 

Total other comprehensive income

 

2,279

 

6,174

Total comprehensive income

$

10,000

$

13,455

The accompanying notes are an integral part of these consolidated financial statements.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

    

    

    

Accumulated 

    

    

Common 

Additional 

other 

stock

paid-in

Retained 

comprehensive 

Treasury

(in thousands, except per share data)

    

 amount

    

 capital

    

earnings

    

income (loss)

    

 stock

    

Total

Balance at December 31, 2018

 

$

32,857

$

187,653

$

166,526

$

(11,802)

$

(4,655)

$

370,579

 

Net income

 

 

 

7,281

 

 

 

7,281

Other comprehensive income

 

 

 

 

6,174

 

 

6,174

Cash dividends declared ($0.20 per share)

 

 

 

(3,105)

 

 

 

(3,105)

Net issuance (441 shares) to employee stock plans, including related tax effects

 

 

(173)

 

 

 

4

 

(169)

Recognition of stock based compensation

 

 

263

 

 

 

 

263

Balance at March 31, 2019

 

32,857

 

187,743

 

170,702

 

(5,628)

 

(4,651)

 

381,023

Balance at December 31, 2019

$

32,857

$

188,536

$

175,780

$

3,911

$

(4,677)

$

396,407

Net income

 

 

 

7,721

 

 

 

7,721

Other comprehensive income

 

 

 

 

2,279

 

 

2,279

Cash dividends declared ($0.22 per share)

 

 

 

(3,429)

 

 

 

(3,429)

Treasury stock purchased (5,586 shares)

 

 

 

 

 

(130)

 

(130)

Net issuance (23,010 shares) to employee stock plans, including related tax effects

 

 

660

 

 

 

129

 

789

Recognition of stock based compensation

 

 

118

 

 

 

 

118

Balance at March 31, 2020

$

32,857

$

189,314

$

180,072

$

6,190

$

(4,678)

$

403,755

The accompanying notes are an integral part of these consolidated financial statements.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 

(in thousands)

    

2020

    

2019

Cash flows from operating activities:

 

 

  

  

Net income

 

$

7,721

$

7,281

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Provision for loan losses

 

1,111

 

324

Net amortization of securities

 

686

 

693

Change in unamortized net loan costs and premiums

 

(132)

 

(85)

Premises and equipment depreciation

 

1,182

 

952

Stock-based compensation expense

 

118

 

90

Accretion of purchase accounting entries, net

 

(1,489)

 

(886)

Amortization of other intangibles

 

256

 

207

Income from cash surrender value of bank-owned life insurance policies

 

(537)

 

(542)

Gain on sales of securities, net

 

(135)

 

Loss on other real estate owned

 

31

 

Loss on premises and equipment, net

 

92

 

Net change in other assets and liabilities

 

(5,900)

 

(3,757)

Net cash provided by operating activities

 

3,004

 

4,277

Cash flows from investing activities:

 

  

 

  

Proceeds from sales of securities available for sale

 

32,017

 

Proceeds from maturities, calls and prepayments of securities available for sale

 

24,899

 

21,709

Purchases of securities available for sale

 

(15,739)

 

(35,290)

Net change in loans

 

6,300

 

(36,209)

Purchase of FHLB stock

 

(3,161)

 

(5,567)

Proceeds from sale of FHLB stock

 

3,943

 

6,119

Purchase of premises and equipment, net

 

(628)

 

(1,809)

Acquisitions, net of cash acquired

(340)

Proceeds from sale of other real estate owned

 

51

 

Net cash provided by (used in) investing activities

 

47,342

 

(51,047)

Cash flows from financing activities:

 

  

 

  

Net decrease in deposits

 

(44,959)

 

(17,260)

Net change in short-term FHLB borrowings

(160,970)

59,716

Net change in short-term FRB borrowings

62,000

Proceeds from long-term borrowings from the FHLB

 

139,000

 

Repayments of long-term borrowings from the FHLB

 

 

(35,705)

Net change in short-term other borrowings

 

(13,831)

 

(1,531)

Repayments of subordinated debt

(32)

Payment of subordinated debt issuance costs

(39)

Net issuance to employee stock plans

789

4

Purchase of treasury stock

(130)

Cash dividends paid on common stock

 

(3,429)

 

(3,105)

Net cash (used in) provided by financing activities

 

(21,601)

 

2,119

Net change in cash and cash equivalents

 

28,745

 

(44,651)

Cash and cash equivalents at beginning of year

 

56,910

 

98,754

Cash and cash equivalents at end of year

$

85,655

$

54,103

The accompanying notes are an integral part of these consolidated financial statements.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Three Months Ended March 31, 

(in thousands)

    

2020

    

2019

Supplemental cash flow information:

 

  

 

  

Interest paid

$

8,455

$

11,490

Income taxes paid, net

 

1,205

 

1,506

Acquisition of non-cash assets and liabilities:

Assets acquired

1,171

Liabilities acquired

(343)

The accompanying notes are an integral part of these consolidated financial statements.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1.          BASIS OF PRESENTATION

The consolidated financial statements (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company” or “Bar Harbor”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Bar Harbor Bankshares is a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include the accounts of the Company, its wholly owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Bank’s consolidated subsidiaries. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly owned and majority owned subsidiaries are consolidated unless GAAP requires otherwise.

In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, 2019 previously filed with the Securities and Exchange Commission (the "SEC").  In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

Reclassifications: Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation. The reclassifications had no impact on net income in the Company’s consolidated income statement.

Summary of Significant Accounting Policies

The disclosures below supplement the accounting policies in previously disclosed in NOTE 1 – Summary of Significant Accounting Policies of the Company’s 2019 Annual Report on Form 10-K.

Operating, Accounting and Reporting Considerations related to COVID-19:

The COVID-19 pandemic has negatively impacted the global economy. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. 

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. A multifamily borrower with a federally backed multifamily mortgage loan that was current as of February 1, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.

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Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

Nonaccrual Status and Risk Rating - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as having a classified risk rating.

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Recent Accounting Pronouncements

The following table provides a brief description of recent accounting standards updates ("ASU") that could have a material impact to the Company’s consolidated financial statements upon adoption:

Standard

Description

Required Date of Adoption

Effect on financial statements

Standards Adopted in 2020

ASU 2017-04, Simplifying the Test for Goodwill Impairment

This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test. The Company still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary

January 1, 2020

The Company has adopted ASU 2017-04 effective January 1, 2020, as required, and the ASU did not have a material impact on its financial statements. Goodwill testing is normally scheduled to be completed during the fourth quarter, but was evaluated in the first quarter in light of the economic impacts of COVID-19. The Company recognized no impairments to goodwill in the first quarter of 2020. See management’s discussion and analysis for further details.

Early adoption is permitted

ASU 2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820

This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

January 1, 2020

The Company has adopted ASU 2018-13, as of January 1, 2020, as required, and the ASU did not have a material impact to the disclosures as a result of the adoption.

Early adoption is permitted.

Standards Not Yet Adopted

ASU 2016-13, Measurement of Credit Losses on Financial Instruments ASU 2018-19, Codification Improvements to ASU 2016-13

This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and certain off-balance sheet exposures. Additional quantitative and qualitative disclosures are required upon adoption.

While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than interest income over time.

The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.

January 1, 2020

Adoption of this ASU is expected to primarily change how the Company estimates credit losses with the application of the expected credit loss model. The Company will apply the standard's provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company's CECL implementation efforts in the first quarter focused on model validation, developing new disclosures, establishing formal policies and procedures and other governance and control documentation. Certain elements of the calculation were finalized in the first quarter, including refinement of the model assumptions, the qualitative framework, internal control design, model validation, and the operational control framework to support the new process. Furthermore, changes to the economic forecasts within the model could positively or negatively impact the actual results.

The ASU was effective for the Company beginning in the first quarter of 2020; however, the CARES Act, issued in 2020, provided temporary relief related to the implementation of this accounting guidance until the earlier of the date on which the national emergency concerning the COVID-19 virus terminates or December 31, 2020. The Company has elected to utilize this relief and has calculated the allowance for loan losses and the resulting provision for loan losses using the prior incurred loss method at March 31, 2020.

Early adoption is permitted.

ASU 2018-14 Compensation- Disclosure Requirements for Defined Pension Plans Topic 715-20

This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans.

January 1, 2021

Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

Early adoption is permitted.

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Standard

Description

Required Date of Adoption

Effect on financial statements

Standards Not Yet Adopted

ASU 2020-04 Facilitation of the Effects of Reference Rate Reform, Topic 848

This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. For instance, companies can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. A company that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Companies, can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, companies can (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform.

May be elected between March 12, 2020 through December 31, 2022.

The Company is currently evaluating all of its contracts, hedging relationships and other transactions that will be effected by reference rates that are being discontinued and determining which elections that need to be made.

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NOTE 2.           SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:

Gross

Gross

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

March 31, 2020

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

284,925

$

11,349

$

(617)

$

295,657

US Government agency

 

98,059

 

3,801

 

(191)

 

101,669

Private label

 

20,209

 

62

 

(1,772)

 

18,499

Obligations of states and political subdivisions thereof

 

134,258

 

3,636

 

(315)

 

137,579

Corporate bonds

 

76,191

 

1,497

 

(4,751)

 

72,937

Total securities available for sale

$

613,642

$

20,345

$

(7,646)

$

626,341

Gross

Gross

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

December 31, 2019

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

319,064

$

4,985

$

(2,080)

$

321,969

US Government agency

 

98,568

 

1,640

 

(547)

 

99,661

Private label

 

20,212

 

68

 

(747)

 

19,533

Obligations of states and political subdivisions thereof

 

139,240

 

3,034

 

(268)

 

142,006

Corporate bonds

 

78,804

 

1,478

 

(221)

 

80,061

Total securities available for sale

$

655,888

$

11,205

$

(3,863)

$

663,230

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at March 31, 2020 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.

Available for sale

(in thousands)

    

Amortized Cost

    

Fair Value

Within 1 year

 

$

$

Over 1 year to 5 years

 

30,554

 

31,547

Over 5 years to 10 years

 

56,401

 

52,656

Over 10 years

 

123,494

 

126,313

Total bonds and obligations

 

210,449

 

210,516

Mortgage-backed securities

 

403,193

 

415,825

Total securities available for sale

$

613,642

$

626,341

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Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:

Less Than Twelve Months

Over Twelve Months

Total

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(In thousands)

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

March 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

165

$

9,548

$

452

$

6,608

$

617

$

16,156

US Government agency

 

180

 

11,899

 

11

 

4,122

 

191

 

16,021

Private label

 

10

 

124

 

1,762

 

18,234

 

1,772

 

18,358

Obligations of states and political subdivisions thereof

 

315

 

17,862

 

 

 

315

 

17,862

Corporate bonds

 

3,831

 

29,977

 

920

 

5,330

 

4,751

 

35,307

Total securities available for sale

$

4,501

$

69,410

$

3,145

$

34,294

$

7,646

$

103,704

Less Than Twelve Months

Over Twelve Months

Total

    

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(In thousands)

Losses

Value

Losses

Value

Losses

Value

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

1,074

$

43,429

$

1,006

$

49,712

$

2,080

$

93,141

US Government agency

 

432

 

19,717

 

115

 

9,120

 

547

 

28,837

Private label

 

380

 

9,843

 

367

 

9,411

 

747

 

19,254

Obligations of states and political subdivisions thereof

 

137

 

29,355

 

131

 

1,682

 

268

 

31,037

Corporate bonds

 

142

 

9,888

 

79

 

12,276

 

221

 

22,164

Total securities available for sale

$

2,165

$

112,232

$

1,698

$

82,201

$

3,863

$

194,433

Securities Impairment: As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. For the three months ended March 31, 2020 and 2019 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

The following table presents the changes in estimated credit losses recognized by the Company for the periods presented:

Three Months Ended

March 31, 

    

2020

    

2019

    

Estimated credit losses as of prior year-end

$

1,697

$

1,697

Reductions for securities paid off during the period

 

 

Estimated credit losses at end of the period

$

1,697

$

1,697

The Company expects to recover its amortized cost basis on all securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of March 31, 2020, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

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Table of Contents

The following summarizes, by investment security type, the basis for the conclusion that securities in an unrealized loss position were not other-than-temporarily impaired at March 31, 2020:

US Government-sponsored enterprises

43 out of the total 675 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 3.83% of the amortized cost of securities in unrealized loss positions. The FNMA and FHLMC guarantee the contractual cash flows of all of the Company’s US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agency

22 out of the total 179 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.18% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Private label

12 of the total 19 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 8.80% of the amortized cost of securities in unrealized loss positions. Based upon the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.

Obligations of states and political subdivisions thereof

10 of the total 210 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.91% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds

12 out of the total 27 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 12.13% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

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NOTE 3.           LOANS

The Company’s loan portfolio is comprised of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans include multi-family, commercial construction and land development, and other commercial real estate classes. Commercial and industrial loans include loans to commercial and agricultural businesses and tax exempt entities. Residential real estate loans consist of mortgages for 1-to-4 family housing. Consumer loans include home equity loans, auto and other installment loans.

The Company’s lending activities are principally conducted in Maine, New Hampshire, and Vermont.

Total loans include business activity loans and acquired loans. Acquired loans are those loans previously acquired from other institutions. The following is a summary of total loans:

March 31, 2020

December 31, 2019

Business

Business

Activities

Acquired

Activities 

Acquired

(in thousands)

    

Loans

    

Loans

    

Total

    

Loans

    

Loans

    

Total

Commercial real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

49,157

$

2,422

$

51,579

$

31,387

$

2,903

$

34,290

Other commercial real estate

 

680,578

 

216,021

 

896,599

 

666,051

 

230,320

 

896,371

Total commercial real estate

 

729,735

 

218,443

 

948,178

 

697,438

 

233,223

 

930,661

Commercial and industrial:

 

  

 

  

 

 

  

 

  

 

Commercial

 

288,082

 

52,713

 

340,795

 

239,692

 

59,072

 

298,764

Agricultural

 

18,597

 

200

 

18,797

 

20,018

 

206

 

20,224

Tax exempt

 

55,694

 

11,071

 

66,765

 

66,860

 

37,443

 

104,303

Total commercial and industrial

 

362,373

 

63,984

 

426,357

 

326,570

 

96,721

 

423,291

Total commercial loans

 

1,092,108

 

282,427

 

1,374,535

 

1,024,008

 

329,944

 

1,353,952

Residential real estate:

 

  

 

  

 

 

  

 

  

 

Residential mortgages

 

742,710

 

389,618

 

1,132,328

 

740,687

 

411,170

 

1,151,857

Total residential real estate

 

742,710

 

389,618

 

1,132,328

 

740,687

 

411,170

 

1,151,857

Consumer:

 

  

 

  

 

 

  

 

  

 

Home equity

 

64,514

 

53,030

 

117,544

 

59,368

 

63,033

 

122,401

Other consumer

 

9,226

 

1,350

 

10,576

 

11,167

 

1,715

 

12,882

Total consumer

 

73,740

 

54,380

 

128,120

 

70,535

 

64,748

 

135,283

Total loans

$

1,908,558

$

726,425

$

2,634,983

$

1,835,230

$

805,862

$

2,641,092

The carrying amount of the acquired loans at March 31, 2020 totaled $726.4 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. These purchased credit-impaired loans presently maintain a carrying value of $15.2 million (and total note balances of $19.3 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at the acquisition date had a carrying amount of $711.2 million as of March 31, 2020.

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The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer:

Three Months Ended March 31, 

(in thousands)

    

2020

    

2019

Balance at beginning of period

$

7,367

$

3,509

Reclassification from nonaccretable difference for loans with improved cash flows

 

 

2,031

Accretion

 

(528)

 

(1,063)

Balance at end of period

$

6,839

$

4,477

The following is a summary of past due loans at March 31, 2020 and December 31, 2019:

Business Activities Loans

90 Days or

Past Due >

    

30-59 Days

    

60-89 Days

    

 Greater 

    

Total Past

    

    

    

90 days and

(in thousands)

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

March 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

142

$

$

276

$

418

$

48,739

$

49,157

$

Other commercial real estate

 

1,521

 

533

 

1,010

 

3,064

 

677,514

 

680,578

 

Total commercial real estate

 

1,663

 

533

 

1,286

 

3,482

 

726,253

 

729,735

 

Commercial and industrial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

1,108

 

1,515

 

1,251

 

3,874

 

284,208

 

288,082

 

381

Agricultural

 

38

 

 

169

 

207

 

18,390

 

18,597

 

51

Tax exempt

 

 

 

 

 

55,694

 

55,694

 

Total commercial and industrial

 

1,146

 

1,515

 

1,420

 

4,081

 

358,292

 

362,373

 

432

Total commercial loans

 

2,809

 

2,048

 

2,706

 

7,563

 

1,084,545

 

1,092,108

 

432

Residential real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgages

 

8,824

 

69

 

1,207

 

10,100

 

732,610

 

742,710

 

293

Total residential real estate

 

8,824

 

69

 

1,207

 

10,100

 

732,610

 

742,710

 

293

Consumer:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity

 

471

 

20

 

412

 

903

 

63,611

 

64,514

 

221

Other consumer

 

19

 

5

 

2

 

26

 

9,200

 

9,226

 

Total consumer

 

490

 

25

 

414

 

929

 

72,811

 

73,740

 

221

Total loans

$

12,123

$

2,142

$

4,327

$

18,592

$

1,889,966

$

1,908,558

$

946

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Table of Contents

Acquired Loans

    

    

    

90 Days or 

    

    

Acquired

    

    

Past Due >

30-59 Days

60-89 Days

Greater

Total Past

Credit

90 days and

(in thousands)

Past Due

Past Due

 Past Due

Due

 

Impaired

Total Loans

 

Accruing

March 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

$

$

$

$

245

$

2,422

$

Other commercial real estate

 

1,843

 

256

 

1,024

 

3,123

 

7,275

 

216,021

 

737

Total commercial real estate

 

1,843

 

256

 

1,024

 

3,123

 

7,520

 

218,443

 

737

Commercial and industrial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

97

 

 

 

97

 

1,752

 

52,713

 

Agricultural

 

 

 

 

 

200

 

200

 

Tax exempt

 

 

 

 

 

 

11,071

 

Total commercial and industrial

 

97

 

 

 

97

 

1,952

 

63,984

 

Total commercial loans

 

1,940

 

256

 

1,024

 

3,220

 

9,472

 

282,427

 

737

Residential real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgages

 

5,043

 

99

 

834

 

5,976

 

4,856

 

389,618

 

401

Total residential real estate

 

5,043

 

99

 

834

 

5,976

 

4,856

 

389,618

 

401

Consumer:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity

 

626

 

 

199

 

825

 

789

 

53,030

 

43

Other consumer

 

1

 

 

 

1

 

58

 

1,350

 

Total consumer

 

627

 

 

199

 

826

 

847

 

54,380

 

43

Total loans

$

7,610

$

355

$

2,057

$

10,022

$

15,175

$

726,425

$

1,181

20

Table of Contents

Business Activities Loans

90 Days or

Past Due >

    

30-59 Days

    

60-89 Days

    

 Greater 

    

Total Past

    

    

    

90 days and

(in thousands)

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

205

$

53

$

$

258

$

31,129

$

31,387

$

Other commercial real estate

 

40

 

1,534

 

1,810

 

3,384

 

662,667

 

666,051

 

Total commercial real estate

 

245

 

1,587

 

1,810

 

3,642

 

693,796

 

697,438

 

Commercial and industrial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

452

 

50

 

894

 

1,396

 

238,296

 

239,692

 

Agricultural

 

62

 

34

 

96

 

192

 

19,826

 

20,018

 

Tax exempt

 

 

 

 

 

66,860

 

66,860

 

Total commercial and industrial

 

514

 

84

 

990

 

1,588

 

324,982

 

326,570

 

Total commercial loans

 

759

 

1,671

 

2,800

 

5,230

 

1,018,778

 

1,024,008

 

Residential real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgages

 

7,293

 

1,243

 

668

 

9,204

 

731,483

 

740,687

 

Total residential real estate

 

7,293

 

1,243

 

668

 

9,204

 

731,483

 

740,687

 

Consumer:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity

 

597

 

43

 

429

 

1,069

 

58,299

 

59,368

 

50

Other consumer

 

36

 

12

 

 

48

 

11,119

 

11,167

 

Total consumer

 

633

 

55

 

429

 

1,117

 

69,418

 

70,535

 

50

Total loans

$

8,685

$

2,969

$

3,897

$

15,551

$

1,819,679

$

1,835,230

$

50

21

Table of Contents

Acquired Loans

    

    

    

90 Days or

    

    

Acquired

    

    

Past Due >

30-59 Days

60-89 Days

 Greater

Total Past

Credit

90 days and

(in thousands)

Past Due

Past Due

 Past Due

Due

Impaired

Total Loans

Accruing

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

$

12

$

$

12

$

384

$

2,903

$

Other commercial real estate

 

2,029

 

245

 

231

 

2,505

 

8,289

 

230,320

 

Total commercial real estate

 

2,029

 

257

 

231

 

2,517

 

8,673

 

233,223

 

Commercial and industrial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

440

 

335

 

140

 

915

 

2,723

 

59,072

 

Agricultural

 

 

 

 

 

173

 

206

 

Tax exempt

 

 

 

 

 

36

 

37,443

 

Total commercial and industrial

 

440

 

335

 

140

 

915

 

2,932

 

96,721

 

Total commercial loans

 

2,469

 

592

 

371

 

3,432

 

11,605

 

329,944

 

Residential real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgages

 

3,185

 

864

 

1,015

 

5,064

 

5,591

 

411,170

 

Total residential real estate

 

3,185

 

864

 

1,015

 

5,064

 

5,591

 

411,170

 

Consumer:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Home equity

 

208

 

548

 

217

 

973

 

1,291

 

63,033

 

217

Other consumer

 

2

 

9

 

 

11

 

66

 

1,715

 

Total consumer

 

210

 

557

 

217

 

984

 

1,357

 

64,748

 

217

Total loans

$

5,864

$

2,013

$

1,603

$

9,480

$

18,553

$

805,862

$

217

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Non-Accrual Loans

The following is summary information pertaining to non-accrual loans at March 31, 2020 and December 31, 2019:

March 31, 2020

December 31, 2019

    

Business

    

    

    

Business

    

    

Activities  

Acquired

Activities

Acquired

(in thousands)

 

Loans

 

Loans

Total

 

  Loans

 

Loans

Total

Commercial real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

276

$

$

276

$

258

$

$

258

Other commercial real estate

 

1,664

 

287

 

1,951

 

2,888

 

343

 

3,231

Total commercial real estate

 

1,940

 

287

 

2,227

 

3,146

 

343

 

3,489

Commercial and industrial:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

1,282

 

89

 

1,371

 

932

 

626

 

1,558

Agricultural

 

625

 

 

625

 

278

 

 

278

Tax exempt

 

 

 

 

 

 

Total commercial and industrial

 

1,907

 

89

 

1,996

 

1,210

 

626

 

1,836

Total commercial loans

 

3,847

 

376

 

4,223

 

4,356

 

969

 

5,325

Residential real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgages

 

4,077

 

1,012

 

5,089

 

3,362

 

1,973

 

5,335

Total residential real estate

 

4,077

 

1,012

 

5,089

 

3,362

 

1,973

 

5,335

Consumer:

 

  

 

  

 

  

 

  

 

  

 

  

Home equity

 

440

 

284

 

724

 

615

 

254

 

869

Other consumer

 

20

 

 

20

 

21

 

 

21

Total consumer

 

460

 

284

 

744

 

636

 

254

 

890

Total loans

$

8,384

$

1,672

$

10,056

$

8,354

$

3,196

$

11,550

Loans evaluated for impairment as of March 31, 2020 and December 31, 2019 are, as follows:

Business Activities Loans

Commercial

Commercial

Residential

(in thousands)

    

real estate

    

 and industrial

    

real estate

    

Consumer

    

Total

March 31, 2020

 

  

 

  

 

  

 

  

 

  

Balance at end of period

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

2,638

$

1,733

$

3,586

$

13

$

7,970

Collectively evaluated

 

727,097

 

360,640

 

739,124

 

73,727

 

1,900,588

Total

$

729,735

$

362,373

$

742,710

$

73,740

$

1,908,558

Acquired Loans

    

Commercial

    

Commercial

    

Residential

    

    

(in thousands)

real estate

 and industrial

real estate

Consumer

Total

March 31, 2020

 

  

 

  

 

  

 

  

 

  

Balance at end of period

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

70

$

$

296

$

$

366

Purchased credit impaired

 

7,520

 

1,952

 

4,856

 

847

 

15,175

Collectively evaluated

 

210,853

 

62,032

 

384,466

 

53,533

 

710,884

Total

$

218,443

$

63,984

$

389,618

$

54,380

$

726,425

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Business Activities Loans

    

Commercial

    

Commercial

    

Residential

    

    

(in thousands)

real estate

 and industrial

real estate

Consumer

Total

December 31, 2019

 

  

 

  

 

  

 

  

 

  

Balance at end of period

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

3,964

$

1,353

$

2,620

$

13

$

7,950

Collectively evaluated

 

693,474

 

325,217

 

738,067

 

70,522

 

1,827,280

Total

$

697,438

$

326,570

$

740,687

$

70,535

$

1,835,230

Acquired Loans

    

Commercial

    

Commercial 

    

Residential

    

    

(in thousands)

real estate

and industrial

real estate

Consumer

Total

December 31, 2019

 

  

 

  

 

  

 

  

 

  

Balance at end of period

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

258

$

385

$

1,032

$

$

1,675

Purchased credit impaired

 

8,673

 

2,932

 

5,591

 

1,357

 

18,553

Collectively evaluated

 

224,292

 

93,404

 

404,547

 

63,391

 

785,634

Total

$

233,223

$

96,721

$

411,170

$

64,748

$

805,862

The following is a summary of impaired loans at March 31, 2020 and December 31, 2019:

Business Activities Loans

March 31, 2020

    

Recorded 

    

Unpaid Principal

    

Related 

(in thousands)

 Investment

 

Balance

 Allowance

With no related allowance:

 

  

 

  

 

  

Construction and land development

$

$

$

Other commercial real estate

 

1,341

 

2,060

 

Commercial

 

1,075

 

1,242

 

Agricultural

 

67

 

68

 

Tax exempt loans

 

 

 

Residential real estate

 

2,603

 

2,794

 

Home equity

 

 

 

Other consumer

 

 

 

With an allowance recorded:

 

  

 

  

 

  

Construction and land development

265

266

213

Other commercial real estate

1,032

1,082

462

Commercial

230

236

47

Agricultural

361

361

91

Tax exempt loans

Residential real estate

983

1,111

126

Home equity

13

13

Other consumer

Total

  

  

  

Commercial real estate

2,638

3,408

675

Commercial and industrial

 

1,733

 

1,907

 

138

Residential real estate

 

3,586

 

3,905

 

126

Consumer

 

13

 

13

 

Total impaired loans

$

7,970

$

9,233

$

939

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Acquired Loans

March 31, 2020

    

Recorded 

    

Unpaid Principal

    

Related

(in thousands)

 Investment

 

Balance

  Allowance

With no related allowance:

 

  

 

  

 

  

Construction and land development

$

$

$

Other commercial real estate

 

 

 

Commercial

 

 

 

Agricultural

 

 

 

Tax exempt loans

 

 

 

Residential real estate

 

134

 

308

 

Home equity

 

 

 

Other consumer

 

 

 

With an allowance recorded:

 

  

 

  

 

  

Construction and land development

Other commercial real estate

70

71

13

Commercial

Agricultural

Tax exempt loans

Residential real estate

162

185

14

Home equity

Other consumer

Total

  

  

  

Commercial real estate

70

71

13

Commercial and industrial

 

 

 

Residential real estate

 

296

 

493

 

14

Consumer

 

 

 

Total impaired loans

$

366

$

564

$

27

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Table of Contents

Business Activities Loans

December 31, 2019

    

Recorded 

    

Unpaid Principal

    

Related  

(in thousands)

 

 Investment

 

Balance

 

Allowance

With no related allowance:

 

  

 

  

 

  

Construction and land development

$

$

$

Other commercial real estate

 

1,911

 

1,957

 

Commercial

 

710

 

773

 

Agricultural

 

361

 

261

 

Tax exempt loans

 

 

 

Residential real estate

 

2,067

 

2,227

 

Home equity

 

 

 

Other consumer

 

 

 

With an allowance recorded:

 

  

 

  

 

  

Construction and land development

258

258

205

Other commercial real estate

1,795

1,940

1,026

Commercial

282

289

164

Agricultural

Tax exempt loans

Residential real estate

553

590

57

Home equity

13

13

Other consumer

Total

  

  

  

Commercial real estate

3,964

4,155

1,231

Commercial and industrial

 

1,353

 

1,423

164

Residential real estate

 

2,620

 

2,817

 

57

Consumer

 

13

 

13

 

Total impaired loans

$

7,950

$

8,408

$

1,452

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Acquired Loans

December 31, 2019

    

Recorded  

    

Unpaid Principal

    

Related  

(in thousands)

 

Investment

 

Balance

 

Allowance

With no related allowance:

 

  

 

  

 

  

Construction and land development

$

$

$

Other commercial real estate

 

90

 

90

 

Commercial

 

385

 

481

 

Agricultural

 

 

 

Tax exempt

 

 

 

Residential mortgages

 

678

 

938

 

Home equity

 

 

 

Other consumer

 

 

 

With an allowance recorded:

 

  

 

  

 

  

Construction and land development

Other commercial real estate

168

168

12

Commercial

Agricultural

Tax exempt

Residential mortgages

354

376

49

Home equity

Other consumer

Total

  

  

  

Commercial real estate

258

258

12

Commercial and industrial

 

385

 

481

 

Residential real estate

 

1,032

 

1,314

 

49

Consumer

 

 

 

Total impaired loans

$

1,675

$

2,053

$

61

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The following is a summary of the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019:

Business Activities Loans

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

    

Average Recorded

    

Interest

    

Average Recorded

    

Interest

(in thousands)

 

Investment

 

Income Recognized

 

Investment

 

Income Recognized

With no related allowance:

 

  

 

  

 

  

 

  

Construction and land development

$

$

$

$

Other commercial real estate

 

1,728

 

3

 

7,773

 

26

Commercial

 

1,071

 

1

 

527

 

2

Agricultural

 

 

 

 

Tax exempt loans

 

 

 

 

Residential real estate

 

2,589

 

17

 

1,965

 

15

Home equity

 

 

 

 

Other consumer

 

 

 

 

With an allowance recorded:

 

  

 

  

 

  

 

  

Construction and land development

261

1

5

Other commercial real estate

1,021

1,203

Commercial

233

890

Agricultural

Tax exempt loans

Residential real estate

979

2

652

2

Home equity

12

13

Other consumer

Total

  

  

  

  

Commercial real estate

3,010

4

8,981

26

Commercial and industrial

 

1,304

1

1,417

 

2

Residential real estate

 

3,568

 

19

2,617

 

17

Consumer

 

12

 

13

 

Total impaired loans

$

7,894

$

24

$

13,028

$

45

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Acquired Loans

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

    

Average Recorded

    

Interest

    

Average Recorded

    

Interest

(in thousands)

 

Investment

 

Income Recognized

 

Investment

 

Income Recognized

With no related allowance:

 

  

 

  

 

  

 

  

Construction and land development

$

$

$

$

Other commercial real estate

 

 

 

90

 

Commercial

 

 

 

479

 

Agricultural

 

 

 

 

Tax exempt loans

 

 

 

 

Residential real estate

 

195

 

 

436

 

Home equity

 

 

 

 

Other consumer

 

 

 

 

With an allowance recorded:

 

  

 

  

 

  

 

  

Construction and land development

Other commercial real estate

70

36

Commercial

Agricultural

Tax exempt loans

Residential real estate

163

367

Home equity

Other consumer

Total

  

  

  

  

Commercial real estate

70

126

Commercial and industrial

 

 

479

Residential real estate

 

358

 

803

 

Consumer

 

 

 

 

Total impaired loans

$

428

$

$

1,408

$

Troubled Debt Restructuring Loans

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.

The following tables include the recorded investment and number of modifications identified during the three months ended March 31, 2020 and 2019, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral.

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Table of Contents

Three Months Ended March 31, 2020

Pre-Modification 

Post-Modification 

Number of 

Outstanding Recorded

Outstanding Recorded

(in thousands)

    

Modifications

    

 Investment

    

 Investment

Troubled Debt Restructurings

 

  

 

  

 

  

Other commercial real estate

 

1

$

54

$

259

Other commercial

 

3

 

41

 

208

Home equity

1

26

25

Other consumer

1

9

9

Total

 

6

$

130

$

501

Three Months Ended March 31, 2019

Pre-Modification 

Post-Modification 

Number of 

Outstanding Recorded

Outstanding Recorded

(in thousands)

    

Modifications

    

 Investment

    

 Investment

Troubled Debt Restructurings

 

  

 

  

 

  

Other commercial real estate

 

3

$

113

$

113

Other commercial

 

2

 

31

 

31

Residential mortgages

 

6

 

530

 

527

Total

 

11

$

674

$

671

The following tables summarize the types of loan concessions made for the periods presented:

Three Months Ended March 31, 

2020

2019

    

    

Post-Modification

    

    

Post-Modification

Outstanding

outstanding

Number of

Recorded

Number of

Recorded

(in thousands, except modifications)

    

Modifications

     

Investment

    

Modifications

     

Investment

Troubled Debt Restructurings

Interest rate and maturity concession

 

$

2

$

12

Interest rate, forbearance and maturity concession

 

4

 

467

 

Amortization and maturity concession

 

 

5

 

314

Amortization concession

 

 

1

 

156

Amortization, interest rate and maturity concession

1

77

Forbearance and interest only payments

1

25

2

112

Maturity concession

 

1

 

9

 

Total

 

6

$

501

11

$

671

For the three months ended March 31, 2020, there were no loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

Modifications in response to COVID-19

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 - Basis of Presentation for more information.

Foreclosure

As of March 31, 2020 and December 31, 2019, the Company maintained bank-owned residential real estate with a fair value of $2.2 million. Additionally, residential mortgage loans collateralized by real estate that are in the process of foreclosure as of March 31, 2020 and December 31, 2019 totaled $931 thousand and $810 thousand, respectively.

Mortgage Banking

Total residential loans included held for sale loans of $11.7 million and $6.5 million at March 31, 2020 and December 31, 2019, respectively.

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Table of Contents

NOTE 4.               ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for an estimate of probable credit losses inherent in the loan portfolio. The allowance is increased by the provision charged to operating expense and reduced by net charge-offs. Loans are charged against the allowance for loan losses when the Company believes collectability has declined to a point where there is a distinct possibility of some loss of principal and interest. While the Company uses the best information available to make the evaluation, future adjustments may be necessary if there are significant changes in conditions.

The allowance is comprised of four distinct reserve components: (1) specific reserves related to loans individually evaluated; (2) quantitative reserves related to loans collectively evaluated; (3) qualitative reserves related to loans collectively evaluated; and (4) a temporal estimate is made for incurred loss emergence period for each loan category within the collectively evaluated pools.

A summary of the methodology employed on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of the Company's allowance for loan losses is as follows:

Specific Reserve for Loans Individually Evaluated

First, the Company identifies loan relationships having aggregate balances in excess of $150 thousand with potential credit weaknesses. Such loan relationships are identified primarily through the Company's analysis of internal loan evaluations, past due loan reports, TDRs and loans adversely classified. Each loan so identified is then individually evaluated for impairment. Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Substantially all impaired loans have historically been collateral dependent, meaning repayment of the loan is expected or is considered to be provided solely from the sale of the loan's underlying collateral. For such loans, the Company measures impairment based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve is established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell. The Company's policy is to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained.

Purchase credit impaired (“PCI”) loans are collectively evaluated, but are not included in the general reserve as described below. The evaluation of the PCI loans requires continued quarterly assessment of key assumptions and estimates similar to the initial fair value estimate, including changes in the severity of loss, timing and speed of payments, collateral value changes, expected cash flows and other relevant factors. The quarterly assessment is compared to the initial fair value estimate and a determination is made if an adjustment to the allowance for loan loss is deemed necessary.

Quantitative Reserve for Loans Collectively Evaluated

Second, the Company stratifies the loan portfolio into two general business loan pools: substandard (7 risk-rated) and pass-rated (0 to 6 risk-rated) by loan type. Substandard rated loans are subject to higher credit loss rates in the allowance for loan loss calculation. The Company utilizes historical loss rates for commercial real estate and commercial and industrial loans assessed by internal risk rating. Historical loss rates on residential real estate and consumer loans are not risk graded. Residential real estate and consumer loans are considered as part of the pass-rated portfolio unless removed due to specific reserve evaluation based on past due status and/or other indications of credit deterioration. Quantitative reserves relative to each loan pool are established as follows: for all loan segments an allocation equaling 100% of the respective pool's average 3-year historical net loan charge-off rate (determined based upon the most recent 12 quarters) is applied to the aggregate recorded investment in the pool of loans. Purchased performing loans are collectively evaluated as their own separate category within each loan pool.

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Table of Contents

Qualitative Reserve for Loans Collectively Evaluated

Third, the Company considers the necessity to adjust the average historical net loan charge-off rates relative to each of the above two loan pools for potential risks factors that could result in actual losses deviating from prior loss experience. Such qualitative risk factors considered are: (1) lending policies and procedures, (2) business conditions, (3) volume and nature of the loan portfolio, (4) experience, ability and depth of lending management, (5) problem loan trends, (6) quality of the Company’s loan review system, (7) concentrations in the loan portfolio, (8) competition, legal, and regulatory environment and (9) collateral coverage and loan-to-value.

Loss Emergence Period for Loans Collectively Evaluated

Fourth, the general allowance related to loans collectively evaluated includes an estimate of incurred losses over an estimated loss emergence period ("LEP"). The LEP is generated utilizing a charge-off look-back analysis, which evaluates the time from the first indication of elevated risk of repayment (or other early event indicating a problem) to eventual charge-off to support the LEP considered in the allowance calculation. This reserving methodology establishes the approximate number of months of LEP that represents incurred losses for each loan portfolio within each portfolio segment in addition to the qualitative reserves.

Activity in the allowance for loan losses for the three months ended March 31, 2020 and 2019 are, as follows:

Business Activities Loans

At or for the Three Months Ended March 31, 2020

    

Commercial

    

Commercial

    

Residential

    

    

(in thousands)

real estate

and industrial

real estate

Consumer

Total

Balance at beginning of period

$

7,668

$

3,608

$

3,402

$

379

$

15,057

Charged-off loans

 

(770)

 

(150)

 

 

(148)

 

(1,068)

Recoveries on charged-off loans

 

25

 

1

 

 

3

 

29

Provision for loan losses

 

738

 

84

 

111

 

150

 

1,083

Balance at end of period

$

7,661

$

3,543

$

3,513

$

384

$

15,101

Individually evaluated for impairment

 

675

 

138

 

126

 

 

939

Collectively evaluated

 

6,986

 

3,405

 

3,387

 

384

 

14,162

Total

$

7,661

$

3,543

$

3,513

$

384

$

15,101

Acquired Loans

At or for the Three Months Ended March 31, 2020

    

Commercial

    

Commercial

    

Residential

    

    

(in thousands)

real estate

and industrial

real estate

Consumer

Total

Balance at beginning of period

$

147

$

6

$

143

$

$

296

Charged-off loans

 

(101)

 

(29)

 

(8)

 

(5)

 

(143)

Recoveries on charged-off loans

 

 

9

 

6

 

 

15

(Releases) provision for loan losses

 

18

 

17

 

(12)

 

5

 

28

Balance at end of period

$

64

$

3

$

129

$

$

196

Individually evaluated for impairment

 

13

 

 

14

 

 

27

Collectively evaluated

 

51

 

3

 

115

 

 

169

Total

$

64

$

3

$

129

$

$

196

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Table of Contents

Business Activities Loans

At or for the Three Months Ended March 31, 2019

    

Commercial

    

Commercial

    

Residential

    

    

(in thousands)

real estate

and industrial

real estate

Consumer

Total

Balance at beginning of period

$

6,811

$

2,380

$

3,982

$

408

$

13,581

Charged-off loans

 

(57)

 

 

 

(53)

 

(110)

Recoveries on charged-off loans

 

16

 

1

 

18

 

3

 

38

(Releases) provision for loan losses

 

(195)

 

397

 

(47)

 

38

 

193

Balance at end of period

$

6,575

$

2,778

$

3,953

$

396

$

13,702

Individually evaluated for impairment

 

396

 

53

 

83

 

1

 

533

Collectively evaluated

 

6,179

 

2,725

 

3,870

 

395

 

13,169

Total

$

6,575

$

2,778

$

3,953

$

396

$

13,702

Acquired Loans

At or for the Three Months Ended March 31, 2019

    

Commercial

    

Commercial

    

Residential

    

    

(in thousands)

real estate

and industrial

real estate

Consumer

Total

Balance at beginning of period

$

173

$

35

$

77

$

$

285

Charged-off loans

 

 

(16)

 

(104)

 

(1)

 

(121)

Recoveries on charged-off loans

 

 

 

 

 

Provision (releases) for loan losses

 

(12)

 

10

 

132

 

1

 

131

Balance at end of period

$

161

$

29

$

105

$

$

295

Individually evaluated for impairment

 

16

 

 

22

 

 

38

Collectively evaluated

 

145

 

29

 

83

 

 

257

Total

$

161

$

29

$

105

$

$

295

Loan Origination/Risk Management: The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. The Company’s Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Company's Board of Directors with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies, non-performing loans and potential problem loans. The Company seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators/Classified Loans: In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Consistent with regulatory guidelines, the Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

The following are the definitions of the Company’s credit quality indicators:

Pass: Loans the Company considers in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.

Special Mention: Loans the Company considers having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point

33

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where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Company to sufficient risks to warrant classification.

Substandard: Loans the Company considers as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans the Company considers as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans the Company considers as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following tables present the Company’s loans by risk rating at March 31, 2020 and December 31, 2019:

Business Activities Loans

Commercial Real Estate

Commercial construction

and land development

Commercial real estate other

Total commercial real estate

(in thousands)

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

Grade:

  

  

  

  

  

  

Pass

$

48,881

$

31,057

$

659,494

$

646,886

$

708,375

$

677,943

Special mention

 

 

 

8,133

 

5,483

 

8,133

 

5,483

Substandard

 

11

 

330

 

11,824

 

11,974

 

11,835

 

12,304

Doubtful

 

265

 

 

1,127

 

1,708

 

1,392

 

1,708

Total

$

49,157

$

31,387

$

680,578

$

666,051

$

729,735

$

697,438

Acquired Loans

Commercial Real Estate

Commercial construction

and land development

Commercial real estate other

Total commercial real estate

(in thousands)

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

Grade:

  

  

  

  

  

  

Pass

$

2,083

$

2,412

$

205,309

$

218,491

$

207,392

$

220,903

Special mention

 

 

12

 

1,742

 

2,261

 

1,742

 

2,273

Substandard

 

339

 

479

 

8,900

 

9,400

 

9,239

 

9,879

Doubtful

 

 

 

70

 

168

 

70

 

168

Total

$

2,422

$

2,903

$

216,021

$

230,320

$

218,443

$

233,223

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Business Activities Loans

Commercial and Industrial

Commercial

Agricultural

Tax exempt loans

Total commercial
and industrial

(in thousands)

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

Grade:

  

  

  

  

  

  

  

  

Pass

$

268,287

$

221,329

$

17,559

$

18,940

$

55,694

$

66,860

$

341,540

$

307,129

Special mention

 

3,641

 

2,744

 

221

 

298

 

 

 

3,862

 

3,042

Substandard

 

15,195

 

14,866

 

456

 

780

 

 

 

15,651

 

15,646

Doubtful

 

959

 

753

 

361

 

 

 

 

1,320

 

753

Total

$

288,082

$

239,692

$

18,597

$

20,018

$

55,694

$

66,860

$

362,373

$

326,570

Acquired Loans

Commercial and Industrial

Commercial

Agricultural

Tax exempt loans

Total commercial
and industrial

(in thousands)

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

Grade:

  

  

  

  

  

  

  

  

Pass

$

50,663

$

51,184

$

200

$

58

$

11,071

$

37,407

$

61,934

$

88,649

Special mention

 

882

 

5,432

 

 

 

 

 

882

 

5,432

Substandard

 

944

 

2,115

 

 

148

 

 

36

 

944

 

2,299

Doubtful

 

224

 

341

 

 

 

 

 

224

 

341

Total

$

52,713

$

59,072

$

200

$

206

$

11,071

$

37,443

$

63,984

$

96,721

Business Activities Loans

Residential Real Estate and Consumer Loans

Residential real estate

Home equity

Other consumer

Total residential real estate and consumer

(in thousands)

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

Performing

$

738,633

$

737,325

$

64,074

$

58,753

$

9,206

$

11,146

$

811,913

$

807,224

Nonperforming

 

4,077

 

3,362

 

440

 

615

 

20

 

21

 

4,537

 

3,998

Total

$

742,710

$

740,687

$

64,514

$

59,368

$

9,226

$

11,167

$

816,450

$

811,222

Acquired Loans

Residential Real Estate and Consumer Loans

Residential real estate

Home equity

Other consumer

Total residential real estate and consumer

(in thousands)

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

    

Mar 31, 2020

    

Dec 31, 2019

Performing

$

387,304

$

407,811

$

52,619

$

62,504

$

1,343

$

1,707

$

441,266

$

472,022

Nonperforming

 

2,314

 

3,359

 

411

 

529

 

7

 

8

 

2,732

 

3,896

Total

$

389,618

$

411,170

$

53,030

$

63,033

$

1,350

$

1,715

$

443,998

$

475,918

The following table summarizes total classified and criticized loans as of March 31, 2020 and December 31, 2019:

March 31, 2020

December 31, 2019

Business

Business

(in thousands)

    

Activities Loans

    

Acquired  Loans

    

Total

    

Activities Loans

    

Acquired  Loans

    

Total

Non-accrual

$

8,384

$

1,672

$

10,056

$

8,354

$

3,196

$

11,550

Substandard accruing

 

26,351

 

11,537

 

37,888

 

26,055

 

13,387

 

39,442

Total classified

 

34,735

 

13,209

 

47,944

 

34,409

 

16,583

 

50,992

Special mention

 

11,995

 

2,624

 

14,619

 

8,525

 

7,705

 

16,230

Total Criticized

$

46,730

$

15,833

$

62,563

$

42,934

$

24,288

$

67,222

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NOTE 5.               BORROWED FUNDS

Borrowed funds at March 31, 2020 and December 31, 2019 are summarized, as follows:

March 31, 2020

December 31, 2019

 

(dollars in thousands)

    

Carrying Value

    

Weighted Average Rate

    

Carrying Value

    

Weighted Average Rate

 

Short-term borrowings

  

  

  

  

 

Advances from the FHLB

$

172,643

 

1.27

%  

$

303,286

 

1.83

%

Advances from the FRB

62,000

0.25

Other borrowings

 

31,001

 

1.21

 

44,832

 

0.99

Total short-term borrowings

 

265,644

 

1.03

 

348,118

 

1.73

Long-term borrowings

 

  

 

  

 

  

 

  

Advances from the FHLB

 

231,936

 

1.80

 

123,278

 

1.93

Subordinated borrowings

 

59,849

 

4.97

 

59,920

 

5.53

Total long-term borrowings

 

291,785

 

2.45

 

183,198

 

2.87

Total

$

557,429

 

1.77

%  

$

531,316

 

2.11

%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended March 31, 2020 and December 31, 2019.

The Company has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At March 31, 2020, the Company’s available secured line of credit at the FRB was $142.1 million. The Company has pledged certain loans and securities to the FRB to support this arrangement. There were $62.0 million of outstanding advances with the FRB for the period ended March 31, 2020 and no borrowings with the FRB as of December 31, 2019.

The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of March 31, 2020 and December 31, 2019. There was no outstanding balance on the line of credit as of March 31, 2020 and December 31, 2019.

Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at March 31, 2020 and December 31, 2019 include no callable advances and $314 thousand of amortizing advances. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of March 31, 2020 is, as follows:

March 31, 2020

 

    

    

Weighted Average

 

(in thousands, except rates)

Carrying Value

 Rate

 

Fixed rate advances maturing:

 

  

 

  

2020

$

142,300

 

1.19

%

2021

 

50,665

 

1.77

2022

 

104,000

 

1.97

2023

 

80,000

 

1.77

2024

 

7,300

 

1.16

2025 and thereafter

 

20,314

 

1.22

Total FHLB advances

$

404,579

 

1.58

%

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On November 26, 2019, the Company executed a Subordinated Note Purchase Agreement with an aggregate of $40.0 million of subordinated notes (the "Notes") to accredited investors. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.625% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 3.27%. The Company has the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of $739 thousand.

The Company also has $20.6 million in floating Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II ("Trust II") and NHTB Capital Trust III ("Trust III"), which are both Connecticut statutory trusts. The Debentures were issued on March 30, 2004, carry a variable interest rate of 3-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.

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NOTE 6.               DEPOSITS

A summary of time deposits is, as follows:

(in thousands)

    

March 31, 2020

    

December 31, 2019

Time less than $100,000

$

559,255

$

600,747

Time $100,000 through $250,000

 

173,305

 

225,505

Time $250,000 or more

 

111,537

 

106,383

Total time deposits

$

844,097

$

932,635

At March 31, 2020 and December 31, 2019, the scheduled maturities by year for time deposits are, as follows:

(in thousands)

    

March 31, 2020

December 31, 2019

Within 1 year

$

479,983

$

555,074

Over 1 year to 2 years

 

295,939

 

287,934

Over 2 years to 3 years

 

31,909

 

51,444

Over 3 years to 4 years

 

27,811

 

31,262

Over 4 years to 5 years

 

8,438

 

6,883

Over 5 years

 

17

 

38

Total

$

844,097

$

932,635

Included in time deposits are brokered deposits of $378.7 million and $526.9 million at March 31, 2020 and December 31, 2019, respectively. Also included in time deposits are reciprocal deposits of $79.3 million and $64.1 million at March 31, 2020 and December 31, 2019, respectively.

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NOTE 7.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:

    

    

Regulatory

    

    

Regulatory

  

March 31, 

Minimum to be

December 31, 

Minimum to be

 

2020

"Well Capitalized"

2019

"Well Capitalized"

 

Company (consolidated)

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets

 

13.61

%  

10.50

%  

13.61

%  

10.50

%  

Common equity tier 1 capital to risk-weighted assets

 

10.61

 

7.00

 

10.57

 

7.00

Tier 1 capital to risk-weighted assets

 

11.42

 

8.50

 

11.39

 

8.50

Tier 1 capital to average assets

 

8.25

 

5.00

 

8.13

 

5.00

Bank

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets

 

12.58

%  

10.50

%  

12.42

%  

10.50

%

Common equity tier 1 capital to risk-weighted assets

 

11.96

 

7.00

 

11.79

 

7.00

Tier 1 capital to risk-weighted assets

 

11.96

 

8.50

 

11.79

 

8.50

Tier 1 capital to average assets

 

8.64

 

5.00

 

8.39

 

5.00

At each date shown, the Company and the Bank met the conditions to be classified as “well-capitalized” under the relevant regulatory framework. To be categorized as "well-capitalized," an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.

The Company and the Bank are subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk-weighted assets and the Company and the Bank each exceed the minimum to be "well-capitalized." Effective January 1, 2019 all banking organizations must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%.

At March 31, 2020, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered "well-capitalized" for regulatory purposes.

Accumulated other comprehensive income (loss)

Components of accumulated other comprehensive income is, as follows:

(in thousands)

    

March 31, 2020

    

December 31, 2019

Other accumulated comprehensive income, before tax:

 

  

 

  

Net unrealized gain on AFS securities

$

12,699

$

7,342

Net unrealized loss on hedging derivatives

 

(3,099)

 

(718)

Net unrealized loss on post-retirement plans

 

(1,512)

 

(1,512)

Income taxes related to items of accumulated other comprehensive income:

 

  

 

  

Net unrealized gain on AFS securities

 

(3,139)

 

(1,793)

Net unrealized loss on hedging derivatives

 

886

 

237

Net unrealized loss on post-retirement plans

 

355

 

355

Accumulated other comprehensive income

$

6,190

$

3,911

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Table of Contents

The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2020 and 2019:

(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Three Months Ended March 31, 2020

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

Net unrealized gain arising during the period

$

5,492

$

(1,378)

$

4,114

Less: reclassification adjustment for gains (losses) realized in net income

 

135

 

(32)

 

103

Net unrealized gain on AFS securities

 

5,357

 

(1,346)

 

4,011

Net unrealized loss on derivative hedges:

 

  

 

  

 

  

Net unrealized loss arising during the period

 

(2,382)

 

650

 

(1,732)

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized loss on derivative hedges

 

(2,382)

 

650

 

(1,732)

Net unrealized gain on post-retirement plans:

 

  

 

  

 

  

Net unrealized gain arising during the period

 

 

 

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on post-retirement plans

 

 

 

Other comprehensive income

$

2,975

$

(696)

$

2,279

Three Months Ended March 31, 2019

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

Net unrealized gain arising during the period

$

8,900

$

(2,079)

$

6,821

Less: reclassification adjustment for gains realized in net income

 

 

 

Net unrealized gain on AFS securities

 

8,900

 

(2,079)

 

6,821

Net unrealized loss on cash flow hedging derivatives:

 

  

 

  

 

  

Net unrealized loss arising during the period

 

(845)

 

198

 

(647)

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on cash flow hedging derivatives

 

(845)

 

198

 

(647)

Net unrealized gain on post-retirement plans:

 

  

 

  

 

  

Net unrealized gain arising during the period

 

 

 

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on post-retirement plans

 

 

 

Other comprehensive income

$

8,055

$

(1,881)

$

6,174

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The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three months ended March 31, 2020 and 2019:

    

Net unrealized

    

Net loss on

    

Net unrealized

    

gain (loss)

effective cash

 loss

on AFS

flow hedging

on pension

(in thousands)

Securities

derivatives

plans

Total

Three Months Ended March 31, 2020

  

  

  

  

Balance at beginning of period

$

5,549

$

(481)

$

(1,157)

$

3,911

Other comprehensive gain (loss) before reclassifications

 

4,114

 

(1,732)

 

 

2,382

Less: amounts reclassified from accumulated other comprehensive income

 

103

 

 

 

103

Total other comprehensive income (loss)

 

4,011

 

(1,732)

 

 

2,279

Balance at end of period

$

9,560

$

(2,213)

$

(1,157)

$

6,190

Three Months Ended March 31, 2019

 

  

 

  

 

  

 

Balance at beginning of period

$

(8,665)

$

(2,249)

$

(888)

$

(11,802)

Other comprehensive gain (loss) before reclassifications

 

6,821

 

(647)

 

 

6,174

Less: amounts reclassified from accumulated other comprehensive income

 

 

 

 

Total other comprehensive income (loss)

 

6,821

 

(647)

 

 

6,174

Balance at end of period

$

(1,844)

$

(2,896)

$

(888)

$

(5,628)

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31, 

Affected Line Item where

(in thousands)

    

2020

    

2019

    

    

Net Income is Presented

Net realized gains on AFS securities:

  

  

  

Before tax(1)

$

135

$

 

Non-interest income

Tax effect

 

(32)

 

 

Tax expense

Total reclassifications for the period

$

103

$

 

Net of tax

(1) Net realized gains before tax include gross realized gains $146 thousand and realized losses of $11 thousand.

..

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NOTE 8.           EARNINGS PER SHARE

The following table presents the calculation of earnings per share:

Three Months Ended

March 31, 

(in thousands, except per share and share data)

    

2020

    

2019

Net income

$

7,721

$

7,281

Average number of basic common shares outstanding

 

15,558,132

 

15,523,423

Plus: dilutive effect of stock options and awards outstanding (1)

 

34,463

 

63,226

Average number of diluted common shares outstanding (1)

 

15,592,595

 

15,586,649

Anti-dilutive options excluded from earnings calculation

 

 

Earnings per share:

 

  

 

  

Basic

$

0.50

$

0.47

Diluted

$

0.50

$

0.47

(1) Average diluted shares outstanding are computed using the treasury stock method.

..

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NOTE 9.           DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As part of its overall asset and liability management strategy, the Company uses derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the changes in interest rates do not have a significant effect on net interest income. Thus, all of the Company's derivative contracts are considered to be interest rate contracts.

The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss.

The Company offers derivative products in the form of interest rate swaps, to commercial loan customers to facilitate their risk management strategies. These instruments are executed through Master Netting Arrangements ("MNA") with financial institution counterparties or Risk Participation Agreements ("RPA") with commercial bank counterparties, for which the Company assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.

The following tables present information about derivative assets and liabilities at March 31, 2020 and December 31, 2019:

March 31, 2020

 

Weighted

 

Location Fair

Notional

Average

Fair Value

Value Asset

Amount

Maturity

Asset (Liability)

    

(Liability)

    

(in thousands)

    

(in years)

    

(in thousands)

 

Cash flow hedges:

Interest rate swap on wholesale funding

$

100,000

 

4.3

$

(6,467)

Other liabilities

Total cash flow hedges

 

100,000

 

4.3

(6,467)

Fair value hedges:

Interest rate swap on securities

 

37,190

 

9.3

 

3,368

Other liabilities

Total fair value hedges

 

37,190

 

3,368

Economic hedges:

Forward sale commitments

 

53,751

 

0.2

 

(73)

Other liabilities

Customer Loan Swaps-MNA Counterparty

150,490

7.8

(15,463)

Other liabilities (1)

Customer Loan Swaps-RPA Counterparty

78,505

8.7

(9,470)

Other liabilities (1)

Customer Loan Swaps-Customer

228,995

8.1

24,933

Other liabilities (1)

Total economic hedges

 

511,741

 

(73)

Non-hedging derivatives:

Interest rate lock commitments

 

23,146

 

0.1

 

93

Other assets

Total non-hedging derivatives

 

23,146

 

93

Total

$

672,077

$

(3,079)

(1) Customer loan derivatives are subject to MNA or RPA arrangements with financial institution counterparties.

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Table of Contents

December 31, 2019

 

Weighted

 

Location Fair

Notional

Average

Fair Value

Value Asset

Amount

Maturity

Asset (Liability)

    

(Liability)

    

(in thousands)

    

(in years)

    

(in thousands)

 

Cash flow hedges:

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

100,000

 

4.6

$

(1,311)

Other liabilities

Total cash flow hedges

 

100,000

 

 

(1,311)

Fair value hedges:

Interest rate swap on securities

 

37,190

 

9.6

 

593

Other liabilities

Total fair value hedges

 

37,190

 

593

Economic hedges:

Forward sale commitments

11,228

 

0.1

 

(84)

Other liabilities

Customer Loan Swaps-MNA Counterparty

135,598

 

7.5

 

(4,669)

(1)

Customer Loan Swaps-RPA Counterparty

69,505

 

8.8

 

(3,377)

(1)

Customer Loan Swaps-Customer

205,103

 

8.1

 

8,046

(1)

Total economic hedges

 

421,434

 

(84)

Non-hedging derivatives:

 

  

 

  

 

  

Interest rate lock commitments

 

21,748

 

0.1

 

59

Other assets

Total non-hedging derivatives

 

21,748

 

 

59

Total

$

580,372

$

(743)

(1) Customer loan derivatives are subject to MNA or RPA arrangements with financial institution counterparties, thus assets and liabilities with the counterparty are netted for financial statement presentation.

As of March 31, 2020 and December 31, 2019, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:

    

    

    

Cumulative Amount of Fair 

Location of Hedged Item on 

Carrying Amount of Hedged 

Value Hedging Adjustment in 

    

Balance Sheet

    

Assets (Liabilities)

    

Carrying Amount

March 31, 2020

 

  

 

  

 

  

Fair value hedges:

 

  

 

  

 

  

Interest rate swap on securities

 

Securities Available for Sale

$

38,710

$

207

December 31, 2019

 

  

 

  

 

  

Fair value hedges:

 

  

 

  

 

  

Interest rate swap on securities

 

Securities Available for Sale

$

39,026

$

523

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Information about derivative assets and liabilities for March 31, 2020 and December 31, 2019, follows:

Three Months Ended March 31, 2020

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

    

Income

    

Comprehensive Income

    

Income(1)

    

Income

    

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

4,949

 

Other income

$

 

Interest expense

$

1

Total cash flow hedges

 

4,949

 

 

 

  

 

1

Fair value hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

(2,736)

 

Interest income

 

 

Interest income

 

13

Total fair value hedges

 

(2,736)

 

 

 

  

 

13

Economic hedges:

 

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

11

Total economic hedges

 

 

 

 

  

 

11

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other Income

 

 

Other Income

 

34

Total non-hedging derivatives

 

 

 

 

  

 

34

Total

$

2,213

$

 

  

$

59

(1) As of March 31, 2020 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months.

Three Months Ended March 31, 2019

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Amount of

Recognized in

Reclassified

Location of

Gain (Loss)

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Recognized

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

Income

Comprehensive Income

Income(1)

Income

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

402

 

Other income

$

 

Interest expense

$

Interest rate cap agreements

2,494

Acquisition, restructuring, and other expenses

Interest expense

163

Total cash flow hedges

2,896

 

 

 

 

Economic hedges:

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

(65)

Total economic hedges

 

 

  

 

 

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other Income

 

6

Total non-hedging derivatives

 

 

  

 

6

Total

$

2,896

 

  

$

 

  

$

6

(1) As of March 31, 2019 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months.

45

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Cash flow hedges

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on four rolling, three-month borrowings indexed to three-month LIBOR. Under the terms of the agreements, the Company paid total premiums of $4.6 million for the right to receive cash flow payments if three-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges, however the caps were terminated in the fourth quarter of 2019, with $3.2 million recognized in acquisition, restructuring and other expenses. The caps were terminated because it was probable that the original forecasted transaction would not occur by the end of the original specified period.

Interest rate swap on deposits

In March and November 2019, the Company entered into interest rate swaps on brokered deposits (the "SWAPS") to limit its exposure to rising interest rates over a five year term.  Under the terms of the agreement, the Company has two swaps each with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.55% respectively, and the financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swap as a cash flow hedge.

Economic hedges

Forward sale commitments

The Company utilizes forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives. The Company typically uses a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into contracts just prior to the loan closing with a customer.

Customer loan derivatives

The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free-standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $26.2 million with counterparties.

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of March 31, 2020

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(15,463)

$

15,463

$

26,200

$

RPA counterparty

 

(9,470)

 

9,470

 

 

Total

$

(24,933)

$

24,933

$

26,200

$

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Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of December 31, 2019

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(4,669)

$

4,669

$

10,700

$

RPA counterparty

 

(3,377)

 

3,377

 

 

Total

$

(8,046)

$

8,046

$

10,700

$

Non-hedging derivatives

Interest rate lock commitments

The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

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NOTE 10.           FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

$

295,657

$

$

295,657

US Government agency

 

 

101,669

 

 

101,669

Private label

 

 

18,499

 

 

18,499

Obligations of states and political subdivisions thereof

 

 

137,579

 

 

137,579

Corporate bonds

 

 

72,937

 

 

72,937

Derivative assets

 

 

24,933

 

93

 

25,026

Derivative liabilities

 

 

(28,032)

 

(73)

 

(28,105)

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

$

321,969

$

$

321,969

US Government agency

 

 

99,661

 

 

99,661

Private label

 

 

19,533

 

 

19,533

Obligations of states and political subdivisions thereof

 

 

142,006

 

 

142,006

Corporate bonds

 

 

80,061

 

 

80,061

Derivative assets

 

 

6,791

 

59

 

6,850

Derivative liabilities

 

 

(8,102)

 

(84)

 

(8,186)

Securities Available for Sale: All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.

Derivative Assets and Liabilities

Cash Flow and Fair Value Hedges. The valuation of the Company's cash flow hedges are obtained from a third party. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The inputs used to value the Company's cash flow hedges are all classified as Level 2 measurements.

Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated

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Table of Contents

fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood of a loan in a lock position will ultimately close. The closing ratio is derived from the Company’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are not considered observable factors. As such, mandatory delivery forward commitments are classified as Level 3 measurements.

Customer Loan Derivatives. The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.

Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2020, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended March 31, 2020:

Assets (Liabilities)

Interest Rate Lock

Forward

(in thousands)

    

Commitments

    

Commitments

Three Months Ended March 31, 2020

  

  

Balance at beginning of period

$

59

$

(84)

Realized gain recognized in non-interest income

 

34

 

11

Balance at end of period

$

93

$

(73)

Three Months Ended March 31, 2019

  

  

Balance at beginning of period

$

8

$

Realized gain recognized in non-interest income

 

6

 

(65)

Balance at end of period

$

14

$

(65)

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Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is, as follows:

Fair Value

Fair Value

March 31, 

December 31,

Valuation 

Unobservable 

Unobservable

(in thousands, except ratios)

    

2020

    

2019

Techniques

    

Inputs

    

Input Value

 

Assets (Liabilities)

  

  

  

  

  

 

Interest Rate Lock Commitment

 

$

93

$

59

Historical trend

 

Closing Ratio

 

90

%

 

 

Pricing Model

Origination Costs, per loan

$

1.7

 

Forward Commitments

 

(73)

 

(84)

Quoted prices for similar loans in active markets.

 

Freddie Mac pricing system

 

Pair-off contract price

Total

$

20

$

(25)

  

 

  

 

  

Non-Recurring Fair Value Measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements:

Fair Value

Three Months Ended

 Measurement Date as of 

March 31, 2020

December 31, 2019

March 31, 2020

March 31, 2020

Level 3

Level 3

Total

Level 3

(in thousands)

    

Inputs

    

Inputs

    

Gains (Losses)

    

Inputs

Assets

  

  

  

  

Impaired loans

$

8,335

$

9,625

$

1,290

March 2020

Capitalized servicing rights

 

3,897

4,301

 

 

March 2020

Other real estate owned

 

2,205

2,236

 

(31)

 

August 2019

Premises held for sale

 

1,764

1,764

 

 

September 2019

Total

$

16,201

$

17,926

$

1,259

 

  

There are no liabilities measured at fair value on a non-recurring basis in 2020 and 2019.

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is, as follows:

Fair Value

Range

 

(in thousands, except ratios)

    

March 31, 2020

    

Valuation Techniques

    

Unobservable Inputs

    

(Weighted Average)(a)

 

Assets

 

  

 

  

 

  

  

Impaired loans

$

4,947

 

Fair value of collateral -appraised value

 

Loss severity

0% to 70%

 

Appraised value

$0 to $975

Impaired loans

 

3,388

 

Discount cash flow

 

Discount rate

 

3.50% to 9.50%

 

Cash flows

$21 to $1,002

Capitalized servicing rights

 

3,897

 

Discounted cash flow

 

Constant prepayment rate (CPR)

 

11.91

%

 

  

 

  

 

Discount rate

 

11.33

%

Other real estate owned

 

2,205

 

Fair value of collateral less selling costs

 

Appraised value

 

$

2,695

 

  

 

  

 

Selling Costs

 

6% to 10%

Premises held for sale(b)

 

1,764

 

Fair value of asset less selling costs

 

Appraised value

$136 to $527

 

  

 

  

 

Selling Costs

 

6

%

Total

$

16,201

 

  

 

  

 

  

(a) Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.

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(b) The carrying value of premises held for sale was $1.8 million as of March 31, 2020.

Fair Value

Range

(in thousands, except ratios)

    

December 31, 2019

    

Valuation Techniques

    

Unobservable Inputs

    

(Weighted Average)(a)

Assets

Impaired loans

$

6,137

Fair value of collateral -appraised value

Loss severity

0% to 55.00%

Appraised value

$0 to $6,915

Impaired loans

 

3,488

Discount cash flow

Discount rate

 

2.88% to 9.50%

Cash flows

$22 to $1,002

Capitalized servicing rights

 

4,301

Discounted cash flow

Constant prepayment rate (CPR)

 

9.95

%

Discount rate

 

10.07

%

Other real estate owned

 

2,236

Fair value of collateral less selling costs

Appraised value

 

$

2,695

Selling Costs

10% to 20%

Premises held for sale(b)

 

1,764

Fair value of asset less selling costs

Appraised value

 

$

$136 to $527

Selling Costs

 

6.00

%

Total

$

17,926

(a) Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.
(b) The carrying value of premises held for sale was $1.8 million as of December 31, 2019.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended March 31, 2020 and December 31, 2019.

Impaired loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, non-recurring fair value measurement adjustments relating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral supporting commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of loan servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, the Company records the property at the fair value of the asset less the

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estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Premises held for sale. Assets held for sale, identified as part of the Company’s strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Summary of Estimated Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

March 31, 2020

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

85,655

$

85,655

$

85,655

$

$

Securities available for sale

 

626,341

 

626,341

 

 

626,341

 

FHLB stock

 

19,897

 

19,897

 

 

19,897

 

Net loans

 

2,619,686

 

2,604,406

 

 

 

2,604,406

Accrued interest receivable

 

3,268

 

3,268

 

 

3,268

 

Cash surrender value of bank-owned life insurance policies

 

76,400

 

76,400

 

 

76,400

 

Derivative assets

 

25,026

 

25,026

 

 

24,933

 

93

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

1,806,460

$

1,861,960

$

$

1,861,960

$

Time deposits

844,097

852,346

852,346

Short-term other borrowings

 

31,001

 

31,000

 

 

31,000

 

FHLB advances

 

404,579

 

410,065

 

 

410,065

 

FRB advances

62,000

62,000

62,000

Subordinated borrowings

 

59,849

 

59,849

 

 

59,849

 

Derivative liabilities

 

28,105

 

28,105

 

 

28,032

 

73

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December 31, 2019

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

56,910

$

56,910

$

56,910

$

$

Securities available for sale

 

663,230

 

663,230

 

 

663,230

 

FHLB stock

 

20,679

 

20,679

 

 

20,679

 

Net loans

 

2,625,739

 

2,634,147

 

 

 

2,634,147

Accrued interest receivable

 

3,294

 

3,294

 

 

3,294

 

Cash surrender value of bank-owned life insurance policies

 

75,863

 

75,863

 

 

75,863

 

Derivative assets

 

6,850

 

6,850

 

 

6,791

 

59

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

1,763,116

$

1,751,481

$

$

1,751,481

$

Time deposits

932,635

932,886

932,886

Short-term other borrowings

 

44,832

 

44,831

 

 

44,831

 

FHLB advances

 

426,564

 

425,989

 

 

425,989

 

Subordinated borrowings

 

59,920

 

59,920

 

 

59,920

 

Derivative liabilities

 

8,186

 

8,186

 

 

8,102

 

84

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which the estimate of fair value goes beyond the carrying value approximating fair value.

Loans, net. The fair value of loans are calculated on an individual basis with consideration given to the loans' underlying characteristics, including account types, remaining terms, annual interest rates or coupons, interest types, timing of principal and interest payments, current market rates, risk ratings, credit ratings and remaining balances. A discounted cash flow model is used to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, liquidity premiums, projected default probabilities, loss given defaults, and estimates of prevailing discount rates.

Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.

Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every 90 days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments including standby letters of credit and other financial guarantees and commitments are considered immaterial to the Company’s financial statements.

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NOTE 11.           REVENUE FROM CONTRACTS WITH CUSTOMER

The Company has accounted for the various non-interest revenue streams and related contracts under ASC 606.

Disaggregation of Revenue

The following tables present disaggregation of the Company’s non-interest revenue by major business line and timing of revenue recognition for the transfer of products or services:

Three Months Ended

March 31, 

(in thousands)

    

2020

    

2019

Major Products/Service Lines

 

  

 

  

Trust management fees

$

3,046

$

2,525

Financial services fees

 

323

 

233

Interchange fees

 

1,738

 

1,031

Customer deposit fees

 

1,110

 

907

Other customer service fees

 

264

 

226

 Total

$

6,481

$

4,922

Three Months Ended

March 31, 

(in thousands)

    

2020

    

2019

Timing of Revenue Recognition

 

  

 

  

Products and services transferred at a point in time

$

3,273

$

2,267

Products and services transferred over time

 

3,208

 

2,655

Total

$

6,481

$

4,922

Trust Management Fees.

The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. Revenue from these services are generally recognized over time and is typically based on a time elapsed measure of service. Certain fees, such as bill paying fees, distribution fees, real estate sale fees, and supplemental tax service fees, are recorded as revenue at a point in time upon the completion of the service.

Financial Services Fees.

Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker dealer offering securities and insurance products not affiliated with the Company or its subsidiaries. The Company has a revenue sharing agreement with Infinex for any financial service fee income generated. Financial services fees are recognized at a point in time upon the completion of service requirements.

Interchange Fees.

The Company earns interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction.

Customer Deposit Fees.

The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to

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customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized by the Company at a point in time upon the completion of the service.

Other Customer Service Fees.

The Company has certain incentive and referral fee arrangements with independent third parties in which fees are earned for new account activity, product sales, or transaction volume generated for the respective third parties. The Company also earns a percentage of the fees generated from third-party credit card plans promoted through the Bank. Revenue from these incentive and referral fee arrangements are recognized over time using the right to invoice measure of progress.

Contract Balances from Contracts with Customers

The following table provides information about contract assets or receivables and contract liabilities or deferred revenues from contracts with customers:

    

Balance at

    

Balance at

(in thousands)

March 31, 2020

December 31, 2019

Balances from contracts with customers only:

 

  

 

  

Other Assets

$

1,336

$

1,703

Other Liabilities

 

3,014

 

3,114

The timing of revenue recognition, billings and cash collections results in contract assets or receivables and contract liabilities or deferred revenue on the consolidated balance sheets. For most customer contracts, fees are deducted directly from customer accounts and, therefore, there is no associated impact on the accounts receivable balance. For certain types of service contracts, the Company has an unconditional right to consideration under the service contract and an accounts receivable balance is recorded for services completed. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

Costs to Obtain and Fulfill a Contract

The Company currently expenses contract costs for processing and administrative fees for debit card transactions. The Company also expenses custody fees and transactional costs associated with securities transactions as well as third party tax preparation fees. The Company has elected the practical expedient in ASC 340-40-25-4, whereby the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets the Company otherwise would have recognized is one year or less.

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NOTE 12.           LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” and all subsequent ASUs modifying ASC 842. Substantially all of the leases pursuant to which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2040. All leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset with a corresponding lease liability using the modified retrospective approach.

The Company elected the following practical expedients in conjunction with implementation of ASC 842 as follows:

Package of practical expedients:
o Lease classification as an operating lease under the prior standards is grandfathered.
o Re-evaluation of embedded leases evaluated under the prior standards is not required.
o No re-assessment of previously recorded initial direct lease costs.
Election to exclude short-term leases (i.e., leases with initial terms of twelve months or less), from capitalization on the consolidated balance sheets.

The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities as of March 31, 2020:

(in thousands)

    

March 31, 2020

December 31, 2019

Lease Right-of-Use Assets

 

Classification

  

  

Operating lease right-of-use assets

 

Other assets

$

10,129

$

9,623

Lease Liabilities

 

  

 

  

 

  

Operating lease liabilities

 

Other liabilities

 

10,205

 

9,651

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used for the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. If there are multiple renewals typically only the next lease renewal is considered. Regarding the discount rate, ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

The following table presents the weighted average lease term and discount rate of the Company’s leases:

March 31, 2020

December 31, 2019

Weighted-average remaining lease term (in years)

  

  

Operating leases

9.52

8.96

Weighted-average discount rate

  

  

Operating leases

3.30

%

3.27

%

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The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as real estate taxes, common area maintenance and utilities.

Three Months Ended

Three Months Ended

(in thousands)

March 31, 2020

March 31, 2019

Lease Costs

 

  

 

  

Operating lease cost

$

234

$

231

Variable lease cost

 

144

 

124

Total lease cost

$

378

$

355

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2020 are, as follows:

(in thousands)

    

Operating Leases

Twelve Months Ended:

 

  

March 31, 2021

$

1,285

March 31, 2022

 

1,300

March 31, 2023

 

1,319

March 31, 2024

 

1,323

March 31, 2025

 

1,240

Thereafter

 

6,495

Total future minimum lease payments

 

12,962

Amounts representing interest

 

(2,757)

Present value of net future minimum lease payments

$

10,205

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NOTE 13.           SUBSEQUENT EVENTS

There were no significant subsequent events between March 31, 2020 and through the date the financial statements are available to be issued.

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ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the full year 2020 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable.

Bar Harbor Bankshares (the “Company”) is the parent of Bar Harbor Bank & Trust (the “Bank”), which is the only community bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a true community bank providing exceptional commercial, retail, and wealth management banking services from over 50 locations. The Company’s corporate goal is to be among the most profitable banks in New England, and its business model is centered on the following:

Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders
Geography, heritage and performance are key while remaining true to a community culture
Strong commitment to risk management while balancing growth and earnings
Service and sales driven culture with a focus on core business growth
Fee income is fundamental to the Company's profitability through trust and treasury management services, customer derivatives and secondary market mortgage banking
Investment in processes, products, technology, training, leadership and infrastructure
Expansion of the Company’s brand and business to deepen market presence
Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Company

Shown below is a profile of the Company as of March 31, 2020:

GRAPHIC

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SELECTED FINANCIAL DATA

The following summary data is based in part on the consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Forms 10-Q.

Three Months Ended

 

March 31, 

 

    

2020

    

2019

 

PER SHARE DATA

Net earnings, diluted

$

0.50

$

0.47

Adjusted earnings, diluted(1)

 

0.50

 

0.47

Total book value

 

25.90

 

24.54

Tangible book value(1)

 

17.70

 

17.63

Market price at period end

 

17.28

 

25.87

Dividends

 

0.22

 

0.20

PERFORMANCE RATIOS(2)

Return on assets

 

0.85

%

 

0.83

%

Adjusted return on assets(1)

 

0.86

 

0.83

Return on equity

 

7.64

 

7.83

Adjusted return on equity(1)

 

7.71

 

7.83

Adjusted return on tangible equity(1)

 

11.54

 

11.19

Net interest margin, fully taxable equivalent (FTE)(1) (3)

 

3.06

 

2.77

Net interest margin (FTE), excluding purchased loan accretion(3)

 

2.99

 

2.67

Efficiency ratio(1)

 

64.82

 

63.94

GROWTH (Year-to-date)(1)

Total commercial loans

 

6.4

%

 

(3.3)

%

Total loans

 

(0.9)

 

5.9

Total deposits

 

(6.7)

 

(2.8)

FINANCIAL DATA (In millions)

Total assets

$

3,677

$

3,629

Total earning assets(4)

 

3,269

 

3,312

Total investments

 

646

 

782

Total loans

 

2,635

 

2,527

Allowance for loan losses

 

15

 

14

Total goodwill and intangible assets

 

129

 

107

Total deposits

 

2,651

 

2,466

Total shareholders' equity

 

404

 

381

Net income

 

8

 

7

Adjusted income(1)

 

8

 

7

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (current quarter annualized)/average loans

 

0.18

%

 

0.03

%

Allowance for loan losses/total loans

 

0.58

 

0.55

Loans/deposits

 

99

 

102

Shareholders' equity to total assets

 

10.98

 

10.50

Tangible shareholders' equity to tangible assets(1)

 

7.77

 

7.77

(1) Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of Management's Discussion and Analysis for additional information.
(2) All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(3) Fully taxable equivalent considers the impact of tax-advantaged investment securities and loans.
(4) Earning assets includes non-accruing loans and securities are valued at amortized cost.

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CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly growth rates as of March 31, 2020 on an annualized basis:

LOAN ANALYSIS

Annualized 

Growth %

March 31, 

December 31, 

September 30,

June 30,

March 31, 

March 31, 

(in thousands, except ratios)

    

2020

    

2019

    

2019

    

2019

    

2019

    

2020

Commercial real estate

$

948,178

$

930,661

$

923,773

$

881,479

$

821,567

 

7.5

%  

Commercial and industrial

 

321,605

 

318,988

 

301,590

 

312,029

 

305,185

 

3.3

 

Total commercial loans

 

1,269,783

 

1,249,649

 

1,225,363

 

1,193,508

 

1,126,752

 

6.4

 

Residential real estate

 

1,132,328

 

1,151,857

 

1,143,452

 

1,167,759

 

1,184,053

 

(6.8)

 

Consumer

 

128,120

 

135,283

 

107,375

 

112,275

 

111,402

 

(21.2)

 

Tax exempt and other

 

104,752

 

104,303

 

101,116

 

104,696

 

104,752

 

1.7

 

Total loans

$

2,634,983

$

2,641,092

$

2,577,306

$

2,578,238

$

2,526,959

 

(0.9)

%  

DEPOSIT ANALYSIS

    

    

    

    

    

    

    

    

    

    

    

Annualized 

Growth %

March 31, 

December 31, 

September 30,

June 30,

March 31, 

March 31, 

(in thousands, except ratios)

    

2020

    

2019

    

2019

    

2019

    

2019

    

2020

Demand

$

400,410

$

414,534

$

380,707

$

354,125

$

342,030

 

(13.6)

%  

NOW

 

578,320

 

575,809

 

490,315

 

472,576

 

470,277

 

1.7

 

Savings

 

423,345

 

388,683

 

360,570

 

352,657

 

346,813

 

35.7

 

Money market

 

404,385

 

384,090

 

359,328

 

305,506

 

349,833

 

21.1

 

Total non-maturity deposits

 

1,806,460

 

1,763,116

 

1,590,920

 

1,484,864

 

1,508,953

 

9.8

 

Total time deposits

 

844,097

 

932,635

 

902,665

 

996,512

 

956,818

 

(38.0)

 

Total deposits

$

2,650,557

$

2,695,751

$

2,493,585

$

2,481,376

$

2,465,771

 

(6.7)

%  

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AVERAGE BALANCES AND AVERAGE YIELDS/RATES

The following tables present average balances and average yields and rates on an annualized fully taxable equivalent basis for the periods included:

    

Three Months Ended March 31, 

 

2020

2019

 

Average 

Average 

 

(in thousands, except ratios)

    

Balance

    

Interest(3)

    

Yield/Rate(3)

    

Balance

    

Interest(3)

    

Yield/Rate(3)

    

Assets

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

945,851

$

10,484

 

4.46

%  

$

825,596

$

9,721

 

4.78

%

Commercial and industrial

 

423,393

 

5,151

 

4.89

 

405,107

 

4,786

 

4.79

Residential

 

1,141,908

 

10,909

 

3.84

 

1,143,862

 

11,126

 

3.94

Consumer

 

130,471

 

1,688

 

5.20

 

113,060

 

1,464

 

5.25

Total loans (1)

 

2,641,623

 

28,232

 

4.30

 

2,487,625

 

27,097

 

4.42

Securities and other (2)

 

661,848

 

5,813

 

3.53

 

777,458

 

6,645

 

3.47

Total earning assets

 

3,303,471

 

34,045

 

4.14

%  

 

3,265,083

 

33,742

 

4.19

%

Other assets

 

358,288

 

  

 

295,957

 

  

 

  

Total assets

$

3,661,759

 

  

$

3,561,040

 

  

 

  

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

NOW

$

570,127

$

565

 

0.40

%  

$

468,392

$

583

 

0.51

%

Savings

 

410,931

 

258

 

0.25

 

346,707

 

163

 

0.19

Money market

 

373,650

 

934

 

1.01

 

335,882

 

1,141

 

1.38

Time deposits

 

892,654

 

4,263

 

1.92

 

894,160

 

4,416

 

2.00

Total interest bearing deposits

 

2,247,362

 

6,020

 

1.08

 

2,045,141

 

6,303

 

1.25

Borrowings

 

556,824

 

2,911

 

2.10

 

761,885

 

5,155

 

2.74

Total interest bearing liabilities

 

2,804,186

 

8,931

 

1.28

%  

 

2,807,026

 

11,458

 

1.66

%

Non-interest bearing demand deposits

 

406,951

 

  

 

  

 

351,362

 

  

 

  

Other liabilities

 

44,343

 

  

 

  

 

25,520

 

  

 

  

Total liabilities

 

3,255,480

 

  

 

  

 

3,183,908

 

  

 

  

Total shareholders' equity

 

406,279

 

  

 

  

 

377,132

 

  

 

  

Total liabilities and shareholders' equity

$

3,661,759

 

  

 

  

$

3,561,040

 

  

 

  

Net interest spread

 

  

 

  

 

2.86

%  

 

  

 

  

 

2.53

%

Net interest margin

 

  

 

  

 

3.06

 

  

 

  

 

2.77

(1) The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
(2) The average balance for securities available for sale is based on amortized cost.
(3) Fully taxable equivalent considers the impact of tax-advantaged securities and loans.

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NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts that the Company views as unrelated to its normalized operations, including gains/losses on securities, premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. Non-GAAP adjustments are presented net of an adjustment for income tax expense.

The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company's performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The following table summarizes the reconciliation of non-GAAP items for the time periods presented:

Three Months Ended March 31, 

(in thousands)

    

2020

    

2019

    

GAAP net income

 

  

$

7,721

$

7,281

Plus (less):

 

  

 

  

 

  

Gain on sale of securities, net

 

  

 

(135)

 

Loss on sale of premises and equipment, net

 

  

 

92

 

Loss on other real estate owned

 

  

 

31

 

Acquisition, restructuring and other expenses

 

  

 

103

 

Income tax expense(1)

 

  

 

(22)

 

Total adjusted income(2)

 

(A)

$

7,790

$

7,281

GAAP net interest income

 

(B)

$

24,563

$

21,765

Plus: Non-interest income

 

  

 

8,421

 

6,167

Total Revenue

 

  

 

32,984

 

27,932

Less: Gain on sale of securities, net

 

  

 

(135)

 

Total adjusted revenue(2)

 

(C)

$

32,849

$

27,932

GAAP total non-interest expense

 

  

$

22,359

$

18,624

Less: Loss on sale of premises and equipment, net

 

  

 

(92)

 

Less: Loss on other real estate owned

 

  

 

(31)

 

Less: Acquisition, restructuring and other expenses

 

  

 

(103)

 

Adjusted non-interest expense(2)

 

(D)

$

22,133

$

18,624

(in millions)

 

  

 

  

 

  

Total average earning assets

 

(E)

$

3,306

$

3,265

Total average assets

 

(F)

 

3,662

 

3,561

Total average shareholders' equity

 

(G)

 

406

 

377

Total average tangible shareholders' equity(2)(3)

 

(H)

 

278

 

270

Total tangible shareholders' equity, period-end(2)(3)

 

(I)

 

276

 

274

Total tangible assets, period-end(2)(3)

 

(J)

 

3,549

 

3,522

(in thousands)

 

  

 

  

 

  

Total common shares outstanding, period-end

 

(K)

 

15,587

 

15,524

Average diluted shares outstanding

 

(L)

 

15,593

 

15,587

Adjusted earnings per share, diluted

 

(A/L)

$

0.50

$

0.47

Tangible book value per share, period-end(2)

 

(I/K)

 

17.70

 

17.63

Securities adjustment, net of tax(1)(4)

 

(M)

 

9,560

 

(1,842)

Tangible book value per share, excluding securities adjustment(2)(4)

 

(I+M)/K

 

17.09

 

17.75

Total tangible shareholders' equity/total tangible assets(2)

 

(I/J)

 

7.77

 

7.77

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Three Months Ended March 31, 

Performance ratios(5)

  

2020

    

2019

    

Return on assets

  

%

0.85

%

0.83

%

Adjusted return on assets(2)

(A/F)

0.86

0.83

Return on equity

  

7.64

7.83

Adjusted return on equity(2)

(A/G)

7.71

7.83

Adjusted return on tangible equity(2)(6)

(A+Q)/H

11.54

11.19

Efficiency ratio(2)(7)

(D-O-Q)/(C+N)

64.82

63.94

Net interest margin(2)

(B+P)/E

3.06

2.77

Supplementary data (in thousands)

  

  

  

Taxable equivalent adjustment for efficiency ratio

(N)

$

719

$

684

Franchise taxes included in non-interest expense

(O)

119

120

Tax equivalent adjustment for net interest margin

(P)

551

515

Intangible amortization

(Q)

256

207

(1) Assumes a marginal tax rate of 23.87% in 2020. A marginal tax rate of 23.78% was used in 2019.
(2) Non-GAAP financial measure.
(3) Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Tangible assets is computed by taking total assets less the intangible assets at period-end.
(4) Securities adjustment, net of tax represents the total unrealized loss on available-for-sale securities recorded on the Company's consolidated balance sheets within total common shareholders' equity.
(5) All performance ratios are based on average balance sheet amounts, where applicable.
(6) Adjusted return on tangible equity is computed by taking adjusted earnings divided by shareholders’ equity less the tax-effected amortization of intangible assets, assuming a marginal rate of 23.87% for the first quarter of 2020 and the fourth quarter of 2019, and 23.78% in the first three quarters of 2019.
(7) Efficiency ratio is computed by dividing adjusted non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis.

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FINANCIAL SUMMARY

The Company reported first quarter 2020 net income of $7.7 million or $0.50 per share, a 6% increase in net income over the same quarter of 2019 of $7.3 million or $0.47 per share. Financial highlights for the first quarter 2020 include the following (compared to the first quarter of 2019, unless otherwise noted):

6% annualized growth in commercial loans
10% annualized growth in non-maturity deposits
99% loan to deposit ratio, improved from 102%
3.06% net interest margin compared to 2.77%
37% increase in non-interest income
0.38% non-accruing loans to total loans compared to 0.66%

The Company’s financial performance in the first quarter 2020 was strong while quickly shifting efforts to address COVID-19 developments.  The Company is fully dedicated to supporting customers and employees during these difficult times and is confident in the strength of its operating model.  

While focusing on the challenges posed by the health crisis in the first quarter, the Company remains committed to its cornerstone of business operations: Risk management, ranging from underwriting practices to what is now at the forefront, crisis management and business continuity planning.  From the onset of the crisis, the Company has maintained open communication with customers and employees alike, and transitioned to a mostly remote working environment.  This transition was smooth given the readiness of the Company’s information technology and operations departments.  The Company modified its branch model providing safety to customers and employees while balancing a personalized touch to meet the needs of its customers.  These modifications include transitioning to mostly drive-up and walk-up windows along with in person meetings by appointment when necessary.  The investments the Company has made in the past few years in online and mobile banking platforms have been essential with the current environment while helping to accelerate adoption rates.          

The Company recognizes the importance of liquidity, especially in the current economic environment.  Therefore, the Company has opportunistically and appropriately utilized many of the various federal programs in an effort to insulate from potential risk and uncertainty.  Further supporting capital levels and the balance sheet the Company recently refinanced and upsized its subordinated debt in the fourth quarter 2019.  Loan volumes were significant this quarter as originations offset elevated payoff levels as typically seen with the lower rate environment.  Growth in commercial loans offset the decrease in the residential portfolio as the Company strategically moved most of production to the secondary market.  The Company also successfully rolled out the Small Business Administration (SBA) Paycheck Protection Program (PPP) in an effort to help its business partners and communities.  As of April 30, 2020, the Company has over 1,500 PPP loans approved by the SBA with a total balance of $127 million.  In addition, the Company has modified close to 500 existing loans, representing $271 million in balances.  The loans modified under these deferment plans are still accruing interest and all contractual principal and interest is expected to be collected.    

The Company’s loan portfolio remains diverse with over 80 different industries and several geographies limiting concentration risk, which is further mitigated by the specific type and strength of the borrowers.  These credit relationships are proven successful operators in their industry and have weathered difficult economic times in the past.  The Company continues to carefully review opportunities with proven borrowers while also stress testing the portfolio regularly.  

Given the recently passed CARES Act, the Company has elected to defer the new accounting for the allowance for loan losses known as “CECL” to prioritize resources around customers and communities.  At the same time, the Company increased the allowance for loan losses during the quarter due to elevated qualitative economic factors at quarter end.  Overall, the Company’s liquidity, capital ratios and overall balance sheet position are strong.  Additionally, the Company’s reliance on wholesale borrowing is further declining and the ability to access such funding sources at fair pricing is significant.

The Company continues to execute strategies that will benefit long-term profitability while being mindful of the short-term challenges and operating environment.  Lower interest rates and the divergence in FHLB borrowings and brokered

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deposit spreads has provided the Company with an opportunity to lock into favorable rates with longer maturities.  The benefits of these activities, along with the balance sheet strategies executed last year, are unveiled as the Company’s net interest margin expanded nearly 30 basis points during the quarter.  Non-interest income has also improved for the quarter as the Company continues to provide hedging transactions to help meet customers’ needs.  While trust and investment management fee income is up significantly over prior year, it is also sensitive to market conditions and could vary as market dynamics persist with the pandemic.  In summary, the Company is focused on activities that create value for long-term shareholders as it continues to build tangible book value at a quarterly annualized rate of close to 10%.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2020 AND DECEMBER 31, 2019

 

Summary

Total assets were $3.7 billion at the end of the first quarter 2020 and at year-end 2019. Asset quality metrics remain strong with an allowance for credit losses to total loans ratio of 0.58% with a coverage ratio to non-accruing loans at 152%, up from 133% as of year-end 2019. The loan to deposit ratio was 99% compared to 98% at year-end 2019 due to lower deposits in the first quarter. The Company's tangible book value per share increased 9%, on annualized basis, in the first quarter 2020.

  

Securities

Securities totaled $646.2 million in the first quarter 2020 and $683.9 million at year-end 2019 representing 18% and 19% of total assets, respectively.  The decrease in the first quarter is consistent with the Company strategy to de-lever and remix the investment portfolio resulting in a higher year-over-year yield along with lower borrowing levels.  Securities purchased in the first quarter 2020 included $13.2 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $2.5 million of corporate bonds, and a net $782 thousand decrease in FHLB stock. The purchases were offset by $58.0 million of sales, maturities, calls and pay-downs of amortizing securities.  Fair value adjustments increased the security portfolio by $12.7 million at the end of the first quarter 2020 and $7.3 million at year-end 2019.  The improvement in the fair value continues to be the result of lower long-term interest rates.  The weighted average yield on the Company's securities profile as of March 31, 2020 was 3.20% for the quarter compared to 3.42% at year-end 2019.  At the end of the first quarter 2020 securities held by the Company had an average life of 5.1 years and a duration of 2.7 years compared to 5.0 years and 3.6 years at the end of 2019, respectively.

 

Loans

Loan balances in the first quarter 2020 were $2.6 billion, flat with year-end 2019.  Total commercial loans grew at an annualized rate of 6% led by commercial real estate with an annualized growth rate of 8% as the Company executed on an expanded pipeline.  Residential real estate loans were relatively flat with the fourth quarter as originations maintained, but were offset by secondary market sales and payoff activity.  Payoff activity was experienced across all products lines as seasoned borrowers refinanced given the lower rate environment.  Although the commercial portfolio grows each quarter, the product mix of total commercial loans remains diversified among 80 industries throughout many geographic regions.  Average yields from loans were 4.30% in the first quarter 2020 as variable rate loans repriced compared with 4.33% in the fourth quarter 2019.          

Asset Quality

The allowance for loan losses totaled $15.3 million at the end of the first quarter 2020 and $14.4 at year-end 2019.  In the first quarter 2020, the Company elected to defer implementation of CECL as allowed under the CARES Act.  As result, the Company continues to operate its incurred loss model, which has been adjusted higher to reflect current economic conditions.  Increases to the allowance associated with those adjustments were offset by improvements in other credit quality factors including several specifically reserved loans that were settled at approximate book value.  Past due accounts between 30 to 89 days as a percentage of total loans was 0.84% for the first quarter compared to 0.74% at year-end 2019.  The majority of the customers in that range have a history of making payments on a cycle that is about 30 days overdue and is not likely an indication of deteriorated credit quality.

Goodwill

Given current events and the economic situation associated with COVID-19 along with the variation of the Company’s stock price, the fair value of the Company’s business and test for goodwill impairment is required under accounting standards.  The Company’s models suggest that the fair value of the business is greater than the book value or market

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capitalization based on the price at which the stock is currently trading.  While the Company concluded there is no goodwill impairment in the first quarter 2020, it will continue to evaluate its position as economic conditions change.  

Deposits and Borrowings

Total deposits were $2.7 billion at the end of the first quarter 2020 and year-end 2019.  Non-maturity deposits increased to $1.8 billion, 10% on annualized basis, during the first quarter 2020.  The Company's expanding branch model has helped to increase new accounts, which totaled 3,071 in the first quarter 2020 compared to 2,918 in the fourth quarter 2019 excluding acquired balances. Time deposits decreased $88.6 million, due to the Company's strategy to target lower rate and longer duration funding sources. The average cost of deposits decreased to 1.08% from 1.19% in the fourth quarter 2019 reflecting the Federal Reserve Bank short-term rate cuts in current and prior quarters.  Total borrowings increased by $26.1 million as the Company took advantage of lower FRB and FHLB rates opposed to other funding sources.  Borrowing costs improved to 2.10% from 2.30% in the fourth 2019 as a result of cuts in short-term interest rates.

 

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to $672.1 million at the end of the first quarter 2020 from $580.4 million at year-end 2019.  The increase is principally due to a $47.8 million increase in customer loan derivatives sold on commercial loans with matching hedges using national bank counterparties and a $42.5 million in forward commitments to sell mortgages in the secondary market.  The net fair value of all derivatives was a liability of $3.1 at the end of the first quarter 2020 compared to $743 thousand at year-end 2019. The increase in the net derivative liability primarily reflects the valuation of the Company’s interest rate swaps on wholesale funding based on lower market rates at the end of the first quarter 2020.

Equity

Total equity was $403.8 million, compared with $396.4 million at year-end 2019. The Company's book value per share increased to $25.90 at the end of the first quarter 2020 from $25.48 at year-end 2019.  The increase includes a $4.0 million improvement in fair value of securities, net of tax, along with strong net income of $7.7 million offset by $3.4 million in dividends. The Company evaluates changes in tangible book value, a non-GAAP financial measure that is a commonly used valuation metric in the investment community, which parallels some regulatory capital measures. Tangible book value per share (non-GAAP measure) increased to $17.70 per share at year-end 2019 up from $17.30 per share at year-end 2019; an increase of 9% on annualized basis.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

 

Summary

Net income in the first quarter 2020 was $7.7 million, or $0.50 per diluted share, compared with $7.3 million, or $0.47 per diluted share, in the same quarter 2019.  Noteworthy improvements in net income include a lower cost of funds and increased non-interest income offset in part by higher operational expenses.  The Company's return on assets ratio was 0.85% during the first quarter of 2020 and 0.83% in the same quarter of 2019 and the return on equity ratio was 7.64% and 7.83% for the same respective periods.

 

Net Interest Income

Net interest income was $24.6 million compared with $21.8 million in the same quarter of 2019 and net interest margin was 3.06% and 2.77% for the same respective periods.  The increase is primarily driven by lower borrowing levels as the average balance decreased to $557 million in the first quarter 2020 from $762 million in the first quarter of 2019 due to deleveraging strategies executed in late 2019 and a lower cost of funds.  The balance sheet strategies executed during the second half of last year along with the rate cuts experienced in the first quarter reduced borrowing rates to 2.10% from 2.74% and interest-bearing deposits rates to 1.08% from 1.25% in the first quarter 2019.  The Company continues to optimize its funding sources to take advantage of this lower rate environment through a mixture of various debt and derivative instruments.  Yields from earning assets declined to 4.14% from 4.19% in the first quarter 2019 reflecting loan originations and repricing of variable rate products in a lower interest rate environment.  Purchase loan accretion contributed 0.08% to net interest margin in the first quarter 2020 compared to 0.10% in the first quarter 2019.  The loan to deposit ratio was 99% in the first quarter 2020 as the Company maintained its fourth quarter 2019 deposit levels, which is due to strong customer relationships within its branch model.

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Loan Loss Provision

The first quarter 2020 provision for loan losses increased to $1.1 million from $324 thousand in the same quarter 2019.  As noted above, the Company is maintaining its incurred loss model for calculating the allowance for loan losses.  The year-over-year increase in the provision for loan losses is due to qualitative adjustments made to reflect a downward economic trend in the first quarter 2020.  Those downward adjustments were offset in part by improvements in other credit quality factors such as charge-off history and underwriting practices.  While the impact of the health crisis is uncertain, we believe the existing allowance for loan losses is sufficient to absorb inherent losses based on a disciplined credit approach, experienced losses and methodology, and current review of the portfolio.        

Non-Interest Income

Non-interest income in the first quarter 2020 increased 37% to $8.4 million from $6.2 million in the same quarter in 2019.  Trust income was $3.4 million in the first quarter 2020, up 22% from the same quarter of 2019 based on higher assets under management within an expanded footprint given the branch acquisition which closed in October 2019.  Customer service fees also increased significantly to $3.1 million compared to $2.2 million from the same quarter of 2019 due to transaction growth from a higher customer base.  Customer loan derivative income also contributed $588 thousand to non-interest income in the first quarter 2020 as demand for these products remains strong within the commercial loan pipeline.

Non-Interest Expense

Non-interest expense was $22.4 million in the first quarter 2020 compared to $18.6 million in the same quarter of 2019.  The increase is primarily due to higher salary and benefit and occupancy and equipment costs to support the Company’s expanded branch model and wealth management business.

Income Tax Expense

The first quarter effective tax rate decreased to 18.8% in 2020 compared with 19.0% in the same quarter of 2019, reflecting a higher level of tax-advantaged income.

Liquidity and Cash Flows

Liquidity is measured by the Company's ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer-initiated needs. Many factors affect the Company's ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.

 

The Bank actively manages its liquidity position through target ratios established under its Asset-Liability Management Policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank's policy is to maintain a liquidity position of at least 4% of total assets. A portion of the Bank's deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank's liquidity position tightens.

At March 31, 2020, same day available liquidity totaled approximately $1.2 billion, including cash, borrowing capacity at the Federal Home Loan Bank of Boston (“FHLB”) and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Bank's amortizing securities and loan portfolios. At March 31, 2020, the Company had unused borrowing capacity at the FHLB of $539.0 million, unused borrowing capacity at the Federal Reserve of $27.0 million and unused lines of credit totaling $51.0 million.

 

The Bank maintains a liquidity contingency plan approved by the Bank's Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company's liquidity position.

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Off-Balance Sheet Arrangements

The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors.

The Company’s off-balance sheet arrangements are limited to standby letters of credit whereby the Bank guarantees the obligations or performance of certain customers. These letters of credit are sometimes issued in support of third-party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.

The Company’s off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND RECENT ACCOUNTING PRONOUNCEMENTS

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

Management has identified the Company's most critical accounting policies as related to:

Allowance for Loan Losses
Acquired Loans
Income Taxes
Goodwill and Identifiable Intangible Assets
Determination of Other-Than-Temporary Impairment of Securities
Fair Value of Financial Instruments

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ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Company’s business activities.

The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee (“ALCO”), chaired by the Chief Financial Officer and composed of various members of senior management. ALCO meets regularly to review balance sheet structure, formulate strategies in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.

Interest Rate Risk: Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank's net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and or cash flow characteristics of assets and liabilities. Management's objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promote sufficient reward for understood and controlled risk.

The Bank's interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off-balance sheet instruments as each relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the Company’s Board of Directors.

The Bank's Asset Liability Management Policy, approved annually by the Bank’s Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat, and decreasing rate scenarios. It is the role of the ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.

Interest Rate Sensitivity Modeling: The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense for all balance sheet and off-balance sheet instruments, under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.

The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product-specific assumptions for deposit accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of a call. Prepayment assumptions for mortgage loans and mortgage-backed securities are developed from industry median estimates of prepayment speeds, based upon similar coupon ranges and degree of seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest rate conditions including:

A flat interest rate scenario in which current prevailing rates are locked in and the only balance sheet fluctuations that occur are due to cash flows, maturities, new volumes, and re-pricing volumes consistent with this flat rate assumption;

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A 200 basis point rise or decline in interest rates applied against a parallel shift in the yield curve over a twelve-month horizon together with a dynamic balance sheet anticipated to be consistent with such interest rate changes;
Various non-parallel shifts in the yield curve, including changes in either short-term or long-term rates over a twelve-month horizon, together with a dynamic balance sheet anticipated to be consistent with such interest rate changes; and
An extension of the foregoing simulations to each of two, three, four and five year horizons to determine the interest rate risk with the level of interest rates stabilizing in years two through five. Even though rates remain stable during this two to five year time period, re-pricing opportunities driven by maturities, cash flow, and adjustable rate products will continue to change the balance sheet profile for each of the interest rate conditions.

Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.

As of March 31, 2020 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 were slightly asset sensitive.

Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will deteriorate over the one year horizon (-2.2% versus the base case) while deteriorating further from that level over the two-year horizon (-6.4% versus the base case).

Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will improve slightly over the one and two-year horizons (1.2% and 3.6%, respectively).

As compared to December 31, 2019, the year-one sensitivity in the down 100 basis points scenario was down slightly for the three months ended March 31, 2020 (-1.0% prior, versus -2.2% current). The year-two sensitivities in the down 100 basis points scenario changed going from -3.7% to -6.4%. In the year-one up 200 basis points scenario, results improved going from .7% to 1.2%. Year-two, up 200 basis points was flat (3.3% prior, versus 3.6% current).

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.

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ITEM 4.           CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive officer and our principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of March 31, 2020 the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.           OTHER INFORMATION

ITEM 1.             LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of management based upon currently available information will have no material effect on the Company's consolidated financial statements.

ITEM 1A.          RISK FACTORS

The disclosures below supplement the risk factors previously disclosed under Item 1A. of the Company’s 2019 Annual Report on Form 10-K.

The COVID-19 pandemic may adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the economy and to the lives of individuals.  Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have an adverse impact on us in a number of ways related to credit quality, collateral values, customer demand, funding, operations, interest rate risk, and human capital.

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ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2020:

    

Total number of shares

Maximum number of

 purchased as a part of 

 shares that may yet be 

Total number of 

Average price 

 

publicly announced 

 

purchased under

Period

    

shares purchased

    

paid per share

    

plans or programs

    

 the plans or programs(1)

January 1-31, 2020

 

$

 

 

776,000

February 1-29, 2020

 

 

 

 

776,000

March 1-31, 2020

 

 

 

 

781,000

Total

 

$

 

 

781,000

(1) On March 12, 2019 and March 12, 2020 the Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 776,000 and 781,000 shares, respectively. The current stock repurchase plan expires on March 20, 2021.

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ITEM 6.           EXHIBITS

31.1

Certification of Chief Executive Officer under Rule 13a-14(a)/15d-14(a)

Filed herewith

31.2

Certification of Chief Financial Officer under Rule 13a-14(a)/15d-14(a)

Filed herewith

32.1

Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350.

Furnished herewith

32.2

Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350.

Furnished herewith

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The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

104

Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BAR HARBOR BANKSHARES

Dated: May 8, 2020

By:

/s/ Curtis C. Simard

Curtis C. Simard

President & Chief Executive Officer

Dated: May 8, 2020

By:

/s/ Josephine Iannelli

Josephine Iannelli

Executive Vice President & Chief Financial Officer

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