Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - CAMDEN NATIONAL CORP | exhibit322q116.htm |
| EX-31.1 - EXHIBIT 31.1 - CAMDEN NATIONAL CORP | exhibit311q116.htm |
| EX-31.2 - EXHIBIT 31.2 - CAMDEN NATIONAL CORP | exhibit312q116.htm |
| EX-32.1 - EXHIBIT 32.1 - CAMDEN NATIONAL CORP | exhibit321q116.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
MAINE | 01-0413282 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
2 ELM STREET, CAMDEN, ME | 04843 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (207) 236-8821
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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer x |
Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at May 3, 2016: Common stock (no par value) 10,272,083 shares.
CAMDEN NATIONAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE | ||
PART I. FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS | |
Consolidated Statements of Condition - March 31, 2016 and December 31, 2015 | ||
Consolidated Statements of Income - Three Months Ended March 31, 2016 and 2015 | ||
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2016 and 2015 | ||
Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2016 and 2015 | ||
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015 | ||
Notes to Consolidated Financial Statements | ||
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | |
ITEM 4. | CONTROLS AND PROCEDURES | |
PART II. OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | |
ITEM 1A. | RISK FACTORS | |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |
ITEM 4. | MINE SAFETY DISCLOSURES | |
ITEM 5. | OTHER INFORMATION | |
ITEM 6. | EXHIBITS | |
SIGNATURES | ||
EXHIBITS | ||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited) | ||||||||
(In Thousands, Except Number of Shares) | March 31, 2016 | December 31, 2015 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 72,201 | $ | 79,488 | ||||
Securities: | ||||||||
Available-for-sale securities, at fair value | 800,029 | 750,338 | ||||||
Held-to-maturity securities, at amortized cost | 87,950 | 84,144 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stock, at cost | 21,605 | 21,513 | ||||||
Total securities | 909,584 | 855,995 | ||||||
Loans held for sale | 16,632 | 10,958 | ||||||
Loans | 2,492,634 | 2,490,206 | ||||||
Less: allowance for loan losses | (21,339 | ) | (21,166 | ) | ||||
Net loans | 2,471,295 | 2,469,040 | ||||||
Goodwill | 95,267 | 95,657 | ||||||
Other intangible assets | 8,191 | 8,667 | ||||||
Bank-owned life insurance | 60,338 | 59,917 | ||||||
Premises and equipment, net | 44,973 | 45,959 | ||||||
Deferred tax assets | 36,154 | 39,716 | ||||||
Interest receivable | 8,785 | 7,985 | ||||||
Other real estate owned | 1,228 | 1,304 | ||||||
Other assets | 37,898 | 34,658 | ||||||
Total assets | $ | 3,762,546 | $ | 3,709,344 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Demand | $ | 349,586 | $ | 357,673 | ||||
Interest checking | 686,517 | 740,084 | ||||||
Savings and money market | 949,309 | 912,668 | ||||||
Certificates of deposit | 482,821 | 516,867 | ||||||
Brokered deposits | 206,599 | 199,087 | ||||||
Total deposits | 2,674,832 | 2,726,379 | ||||||
Federal Home Loan Bank advances | 55,000 | 55,000 | ||||||
Other borrowed funds | 545,473 | 458,763 | ||||||
Subordinated debentures | 58,638 | 58,599 | ||||||
Accrued interest and other liabilities | 53,146 | 47,413 | ||||||
Total liabilities | 3,387,089 | 3,346,154 | ||||||
Commitments and Contingencies | ||||||||
Shareholders’ Equity | ||||||||
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 10,271,083 and 10,220,478 shares as of March 31, 2016 and December 31, 2015, respectively | 154,437 | 153,083 | ||||||
Retained earnings | 227,540 | 222,329 | ||||||
Accumulated other comprehensive loss: | ||||||||
Net unrealized gains (losses) on available-for-sale securities, net of tax | 3,968 | (3,801 | ) | |||||
Net unrealized losses on cash flow hedging derivative instruments, net of tax | (8,479 | ) | (6,374 | ) | ||||
Net unrecognized losses on postretirement plans, net of tax | (2,009 | ) | (2,047 | ) | ||||
Total accumulated other comprehensive loss | (6,520 | ) | (12,222 | ) | ||||
Total shareholders’ equity | 375,457 | 363,190 | ||||||
Total liabilities and shareholders’ equity | $ | 3,762,546 | $ | 3,709,344 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME (unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
(In Thousands, Except Number of Shares and Per Share Data) | 2016 | 2015 | ||||||
Interest Income | ||||||||
Interest and fees on loans | $ | 27,016 | $ | 18,084 | ||||
Interest on U.S. government and sponsored enterprise obligations | 3,990 | 3,872 | ||||||
Interest on state and political subdivision obligations | 714 | 387 | ||||||
Interest on federal funds sold and other investments | 261 | 105 | ||||||
Total interest income | 31,981 | 22,448 | ||||||
Interest Expense | ||||||||
Interest on deposits | 2,042 | 1,529 | ||||||
Interest on borrowings | 1,136 | 860 | ||||||
Interest on subordinated debentures | 851 | 625 | ||||||
Total interest expense | 4,029 | 3,014 | ||||||
Net interest income | 27,952 | 19,434 | ||||||
Provision for credit losses | 872 | 446 | ||||||
Net interest income after provision for credit losses | 27,080 | 18,988 | ||||||
Non-Interest Income | ||||||||
Service charges on deposit accounts | 1,724 | 1,487 | ||||||
Other service charges and fees | 2,328 | 1,510 | ||||||
Income from fiduciary services | 1,169 | 1,220 | ||||||
Mortgage banking income, net | 808 | 239 | ||||||
Brokerage and insurance commissions | 458 | 449 | ||||||
Bank-owned life insurance | 422 | 422 | ||||||
Other income | 1,008 | 820 | ||||||
Total non-interest income | 7,917 | 6,147 | ||||||
Non-Interest Expense | ||||||||
Salaries and employee benefits | 11,610 | 8,375 | ||||||
Furniture, equipment and data processing | 2,427 | 1,923 | ||||||
Net occupancy | 1,877 | 1,472 | ||||||
Consulting and professional fees | 885 | 591 | ||||||
Other real estate owned and collection costs | 656 | 562 | ||||||
Regulatory assessments | 721 | 510 | ||||||
Amortization of intangible assets | 476 | 287 | ||||||
Merger and acquisition costs | 644 | 735 | ||||||
Other expenses | 3,632 | 2,346 | ||||||
Total non-interest expense | 22,928 | 16,801 | ||||||
Income before income taxes | 12,069 | 8,334 | ||||||
Income Taxes | 3,735 | 2,723 | ||||||
Net Income | $ | 8,334 | $ | 5,611 | ||||
Per Share Data | ||||||||
Basic earnings per share | $ | 0.81 | $ | 0.75 | ||||
Diluted earnings per share | $ | 0.81 | $ | 0.75 | ||||
Weighted average number of common shares outstanding | 10,259,995 | 7,431,065 | ||||||
Diluted weighted average number of common shares outstanding | 10,298,171 | 7,453,875 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
(In Thousands) | 2016 | 2015 | ||||||
Net Income | $ | 8,334 | $ | 5,611 | ||||
Other comprehensive income: | ||||||||
Net change in unrealized gains on available-for-sale securities, net of tax of ($4,183), and ($2,212), respectively | 7,769 | 4,108 | ||||||
Net change in unrealized losses on cash flow hedging derivatives: | ||||||||
Net change in unrealized loss on cash flow hedging derivatives, net of tax of $1,261, and $751, respectively | (2,342 | ) | (1,395 | ) | ||||
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, net of tax of ($128) and ($120), respectively(1) | 237 | 223 | ||||||
Net change in unrealized losses on cash flow hedging derivatives, net of tax | (2,105 | ) | (1,172 | ) | ||||
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($21) and ($21), respectively(2) | 38 | 38 | ||||||
Other comprehensive income | 5,702 | 2,974 | ||||||
Comprehensive Income | $ | 14,036 | $ | 8,585 | ||||
(1) Reclassified into the consolidated statements of income in interest on subordinated debentures.
(2) Reclassified into the consolidated statements of income in salaries and employee benefits.
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited) | |||||||||||||||||||
Common Stock | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | |||||||||||||||||
(In Thousands, Except Number of Shares and Per Share Data) | Shares Outstanding | Amount | Retained Earnings | ||||||||||||||||
Balance at December 31, 2014 | 7,426,222 | $ | 41,555 | $ | 211,979 | $ | (8,425 | ) | $ | 245,109 | |||||||||
Net income | — | — | 5,611 | — | 5,611 | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | 2,974 | 2,974 | ||||||||||||||
Stock-based compensation expense | — | 198 | — | — | 198 | ||||||||||||||
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit | 12,707 | 136 | — | — | 136 | ||||||||||||||
Cash dividends declared ($0.30 per share) | — | — | (2,229 | ) | — | (2,229 | ) | ||||||||||||
Balance at March 31, 2015 | 7,438,929 | $ | 41,889 | $ | 215,361 | $ | (5,451 | ) | $ | 251,799 | |||||||||
Balance at December 31, 2015 | 10,220,478 | $ | 153,083 | $ | 222,329 | $ | (12,222 | ) | $ | 363,190 | |||||||||
Net income | — | — | 8,334 | — | 8,334 | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | 5,702 | 5,702 | ||||||||||||||
Stock-based compensation expense | — | 337 | — | — | 337 | ||||||||||||||
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit | 50,605 | 1,017 | — | — | 1,017 | ||||||||||||||
Cash dividends declared ($0.30 per share) | — | — | (3,123 | ) | — | (3,123 | ) | ||||||||||||
Balance at March 31, 2016 | 10,271,083 | $ | 154,437 | $ | 227,540 | $ | (6,520 | ) | $ | 375,457 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
(In Thousands) | 2016 | 2015 | ||||||
Operating Activities | ||||||||
Net Income | $ | 8,334 | $ | 5,611 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for credit losses | 872 | 446 | ||||||
Depreciation expense | 1,427 | 764 | ||||||
Purchase accounting accretion, net | (1,055 | ) | (66 | ) | ||||
Investment securities amortization, net | 652 | 509 | ||||||
Stock-based compensation expense | 337 | 198 | ||||||
Amortization of intangible assets | 476 | 287 | ||||||
Net increase in other real estate owned valuation allowance and loss on disposition | 66 | 81 | ||||||
Originations of mortgage loans held for sale | (44,431 | ) | (5,425 | ) | ||||
Proceeds from the sale of mortgage loans | 39,868 | 4,935 | ||||||
Gain on sale of mortgage loans | (972 | ) | (129 | ) | ||||
Increase in other assets | 2,869 | 780 | ||||||
(Decrease) increase in other liabilities | (4,170 | ) | 16 | |||||
Net cash provided by operating activities | 4,273 | 8,007 | ||||||
Investing Activities | ||||||||
Proceeds from maturities of available-for-sale securities | 28,580 | 37,132 | ||||||
Purchase of available-for-sale securities | (66,849 | ) | (20,344 | ) | ||||
Purchase of held-to-maturity securities | (3,929 | ) | (16,076 | ) | ||||
Net increase in loans | (2,321 | ) | (20,293 | ) | ||||
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock | (92 | ) | — | |||||
Proceeds from the sale of other real estate owned | 42 | 1,564 | ||||||
Recoveries of previously charged-off loans | 104 | 133 | ||||||
Purchase of premises and equipment | (464 | ) | (464 | ) | ||||
Net cash used by investing activities | (44,929 | ) | (18,348 | ) | ||||
Financing Activities | ||||||||
Net (decrease) increase in deposits | (51,286 | ) | 34,112 | |||||
Repayments on Federal Home Loan Bank long-term advances | — | (19 | ) | |||||
Net increase (decrease) in other borrowed funds | 86,726 | (29,392 | ) | |||||
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit | 1,017 | 136 | ||||||
Cash dividends paid on common stock | (3,088 | ) | (2,235 | ) | ||||
Net cash provided by financing activities | 33,369 | 2,602 | ||||||
Net decrease in cash and cash equivalents | (7,287 | ) | (7,739 | ) | ||||
Cash and cash equivalents at beginning of period | 79,488 | 60,813 | ||||||
Cash and cash equivalents at end of period | $ | 72,201 | $ | 53,074 | ||||
Supplemental information | ||||||||
Interest paid | $ | 4,029 | $ | 3,015 | ||||
Income taxes paid | 5 | 5 | ||||||
Transfer from loans to other real estate owned | 32 | 1,439 | ||||||
Held-to-maturity securities purchased but unsettled | — | 4,830 | ||||||
SBM acquisition measurement-period adjustments | 390 | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts In Tables Expressed in Thousands, Except Per Share Data)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation as of March 31, 2016 and December 31, 2015, the consolidated statements of income for the three months ended March 31, 2016 and 2015, the consolidated statements of comprehensive income for the three months ended March 31, 2016 and 2015, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2016 and 2015, and the consolidated statements of cash flows for the three months ended March 31, 2016 and 2015. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior period were reclassified to conform to the current period presentation. The income reported for the three months ended March 31, 2016 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the year ended December 31, 2015 Annual Report on Form 10-K.
The acronyms and abbreviations identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information." The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
Acadia Trust: | Acadia Trust, N.A., a wholly-owned subsidiary of Camden National Corporation | FASB: | Financial Accounting Standards Board | |
AFS: | Available-for-sale | FDIC: | Federal Deposit Insurance Corporation | |
ALCO: | Asset/Liability Committee | FHLB: | Federal Home Loan Bank | |
ALL: | Allowance for loan losses | FHLBB: | Federal Home Loan Bank of Boston | |
AOCI: | Accumulated other comprehensive income (loss) | FRB: | Federal Reserve Bank | |
ASC: | Accounting Standards Codification | Freddie Mac: | Federal Home Loan Mortgage Corporation | |
ASU: | Accounting Standards Update | GAAP: | Generally accepted accounting principles in the United States | |
Bank: | Camden National Bank, a wholly-owned subsidiary of Camden National Corporation | HPFC: | Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank | |
BOLI: | Bank-owned life insurance | HTM: | Held-to-maturity | |
Board ALCO: | Board of Directors' Asset/Liability Committee | IRS: | Internal Revenue Service | |
BSA: | Bank Secrecy Act | LIBOR: | London Interbank Offered Rate | |
CCTA: | Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation | LTIP: | Long-Term Performance Share Plan | |
CDARS: | Certificate of Deposit Account Registry System | Management ALCO: | Management Asset/Liability Committee | |
CDs: | Certificate of deposits | MBS: | Mortgage-backed security | |
Company: | Camden National Corporation | Merger: | On October 16, 2015, the two-step merger of Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of Camden National Corporation, was completed | |
CSV: | Cash surrender value | Merger Agreement: | Plan of Merger, dated as of March 29, 2015, by and among Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of the Company | |
CMO: | Collateralized mortgage obligation | MSHA: | Maine State Housing Authority | |
DCRP: | Defined Contribution Retirement Plan | MSRs: | Mortgage servicing rights | |
EPS: | Earnings per share | MSPP: | Management Stock Purchase Plan | |
8
OTTI: | Other-than-temporary impairment | SBM: | SBM Financial, Inc., the parent company of The Bank of Maine | |
NIM: | Net interest margin on a fully-taxable basis | SERP: | Supplemental executive retirement plans | |
N.M.: | Not meaningful | TDR: | Troubled-debt restructured loan | |
NRV: | Net realizable value | UBCT: | Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation | |
OCC: | Office of the Comptroller of the Currency | U.S.: | United States of America | |
OCI: | Other comprehensive income (loss) | 2003 Plan: | 2003 Stock Option and Incentive Plan | |
OFAC: | Office of Foreign Assets Control | 2012 Plan: | 2012 Equity and Incentive Plan | |
OREO: | Other real estate owned | 2013 Repurchase Program: | 2013 Common Stock Repurchase Program, approved by the Company's Board of Directors | |
NOTE 2 – EPS
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net income | $ | 8,334 | $ | 5,611 | ||||
Dividends and undistributed earnings allocated to participating securities(1) | (29 | ) | (17 | ) | ||||
Net income available to common shareholders | $ | 8,305 | $ | 5,594 | ||||
Weighted-average common shares outstanding for basic EPS | 10,259,995 | 7,431,065 | ||||||
Dilutive effect of stock-based awards(2) | 38,176 | 22,810 | ||||||
Weighted-average common and potential common shares for diluted EPS | 10,298,171 | 7,453,875 | ||||||
Earnings per common share: | ||||||||
Basic EPS | $ | 0.81 | $ | 0.75 | ||||
Diluted EPS | $ | 0.81 | $ | 0.75 | ||||
Awards excluded from the calculation of diluted EPS(3): | ||||||||
Stock options | 13,250 | 15,250 | ||||||
(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Represents the effect of the assumed exercise of stock options, vesting of restricted shares, vesting of restricted stock units, and vesting of LTIP awards that have met the performance criteria, as applicable, utilizing the treasury stock method.
(3) Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock and are considered anti-dilutive.
Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards.
Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.
9
NOTE 3 – SECURITIES
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated:
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
March 31, 2016 | |||||||||||||||
AFS Securities: | |||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | 4,973 | $ | 146 | $ | — | $ | 5,119 | |||||||
Obligations of states and political subdivisions | 15,254 | 286 | — | 15,540 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | 460,604 | 6,612 | (617 | ) | 466,599 | ||||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 308,902 | 2,126 | (2,470 | ) | 308,558 | ||||||||||
Subordinated corporate bonds | 3,480 | 18 | (37 | ) | 3,461 | ||||||||||
Total AFS debt securities | 793,213 | 9,188 | (3,124 | ) | 799,277 | ||||||||||
Equity securities | 712 | 40 | — | 752 | |||||||||||
Total AFS securities | $ | 793,925 | $ | 9,228 | $ | (3,124 | ) | $ | 800,029 | ||||||
HTM Securities: | |||||||||||||||
Obligations of states and political subdivisions | $ | 87,950 | $ | 2,816 | $ | (37 | ) | $ | 90,729 | ||||||
Total HTM securities | $ | 87,950 | $ | 2,816 | $ | (37 | ) | $ | 90,729 | ||||||
December 31, 2015 | |||||||||||||||
AFS Securities: | |||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | 4,971 | $ | 69 | $ | — | $ | 5,040 | |||||||
Obligations of states and political subdivisions | 17,355 | 339 | — | 17,694 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | 419,429 | 3,474 | (3,857 | ) | 419,046 | ||||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 312,719 | 409 | (6,271 | ) | 306,857 | ||||||||||
Subordinated corporate bonds | 1,000 | — | (4 | ) | 996 | ||||||||||
Total AFS debt securities | 755,474 | 4,291 | (10,132 | ) | 749,633 | ||||||||||
Equity securities | 712 | 2 | (9 | ) | 705 | ||||||||||
Total AFS securities | $ | 756,186 | $ | 4,293 | $ | (10,141 | ) | $ | 750,338 | ||||||
HTM Securities: | |||||||||||||||
Obligations of states and political subdivisions | $ | 84,144 | $ | 1,564 | $ | (61 | ) | $ | 85,647 | ||||||
Total HTM securities | $ | 84,144 | $ | 1,564 | $ | (61 | ) | $ | 85,647 | ||||||
Net unrealized gains on AFS securities at March 31, 2016 included in AOCI amounted to $4.0 million, net of a deferred tax liability of $2.1 million. Net unrealized losses on AFS securities at December 31, 2015 included in AOCI amounted to $3.8 million, net of a deferred tax benefit of $2.0 million.
During the first three months of 2016, the Company purchased investment securities totaling $70.8 million. The Company designated $66.9 million as AFS securities and $3.9 million as HTM securities.
During the first three months of 2015, the Company purchased investment securities totaling $36.4 million. The Company designated $20.3 million as AFS securities and $16.1 million as HTM securities.
10
Impaired Securities
Management periodically reviews the Company’s investment portfolio to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.
The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at March 31, 2016 and December 31, 2015, by length of time that individual securities in each category have been in a continuous loss position:
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
March 31, 2016 | |||||||||||||||||||||||
AFS Securities: | |||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | $ | 14,453 | $ | (82 | ) | $ | 49,596 | $ | (535 | ) | $ | 64,049 | $ | (617 | ) | ||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 8,240 | (47 | ) | 145,716 | (2,423 | ) | 153,956 | (2,470 | ) | ||||||||||||||
Subordinated corporate bonds | 1,963 | (37 | ) | — | — | 1,963 | (37 | ) | |||||||||||||||
Total AFS securities | $ | 24,656 | $ | (166 | ) | $ | 195,312 | $ | (2,958 | ) | $ | 219,968 | $ | (3,124 | ) | ||||||||
HTM Securities: | |||||||||||||||||||||||
Obligations of states and political subdivisions | $ | 2,181 | $ | (37 | ) | $ | — | $ | — | $ | 2,181 | $ | (37 | ) | |||||||||
Total HTM securities | $ | 2,181 | $ | (37 | ) | $ | — | $ | — | $ | 2,181 | $ | (37 | ) | |||||||||
December 31, 2015 | |||||||||||||||||||||||
AFS Securities: | |||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | $ | 234,897 | $ | (2,351 | ) | $ | 45,629 | $ | (1,506 | ) | $ | 280,526 | $ | (3,857 | ) | ||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 111,143 | (1,068 | ) | 147,180 | (5,203 | ) | 258,323 | (6,271 | ) | ||||||||||||||
Subordinated corporate bonds | 996 | (4 | ) | — | — | 996 | (4 | ) | |||||||||||||||
Equity Securities | 615 | (9 | ) | — | — | 615 | (9 | ) | |||||||||||||||
Total AFS securities | $ | 347,651 | $ | (3,432 | ) | $ | 192,809 | $ | (6,709 | ) | $ | 540,460 | $ | (10,141 | ) | ||||||||
HTM Securities: | |||||||||||||||||||||||
Obligations of states and political subdivisions | $ | 5,507 | $ | (61 | ) | $ | — | $ | — | $ | 5,507 | $ | (61 | ) | |||||||||
Total HTM securities | $ | 5,507 | $ | (61 | ) | $ | — | $ | — | $ | 5,507 | $ | (61 | ) | |||||||||
At March 31, 2016 and December 31, 2015, the Company held 42 and 109 investment securities with a fair value of $222.1 million and $546.0 million with unrealized losses totaling $3.2 million and $10.2 million, respectively, that were considered temporary. Of these, the Company had 29 MBS and CMO investments with a fair value of $195.3 million that were in an unrealized loss position totaling $3.0 million at March 31, 2016 and 28 MBS and CMO investments with a fair value of $192.8 million that were in an unrealized loss position totaling $6.7 million at December 31, 2015 for 12 months or more. The decline in the fair value of securities is reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall change in credit quality or other factors with the Company's investment portfolio. At March 31, 2016
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and December 31, 2015, gross unrealized losses on the Company's AFS and HTM securities were 1% and 2%, respectively, of the respective investment securities fair value.
The Company has the intent and ability to retain its investment securities in an unrealized loss position at March 31, 2016 until the decline in value has recovered.
For the three months ended March 31, 2016 and 2015, the Company did not sell any investment securities.
FHLBB and FRB Stock
As of March 31, 2016 and December 31, 2015, the Company's investment in FHLBB stock was $20.7 million and $20.6 million, respectively. As of March 31, 2016 and December 31, 2015, the Company's investment in FRB stock was $908,000.
Securities Pledged
At March 31, 2016 and December 31, 2015, securities with an amortized cost of $557.1 million and $577.6 million, respectively, and estimated fair values of $559.6 million and $570.9 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at March 31, 2016, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Cost | Fair Value | ||||||
AFS Securities | |||||||
Due in one year or less | $ | 1,002 | $ | 1,016 | |||
Due after one year through five years | 103,817 | 105,196 | |||||
Due after five years through ten years | 111,295 | 113,903 | |||||
Due after ten years | 577,099 | 579,162 | |||||
$ | 793,213 | $ | 799,277 | ||||
HTM Securities | |||||||
Due after one year through five years | $ | 2,204 | $ | 2,260 | |||
Due after five years through ten years | 2,494 | 2,538 | |||||
Due after ten years | 83,252 | 85,931 | |||||
$ | 87,950 | $ | 90,729 | ||||
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NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at March 31, 2016 and December 31, 2015 was as follows:
March 31, 2016 | December 31, 2015 | ||||||
Residential real estate(1) | $ | 813,266 | $ | 821,074 | |||
Commercial real estate(1) | 953,220 | 927,951 | |||||
Commercial(1) | 291,684 | 297,721 | |||||
Home equity(1) | 343,137 | 348,634 | |||||
Consumer(1) | 17,096 | 17,953 | |||||
HPFC(1) | 74,304 | 77,243 | |||||
Deferred loan fees, net | (73 | ) | (370 | ) | |||
Total loans | $ | 2,492,634 | $ | 2,490,206 | |||
(1) | The loan balances are presented net of the unamortized fair value mark discount associated with the purchase accounting for acquired loans of $12.1 million and $13.1 million at March 31, 2016 and December 31, 2015, respectively. |
The Bank’s lending activities are primarily conducted in Maine, and its footprint continues to expand into other New England states, including New Hampshire and Massachusetts. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.
HPFC provides niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. Unlike the Bank's loan portfolio, there is, generally, little to no indication of credit quality issues and/or concerns of borrowers honoring their commitments until a payment is delinquent. Generally, once a payment is delinquent, if the payment is not received shortly thereafter to bring the loan current, the loan is deemed impaired (typically within 45 days). Effective February 19, 2016, the Company closed HPFC's operations and is no longer originating loans.
The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.
There were no significant changes in the Company's ALL methodology during the three months ended March 31, 2016.
The board of directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. The Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the board of directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of
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determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, consumer and HPFC. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include:
Residential Real Estate. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residential properties.
Commercial Real Estate. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant & equipment, or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Home Equity. Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.
Consumer. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
HPFC. HPFC is a niche lender that provides commercial lending to dentists, optometrists and veterinarians, many of which are start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral may consist of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower and the terms range from seven to ten years.
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The following tables presents the activity in the ALL and select loan information by portfolio segment for the three months ended March 31, 2016 and 2015, and for the year ended December 31, 2015:
Residential Real Estate | Commercial Real Estate | Commercial | Home Equity | Consumer | HPFC | Unallocated | Total | ||||||||||||||||||||||||
For The Three Months Ended March 31, 2016 | |||||||||||||||||||||||||||||||
ALL for the three months ended: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 4,545 | $ | 10,432 | $ | 3,241 | $ | 2,731 | $ | 193 | $ | 24 | $ | — | $ | 21,166 | |||||||||||||||
Loans charged off | (210 | ) | (222 | ) | (226 | ) | (128 | ) | (15 | ) | — | — | (801 | ) | |||||||||||||||||
Recoveries | 40 | 9 | 52 | 1 | 2 | — | — | 104 | |||||||||||||||||||||||
Provision(1) | 141 | 161 | 231 | 18 | 2 | 317 | — | 870 | |||||||||||||||||||||||
Ending balance | $ | 4,516 | $ | 10,380 | $ | 3,298 | $ | 2,622 | $ | 182 | $ | 341 | $ | — | $ | 21,339 | |||||||||||||||
ALL balance attributable to loans: | |||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 512 | $ | 158 | $ | 214 | $ | 89 | $ | — | $ | 307 | $ | — | $ | 1,280 | |||||||||||||||
Collectively evaluated for impairment | 4,004 | 10,222 | 3,084 | 2,533 | 182 | 34 | — | 20,059 | |||||||||||||||||||||||
Total ending ALL | $ | 4,516 | $ | 10,380 | $ | 3,298 | $ | 2,622 | $ | 182 | $ | 341 | $ | — | $ | 21,339 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,033 | $ | 3,130 | $ | 3,862 | $ | 492 | $ | 7 | $ | 357 | $ | — | $ | 13,881 | |||||||||||||||
Collectively evaluated for impairment | 805,941 | 949,351 | 288,202 | 344,005 | 17,182 | 74,072 | — | 2,478,753 | |||||||||||||||||||||||
Total ending loans balance | $ | 811,974 | $ | 952,481 | $ | 292,064 | $ | 344,497 | $ | 17,189 | $ | 74,429 | $ | — | $ | 2,492,634 | |||||||||||||||
For The Three Months Ended March 31, 2015 | |||||||||||||||||||||||||||||||
ALL for the three months ended: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 4,899 | $ | 7,951 | $ | 3,354 | $ | 2,247 | $ | 281 | $ | — | $ | 2,384 | $ | 21,116 | |||||||||||||||
Loans charged off | (113 | ) | (55 | ) | (159 | ) | (89 | ) | (8 | ) | — | — | (424 | ) | |||||||||||||||||
Recoveries | 3 | 10 | 104 | 5 | 11 | — | — | 133 | |||||||||||||||||||||||
Provision (credit)(1) | 46 | 328 | 128 | 84 | (14 | ) | — | (132 | ) | 440 | |||||||||||||||||||||
Ending balance | $ | 4,835 | $ | 8,234 | $ | 3,427 | $ | 2,247 | $ | 270 | $ | — | $ | 2,252 | $ | 21,265 | |||||||||||||||
ALL balance attributable to loans: | |||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 743 | $ | 132 | $ | 139 | $ | — | $ | 78 | $ | — | $ | — | $ | 1,092 | |||||||||||||||
Collectively evaluated for impairment | 4,092 | 8,102 | 3,288 | 2,247 | 192 | — | 2,252 | 20,173 | |||||||||||||||||||||||
Total ending ALL | $ | 4,835 | $ | 8,234 | $ | 3,427 | $ | 2,247 | $ | 270 | $ | — | $ | 2,252 | $ | 21,265 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,107 | $ | 2,696 | $ | 823 | $ | 302 | $ | 156 | $ | — | $ | — | $ | 10,084 | |||||||||||||||
Collectively evaluated for impairment | 578,366 | 654,765 | 256,940 | 274,482 | 16,443 | — | — | 1,780,996 | |||||||||||||||||||||||
Total ending loans balance | $ | 584,473 | $ | 657,461 | $ | 257,763 | $ | 274,784 | $ | 16,599 | $ | — | $ | — | $ | 1,791,080 | |||||||||||||||
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Residential Real Estate | Commercial Real Estate | Commercial | Home Equity | Consumer | HPFC | Unallocated | Total | ||||||||||||||||||||||||
For The Year Ended December 31, 2015 | |||||||||||||||||||||||||||||||
ALL: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 4,899 | $ | 7,951 | $ | 3,354 | $ | 2,247 | $ | 281 | $ | — | $ | 2,384 | $ | 21,116 | |||||||||||||||
Loans charged off | (801 | ) | (481 | ) | (655 | ) | (525 | ) | (154 | ) | — | — | (2,616 | ) | |||||||||||||||||
Recoveries | 55 | 74 | 389 | 188 | 22 | — | — | 728 | |||||||||||||||||||||||
Provision (credit)(1) | 392 | 2,888 | 153 | 821 | 44 | 24 | (2,384 | ) | 1,938 | ||||||||||||||||||||||
Ending balance | $ | 4,545 | $ | 10,432 | $ | 3,241 | $ | 2,731 | $ | 193 | $ | 24 | $ | — | $ | 21,166 | |||||||||||||||
ALL balance attributable to loans: | |||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 544 | $ | 644 | $ | 92 | $ | 89 | $ | — | $ | — | $ | — | $ | 1,369 | |||||||||||||||
Collectively evaluated for impairment | 4,001 | 9,788 | 3,149 | 2,642 | 193 | 24 | — | 19,797 | |||||||||||||||||||||||
Total ending ALL | $ | 4,545 | $ | 10,432 | $ | 3,241 | $ | 2,731 | $ | 193 | $ | 24 | $ | — | $ | 21,166 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,026 | $ | 4,610 | $ | 3,937 | $ | 588 | $ | 74 | $ | — | $ | — | $ | 15,235 | |||||||||||||||
Collectively evaluated for impairment | 814,591 | 923,341 | 293,784 | 348,046 | 17,879 | 77,330 | — | 2,474,971 | |||||||||||||||||||||||
Total ending loans balance | $ | 820,617 | $ | 927,951 | $ | 297,721 | $ | 348,634 | $ | 17,953 | $ | 77,330 | $ | — | $ | 2,490,206 | |||||||||||||||
(1) | The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. At March 31, 2016 and 2015, and December 31, 2015, the reserve for unfunded commitments was $24,000, $23,000 and $22,000, respectively. |
The following table reconciles the three months ended March 31, 2016 and 2015, and year ended December 31, 2015 provision for loan losses to the provision for credit losses as presented on the consolidated statement of income:
Three Months Ended March 31, | Year Ended December 31, | |||||||||||
2016 | 2015 | 2015 | ||||||||||
Provision for loan losses | $ | 870 | $ | 440 | $ | 1,938 | ||||||
Change in reserve for unfunded commitments | 2 | 6 | (2 | ) | ||||||||
Provision for credit losses | $ | 872 | $ | 446 | $ | 1,936 | ||||||
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by Credit Risk Administration. As of March 31, 2016, the non-residential building operators industry exposure was 11% of the Company's total loan portfolio and 29% of the total commercial real estate portfolio. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of March 31, 2016.
16
To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate and residential real estate loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:
• | Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties. |
• | Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification. |
• | Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral. |
• | Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. |
• | Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted. |
Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.
17
The following table summarizes credit risk exposure indicators by portfolio segment as of the following dates:
Residential Real Estate | Commercial Real Estate | Commercial | Home Equity | Consumer | HPFC | Total | ||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||
Pass (Grades 1-6) | $ | 795,256 | $ | 886,346 | $ | 277,568 | $ | — | $ | — | $ | 72,615 | $ | 2,031,785 | ||||||||||||||
Performing | — | — | — | 342,929 | 17,185 | — | 360,114 | |||||||||||||||||||||
Special Mention (Grade 7) | 3,043 | 32,330 | 7,778 | — | — | 301 | 43,452 | |||||||||||||||||||||
Substandard (Grade 8) | 13,675 | 33,805 | 6,718 | — | — | 1,513 | 55,711 | |||||||||||||||||||||
Non-performing | — | — | — | 1,568 | 4 | — | 1,572 | |||||||||||||||||||||
Total | $ | 811,974 | $ | 952,481 | $ | 292,064 | $ | 344,497 | $ | 17,189 | $ | 74,429 | $ | 2,492,634 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||