Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - CAMDEN NATIONAL CORP | exhibit322q120.htm |
EX-32.1 - EXHIBIT 32.1 - CAMDEN NATIONAL CORP | exhibit321q120.htm |
EX-31.2 - EXHIBIT 31.2 - CAMDEN NATIONAL CORP | exhibit312q120.htm |
EX-31.1 - EXHIBIT 31.1 - CAMDEN NATIONAL CORP | exhibit311q120.htm |
EX-10.2 - EXHIBIT 10.2 - CAMDEN NATIONAL CORP | ex102psuagreement.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, 2020
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, without par value | CAC | The NASDAQ Stock Market LLC |
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 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 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 ¨ |
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 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 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 April 30, 2020: Common stock (no par value) 14,954,765 shares.
CAMDEN NATIONAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2020
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE | ||
PART I. FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS | |
Consolidated Statements of Condition (unaudited) - March 31, 2020 and December 31, 2019 | ||
Consolidated Statements of Income (unaudited) - Three Months Ended March 31, 2020 and 2019 | ||
Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended March 31, 2020 and 2019 | ||
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - Three Months Ended March 31, 2020 and 2019 | ||
Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2020 and 2019 | ||
Notes to the Unaudited 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 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (unaudited) | ||||||||
(In thousands, except number of shares) | March 31, 2020 | December 31, 2019 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 32,477 | $ | 39,586 | ||||
Interest-bearing deposits in other banks (including restricted cash) | 21,732 | 36,050 | ||||||
Total cash, cash equivalents and restricted cash | 54,209 | 75,636 | ||||||
Investments: | ||||||||
Available-for-sale securities, at fair value (book value of $931,876 and $913,978, respectively) | 960,131 | 918,118 | ||||||
Held-to-maturity securities, at amortized cost (fair value of $1,358 and $1,359, respectively) | 1,300 | 1,302 | ||||||
Other investments | 15,056 | 13,649 | ||||||
Total investments | 976,487 | 933,069 | ||||||
Loans held for sale, at fair value (book value of $28,356 and $11,915, respectively) | 27,730 | 11,854 | ||||||
Loans | 3,157,762 | 3,095,023 | ||||||
Less: allowance for loan losses | (26,521 | ) | (25,171 | ) | ||||
Net loans | 3,131,241 | 3,069,852 | ||||||
Goodwill | 94,697 | 94,697 | ||||||
Core deposit intangible assets | 3,355 | 3,525 | ||||||
Bank-owned life insurance | 93,033 | 92,344 | ||||||
Premises and equipment, net | 41,131 | 41,836 | ||||||
Deferred tax assets | 10,708 | 16,823 | ||||||
Other assets | 161,948 | 89,885 | ||||||
Total assets | $ | 4,594,539 | $ | 4,429,521 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Non-interest checking | $ | 536,243 | $ | 552,590 | ||||
Interest checking | 1,147,653 | 1,153,203 | ||||||
Savings and money market | 1,146,038 | 1,119,193 | ||||||
Certificates of deposit | 545,013 | 521,752 | ||||||
Brokered deposits | 188,758 | 191,005 | ||||||
Total deposits | 3,563,705 | 3,537,743 | ||||||
Short-term borrowings | 326,722 | 268,809 | ||||||
Long-term borrowings | 35,000 | 10,000 | ||||||
Subordinated debentures | 59,155 | 59,080 | ||||||
Accrued interest and other liabilities | 117,277 | 80,474 | ||||||
Total liabilities | 4,101,859 | 3,956,106 | ||||||
Commitments and Contingencies | ||||||||
Shareholders’ Equity | ||||||||
Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 14,951,597 and 15,144,719 on March 31, 2020 and December 31, 2019, respectively | 131,498 | 139,103 | ||||||
Retained earnings | 349,141 | 340,580 | ||||||
Accumulated other comprehensive income (loss): | ||||||||
Net unrealized gain on available-for-sale debt securities, net of tax | 22,180 | 3,250 | ||||||
Net unrealized loss on cash flow hedging derivative instruments, net of tax | (6,802 | ) | (6,048 | ) | ||||
Net unrecognized loss on postretirement plans, net of tax | (3,337 | ) | (3,470 | ) | ||||
Total accumulated other comprehensive income (loss) | 12,041 | (6,268 | ) | |||||
Total shareholders’ equity | 492,680 | 473,415 | ||||||
Total liabilities and shareholders’ equity | $ | 4,594,539 | $ | 4,429,521 |
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) | 2020 | 2019 | ||||||
Interest Income | ||||||||
Interest and fees on loans | $ | 34,045 | $ | 35,721 | ||||
Taxable interest on investments | 4,878 | 4,994 | ||||||
Nontaxable interest on investments | 787 | 644 | ||||||
Dividend income | 168 | 230 | ||||||
Other interest income | 335 | 420 | ||||||
Total interest income | 40,213 | 42,009 | ||||||
Interest Expense | ||||||||
Interest on deposits | 6,662 | 8,423 | ||||||
Interest on borrowings | 838 | 974 | ||||||
Interest on subordinated debentures | 887 | 717 | ||||||
Total interest expense | 8,387 | 10,114 | ||||||
Net interest income | 31,826 | 31,895 | ||||||
Provision for credit losses | 1,775 | 744 | ||||||
Net interest income after provision for credit losses | 30,051 | 31,151 | ||||||
Non-Interest Income | ||||||||
Mortgage banking income, net | 3,534 | 1,252 | ||||||
Debit card income | 2,141 | 2,010 | ||||||
Service charges on deposit accounts | 2,012 | 2,023 | ||||||
Income from fiduciary services | 1,502 | 1,392 | ||||||
Bank-owned life insurance | 689 | 594 | ||||||
Brokerage and insurance commissions | 657 | 585 | ||||||
Customer loan swap fees | 114 | 525 | ||||||
Other income | 754 | 1,008 | ||||||
Total non-interest income | 11,403 | 9,389 | ||||||
Non-Interest Expense | ||||||||
Salaries and employee benefits | 14,327 | 12,978 | ||||||
Furniture, equipment and data processing | 2,790 | 2,680 | ||||||
Net occupancy costs | 2,003 | 1,914 | ||||||
Debit card expense | 934 | 823 | ||||||
Consulting and professional fees | 783 | 813 | ||||||
Amortization of core deposit intangible assets | 170 | 176 | ||||||
Regulatory assessments | 162 | 472 | ||||||
Other real estate owned and collection costs (recoveries), net | 101 | (307 | ) | |||||
Other expenses | 3,291 | 3,234 | ||||||
Total non-interest expense | 24,561 | 22,783 | ||||||
Income before income tax expense | 16,893 | 17,757 | ||||||
Income Tax Expense | 3,400 | 3,484 | ||||||
Net Income | $ | 13,493 | $ | 14,273 | ||||
Per Share Data | ||||||||
Basic earnings per share | $ | 0.89 | $ | 0.91 | ||||
Diluted earnings per share | $ | 0.89 | $ | 0.91 | ||||
Weighted average number of common shares outstanding | 15,103,176 | 15,592,141 | ||||||
Diluted weighted average number of common shares outstanding | 15,147,218 | 15,634,126 | ||||||
Cash dividends declared per share | $ | 0.33 | $ | 0.30 |
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) | 2020 | 2019 | ||||||
Net Income | $ | 13,493 | $ | 14,273 | ||||
Other comprehensive income: | ||||||||
Net change in unrealized gain on available-for-sale securities, net of tax | 18,930 | 10,899 | ||||||
Net change in unrealized loss on cash flow hedging derivatives, net of tax | (754 | ) | (831 | ) | ||||
Net gain on postretirement plans, net of tax | 133 | 48 | ||||||
Other comprehensive income | 18,309 | 10,116 | ||||||
Comprehensive Income | $ | 31,802 | $ | 24,389 |
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited) | |||||||||||||||||||
Three Months Ended | |||||||||||||||||||
Common Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||
(In thousands, except number of shares and per share data) | Shares Outstanding | Amount | |||||||||||||||||
Balance at December 31, 2018 | 15,591,914 | $ | 158,215 | $ | 302,030 | $ | (24,420 | ) | $ | 435,825 | |||||||||
Cumulative-effect adjustment upon adoption of ASU 2016-02(1) | — | — | 254 | — | 254 | ||||||||||||||
Net income | — | — | 14,273 | — | 14,273 | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | 10,116 | 10,116 | ||||||||||||||
Stock-based compensation expense | — | 458 | — | — | 458 | ||||||||||||||
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings | 24,208 | (215 | ) | — | — | (215 | ) | ||||||||||||
Common stock repurchased | (55,557 | ) | (2,306 | ) | — | — | (2,306 | ) | |||||||||||
Cash dividends declared ($0.30 per share) | — | — | (4,687 | ) | — | (4,687 | ) | ||||||||||||
Balance at March 31, 2019 | 15,560,565 | $ | 156,152 | $ | 311,870 | $ | (14,304 | ) | $ | 453,718 | |||||||||
Balance at December 31, 2019 | 15,144,719 | $ | 139,103 | $ | 340,580 | $ | (6,268 | ) | $ | 473,415 | |||||||||
Net income | — | — | 13,493 | — | 13,493 | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | 18,309 | 18,309 | ||||||||||||||
Stock-based compensation expense | — | 421 | — | — | 421 | ||||||||||||||
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings | 23,909 | (53 | ) | — | — | (53 | ) | ||||||||||||
Common stock repurchased | (217,031 | ) | (7,973 | ) | — | — | (7,973 | ) | |||||||||||
Cash dividends declared ($0.33 per share) | — | — | (4,932 | ) | — | (4,932 | ) | ||||||||||||
Balance at March 31, 2020 | 14,951,597 | $ | 131,498 | $ | 349,141 | $ | 12,041 | $ | 492,680 |
(1) | Effective January 1, 2019, the Company adopted ASU 2016-02, Leases, on a modified-retrospective basis. |
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) | 2020 | 2019 | ||||||
Operating Activities | ||||||||
Net Income | $ | 13,493 | $ | 14,273 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Originations of mortgage loans held for sale | (85,676 | ) | (32,405 | ) | ||||
Proceeds from the sale of mortgage loans | 70,711 | 28,834 | ||||||
Gain on sale of mortgage loans, net of origination costs | (1,476 | ) | (826 | ) | ||||
Provision for credit losses | 1,775 | 744 | ||||||
Depreciation and amortization expense | 969 | 922 | ||||||
Investment securities amortization and accretion, net | 742 | 660 | ||||||
Stock-based compensation expense | 421 | 458 | ||||||
Amortization of intangible assets | 170 | 176 | ||||||
Purchase accounting accretion, net | (244 | ) | (477 | ) | ||||
Increase in other assets | (34,101 | ) | (10,710 | ) | ||||
Increase (decrease) in other liabilities | 221 | (6,291 | ) | |||||
Net cash used in operating activities | (32,995 | ) | (4,642 | ) | ||||
Investing Activities | ||||||||
Proceeds from sales and maturities of available-for-sale securities | 40,188 | 26,355 | ||||||
Purchase of available-for-sale securities | (58,826 | ) | (26,749 | ) | ||||
Net increase in loans | (62,982 | ) | (16,734 | ) | ||||
Purchase of Federal Home Loan Bank stock | (9,161 | ) | (2,012 | ) | ||||
Proceeds from sale of Federal Home Loan Bank stock | 7,754 | 5,691 | ||||||
Purchase of premises and equipment | (1,284 | ) | (1,583 | ) | ||||
Recoveries of previously charged-off loans | 68 | 75 | ||||||
Net cash used in investing activities | (84,243 | ) | (14,957 | ) | ||||
Financing Activities | ||||||||
Net increase in deposits | 25,966 | 113,740 | ||||||
Net proceeds from (repayments of) borrowings less than 90 days | 57,913 | (14,687 | ) | |||||
Proceeds from Federal Home Loan Bank long-term advances | 25,000 | — | ||||||
Common stock repurchases | (7,973 | ) | (1,957 | ) | ||||
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings | (53 | ) | (215 | ) | ||||
Cash dividends paid on common stock | (5,009 | ) | (4,687 | ) | ||||
Finance lease payments | (33 | ) | (26 | ) | ||||
Net cash provided by financing activities | 95,811 | 92,168 | ||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (21,427 | ) | 72,569 | |||||
Cash, cash equivalents, and restricted cash at beginning of period | 75,636 | 66,999 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 54,209 | $ | 139,568 | ||||
Supplemental information | ||||||||
Interest paid | $ | 8,555 | $ | 9,738 | ||||
Income taxes paid | 126 | 91 | ||||||
Unsettled common stock repurchase | — | 349 | ||||||
Transfer from loans to other real estate owned | — | 543 |
The accompanying notes are an integral part of these consolidated financial statements.
7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the "Company") as of March 31, 2020 and December 31, 2019, the consolidated statements of income for the three months ended March 31, 2020 and 2019, the consolidated statements of comprehensive income for the three months ended March 31, 2020 and 2019, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2020 and 2019, and the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019. The consolidated financial statements include the accounts of the Company and Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company (which includes the consolidated accounts of Healthcare Professional Funding Corporation ("HPFC"), Property A, Inc. and Property P, Inc.). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Bank in a fiduciary capacity, through Camden National Wealth Management, a division of the Bank, are not assets of the Company and, therefore, are not included in the consolidated statements of condition. The Company also owns 100% of the common stock of Camden Capital Trust A and Union Bankshares Capital Trust I. These entities are unconsolidated subsidiaries of the Company. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not impact net income or shareholders' equity as previously reported. Net income reported for the three months ended March 31, 2020, is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
8
The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.
AFS: | Available-for-sale | HPFC: | Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank | |
ALCO: | Asset/Liability Committee | HTM: | Held-to-maturity | |
ALL: | Allowance for loan losses | IRS: | Internal Revenue Service | |
AOCI: | Accumulated other comprehensive income (loss) | LIBOR: | London Interbank Offered Rate | |
ASC: | Accounting Standards Codification | LTIP: | Long-Term Performance Share Plan | |
ASU: | Accounting Standards Update | Management ALCO: | Management Asset/Liability Committee | |
Bank: | Camden National Bank, a wholly-owned subsidiary of Camden National Corporation | MBS: | Mortgage-backed security | |
BOLI: | Bank-owned life insurance | MSPP: | Management Stock Purchase Plan | |
Board ALCO: | Board of Directors' Asset/Liability Committee | N/A: | Not applicable | |
CCTA: | Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation | N.M.: | Not meaningful | |
CDs: | Certificate of deposits | OCC: | Office of the Comptroller of the Currency | |
Company: | Camden National Corporation | OCI: | Other comprehensive income (loss) | |
CMO: | Collateralized mortgage obligation | OREO: | Other real estate owned | |
DCRP: | Defined Contribution Retirement Plan | OTTI: | Other-than-temporary impairment | |
EPS: | Earnings per share | SERP: | Supplemental executive retirement plans | |
FASB: | Financial Accounting Standards Board | Tax Act: | Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017 | |
FDIC: | Federal Deposit Insurance Corporation | TDR: | Troubled-debt restructured loan | |
FHLB: | Federal Home Loan Bank | UBCT: | Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation | |
FHLBB: | Federal Home Loan Bank of Boston | U.S.: | United States of America | |
FRB: | Federal Reserve System Board of Governors | 2003 Plan: | 2003 Stock Option and Incentive Plan | |
FRBB: | Federal Reserve Bank of Boston | 2012 Plan: | 2012 Equity and Incentive Plan | |
GAAP: | Generally accepted accounting principles in the United States |
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in 2020
The Company adopted and updated its accounting policy for the following accounting standard(s) that became effective January 1, 2020 and were applied to the Company's three months ended March 31, 2020 interim consolidated financial statements:
Goodwill. The Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), effective January 1, 2020. In accordance with ASU 2017-04, the Company will recognize an impairment of goodwill to the extent the carrying value of a reporting unit exceeds its fair value ("Step 1"). ASU 2017-04 eliminated the need to calculate the implied fair value of goodwill for a reporting unit and recognize an impairment to the extent the carrying value exceeded its implied fair value ("Step 2"). The Company adopted ASU 2017-04 prospectively. Upon adoption, ASU 2017-04 did not have a material impact on the Company's consolidated financial statements. Under the new accounting guidance the Company is more likely to record an impairment of goodwill, as there are now less requirements.
As described within the Company's Annual Report on Form 10-K for the year ended December 31, 2019, the Company last evaluated goodwill for impairment as of November 30, 2019 and determined goodwill was not impaired. In light of the COVID-19 pandemic and its impact on global, national and local markets and economy, the Company assessed if a triggering event that would require an interim goodwill impairment assessment occurred as of March 31, 2020. Through its assessment, the Company determined that a triggering event had not occurred as of March 31, 2020. The Company will continue to monitor the impact and effects of the pandemic on its business and assess goodwill for impairment should a triggering event occur.
9
Accounting Standards Issued
The following are recently issued accounting pronouncements that have yet to be adopted by the Company:
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), updated by ASU No. 2018-19 - Financial Instruments - Credit Losses (Topic 326): Codification improvements to Topic 326 ("ASU 2018-19"), and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"). The FASB issued ASU 2016-13, commonly referred to as “CECL,” to require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.
On March 27, 2020, the Coronavirus, Relief, and Economic Security Act ("CARES Act") was signed into law in response to the COVID-19 pandemic. Under Section 4014 of the CARES Act, the Company is permitted to delay its compliance with CECL until the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic that the President of the United States declared on March 15, 2020 terminates, or (2) December 31, 2020. The Company intends to delay the implementation of CECL until December 31, 2020, unless earlier implementation is required. The Company opted to delay its compliance with CECL so it could devote its resources to serve its customers impacted by the pandemic and support the roll-out of the various federal relief programs introduced by the CARES Act, such as the Paycheck Protection Program. When adopted, the Company will adopt CECL using a modified-retrospective approach as of January 1, 2020, which is the original effective date of the standard for the Company, and will record a cumulative-effect adjustment to retained earnings.
The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and HTM debt securities. CECL also applies to certain off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees and other similar investments. In addition, ASU 2016-13 made changes to the accounting for AFS debt securities, and a company will no longer immediately write-down a security for any impairment deemed to be a credit loss. Instead, a company will be required to present credit losses on AFS debt securities as an allowance on investments if it does not intend to sell the impaired security or it is not more-likely-than-not required to sell the impaired security before recovery of its amortized cost basis.
The Company assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation, and to identify new internal controls over enhanced accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, as well as assessing models for default and loss estimates. The Company is currently working to finalize its third party independent review of the Company's model, mechanics and certain key assumptions, internal CECL policy, and internal control framework.
The Company has completed the development of its process for estimation of the allowance for loan losses and off-balance sheet exposures. To estimate the allowance for loan losses, the Company will primarily utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and will include the impact of forecasted economic conditions. To estimate the off-balance sheet credit exposures, which are primarily unfunded loan commitments, the Company will apply certain assumptions, including, but not limited to, a funding assumption and expected loss rate.
The Company has performed parallel calculations as of December 31, 2019 and March 31, 2020 comparing the ALL calculated under current accounting guidance, commonly referred to as the “incurred model,” to the ACL calculated under CECL. Had CECL been adopted as of January 1, 2020, the Company estimates that its ACL would have increased $2.0 to $4.0 million over the ALL reported as of December 31, 2019, and increased $2.5 to $8.7 million over the ALL reported as of March 31, 2020.
In March 2020, the regulatory banking agencies issued an interim final rule that allows banking institutions that implement CECL during 2020 to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. As an alternative, banking institutions may elect to forego the provided relief under the interim final rule, and may use the regulatory capital transition rule issued by the regulatory banking agencies in February 2019 that provided a three-year phase in option, effective upon adoption of CECL. The Company is currently assessing its options at this time, and will make its election during the 2020 calendar quarter in which it adopts CECL.
10
NOTE 3 – INVESTMENTS
AFS and HTM Investments
The following table summarizes the amortized cost and estimated fair values of AFS and HTM investments, as of the dates indicated:
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
March 31, 2020 | ||||||||||||||||
AFS Investments (carried at fair value): | ||||||||||||||||
Obligations of states and political subdivisions | $ | 123,893 | $ | 3,324 | $ | (337 | ) | $ | 126,880 | |||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | 472,508 | 15,618 | (77 | ) | 488,049 | |||||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 324,929 | 9,698 | (12 | ) | 334,615 | |||||||||||
Subordinated corporate bonds | 10,546 | 116 | (75 | ) | 10,587 | |||||||||||
Total AFS investments | $ | 931,876 | $ | 28,756 | $ | (501 | ) | $ | 960,131 | |||||||
HTM Investments (carried at amortized cost): | ||||||||||||||||
Obligations of states and political subdivisions | $ | 1,300 | $ | 58 | $ | — | $ | 1,358 | ||||||||
Total HTM investments | $ | 1,300 | $ | 58 | $ | — | $ | 1,358 | ||||||||
December 31, 2019 | ||||||||||||||||
AFS Investments (carried at fair value): | ||||||||||||||||
Obligations of states and political subdivisions | $ | 115,632 | $ | 2,779 | $ | (328 | ) | $ | 118,083 | |||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | 462,593 | 3,398 | (2,605 | ) | 463,386 | |||||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 325,200 | 3,183 | (2,478 | ) | 325,905 | |||||||||||
Subordinated corporate bonds | 10,553 | 191 | — | 10,744 | ||||||||||||
Total AFS investments | $ | 913,978 | $ | 9,551 | $ | (5,411 | ) | $ | 918,118 | |||||||
HTM Investments (carried at amortized cost): | ||||||||||||||||
Obligations of states and political subdivisions | $ | 1,302 | $ | 57 | $ | — | $ | 1,359 | ||||||||
Total HTM investments | $ | 1,302 | $ | 57 | $ | — | $ | 1,359 |
The net unrealized gain on AFS investments reported within AOCI at March 31, 2020, was $22.2 million, net of a deferred tax liability of $6.1 million. The net unrealized gain on AFS investments reported within AOCI at December 31, 2019, was $3.3 million, net of a deferred tax liability of $890,000.
Impaired AFS and HTM Investments:
Quarterly, management reviews the Company’s AFS and HTM investments to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, and recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.
11
The following table presents the estimated fair values and gross unrealized losses on AFS and HTM investments that were in a continuous loss position that was considered temporary, by length of time that an individual security in each category has been in a continuous loss position as of the dates indicated:
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||
(In thousands, except number of holdings) | Number of Holdings | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||
March 31, 2020 | |||||||||||||||||||||||||||
AFS Investments: | |||||||||||||||||||||||||||
Obligations of states and political subdivisions | 168 | $ | 20,029 | $ | (337 | ) | $ | — | $ | — | $ | 20,029 | $ | (337 | ) | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | 144 | 7,626 | (34 | ) | 1,638 | (43 | ) | 9,264 | (77 | ) | |||||||||||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 86 | 5,180 | (12 | ) | — | — | 5,180 | (12 | ) | ||||||||||||||||||
Subordinated corporate bonds | 8 | 4,925 | (75 | ) | — | — | 4,925 | (75 | ) | ||||||||||||||||||
Total AFS investments | 406 | $ | 37,760 | $ | (458 | ) | $ | 1,638 | $ | (43 | ) | $ | 39,398 | $ | (501 | ) | |||||||||||
December 31, 2019 | |||||||||||||||||||||||||||
AFS Investments: | |||||||||||||||||||||||||||
Obligations of states and political subdivisions | 11 | $ | 30,459 | $ | (328 | ) | $ | — | $ | — | $ | 30,459 | $ | (328 | ) | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises | 59 | 162,964 | (1,850 | ) | 63,633 | (755 | ) | 226,597 | (2,605 | ) | |||||||||||||||||
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises | 35 | 66,549 | (733 | ) | 68,614 | (1,745 | ) | 135,163 | (2,478 | ) | |||||||||||||||||
Total AFS investments | 105 | $ | 259,972 | $ | (2,911 | ) | $ | 132,247 | $ | (2,500 | ) | $ | 392,219 | $ | (5,411 | ) |
At March 31, 2020 and December 31, 2019, unrealized losses within the AFS and HTM investment portfolios were reflective of current interest rates in excess of the yield received on debt investments, and were not indicative of an overall change in credit quality or other factors. At March 31, 2020 and December 31, 2019, gross unrealized losses on the Company's AFS and HTM investments were 1% of their respective fair values.
At March 31, 2020, the Company had the intent and ability to retain its debt investments in an unrealized loss position until the decline in value has recovered.
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Sale of AFS Investments:
For the three months ended March 31, 2020 and 2019, the Company did not sell any AFS investments.
AFS and HTM Investments Pledged:
At March 31, 2020 and December 31, 2019, AFS and HTM investments with an amortized cost of $712.4 million and $709.0 million and estimated fair values of $735.3 million and $712.4 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
Contractual Maturities:
The amortized cost and estimated fair values of the Company's AFS and HTM investments by contractual maturity at March 31, 2020, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In thousands) | Amortized Cost | Fair Value | ||||||
AFS Investments | ||||||||
Due in one year or less | $ | — | $ | — | ||||
Due after one year through five years | 76,517 | 78,367 | ||||||
Due after five years through ten years | 215,515 | 223,272 | ||||||
Due after ten years | 639,844 | 658,492 | ||||||
Total | $ | 931,876 | $ | 960,131 | ||||
HTM Investments | ||||||||
Due in one year or less | $ | — | $ | — | ||||
Due after one year through five years | 511 | 532 | ||||||
Due after five years through ten years | 789 | 826 | ||||||
Due after ten years | — | — | ||||||
Total | $ | 1,300 | $ | 1,358 |
Other Investments
The following table summarizes the cost and estimated fair values of the Company's investment in equity securities, FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated:
(In thousands) | Cost | Unrealized Gains | Unrealized Losses | Fair Value / Carrying Value | ||||||||||||
March 31, 2020 | ||||||||||||||||
Equity securities - bank stock (carried at fair value) | $ | 544 | $ | 1,130 | $ | — | $ | 1,674 | ||||||||
FHLBB (carried at cost) | 8,008 | — | — | 8,008 | ||||||||||||
FRB (carried at cost) | 5,374 | — | — | 5,374 | ||||||||||||
Total other investments | $ | 13,926 | $ | 1,130 | $ | — | $ | 15,056 | ||||||||
December 31, 2019 | ||||||||||||||||
Equity securities - bank stock (carried at fair value) | $ | 544 | $ | 1,130 | $ | — | $ | 1,674 | ||||||||
FHLBB (carried at cost) | 6,601 | — | — | 6,601 | ||||||||||||
FRB (carried at cost) | 5,374 | — | — | 5,374 | ||||||||||||
Total other investments | $ | 12,519 | $ | 1,130 | $ | — | $ | 13,649 |
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For the three months ended March 31, 2020 and 2019, the Company recognized an unrealized gain of $0 and $243,000, respectively, due to the change in fair value of its bank stock equity securities, which was presented within other income on the consolidated statements of income.
The Company did not record any OTTI on its FHLBB and FRB stock for the three months ended March 31, 2020 and 2019.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:
(In thousands) | March 31, 2020 | December 31, 2019 | ||||||
Residential real estate | $ | 1,064,212 | $ | 1,070,374 | ||||
Commercial real estate | 1,299,860 | 1,243,397 | ||||||
Commercial | 444,830 | 421,108 | ||||||
Home equity | 306,226 | 312,779 | ||||||
Consumer | 24,377 | 25,772 | ||||||
HPFC | 18,257 | 21,593 | ||||||
Total loans | $ | 3,157,762 | $ | 3,095,023 |
The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination costs for the dates indicated:
(In thousands) | March 31, 2020 | December 31, 2019 | ||||||
Net unamortized fair value mark discount on acquired loans | $ | (2,346 | ) | $ | (2,593 | ) | ||
Net unamortized loan origination costs | 3,115 | 3,111 | ||||||
Total | $ | 769 | $ | 518 |
The Company's lending activities are primarily conducted in Maine, but also include loan production offices in Massachusetts and New Hampshire. The Company originates single- and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.
The HPFC loan portfolio is an acquired loan portfolio. It consists of niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians, across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. In 2016, the Company closed HPFC's operations and is no longer originating HPFC loans.
In the normal course of business, the Bank makes loans to certain officers, directors and their associated companies, under terms that are consistent with the Company's lending policies and regulatory requirements and that do not involve more than the normal risk of collectability or present other unfavorable features. At March 31, 2020 and December 31, 2019, outstanding loans to certain officers, directors and their associated companies was less than 5% of the Company's shareholders' equity.
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The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions, including consideration of the effect and impact of the COVID-19 pandemic; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.
As discussed in Note 2, the Company did not adopt ASU 2016-04, commonly referred to as "CECL", in the first quarter of 2020. The Company's ALL, as presented, has been determined in accordance with its policies and procedures described within its Annual Report on Form 10-K for the year ended December 31, 2019. In light of the COVID-19 pandemic, the Company adjusted its economic qualitative factor ("Q-factor") to estimate the impact of the health crisis on its loan portfolio, based on information available as of March 31, 2020. The Q-factor adjustment resulted in an $800,000 increase in the ALL as of March 31, 2020. The Company will continue to adjust its economic Q-factor in coming quarters, as appropriate, as additional economic data becomes available and/or should the Company experience credit deterioration within its loan portfolio. There were no other significant changes to the Company's ALL methodology during the three months ended March 31, 2020.
The Board of Directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the Board of Directors. The Company's practice is to manage the portfolio proactively such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.
For purposes of determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, consumer and HPFC. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include the following:
Residential Real Estate. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residential properties, including for investment purposes.
Commercial Real Estate. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Home Equity. Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable
15
credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.
Consumer. Consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
HPFC. Prior to the Company's closing of HPFC's operations in 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral consists of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower.
16
The following presents the activity in the ALL and select loan information by portfolio segment for the periods indicated:
(In thousands) | Residential Real Estate | Commercial Real Estate | Commercial | Home Equity | Consumer | HPFC | Total | |||||||||||||||||||||
At or For The Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||
ALL for the three months ended: | ||||||||||||||||||||||||||||
Beginning balance | $ | 5,842 | $ | 12,414 | $ | 3,769 | $ | 2,423 | $ | 507 | $ | 216 | $ | 25,171 | ||||||||||||||
Loans charged off | (96 | ) | (50 | ) | (253 | ) | (34 | ) | (57 | ) | — | (490 | ) | |||||||||||||||
Recoveries | 2 | 4 | 53 | 4 | 5 | — | 68 | |||||||||||||||||||||
Provision (credit)(1) | 149 | 1,006 | 545 | 87 | 18 | (33 | ) | 1,772 | ||||||||||||||||||||
Ending balance | $ | 5,897 | $ | 13,374 | $ | 4,114 | $ | 2,480 | $ | 473 | $ | 183 | $ | 26,521 | ||||||||||||||
ALL balance attributable to loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 324 | $ | 34 | $ | — | $ | 89 | $ | — | $ | — | $ | 447 | ||||||||||||||
Collectively evaluated for impairment | 5,573 | 13,340 | 4,114 | 2,391 | 473 | 183 | 26,074 | |||||||||||||||||||||
Total ending ALL | $ | 5,897 | $ | 13,374 | $ | 4,114 | $ | 2,480 | $ | 473 | $ | 183 | $ | 26,521 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,286 | $ | 400 | $ | 299 | $ | 370 | $ | — | $ | — | $ | 4,355 | ||||||||||||||
Collectively evaluated for impairment | 1,060,926 | 1,299,460 | 444,531 | 305,856 | 24,377 | 18,257 | 3,153,407 | |||||||||||||||||||||
Total ending loans balance | $ | 1,064,212 | $ | 1,299,860 | $ | 444,830 | $ | 306,226 | $ | 24,377 | $ | 18,257 | $ | 3,157,762 | ||||||||||||||
At or For The Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||
ALL for the three months ended: | ||||||||||||||||||||||||||||
Beginning balance | $ | 6,071 | $ | 11,654 | $ | 3,620 | $ | 2,796 | $ | 234 | $ | 337 | $ | 24,712 | ||||||||||||||
Loans charged off | (11 | ) | (65 | ) | (236 | ) | (10 | ) | (14 | ) | — | (336 | ) | |||||||||||||||
Recoveries | 2 | 4 | 62 | — | 7 | — | 75 | |||||||||||||||||||||
Provision (credit)(1) | 91 | 245 | 170 | 241 | 32 | (29 | ) | 750 | ||||||||||||||||||||
Ending balance | $ | 6,153 | $ | 11,838 | $ | 3,616 | $ | 3,027 | $ | 259 | $ | 308 | $ | 25,201 | ||||||||||||||
ALL balance attributable to loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 553 | $ | 27 | $ | — | $ | 347 | $ | — | $ | — | $ | 927 | ||||||||||||||
Collectively evaluated for impairment | 5,600 | 11,811 | 3,616 | 2,680 | 259 | 308 | 24,274 | |||||||||||||||||||||
Total ending ALL | $ | 6,153 | $ | 11,838 | $ | 3,616 | $ | 3,027 | $ | 259 | $ | 308 | $ | 25,201 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 4,736 | $ | 410 | $ | 223 | $ | 895 | $ | — | $ | — | $ | 6,264 | ||||||||||||||
Collectively evaluated for impairment | 1,012,706 | 1,258,064 | 390,759 | 323,074 | 20,733 | 30,842 | 3,036,178 | |||||||||||||||||||||
Total ending loans balance | $ | 1,017,442 | $ | 1,258,474 | $ | 390,982 | $ | 323,969 | $ | 20,733 | $ | 30,842 | $ | 3,042,442 |
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(In thousands) | Residential Real Estate | Commercial Real Estate | Commercial | Home Equity | Consumer | HPFC | Total | |||||||||||||||||||||
At or For The Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
ALL: | ||||||||||||||||||||||||||||
Beginning balance | $ | 6,071 | $ | 11,654 | $ | 3,620 | $ | 2,796 | $ | 234 | $ | 337 | $ | 24,712 | ||||||||||||||
Loans charged off | (462 | ) | (300 | ) | (1,167 | ) | (412 | ) | (301 | ) | (71 | ) | (2,713 | ) | ||||||||||||||
Recoveries | 16 | 49 | 225 | 1 | 19 | — | 310 | |||||||||||||||||||||
Provision (credit)(1) | 217 | 1,011 | 1,091 | 38 | 555 | (50 | ) | 2,862 | ||||||||||||||||||||
Ending balance | $ | 5,842 | $ | 12,414 | $ | 3,769 | $ | 2,423 | $ | 507 | $ | 216 | $ | 25,171 | ||||||||||||||
ALL balance attributable to loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 364 | $ | 30 | $ | — | $ | 69 | $ | — | $ | — | $ | 463 | ||||||||||||||
Collectively evaluated for impairment | 5,478 | 12,384 | 3,769 | 2,354 | 507 | 216 | 24,708 | |||||||||||||||||||||
Total ending ALL | $ | 5,842 | $ | 12,414 | $ | 3,769 | $ | 2,423 | $ | 507 | $ | 216 | $ | 25,171 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,384 | $ | 402 | $ | 319 | $ | 373 | $ | — | $ | — | $ | 4,478 | ||||||||||||||
Collectively evaluated for impairment | 1,066,990 | 1,242,995 | 420,789 | 312,406 | 25,772 | 21,593 | 3,090,545 | |||||||||||||||||||||
Total ending loans balance | $ | 1,070,374 | $ | 1,243,397 | $ | 421,108 | $ | 312,779 | $ | 25,772 | $ | 21,593 | $ | 3,095,023 |
(1) | The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. At March 31, 2020 and 2019, and December 31, 2019, the reserve for unfunded commitments was $24,000, $16,000 and $21,000, respectively. |
The following reconciles the provision for loan losses to the provision for credit losses as presented on the consolidated statements of income for the periods indicated:
Three Months Ended March 31, | Year Ended December 31, 2019 | |||||||||||
(In thousands) | 2020 | 2019 | ||||||||||
Provision for loan losses | $ | 1,772 | $ | 750 | $ | 2,862 | ||||||
Change in reserve for unfunded commitments | 3 | (6 | ) | (1 | ) | |||||||
Provision for credit losses | $ | 1,775 | $ | 744 | $ | 2,861 |
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored. As of March 31, 2020, the Company's total exposure to the lessors of nonresidential buildings' industry was 13% of total loans and 32% of total commercial real estate loans. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of March 31, 2020.
18
To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate, residential real estate, and HPFC loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:
• | Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties. |
• | Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification. |
• | Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral. |
• | Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. |
• | Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted. |
Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.
19
The following summarizes credit risk exposure indicators by portfolio segment as of the following dates:
(In thousands) | Residential Real Estate | Commercial Real Estate | Commercial | Home Equity | Consumer | HPFC | Total | |||||||||||||||||||||
March 31, 2020 | ||||||||||||||||||||||||||||
Pass (Grades 1-6) | $ | 1,057,552 | $ | 1,254,201 | $ | 439,638 | $ | — | $ | — | $ | 17,410 | $ | 2,768,801 | ||||||||||||||
Performing | — | — | — | 304,131 | 24,372 | — | 328,503 | |||||||||||||||||||||
Special Mention (Grade 7) | 469 | 31,028 | 1,424 | — | — | 77 | 32,998 | |||||||||||||||||||||
Substandard (Grade 8) | 6,191 | 14,631 | 3,768 | — | — | 770 | 25,360 | |||||||||||||||||||||
Non-performing | — | — | — | 2,095 | 5 | — | 2,100 | |||||||||||||||||||||
Total | $ | 1,064,212 | $ | 1,299,860 | $ | 444,830 | $ | 306,226 | $ | 24,377 | $ | 18,257 | $ | 3,157,762 | ||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||
Pass (Grades 1-6) | $ | 1,062,825 | $ | 1,196,683 | $ | 415,870 | $ |