UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31,☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
001-13349
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)
| | |
Maine | 01-0393663 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| | |
PO Box 400 | | |
82 Main Street, Bar Harbor, ME | 04609-0400 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common | | BHB | | NYSE American |
Securities registered pursuant to Section 12(g) of the Act:
NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, or "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
| | | |
Large Accelerated Filer ☐ | Accelerated Filer ☒ | Non-Accelerated Filer ☐ | Smaller Reporting Company ☐ |
Emerging growth company ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
The aggregate market value of the common stock held by non-affiliates of Bar Harbor Bankshares was $469,384,260$420,108,452 based on the closing sale price of the common stock on the NYSE American on June 30, 2018,2021, the last trading day of the registrant’s most recently completed second quarter.
The Registrant had 15,523,62815,012,606 shares of common stock, par value $2.00 per share, outstanding as of March 8, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 201917, 2022 are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
FORM 10-K
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The Company conducts business operations principally through Bar Harbor Bank & Trust, which may be referred to as the Bank and which is a subsidiary of Bar Harbor Bankshares. Unless the context requires otherwise, references in this report to "our company, "our," "us," "we" and similar terms refer to Bar Harbor Bankshares and its subsidiaries, including the Bank, collectively.
2
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-Kreport that are not historical facts may constitute forward-lookingforward- looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that Bar Harbor Bankshares files with the Securities and Exchange Commission.Commission ("SEC"). All risk factors set forth in Item 1A of this Annual Report on Form 10-Kreport should be considered in evaluating forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.
GENERAL
Bar Harbor Bankshares (the "Company") is referred to as “BHB”, “the Company", “we”, “our”, or “us.”the parent company of Bar Harbor Bank & Trust (“the Bank”(the "Bank”) was established in 1887, and, which is the only community bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a trueregional community bank providing exceptional commercial, retailthat thinks differently about banking. We provide the technology offerings and capabilities of larger banks, accompanied by access to local decision makers who are acutely focused on their local markets. As we celebrate the 135th anniversary of our founding, we remain focused on helping our customers achieve their goals as the key to the Bank’s success. We deliver banking, lending and wealth management banking services through a network of 48 full-service branches.
| ● | Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders |
| ● | Geography, heritage, and performance are key while remaining true to a community-focused culture |
| ● | Strong commitment to risk management while balancing growth and earnings |
| ● | Service and sales driven culture with a focus on core business growth |
| ● | Fee income is fundamental to the Company’s profitability through wealth management and treasury management services, customer derivatives, and secondary market mortgage sales |
| ● | Investment in processes, products, technology, training, leadership, and infrastructure |
| ● | Expansion of the Company’s brand and business to deepen market presence |
| ● | Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Company |
3
Shown below is a profile and geographical footprint of the Bank as of December 31, 2018:
The Bank serves affluent and growing markets in Maine, New Hampshire and Vermont.Vermont with more than 49 thousand, 47 thousand and 24 thousand customers, respectively. Within these markets, tourism, agriculture and fishing industries remain strong and continue to drive economic activity. These core markets have also maintained their strength through diversification into various service industries.
Maine
The Bank operates 1422 full-service branches and two wealth management offices principally located in the regions of downeast, midcoast and central Maine, which can generally be characterized as rural areas. As previously announced, theThe Bank openedalso has a new commercial loan office in Portland, Maine in December 2018.Maine. In Maine, the Bank considers its primary market areas to be Hancock, Knox,Penobscot, Washington, Kennebec, Knox and Sagadahoc counties. The economies in these counties are based primarily on tourism, healthcare, fishing and lobstering, agriculture, state government, and small local businesses and are also supported by a large contingent of retirees.
New Hampshire
The Bank operates 21 full-service branches and two stand-alone drive-up windowsthree wealth management offices in New Hampshire located in the regions of the lake sunapee, upper valleyLake Sunapee, Upper Valley and merrimack valley.Merrimack Valley. There are several distinct markets within each of these regions. The towns or cities of Nashua, Manchester, and Concord are considered part of the merrimack valley.Merrimack Valley. Nashua, New Hampshire is a regional commercial, entertainment and dining destination and with its boardborder with Massachusetts, also enjoys a vibrant high-tech industry and a robust retail industry due in part to the state'sstate’s absence of a sales tax. The upper valley region of New Hampshire includes the towns of Lebanon and Hanover, which are home to Dartmouth-Hitchcock Medical Center and Dartmouth College, respectively. The lake sunapeeLake Sunapee market is a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee and includes the towns of Claremont, New London, and Newport.
Vermont
The Bank operates 1310 full-service branches and one stand-alone drive-up window in Vermont. The branches are primarily located in central Vermont within the counties of Rutland, Windsor and Orange. These markets are home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.Ludlow.
4
SUBSIDIARY ACTIVITIES
Bar Harbor Bankshares is a legal entity separate and distinct from its first-tier bank subsidiary, Bar Harbor Bank & Trust, and its second-tier subsidiaries, Bar Harbor Trust Services, Charter Trust Company and Cottage Street Corporation. Under Charter Trust Company are third-tier subsidiaries Charter Holding Corporation and Charter New England Agency.
The Company also owns all of the common stock of two Connecticut statutory trusts. These capital trusts are unconsolidated and their only material asset is a $20.6 million trust preferred security related to the junior subordinated debentures reported in Note 8 -
AVAILABLE INFORMATION
The Company is required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are also available free of charge on the Company'sCompany’s website at www.bhbt.comwww.barharbor.bank under the Shareholders Relations link as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Investors should note that the Company currently announces material information to investors and others using SEC filings, press releases and postings on the Company'sCompany’s website (www.bhbt.com)(www.barharbor.bank), including news and announcements regarding the Company'sCompany’s financial performance, key personnel, brands and business strategy. Information that is posted on the corporate website could be deemed material to investors. The Company encourages investors to review the information posted on these channels. Updates may be made, from time to time, to the list of channels used to communicate information that could be deemed material and any such change will be posted on www.bhbt.com.www.barharbor.bank. The information on the website is not, and shall not be deemed to be, a part hereof or incorporated into this or any other filings with the SEC.
COMPETITION
Major competitors in the Company'sCompany’s market areas include local independent banks, local branches of large regional and national bank affiliates, thrift institutions, savings and loan institutions, mortgage companies, and credit unions.
The Company has generally been able to compete effectively with other financial institutions by emphasizing quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. However, no assurance can be provided regarding the Company’s ongoing ability to compete effectively with other financial institutions in the future.
No part of the Company’s business is materially dependent upon one, or a few customers, or upon a particular industry segment, the loss of which would have a material adverse impact on the operations of the Company.
LENDING ACTIVITIES
General
The Bank originates loans in four basic portfolio categories, which are discussed below. These portfolioportfolios include the categories include construction and land development, commercial real estate, commercial and industrial, agricultural, tax exempt entities, residential mortgages, home equityreal estate and other consumer loans. Loan interest rates and other key loan terms are affected principally by the Bank’s lending policy, asset/liability strategy, loan demand, competition, and the supply of money available for lending purposes. The Bank does not engage in subprime lending activities. The Bank monitors and manages the amount of long-term fixed-rate lending and adjustable-rate loan products according to its interest rate management policy. The Bank generally originates loans for investment except for certain residential mortgages that are underwritten with the intention to be sold in the secondary mortgage market.
5
Loan Portfolio Analysis. Analysis
The following table sets forth the year-end composition of the Company’s loan portfolio in dollar amounts and as a percentage of the portfolio for the five years indicated. Further information about the composition of the loan portfolio is contained in Note 3 - – Loans and Allowance for Credit Losses of the Consolidated Financial Statements.
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||
| (in thousands, except percentages) | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||||||||||||||
| Commercial real estate | $ | 826,699 | 33 | % | $ | 826,746 | 34 | % | $ | 418,119 | 37 | % | $ | 396,032 | 40 | % | $ | 351,354 | 38 | % | |||||||||||||||
| Commercial and industrial | 404,870 | 16 | 379,423 | 15 | 151,240 | 13 | 126,158 | 13 | 121,057 | 13 | |||||||||||||||||||||||||
| Total commercial | 1,231,569 | 49 | 1,206,169 | 49 | 569,359 | 50 | 522,190 | 53 | 472,411 | 51 | |||||||||||||||||||||||||
| Residential | 1,144,698 | 46 | 1,155,682 | 46 | 506,612 | 45 | 408,401 | 41 | 382,678 | 42 | |||||||||||||||||||||||||
| Consumer | 113,960 | 5 | 123,762 | 5 | 53,093 | 5 | 59,479 | 6 | 63,935 | 7 | |||||||||||||||||||||||||
| Total loans | 2,490,227 | 100 | % | 2,485,613 | 100 | % | 1,129,064 | 100 | % | 990,070 | 100 | % | 919,024 | 100 | % | ||||||||||||||||||||
| Allowance for loan losses | (13,866 | ) | (12,325 | ) | (10,419 | ) | (9,439 | ) | (8,969 | ) | |||||||||||||||||||||||||
| Net loans | $ | 2,476,361 | $ | 2,473,288 | $ | 1,118,645 | $ | 980,631 | $ | 910,055 | |||||||||||||||||||||||||
| | | | | | | | | | | | |
| | 2021 | | 2020 | ||||||||
(in thousands, except |
| |
| % of | | |
| % of | ||||
percentages) | | Amount | | Total | | Amount | | Total | ||||
Commercial construction |
| $ | 56,263 |
| 2 | % | | $ | 117,882 |
| 5 | % |
Commercial real estate owner occupied | |
| 257,122 |
| 12 | | |
| 219,217 |
| 9 | |
Commercial real estate non-owner occupied | | | 887,092 | | 35 | | | | 716,776 | | 28 | |
Tax exempt | | | 41,280 | | 2 | | | | 47,862 | | 2 | |
Commercial and industrial | | | 307,112 | | 12 | | | | 355,684 | | 14 | |
Residential real estate | |
| 888,263 |
| 34 | | |
| 995,216 |
| 38 | |
Home equity | | | 86,657 | | 3 | | | | 100,096 | | 4 | |
Consumer other | |
| 8,121 |
| — | | |
| 10,152 |
| — | |
Total loans | | $ | 2,531,910 |
| 100 | % | | $ | 2,562,885 |
| 100 | % |
Commercial Real Estate
All commercial loans are secured primarily by multifamily dwellings, industrial/warehouse buildings, retail centers, office buildingsassigned Standard Industrial Classification codes, North American Industry Classification System codes, and hospitality properties, primarily located instate and county codes. The following table summarizes the Company's market area in New England. The Company's loans secured by commercial real estate are originated with either a fixed or an adjustable interest rate. Interest rates on adjustable rate loans are based on a variety of indices, generally determined through negotiations with borrowers. The Bank's commercial real estate underwriting guidelines call for loan-to-value (LTV) ratios not to exceed 80 percentmajor industries of the appraised valueCompany’s commercial loan portfolio as of the underlying property securing the loan. Unless on some sortDecember 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | ||||||||||||||
(in thousands, except percentages) |
| Loans |
| Total Exposure | | % of Total Portfolio | | Loans | | Total Exposure | | % of Total Portfolio | ||||||
Real Estate and Rental and Leasing | | $ | 707,444 | | $ | 815,070 | | 46 | % | | $ | 644,944 | | $ | 711,606 | | 45 | % |
Accommodation and Food Services | |
| 281,122 | | | 294,971 | | 18 | | | | 276,421 | | | 317,989 | | 19 | |
Health Care and Social Assistance | |
| 99,128 | | | 138,008 | | 6 | | | | 91,989 | | | 116,910 | | 6 | |
Retail Trade | |
| 58,647 | | | 79,109 | | 4 | | | | 58,942 | | | 76,073 | | 4 | |
Finance and Insurance | | | 54,462 | | | 83,153 | | 4 | | | | 36,236 | | | 81,398 | | 2 | |
Agriculture, Forestry, Fishing and Hunting | | | 52,957 | | | 61,157 | | 3 | | | | 41,271 | | | 65,435 | | 3 | |
Educational Services | | | 52,921 | | | 65,524 | | 3 | | | | 61,696 | | | 74,503 | | 4 | |
Manufacturing | | | 50,752 | | | 70,742 | | 3 | | | | 57,280 | | | 73,984 | | 4 | |
Arts, Entertainment, and Recreation | | | 34,122 | | | 36,854 | | 2 | | | | 22,137 | | | 22,389 | | 2 | |
Public Administration | | | 32,576 | | | 35,189 | | 2 | | | | 39,315 | | | 41,695 | | 3 | |
Construction | | | 32,451 | | | 58,394 | | 2 | | | | 40,716 | | | 46,979 | | 3 | |
Wholesale Trade | | | 24,179 | | | 38,098 | | 2 | | | | 20,727 | | | 36,215 | | 1 | |
Transportation and Warehousing | | | 14,569 | | | 17,656 | | 1 | | | | 15,038 | | | 16,350 | | 1 | |
All other | | | 53,539 | | | 73,417 | | 4 | | | | 50,709 | | | 117,716 | | 3 | |
Total commercial loans | | $ | 1,548,869 | | $ | 1,867,341 | | 100 | % | | $ | 1,457,421 | | $ | 1,799,242 | | 100 | % |
6
Maturity and Sensitivity of the Loan Portfolio
The following table shows contractual final maturities of selected loan categories at December 31, 2018.2021. The contractual maturities do not reflect premiums, discounts, deferred costs, or prepayments.
| (in thousands) | 1 Year or Less | 1 to 5 Years | More than 5 Years | Total | ||||||||||||
| Commercial real estate | $ | 15,156 | $ | 85,239 | $ | 726,304 | $ | 826,699 | ||||||||
| Commercial and industrial | 38,630 | 117,956 | 248,284 | 404,870 | ||||||||||||
| Total commercial | 53,786 | 203,195 | 974,588 | 1,231,569 | ||||||||||||
| Residential | 273 | 20,351 | 1,124,074 | 1,144,698 | ||||||||||||
| Consumer | 7,643 | 25,977 | 80,340 | 113,960 | ||||||||||||
| Total | $ | 61,702 | $ | 249,523 | $ | 2,179,002 | $ | 2,490,227 | ||||||||
| | | | | | | | | | | | | | | | | | |
| | | Within | | 1 to 5 | | 5 to 15 | | After | | | | | | | |||
(in thousands, except percentages) | | | 1 year |
| Years |
| Years | | 15 Years |
| Total | | % of Total | |||||
Commercial construction |
| $ | 47,672 | | $ | 7,340 | | $ | 1,215 | | $ | 36 | | $ | 56,263 | | 2 | % |
Commercial real estate owner occupied | |
| 112,217 | |
| 56,616 | |
| 73,957 | |
| 14,332 | |
| 257,122 | | 10 | |
Commercial real estate non-owner occupied | | | 393,042 | |
| 245,168 | |
| 239,803 | |
| 9,079 | |
| 887,092 | | 35 | |
Tax exempt | | | 206 | |
| 9,455 | |
| 24,819 | |
| 6,800 | |
| 41,280 | | 2 | |
Commercial and industrial | | | 122,727 | | | 79,489 | | | 78,440 | | | 26,456 | | | 307,112 | | 12 | |
Residential real estate | | | 36,070 | | | 85,324 | | | 217,919 | | | 548,950 | | | 888,263 | | 35 | |
Home equity | | | 63,736 | | | 9,696 | | | 3,619 | | | 9,606 | | | 86,657 | | 3 | |
Consumer other | | | 2,346 | | | 4,742 | | | 693 | | | 340 | | | 8,121 | | 1 | |
Total loans | | $ | 778,016 | | $ | 497,830 | | $ | 640,465 | | $ | 615,599 | | $ | 2,531,910 | | 100 | % |
Fixed-rate | | | 75,926 | | | 305,778 | | | 503,129 | | | 615,322 | | | 1,500,155 | | 59 | |
Floating or adjustable rate | | | 702,090 | | | 192,052 | | | 137,336 | | | 277 | | | 1,031,755 | | 41 | |
Total loans | | $ | 778,016 | | $ | 497,830 | | $ | 640,465 | | $ | 615,599 | | $ | 2,531,910 | | 100 | % |
Problem Assets
The Bank prefers to work with borrowers to resolve problems rather than proceeding to foreclosure. For commercial loans, this may result in a period of forbearance or restructuring of the loan, which is normally done at current market terms and doesmay not result in a “troubled” loan designation. For residential mortgage loans, the Bank generally follows The Federal Deposit Insurance Corporation ("FDIC"the Consumer Financial Protection Bureau (“CFPB”) guidelines to attempt a restructuring that will enable owner-occupants to remain in their home. However, if these processes fail to result in a performing loan, then the Bank generally will initiate foreclosure or other proceedings no later than the 90th120th day of a delinquency, as necessary, to minimize any potential loss. Management reports on delinquent loans and non-performing assets to the Board monthly. Loans are generally removed from accruing status when they reach 90 days delinquent, except for certain loans which are well secured and in the process of collection. Loan collections are managed by a combination of the related business units and the Bank’s Managed Assets Group,managed assets group, which focuses on larger, riskier collections and the recovery of purchased credit impaired loans.
The following table presents the problem assets and accruing troubled debt restructurings ("TDRs") for the five years indicated:
| | | | | | | |
(in thousands, except ratios) |
| 2021 |
| 2020 |
| ||
Non-accruing loans: |
| |
|
| |
| |
Commercial construction | | $ | — | | $ | 258 | |
Commercial real estate owner occupied | |
| 783 | |
| 3,038 | |
Commercial real estate non-owner occupied | |
| 622 | |
| 383 | |
Tax exempt | | | — | | | — | |
Commercial and industrial | |
| 677 | |
| 1,223 | |
Residential real estate | | | 6,835 | | | 5,883 | |
Home equity | | | 1,269 | | | 1,345 | |
Consumer other | |
| 5 | |
| 58 | |
Total loans | | | 10,191 | | | 12,188 | |
Other real estate owned | |
| — | |
| — | |
Total non-performing assets | | $ | 10,191 | | $ | 12,188 | |
| | | | | | | |
Troubled debt restructurings (accruing) | | $ | — | | $ | 95 | |
Accruing loans 90+ days past due | |
| 134 | |
| 125 | |
| | | | | | | |
Total non-performing loans/total loans | |
| 0.40 | % |
| 0.48 | % |
Total non-performing assets/total assets | |
| 0.27 | |
| 0.33 | |
7
| (in thousands, except ratios) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Non-accruing loans: | ||||||||||||||||||||
| Commercial real estate | $ | 8,156 | $ | 8,343 | $ | 2,564 | $ | 2,390 | $ | 4,484 | ||||||||||
| Commercial and industrial | 2,331 | 1,209 | 315 | 308 | 708 | |||||||||||||||
| Residential | 7,210 | 4,266 | 3,419 | 3,452 | 6,051 | |||||||||||||||
| Consumer | 538 | 500 | 198 | 830 | 1,045 | |||||||||||||||
| Total non-performing loans | 18,235 | 14,318 | 6,496 | 6,980 | 12,288 | |||||||||||||||
| Real estate owned | 2,351 | 122 | 90 | 256 | 523 | |||||||||||||||
| Total non-performing assets | $ | 20,586 | $ | 14,440 | $ | 6,586 | $ | 7,236 | $ | 12,811 | ||||||||||
| Troubled debt restructurings (accruing) | $ | 1,657 | $ | 1,046 | $ | 2,713 | $ | 2,336 | $ | 1,092 | ||||||||||
| Accruing loans 90+ days past due | 246 | 510 | — | 28 | — | |||||||||||||||
| Total non-performing loans/total loans | 0.73 | % | 0.58 | % | 0.58 | % | 0.71 | % | 1.34 | % | ||||||||||
| Total non-performing assets/total assets | 0.57 | 0.41 | 0.38 | 0.46 | 0.88 | |||||||||||||||
Allowance for LoanCredit Losses
The Bank’s loan portfolio is regularly reviewed by management to evaluate the adequacy of the allowance for loan losses.credit losses (ACL). The allowance represents management’s estimate of inherent losses that are probable and estimatableestimable as of the date of the financial statements. The allowance includesACL is comprised of reserves measured on a specific component for impairedcollective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally comprised of larger non-accruing commercial loans (a “specific loan loss reserve”) and a general component for portfolios of all outstanding loans (a “general loan loss reserve”). At the time of acquisition, noTDRs. The allowance for loancredit losses is assigned to loans acquired in business combinations. These loans are carried at fair value, including the impact of expected losses, as of the acquisition date. The loan loss allowance is discussed further in Note
The following table presents an analysis of the allowance for loancredit losses for the five years indicated:
| | | | | | | |
(in thousands, except ratios) |
| 2021 |
| 2020 |
| ||
Balance at beginning of year | | $ | 19,082 | | $ | 15,353 | |
Impact of CECL adoption | | | 5,228 | | | — | |
Charged-off loans: | |
|
| |
|
| |
Commercial construction | |
| — | |
| — | |
Commercial real estate owner occupied | |
| (403) | |
| — | |
Commercial real estate non-owner occupied | |
| — | |
| (1,137) | |
Tax exempt | | | — | | | — | |
Commercial and industrial | | | (59) | | | (593) | |
Residential real estate | | | (77) | | | (54) | |
Home equity | | | (154) | | | — | |
Consumer other | |
| (205) | |
| (384) | |
Total charged-off loans | |
| (898) | |
| (2,168) | |
Recoveries on charged-off loans: | |
|
| |
|
| |
Commercial construction | |
| 18 | |
| — | |
Commercial real estate owner occupied | |
| 290 | |
| — | |
Commercial real estate non-owner occupied | |
| 4 | |
| 173 | |
Tax exempt | | | — | | | — | |
Commercial and industrial | | | 77 | | | 30 | |
Residential real estate | | | 159 | | | 13 | |
Home equity | | | 51 | | | — | |
Consumer other | |
| 9 | |
| 56 | |
Total recoveries on charged-off loans | |
| 608 | |
| 272 | |
Net charged-off | |
| (290) | |
| (1,896) | |
Provision for credit losses | |
| (1,302) | |
| 5,625 | |
Balance at end of year | | $ | 22,718 | | $ | 19,082 | |
| | | | | | | |
Ratios: | |
|
| |
|
| |
Net charge-offs/average loans | |
| 0.01 | % |
| 0.07 | % |
Recoveries/charged-off loans | |
| 68 | |
| 13 | |
Allowance for credit losses/total loans | |
| 0.90 | |
| 0.74 | |
Allowance for credit losses/non-accruing loans | |
| 223 | |
| 157 | |
8
| (in thousands, except ratios) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Balance at beginning of year | $ | 12,325 | $ | 10,419 | $ | 9,439 | $ | 8,969 | $ | 8,475 | ||||||||||
| Charged-off loans: | ||||||||||||||||||||
| Commercial real estate | 553 | 275 | 133 | 667 | 238 | |||||||||||||||
| Commercial and industrial | 277 | 207 | 90 | 395 | 489 | |||||||||||||||
| Residential | 383 | 255 | 141 | 70 | 650 | |||||||||||||||
| Consumer | 694 | 289 | 47 | 487 | 243 | |||||||||||||||
| Total charged-off loans | 1,907 | 1,026 | 411 | 1,619 | 1,620 | |||||||||||||||
| Recoveries on charged-off loans: | ||||||||||||||||||||
| Commercial real estate | 318 | 50 | 40 | 98 | 85 | |||||||||||||||
| Commercial and industrial | 83 | 11 | 289 | 54 | 146 | |||||||||||||||
| Residential | 166 | 65 | 44 | 129 | 12 | |||||||||||||||
| Consumer | 101 | 18 | 39 | 23 | 38 | |||||||||||||||
| Total recoveries on charged-off loans | 668 | 144 | 412 | 304 | 281 | |||||||||||||||
| Net charged-off | 1,239 | 882 | (1 | ) | 1,315 | 1,339 | ||||||||||||||
| Provision for loan losses | 2,780 | 2,788 | 979 | 1,785 | 1,833 | |||||||||||||||
| Balance at end of year | $ | 13,866 | $ | 12,325 | $ | 10,419 | $ | 9,439 | $ | 8,969 | ||||||||||
| Ratios: | ||||||||||||||||||||
| Net charge-offs/average loans | 0.05 | % | 0.04 | % | — | % | 0.14 | % | 0.15 | % | ||||||||||
| Recoveries/charged-off loans | 35.03 | 14.04 | 100.24 | 18.78 | 17.35 | |||||||||||||||
| Allowance for loan losses/total loans | 0.56 | 0.50 | 0.92 | 0.95 | 0.98 | |||||||||||||||
| Allowance for loan losses/non-accruing loans | 76.04 | 86.08 | 160.39 | 135.23 | 72.99 | |||||||||||||||
The following table presents year-end data for the approximate allocation of the allowance for loancredit losses by loan categories at the dates indicated. The table shows for each category the amount of the allowance allocated to that category as a percentage of the outstanding loans in that category. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not indicative of future losses and does not restrict the use of any of the allowance to absorb losses in any category. Due to the impact of accounting standards for acquired loans, data in the accompanying tables may not be comparable between accounting periods.
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||
| (in thousands, except ratios) | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | |||||||||||||||||||||||||
| Commercial real estate | $ | 6,984 | 0.84 | % | $ | 6,134 | 0.74 | % | $ | 5,145 | 1.23 | % | $ | 4,430 | 1.12 | % | $ | 4,613 | 1.31 | % | |||||||||||||||
| Commercial and industrial | 2,415 | 0.60 | 2,389 | 0.63 | 1,952 | 1.29 | 1,590 | 1.26 | 1,277 | 1.05 | |||||||||||||||||||||||||
| Residential | 4,059 | 0.35 | 3,416 | 0.30 | 2,721 | 0.54 | 2,747 | 0.67 | 2,714 | 0.71 | |||||||||||||||||||||||||
| Consumer | 408 | 0.36 | 386 | 0.31 | 601 | 1.13 | 672 | 1.13 | 365 | 0.57 | |||||||||||||||||||||||||
| Total | $ | 13,866 | 0.56 | % | $ | 12,325 | 0.50 | % | $ | 10,419 | 0.92 | % | $ | 9,439 | 0.95 | % | $ | 8,969 | 0.98 | % | |||||||||||||||
| | | | | | | | | | | |
| | 2021 | | 2020 |
| ||||||
| | | | | % Allocated to | | | | | % Allocated to |
|
(in thousands, except ratios) |
| Amount |
| Total Loans |
| Amount |
| Total Loans |
| ||
Commercial construction |
| $ | 2,111 |
| 0.08 | % | $ | 824 |
| 0.03 | % |
Commercial real estate owner occupied |
| | 2,751 |
| 0.11 |
| | 1,783 |
| 0.07 | |
Commercial real estate non-owner occupied | | | 5,650 |
| 0.23 |
| | 7,864 |
| 0.31 | |
Tax exempt | | | 86 | | 0.01 | | | 58 | | — | |
Commercial and industrial | | | 5,369 | | 0.21 | | | 3,137 | | 0.12 | |
Residential real estate | | | 5,862 | | 0.23 | | | 5,010 | | 0.20 | |
Home equity | | | 814 | | 0.03 | | | 285 | | 0.01 | |
Consumer other | | | 75 | | — | | | 121 | | — | |
Total | | $ | 22,718 | | 0.90 | % | $ | 19,082 | | 0.74 | % |
INVESTMENT SECURITIES ACTIVITIES
The general objectives of the Company'sCompany’s investment portfolio are to provide liquidity when loan demand is high, and to absorb excess funds when demand is low. The securities portfolio also provides a medium for certain interest rate risk measures intended to maintain an appropriate balance between interest income from loans and total interest expense. For additional information, see Item 7A of this Annual Report on Form 10-K.
The Company only invests in high-quality investment-grade securities. Investment decisions are made in accordance with the Company’s investment policyand treasury policies and include consideration of risk, return, duration, and portfolio concentrations.
The following table presents the amortized cost and fair value of securities available for sale for the three years indicated:
| | | | | | | | | | | | |
| | 2021 | | 2020 | ||||||||
| | Amortized | | | | | Amortized | | | | ||
(in thousands) |
| Cost |
| Fair Value |
| Cost |
| Fair Value | ||||
US Government-sponsored enterprises | | $ | 237,283 | | $ | 236,117 | | $ | 206,834 | | $ | 212,390 |
US Government agency | |
| 79,143 | |
| 79,637 | |
| 82,878 | |
| 85,632 |
Private label | |
| 68,691 | |
| 68,695 | |
| 19,810 | |
| 19,709 |
Obligations of states and political subdivisions thereof | |
| 140,585 | |
| 141,776 | |
| 164,766 | |
| 169,004 |
Corporate bonds | |
| 89,994 | |
| 92,051 | |
| 97,689 | |
| 98,311 |
Total | | $ | 615,696 | | $ | 618,276 | | $ | 571,977 | | $ | 585,046 |
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| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
| Obligations of US Government-sponsored enterprises | $ | — | $ | — | $ | 6,967 | $ | 6,972 | $ | — | $ | — | ||||||||||||
| US Government-sponsored enterprises | 413,492 | 404,952 | 447,081 | 443,003 | 330,635 | 328,452 | ||||||||||||||||||
| US Government agency | 111,938 | 110,512 | 96,357 | 95,596 | 76,722 | 76,906 | ||||||||||||||||||
| Private label | 20,353 | 20,382 | 529 | 674 | 936 | 1,132 | ||||||||||||||||||
| Obligations of states and political subdivisions thereof | 133,260 | 132,265 | 138,522 | 140,200 | 123,832 | 122,366 | ||||||||||||||||||
| Corporate bonds | 58,098 | 57,726 | 30,527 | 30,797 | — | — | ||||||||||||||||||
| Total | $ | 737,141 | $ | 725,837 | $ | 719,983 | $ | 717,242 | $ | 532,125 | $ | 528,856 | ||||||||||||
The following table presents the amortized cost and weighted average yields of securities available for sale at December 31, 2018:
| Available for sale | |||||||
| (in thousands, except ratios) | Amortized Cost | Weighted Average Yield | |||||
| Within 1 year | $ | 425 | 0.85 | % | |||
| Over 1 year to 5 years | 23,312 | 5.96 | |||||
| Over 5 years to 10 years | 62,111 | 3.76 | |||||
| Over 10 years | 105,510 | 3.80 | |||||
| Total bonds and obligations | 191,358 | 3.94 | |||||
| Mortgage-backed securities | 545,783 | 2.96 | |||||
| Total securities available for sale | $ | 737,141 | 3.20 | % | |||
| | | | | | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||||||
| | Within | | Over 1 Year | | Over 5 Years | | Over | | | | |||||
(in thousands, except ratios) |
| 1 Year |
| to 5 Years | | to 10 years | | 10 Years | | Total | ||||||
US Government-sponsored enterprises | | $ | 32 | | $ | 2,601 | | $ | 8,227 | | $ | 226,423 | | $ | 237,283 | |
US Government agency | | | 3 | | | 306 | | | 1,798 | | | 77,036 | | | 79,143 | |
Private label | |
| — |
|
| — | | | 31,185 | | | 37,506 | | | 68,691 | |
Obligations of states and political subdivisions thereof | |
| — |
|
| 285 | | | 3,663 | | | 136,637 | | | 140,585 | |
Corporate bonds | |
| 4,999 |
|
| 24,245 | | | 55,750 | | | 5,000 | | | 89,994 | |
Total | | $ | 5,034 | | $ | 27,437 | | $ | 100,623 | | $ | 482,602 | | $ | 615,696 | |
| | | | | | | | | | | | | | | | |
Weighted Average Yield | | | 4.37 | % | | 5.48 | % | | 3.65 | % | | 1.92 | % | | 2.38 | % |
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest swap derivatives to minimize fluctuations in earnings and cash flows caused by interest rate volatility either in the form of interest rate swaps on wholesale funding and variable rate loans designated as cash flow hedges or partial interest rate hedges on securities accounted for as fair value hedges. For further discussion on derivatives see Note 10 – Derivative Financial Instruments and Hedging Activities of the Consolidated Financial Statements.
The Company offers derivative products in the form of interest rate swaps and interest rate caps, to commercial loan customers to facilitate their risk management strategies. The Company enters into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. These interest rate swap transactions allows customers to effectively fix the interest rate on their loans. Customer loan derivative income is recognized for the upfront fee paid by the customer at origination. These swaps are designated as economic hedges and transactions are cleared through arrangements with third-party financial institutions.
The Company’s mortgage banking activities result in two types of derivative instruments. Interest rate lock commitments are offered to residential loan customers, to allow them the ability to lock into a fixed interest rate prior to closing, for loans the Company intends to sell are classified as non-hedging derivatives. To offset this risk the Company often enters into offsetting forward sale commitments with national financial institutions to purchase the loans selected for sale under a best efforts or mandatory delivery contract accounted for as an economic hedge.
The Company’s floating-rate funding, certain hedging transactions and certain of the Company’s products, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. Further accounting guidance has been issued regarding rate reform in relation to derivative instruments as further described in Note 1– Summary of Significant Accounting Policies of the Consolidated Financial Statements.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
The Company offers a variety of deposit products to consumers, businesses and institutional customers with a wide range of interest rates and terms. The Company'sCompany’s deposits consist of interest-bearing and non-interest-bearing demand accounts, savings accounts, money market deposit accounts, and certificates of deposit. The Company solicits deposits primarily in its market area, excluding brokered deposits. The Company primarily relies on competitive pricing policies, marketing and customer service to attract and retain deposits.
Additionally, customer related deposit fees are a significant source of fee income and principally derived from debit card interchange fees earned from transaction fees that merchants pay whenever a customer uses a debit card to make a
10
purchase. Customer deposit fees are also earned from a variety of deposit accounts with various fee schedules and terms, which are designed to meet the customer’s financial needs. Other depositor related fee services provided to customers include ATMs, remote deposit capture, ACH origination, wire transfers, internet bill pay, and other cash management services.
The Company manages pricing of deposits in keeping with the Company'sCompany’s asset/liability management, liquidity and profitability objectives, subject to market competitive factors. Based on the Company's experience, the Company believes that the Company'stheir deposits are relatively stable sources of funds. Despite this stability, the Company'sCompany’s ability to attract and maintain these deposits and rates are significantly affected by market conditions.
The following table presents the average balances and weighted average rates for deposits for the three years indicated:
| 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| (in thousands, except ratios) | Average Balance | Percent of Total Average Deposits | Weighted Average Rate | Average Balance | Percent of Total Average Deposits | Weighted Average Rate | Average Balance | Percent of Total Average Deposits | Weighted Average Rate | |||||||||||||||||||||
| Demand | $ | 354,499 | 15 | % | — | % | $ | 339,303 | 15 | % | — | % | $ | 93,757 | 11 | % | — | % | ||||||||||||
| NOW | 456,591 | 20 | 0.42 | 455,064 | 20 | 0.25 | 161,494 | 16 | 0.20 | |||||||||||||||||||||
| Savings | 354,453 | 15 | 0.17 | 367,785 | 17 | 0.16 | 72,657 | 7 | 0.09 | |||||||||||||||||||||
| Money market | 281,258 | 12 | 0.78 | 300,905 | 14 | 0.49 | 240,325 | 24 | 0.40 | |||||||||||||||||||||
| Time deposits | 902,507 | 38 | 1.64 | 760,544 | 34 | 1.07 | 414,347 | 42 | 1.29 | |||||||||||||||||||||
| Total | $ | 2,349,308 | 100 | % | 0.83 | % | $ | 2,223,601 | 100 | % | 0.51 | % | $ | 982,580 | 100 | % | 0.68 | % | ||||||||||||
| | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| ||||||||||
(in thousands, except ratios) |
| Average Balance |
| Percent of Total |
| Weighted Average Rate |
| Average Balance |
| Percent of Total |
| Weighted Average Rate | | ||
Demand | | $ | 668,379 |
| 22 | % | — | % | $ | 480,721 |
| 17 | % | — | % |
NOW | |
| 949,485 |
| 31 |
| 0.11 | |
| 643,289 |
| 23 |
| 0.20 | |
Savings | |
| 629,152 |
| 20 |
| 0.09 | |
| 466,593 |
| 17 |
| 0.16 | |
Money market | |
| 390,150 |
| 13 |
| 0.12 | |
| 395,571 |
| 14 |
| 0.42 | |
Time deposits | |
| 424,899 |
| 14 |
| 1.51 | |
| 795,535 |
| 29 |
| 1.80 | |
Total | | $ | 3,062,065 |
| 100 | % | 0.28 | % | $ | 2,781,709 |
| 100 | % | 0.65 | % |
The following table presents the scheduled maturities of uninsured time deposits $100 thousand or greater at December 31, 2018:
| (in thousands, except ratios) | Amount | Weighted Average Rate | |||||
| Three months or less | $ | 118,778 | 1.40 | % | |||
| Over 3 months through 6 months | 70,788 | 1.90 | |||||
| Over 6 months through 12 months | 31,737 | 1.37 | |||||
| Over 12 months | 89,012 | 1.78 | |||||
| Total | $ | 310,315 | 1.62 | % | |||
| | | |
|
|
| |
(in thousands, except ratios) | | Amount | |
Three months or less | | $ | 13,546 |
Over 3 months through 6 months | |
| 8,638 |
Over 6 months through 12 months | |
| 8,856 |
Over 12 months | |
| 9,048 |
Total | | $ | 40,088 |
BORROWING ACTIVITIES
The Company may also utilize borrowings as an alternative source of funds which can be invested at a positive interest rate spread when the Company desires additional capacity to fund loan demand or when they meet the Company'sCompany’s asset/liability management goals to diversify funding sources and enhance interest rate risk management.
The Company'sCompany’s borrowings historically have included advances from the Federal Home Loan Bank of Boston ("FHLB"), securities sold under repurchase agreements, and ana correspondent bank unsecured line of credit. The Company also has the ability to borrow from the Federal Reserve Bank of Boston ("FRB"), which was used as a lending facility for Paycheck Protection Program (“PPP”) loans, as well as through unsecured federal funds lines with a correspondent banks.bank. The Company may obtain advances from the FHLB by collateralizing the advances with certain loans and investment securities of the Company. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.
The Company has $60 million in subordinated notes to accredited investors that provides funds for ongoing operations and future growth. Subordinated notes consist of $40 million issued in November 2019 and an additional $20 million from the Lake Sunapee acquisition.
11
RETAIL BROKERAGE SERVICES
Bar Harbor Financial Services principally serves the brokerage needs of individuals ranging from first-time purchasers, to sophisticated investors. It also offers a line of life insurance, annuity, and retirement products, as well as financial planning services. These products are not deposits, are not insured by the FDIC or any other government agency, are not guaranteed by the Bank or any affiliate, and may be subject to investment risk, including possible loss of principal.
The Bank is a branch office of Infinex Investments, Inc., (“Infinex”) a full-service third-party broker-dealer, conducting business under the assumed business name “Bar Harbor Financial Services.” Infinex is an independent registered broker-dealer and is not affiliated with the Company or its subsidiaries. Infinex was formed by a group of member banks, and is one of the largest providers of third-party investment and insurance services to banks and their customers in New England. Through Infinex, the Bank is able to take advantage of the expertise, capabilities, and experience of a well-established third-party broker-dealer in a cost effective manner.
TRUST MANAGEMENT SERVICES
The Bank has two wholly-owned subsidiaries that provide a comprehensive array of fiduciary services including trust and estate administration, wealth advisory services, and investment management services to individuals, businesses, not-for-profit organizations, and municipalities. Bar Harbor Trust Services is a Maine-chartered trust company, and Charter Trust is a New Hampshire-chartered trust company that was obtained through a 2017 business combination.company. As a New Hampshire-chartered trust company, Charter Trust is subject to New Hampshire laws applicable to trust companies and fiduciaries. TrustProfessional advisors help individuals and families structure accounts that will meet their long-term financial needs. To many wealth management clients, the effective transfer of wealth to future generations is of paramount importance. The Company’s trust services include trusteeact as a fiduciary for various types of both living trusts and trusts under wills, including revocable, irrevocable, charitable remainder and testamentary trusts, and in this capacity holds, accountstrusts. In addition the Company also serves as the investment manager for and managesthese accounts. Outside of trust services, they also provide 401K plan services, financial, assets, real estate and special assets. Trust Services offers custody, estate settlement,charitable planning, investment management, family office, municipal and fiduciary tax services. The employees include credentialed investment and trust professionals with extensive experience. At December 31, 20182021 and 2017,2020, trust management services had total assets under management of $1.7$2.5 billion and $1.8$2.3 billion, respectively.
HUMAN CAPITAL
The Company had 445489 and 531 full time equivalent employee positions compared to 423 full time equivalents at December 31, 2017. The2021 and 2020, respectively, including 277, 175 and 37 in Maine, New Hampshire and Vermont, respectively, at December 31, 2021. Strategically the Company has augmented the staffemployee talent with targeted hires to deepen the overall employee skill set. All employment decisions are based on talent and potential for growth. The Company’s ability to attract and retain the best diverse talent while sustaining and deepening the current employees’ relationship is critical to maintaining a best-in-class customer experience. The opportunity for personal and professional development is a critically important focus of ours and one that helps us retain top talent. The Company is committed to supporting, developing, and encouraging employees to engage with their communities.
The Company invests in its employees and continuously encourages them to build the skills they need to become an even more valuable team member. Opportunities are provided for employees to take on challenging and intriguing work to advance their career goals and transition into new roles as the banking industry evolves. Developing programs aligned with employee skills and capabilities is critical to the organization’s success and creates robust development opportunities supported by leaders at every level.
Attracting, retaining, and rewarding high-performing talent is key to the Company’s success. The total rewards program is designed to recognize and reward top talent and keep employees engaged effectively. Compensation programs align with the Company’s Pay for Performance philosophy and guarantees that every employee knows their contribution to the success of the organization. The Company participates in several market studies, including peers in the banking industry, to ensure competitive pay, benefits, and programs are offered to validate that the Company is an employer of choice. Annual merit increases align with market data and performance to ensure fair and equitable practices are adhered to.
12
The Company’s commitment to an employee’s health and well-being is evidenced through comprehensive benefit packages, including medical, dental, vision, life and disability offerings, and several other voluntary programs. The Company contributes to employee-owned health savings accounts and has a robust wellness program to encourage employees to stay fit physically and mentally. The retirement savings programs include a 401k plan with a generous Company match that vests immediately, along with an Employee Stock Purchase Plan that allows employees to be owners of the Bank at a reduced price. The plan encourages employees to think and make decisions like shareholders while mitigating risk-taking behavior.
Providing good work-life balance choices results in the Company’s employees’ making more meaningful contributions in the workplace. The Company has never had a work stoppage,Paid Time Off policy to support employees’ time management and nopaid volunteer time to support this. In 2021, the Company continued to offer Flexible Work Arrangements (“FWA”) on a permanent basis to help employees navigate the unprecedented pandemic operating environment. Programs include full remote, partially remote, condensed workweeks, and flexible hours. The flexibility these various FWAs offer allows employees to manage their work-life needs while continuing to deliver stellar results in the workplace.
The Company values a diverse workforce to ensure different perspectives and ideas are represented byconsidered and are a labor organization or subject to any collective bargaining arrangements. The employee relationspart of operations. As part of the commitment to equal employment opportunities, the Company are consideredseeks to be good.
REGULATION AND SUPERVISION
As a bank holding company, the Company is regulated under the federal Bank Holding Company Act (“BHC”BHC Act”) and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System or the(the “Federal Reserve Board”). The Federal Reserve Board. Board requires the Company to file various reports and also may conduct an examination of the Company.
The Company is also under the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act.Act of 1934, as amended. The Company’s common stock is listed on the New York Stock Exchange American (“NYSE AmericanAmerican”) exchange under the trading symbol “BHB,” and is subject to the rules of NYSE American for listed companies.
As a Maine-chartered financial institution, the Bank is subject to supervision, periodicregular examination, and regulation by the Maine Bureau of Financial Institutions ("BFI") as its chartering authority and the Federal Deposit Insurance Corporation ("FDIC") as its primary federal regulator.regulator and as its deposit insurer. The Bank’s deposits are insured by the FDIC in accordance with applicable federal laws and regulations. The prior approval of the BFI and the FDIC is required, among other things, for the Bank to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation, purchase or sale of all or substantially all of the assets of any bank.
The Bank’s significant wholly owned subsidiaries include Bar Harbor Trust Services, a Maine chartered non-depository trust company, and Charter Trust Company, New Hampshire-chartered non-depository trust company, company. In February 2021, the Company submitted its application to merge Bar Harbor Trust Services and Charter Trust Company into one New Hampshire-chartered non-depository trust company.
Bar Harbor Trust Services (“BHTS”) is subject to supervision, regular examination, and regulation by BFI. The Bank has other directly held subsidiaries that are not included as they are not significant to our business. The prior approval of the BFI is required, among other things, for BHTS to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation, purchase or sale of all or substantially all of the assets of BHTS.
Charter Trust Company and its affiliates (“Charter”) isare subject to supervision, and periodicregular examination, and regulation by the New Hampshire Banking Department. Charter’s consolidated capital includes the following legal entities: Charter Holding Corporation, Charter Trust Company and Charter New England Agency.
13
In accordance with NH RSA 383-C:5-502, Charter’s Capital Plan requires minimum capital of $500 thousand to be heldinvested in accordance with NH RSA 564-B:9-902. As of December 31, 20182021, Charter’s total capital was $10.1$18.2 million, and it had liquidation reserves of $501$503 thousand held in a savings account. Charter also had operating reserves of $10.4$16.5 million held in a U.S. Government money market fund.primarily at the Bank. As of December 31, 2018,2021, Charter had an appropriate liquidation reserve, minimum capital in excess of statutory requirements, and all funds were held in accordance with prudent investor standards of NH RSA 564-B:9-902.
Certain Laws and Regulations Applicable to the Company
The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which the Company may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
Permitted Activities
Generally, bank holding companies are prohibited under the BHC Act from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any activity other than (i) banking or managing or controlling banks or (ii) an activity that thenon-banking activities. The Federal Reserve Board determines to be sohas allowed by regulation some exceptions based on activities closely related to banking including: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; and (v) acquiring a savings and loan association whose direct and indirect activities are limited to be a proper incident to the business of banking.those permitted for bank holding companies. The Federal Reserve Board has the authority to require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness, or stability of any of its banking subsidiaries.
A bank holding company that qualifies and elects to become a financial holding company is permitted to engage in additional activities that are financial in nature or incidental or complementary to financial activity. The Company currently has no plans to make a financial holding company election.
Safe and Sound Banking Practices
Bank holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices. For example, under certain circumstances the Federal Reserve Board’s Regulation Y requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid, together with the consideration paid for any repurchases induring the preceding year,12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate a regulation. As another example, a holding company is prohibited from impairing its subsidiary bank’s safety and soundness by causing the bank to make funds available to non-banking subsidiaries or their customers if the Federal Reserve Board believes it not prudent to do so. The Federal Reserve Board has the power to assess civil money penalties for knowing or reckless violations, if the activities leading to a violation caused a substantial loss to a depository institution. Potential penalties are as high as $1,000,000 for each day the activity continues.
Dividends
Dividends from the Bank are the Company’s principal source of cash revenues. The Company’s earnings and activities are affected by federal and state legislation, regulations, local legislative and administrative bodies, and decisions of courts in the jurisdictions in which business is conducted. These include limitations on the ability of the Bank to pay dividends to the Company and the Company’s ability to pay dividends to its stockholders. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement.
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The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Maine law requires the approval of the BFI for any dividend that would reduce a bank’s capital below prescribed limits.
Source of Strength
In accordance with Federal Reserve Board policy, the holding companyCompany is expected to act as a source of financial and managerial strength to the Bank. Section 616 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) codifies the requirement that bank holding companies serve as a source of financial strength to their subsidiary depository institutions. Under this policy, the holding company is expected to commit resources to support its bank subsidiary, including at times when the holding company may not be in a financial position to provide it. As discussed below, the holding companyCompany could be required to guarantee the capital plan of the Bank if it becomes undercapitalized for purposes of banking regulations. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The BHC Act provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.
Anti-tying Restrictions
Bank holding companies and their affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.
Mergers & Acquisitions
The BHC Act, the federal Bank Merger Act, the laws of the State of Maine applicable to financial institutions and other federal and state statutes regulate acquisitions of banks and their holding companies. The BHC Act generally limits acquisitions by bank holding companies to banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before (i) acquiring more than 5% of the voting stock of any bank or other bank holding company, (ii) acquiring all or substantially all of the assets of any bank or bank holding company, or (iii) merging or consolidating with any other bank holding company.
In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities generally consider, among other things, the competitive effect and public benefits of the transactions, the financial and managerial resources and future prospects of the combined organization (including the capital position of the combined organization), the applicant’s performance record under the federal Community Reinvestment Act (see
Community Reinvestment Act included in Item I), fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.Limitations on Acquisitions of Bar Harbor Bankshares Common Stock
The federal Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the appropriate federal bank regulator has been notified and has not objected to the transaction. Under a rebuttable presumption established by the federal bank regulator, the acquisition of 10% or more of a class of voting securities of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would constitute the acquisition of control of a bank holding company. In addition, the BHC Act prohibits any company from acquiring control of a bank or bank holding company without first having obtained the approval of the federal bank regulator. Among other circumstances, under the BHC Act, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company, controls in any manner the election of a majority of directors or trustees of the bank or bank holding company, or the federal bank regulator has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company.
Transactions with Affiliates
The holding company and the Bank are considered “affiliates” of each other under the Federal Reserve Act, and transactions between a bank and its affiliates are subject to certain restrictions, under Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Board'sBoard’s implementing Regulation W. Generally, Sections 23A and 23B: (1) limit
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the extent to which an insured depository or its subsidiaries may engage in covered transactions (a) with an affiliate (as defined in such sections) to an amount equal to 10% of such institution’s capital and surplus, and (b) with all affiliates, in the aggregate to an amount equal to 20% of such capital and surplus; and (2) require all transactions with an affiliate, whether or not covered transactions, to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as the terms provided or that would be provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.
State Law Restrictions
As a Maine corporation, the holding companyCompany is subject to certain limitations and restrictions under applicable Maine corporate law. For example, state law restrictions in Maine include limitations and restrictions relating to indemnification of directors, distributions and dividends to stockholders, transactions involving directors, officers or interested stockholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
Capital Adequacy and Prompt Corrective Action
In July 2013, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency (the “OCC”) issued final rules (the “Capital Rules”) that established a newthe current capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules. The Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The risk based capital guidelines are designed to make regulatory capital requirements sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposures and to minimize disincentives for holding liquid, low-risk assets.
The Capital Rules: (i) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. The Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components and other provisions. Under the Capital Rules, for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan losses, in each case, subject to the Capital Rules’ specific requirements. Pursuant to the Capital Rules, the minimum capital ratios plus additional capital conservation buffer for 2018 are as follows:
The Capital Rules prescribe a standardized approach for risk weightings, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset classes.
Pursuant to Section 38 of the FDIA,Federal Deposit Insurance Act (“FDI Act”), federal banking agencies are required to take “prompt corrective action” should an insured depository institutions fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
For purposes of PCA, to be: (i) well-capitalized,Section 38 of the FDI Act, for an insured depository institution to be well-capitalized it must have aa:
(i) total risk-based capital ratio of at least 10%, a
(ii) Tier 1 risk-based capital ratio of at least 8%, a
(iii) CET1 risk-based capital ratio of at least 6.5%, and a Tier 1
(iv) leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk-based capital ratio.
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Both the Company and the Bank have always maintained the capital ratios and leverage ratio above the levels to be considered quantitatively well-capitalized. For information regarding the capital ratios and leverage ratio of the Company and the Bank as of December 31, 2018,2021, and December 31, 2017,2020, see the discussion under the section captioned
Significant Banking Regulations Applicable to the Bank
Deposit Insurance
The Bank’s deposit accounts are fully insured by the Deposit Insurance Fund ("DIF") of the FDIC up to the deposit insurance limit of $250,000 per depositor, per FDIC insured institution,limits set forth in applicable law and per ownership category, all in accordance with applicable laws and regulations.
The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that accounts for a bank'sbank’s capital level and supervisory rating (CAMELS rating). The risk matrix uses different risk categories distinguished by capital levels and supervisory ratings. The base for deposit insurance assessments is consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. The FDIC may increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the risk category for the Bank or in the assessment rates could have an adverse effect on the Bank’s and consequently the Company’s earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders.
In addition to deposit insurance assessments, the FDIAFDI Act provides for additional assessments to be imposed on insured depository institutions to pay for the cost of Financing Corporation (“FICO”) funding. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987, whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessments are adjusted quarterly to reflect changes in the assessment base of the DIF and do not vary depending upon a depository institution’s capitalization or supervisory evaluation. The current annualized assessment rate is approximately six basis points and the rate is adjusted quarterly. These assessments will continuecontinued until the FICO bonds maturematured in 2019.
Consumer Financial Protection
The Company is subject to a number of federal and state consumer protection laws that govern its relationship with its customers. These laws include, for example, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act and these federal laws’ respective state law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Bank'sBank’s ability to raise interest rates and subject the Bank to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees.
Further, the Consumer Financial Protection Bureau ("CFPB") has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s: (i) lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service, (ii) inability of the consumer to protect its interests in selecting or using a consumer financial product or service, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests.
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Neither the Dodd-Frank Act nor the individual consumer financial protection laws prevent states from adopting stricter consumer protection standards.
Brokered Deposit Restrictions
Under the FDIC Improvement Act, banks may be restricted in their ability to accept brokered deposits, depending on their classification. “Well-capitalized” institutions are permitted to accept brokered deposits, but all banks that are not well-capitalizedwell- capitalized could be restricted from accepting such deposits. The Bank is currently well-capitalized and not restricted from accepting brokered deposits.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”), requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable federal regulators regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s records of meeting the credit needs of its community. During its last examination, the Bank received a CRA rating of “satisfactory” was received by the Bank.
Insider Credit Transactions
Section 22(h) of the Federal Reserve Act ("FRA") and its implementing Regulation O, restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the Board of Directors. Further, under Section 22(h) of the FRA, loans to directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.
Safety and Soundness
Under the FDIA,FDI Act, each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution whichthat fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
Financial Privacy
Section V of the Gramm-Leach-Bliley Act ("GLBA") and its implementing regulations require all financial institutions, including the Company and the Bank and the Bank’s subsidiaries, to adopt privacy policies, restrict the sharing of nonpublic customer data with non-affiliated parties at the customer’s request, limit the reuse of certain consumer information received from non-affiliated financial institutions, and establish procedures and practices to protect customer data from unauthorized access. In addition, the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act”), includes many provisions affecting the Company, Bank, and/or their affiliates, including provisions concerning obtaining consumer reports, furnishing information to consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated companies, and other provisions. The FACT Act requires entities subject to FCRA to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The CFPB and the Federal Trade Commission (“FTC”) have extensive rulemaking authority under the FACT Act, and the Company and the Bank are subject to the rules that have been promulgated under the FACT Act, including rules requiring financial institutions with covered accounts (e.g. consumer bank accounts and loans) to develop, implement, and
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administer an identity theft protection program, as well as rules regarding limitations on affiliate marketing and implementation of programs to identify, detect and mitigate certain identity theft red flags. The Company has developed policies and procedures for itself and its subsidiaries, including the Bank, and believes it is in compliance with all privacy, information sharing, and notification provisions of the GLBA and the FACT Act. The Bank is also subject to data security standards, privacy and data breach notice requirements, primarily those issued by the FDIC.
Anti-Money Laundering Initiatives and the USA Patriot Act
A major focus of governmental policy on financial institutions over the last two decades has been combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (“USA Patriot Act”), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of their customers. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, can have serious legal and reputational consequences for the institution.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. The Company is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences.
Guidance on Sound Compensation Policies
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter(the so-called “say-on-pay vote”) and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions.
The Dodd-Frank Act also requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.
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Changing Regulatory Structure and Future Legislation and Regulation
Congress may enact further legislation that affects the regulation of the financial services industry, and the Maine or New Hampshire legislaturestate legislatures may enact further legislation affecting the regulation of financial institutions chartered by the State of Maine or the State of New Hampshire.institutions. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The Company cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof, although enactment of the proposed legislation could impact the regulatory structure under which the Company operates and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to the Company’s business strategy, and limit the Company’s ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material effect on its business.
Other Laws and Economic Environment
The earningsCompany is not only subject to federal laws applicable to it, it is also subject to the rules and regulations of the Company are significantly affected byvarious federal agencies charged with the monetary and fiscal policiesresponsibility of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implementimplementing these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments, and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to
ITEM 1A. RISK FACTORS
An investment in the Company involves risk, some of which, including market, liquidity, credit, operational, legal, compliance, reputational and strategic risks, could be substantial and is inherent in the Company'sCompany’s business. This risk also includes the possibility that the value of the investment could decrease considerably, and dividends or other distributions concerning the investment could be reduced or eliminated. Discussed below are risk factors that could adversely affect financial results and condition, as well as the value of, and return on investments made in the Company. Although the Company believes that these risks are the most important for you to consider, you should read this section in conjunction with the Consolidated Financial Statements, the notes to those Financial Statements and management’s discussion and analysis of financial condition and results of operations.
Credit Risks
Deterioration in local economies or real estate market may adversely affect the Company’s financial performance.
The Company serves individuals and businesses located in the downeast, midcoast and central regions of Maine, the Cheshire, Grafton, Hillsborough, Merrimack and Sullivan counties in central and western New Hampshire, and the Rutland, Windsor and Orange counties in central Vermont. A substantial portion of the loan portfolio is secured by real estate in these areas and the value of the associated collateral is subject to local real estate market conditions. Furthermore, many customers in the hospitality industry rely upon a high number of tourists to vacation destinations and attractions within the Company'sCompany’s markets. The Company'sCompany’s success is largely dependent on the economic conditions, including employment levels, population growth, income levels, savings trends and government policies in those market areas. A downturn in the local economies may adversely affect collateral values, sources of funds, and demand for products, all of which could have a negative impact on results of operations, financial condition and business expansion.
High concentrations of commercial loans may increase exposure to credit loss upon borrower default.
As of December 31, 2021, approximately 60% of the general economyBanks’s loan portfolio consisted of commercial real estate, commercial and industrial and construction loans. Commercial loan portfolio concentration generally exposes lenders to greater risk of delinquency and loss than residential real estate loans because repayment of the loans often depends on the successful operation and income streams from the property. Commercial loans typically involve larger balances to single borrowers or groups of related borrowers as compared to residential real estate loans. As the financial markets could adversely affect financial performance.
The Bank is exposed to risk of environmental liabilities with respect to properties to which it takes title.
In the course of business, the Bank may own or foreclose and take title to real estate that may be subject to environmental liabilities with respect to subject property. As a result, the Company may be held liable for property damage, personal injury, investigation and restoration costs. The cost associated with investigation or restoration activities could be
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substantial. In addition, as the owner or former owner of a contaminated site, the Company may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
Greater than anticipated credit losses in the loan portfolios may adversely affect earnings.
Credit losses are inherent in the business of making loans and could have a negative impactmaterial adverse effect on resultsoperating results. The Company makes various assumptions and judgments about the collectability of operationsthe loan portfolio and financial condition. Deterioration or defaults made by issuersprovides an allowance for credit losses based on a number of factors. The allowance for credit losses is evaluated on a periodic basis using current information, including the quality of the loan portfolio, economic conditions, value of the underlying collateral and the level of investment securities may cause additional credit-related other-than-temporary impairment chargesnon-accrual loans. Although the Company believes the allowance for credit losses is appropriate to the income statement. The Company's ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by disruptionsabsorb probable losses in the capital marketsloan portfolio, this allowance may not be adequate. Increases in the allowance will result in an expense for the period, thereby reducing reported net income.
As further discussed in Note 1– Summary of Significant Accounting Policies of the Consolidated Financial Statements in this report, the Company has adopted Accounting Standard Codification (ASC) 326 or other events, including actions by rating agencies or deteriorating investor expectations.
Liquidity and Interest Rate Risks
Interest rate volatility could significantly reduce the Company’s profitability.
The Bank’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-bearing assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions, demand for loans, securities and deposits, policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System.agencies. Changes in monetary policy, including changes in interest rates, or the slope of the yield curve could influence not only the interest received on loans and securities and the amount of interest paid on deposits and borrowings, but such changes could also affect (i) the ability to originate loans and obtain deposits, (ii) the fair value of the Company'sCompany’s financial assets and liabilities, and (iii) the average duration of loans and securities that are collateralized by mortgages. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. If interest rates decline, the Bank’s higher-ratehigher- rate loans and investments may be subject to prepayment risk, which could negatively impact its net interest margin. Conversely, if interest rates increase, the Bank’s loans and investment securities may be subject to extension risk, which could negatively impact its net interest margin as well.
Wholesale funding sources may prove insufficient to replace deposits, support operations and future growth.
The Company and banking subsidiaries must maintain sufficient funds to respond to the needs of customers. To manage liquidity, the Company draws upon a number of funding sources in addition to core deposit growth, loan repayments and maturities of loans and securities. These sources include FHLB and FRB advances, proceeds from the sale of securities and loans and liquidity resources at the holding company. The Company’s ability to manage liquidity will be severely constrained if unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if the Company is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, operating margins and profitability would be adversely affected.
Loss of deposits or a change in deposit mix could increase the cost of funding.
Deposits are a low cost and stable source of funding. The Company competes with banks and other financial institutions for deposits. Funding costs may increase if deposits are lost and are forced to replace them with more expensive sources of funding, if customers shift their deposits into higher cost products or if the Company needs to raise interest rates to avoid losing deposits. Higher funding costs reduce the net interest margin, net interest income and net income.
The Company’s access to funds from subsidiaries may be restricted.
Bar Harbor Bankshares is a separate and distinct legal entity from the Bank and non-banking subsidiaries. Bar Harbor Bankshares depends on dividends, distributions and other payments from its banking and non-banking subsidiaries to fund
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dividend payments on its common stock, debt service of subordinated borrowings, fund stock repurchase program and to replace deposits at maturity and support operations and future growth.
Prepayments of loans and investments. These sources include FHLB advances, proceeds frommay negatively impact the saleCompany’s business. Generally, customers may prepay the principal amount of investments andtheir outstanding loans at any time.
The speeds at which such prepayments occur, as well as the size of such prepayments, are within the customers’ discretion. Fluctuations in interest rates, in certain circumstances, may also lead to high levels of loan prepayments, which may also have an adverse impact on net interest income. If customers prepay the principal amount of their loans, and liquidity resources at the holding company. The Company's ability to manage liquidity will be severely constrained if unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if the Company is requiredunable to rely more heavilylend those funds to other borrowers or invest the funds at the same or higher interest rates, interest income will be reduced. A significant reduction in interest income could have a negative impact on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, operating marginsresults of operations and profitability would be adversely affected. Turbulence in the capital and credit marketsfinancial condition.
Secondary mortgage market conditions may adversely affect liquidity and financial condition and earnings.
The secondary mortgage markets are impacted by interest rates and investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate in the willingnessfuture. As a result, a prolonged period of certain counterpartiessecondary market illiquidity may reduce the Company’s loan production volumes, change loan portfolio composition, and customersreduce operating results. Secondary markets are affected by Fannie Mae, Freddie Mac, and Ginny Mae (collectively, the "Agencies") for loan purchases that meet their conforming loan requirements. These agencies could limit purchases of conforming loans due to capital constraints, changes in conforming loan criteria or other factors. Proposals to reform mortgage finance could affect the role of the Agencies and the market for conforming loans.
Reforms to London Interbank Offered Rate ("LIBOR") and other indices, and related uncertainty, may adversely affect our business, financial condition or results of operations.
The Company established a committee in 2020 comprised of bank management to prepare for the discontinuance of LIBOR. The Company has determined that its financial products tied to LIBOR will not be subject to cessation until June 30, 2023. This review also identified that only a few legacy contracts do business withnot include appropriate fallback language. The Company anticipates that the Company.
Operational Risks
The Company is subject to a variety of the Banks’s loan portfolio consisted of commercial real estate, commercialoperational risks, including reputational risk, and industrial, construction and agricultural loans. Commercial loan portfolio concentration generally exposes lenders to greaterthe risk of delinquency and loss than residential real estate loans because repayment of the loans often depends on the successful operation and income streams from the property. Additionally, commercial loans typically involve larger balances to single borrowersfraud or groups of related borrowers compared to residential real estate loans. Because the Bank’s loan portfolio contains a significant number of large commercial loans, the deterioration of onetheft by employees or a few of these loans could cause a significant increase in non-performing loans, provision for loan losses, and/or an increase in loan charge-offs, all ofoutsiders, which couldmay adversely affect the Company's financial conditionCompany’s business and results of operations.
The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. If personal, non-public, confidential, or proprietary information of customers in the loan portfolios may adversely affect earnings.
Because the collectabilitynature of the loan portfoliofinancial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and provide an allowance for loan losses based on a numbersuccessfully rectified. The Company’s necessary dependence upon automated systems to record and process transactions and its large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of factors. The allowance for loan losses is evaluated on a periodic basis using current information, including the quality of the loan portfolio, economic conditions, the value of the underlying collateral and the level of non-accrual loans. Although the Company believes the allowance for loan losses is appropriate to absorb probable losses in the loan portfolio, this allowance may not be adequate. Increases in the allowancethose systems will result in an expense forlosses that are difficult to detect. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (i.e., computer viruses or electrical or telecommunications outages, natural disaster, pandemics, or other damage to property or physical assets), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the period, thereby reducing reported net income.risk that its external vendors may be unable to fulfill their contractual
22
obligations (or will be subject to the same risk of fraud or operational errors by their respective employees) and to the risk that the Company’s vendors’ business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate (i.e., by requiring the Company to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage, and regulatory intervention.
Disruptions to the Company’s information systems and security breaches couldmay adversely affect its business and reputation.
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its businesses and to store sensitive data, including financial information regarding its customers. The integrity of information systems are under significant threat from cyber-attackscyberattacks by third parties, including through coordinated attacks sponsored by foreign nations and criminal organizations to disrupt business operations and other compromises to data and systems for political or criminal purposes. The Company employs an in-depth, layered, defense approach that leverages people, processes and technology to manage and maintain cyber securitycybersecurity controls. Notwithstanding the strength of defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and attackers respond rapidly to changes in defensive measures. Cyber securityCybersecurity risks may also occur with the Company’s third-party service providers, and may interfere with their ability to fulfill their contractual obligations to us, with additional potential for financial loss or liability that could adversely affect the Company’s financial condition or results of operations. The Company offers its customers the ability to bank remotely and provide other technology-based products and services, which services include the secure transmission of confidential information over the Internet and other remote channels. To the extent that the Company’s customers’ systems are not secure or are otherwise compromised, its network could be vulnerable to unauthorized access, malicious software, phishing schemes and other security breaches. To the extent that the Company’s activities or the activities of its clients or third-party service providers involve the storage and transmission of confidential information, security breaches and malicious software could expose the Company to claims, regulatory scrutiny, litigation and other possible liabilities.
While to date the Company has not experienced a significant compromise, significant data loss or material financial losses related to cyber securitycybersecurity attacks, the Company’s systems and those of its clientscustomers and third-party service providers, are under constant threat and may experience a significant event in the future. The Company may suffer material financial losses related to these risks in the future or it may be subject to liability for compromises to its clientcustomers or third-party service provider systems.providers. Any such losses or liabilities could adversely affect the Company’s financial condition or results of operations, and could expose us to reputation risk, the loss of client business, increased operational costs, as well as additional regulatory scrutiny, possible litigation, and related financial liability. These risks also include possible business interruption, including the inability to access critical information and systems.
The Company may be adversely affected by continuous technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effectiveCompany’s operations are dependent on the use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, uponcertain outside vendors for its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional operational efficiencies. Many of the Company's larger competitors have substantially greater resources to invest in technological improvements. The Companyday-to-day operations. Vendors may not perform in accordance with established performance standards required in their agreements for any number of reasons including a change in the vendor’s senior management, financial condition, product line or mix and how they support existing customers, or simply change their strategic focus putting the Company at risk. While the Company has comprehensive policies and procedures in place to mitigate risk in all phases of vendor management from selection to performance monitoring, the failure of a vendor to perform in accordance with contractual agreements could be able to effectively implement new technology-driven products and services or be successful in marketing these products and servicesdisruptive to its customers.
The Company may be adversely affected by the soundness of other financial institutions.
The Company'sCompany’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Bank and non-bank financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. The Company has exposure to different industries and counterparties through transactions with counterparties in the bank and non-bank financial services industries, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more bank or non-bank financial services companies, or the bank or non-bank financial services industries generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have an adverse affecteffect on the Company'sCompany’s business, financial condition and results of operations.
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Changes in the federal, state, or local tax laws may negatively impact the Company'sCompany’s financial performance.
The Company is subject to changes in tax law that could increase effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect the Company’s current and future financial performance. Legislation enacted in 2017 resulted in a reduction in the Company’s federal corporate tax rate from 35% in 2017 to 21% in 2018, which had a favorable impact on earnings and capital generation abilities. During 2021, Congress debated various proposals for increase in the corporate tax rate and possible surcharges on corporate share repurchases as part of the funding for various spending initiatives. Any such increase in the corporate tax rate or surcharges would adversely affect the Company’s results of operations in future periods.
Impairment of investment securities or goodwill could result in a negative impact on the Company’s results of operations.
In assessing whether the impairment of securities is related to a deterioration in credit factors, the Company considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain the securities for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. A decline in the Company’s stock price or occurrence of a triggering event following any of its quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, require performance of a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release. During 2021, the annual impairment test conducted in October, using discounted cash flows and market based approaches, indicated that the estimated fair value of its sole reporting unit “Bar Harbor Bank & Trust” exceeded the carrying value. In a future assessments, the Company could conclude that all or a portion of our goodwill may be impaired, which would result in a non-cash charge to earnings.
Revenues from the Company’s wealth management companies are significant to its earnings.
Revenues from the Company’s wealth management business are significant to our earnings. Generating returns that satisfy clients in a variety of asset classes is important to maintaining existing business and attracting new business. Generally,Administering or managing assets in accordance with the terms of governing documents and applicable laws is also important to client satisfaction. Failure in either of the foregoing areas can expose the Company to liability, and result in a decrease in revenues and earnings.
Societal responses to climate change could adversely affect the Company’s business and performance, including indirectly through impacts on the Company’s customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. The Company and its customers may prepay the principal amount of their outstanding loans at any time.
Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact the Company’s business and the business of its customers.
Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. In particular, such prepayments,events may have a particularly negative impact upon the business of customers who are withinengaged in the customers’ discretion. Fluctuationshospitality in the Company’s market area, which could have a direct negative impact on the Company’s business and results of operations.
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Strategic and External Risks
The COVID-19 pandemic may adversely impact our business and financial results, as it is highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has created extensive disruptions to the economy and to the lives of individuals. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 continue to evolve, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in certain circumstances, may also lead to high levelssustained economic stress or recession, many of loan prepayments, which may alsothe risk factors identified in our Form 10-K could be exacerbated and such effects could have an adverse impact on net interest income. If customers prepay the principal amount of their loans, and the Company is unablein a number of ways related to lend those funds to other borrowerscredit quality, collateral values, customer demand, funding, operations, interest rate risk, and human capital.
Changes in the general economy or invest the funds at the same or higher interest rates, interest income will be reduced. financial markets could adversely affect financial performance.
A significant reduction in interest incomedeterioration of general economic conditions could adversely affect local economies and have a negative impact on results of operations and financial condition.
Monetary policy and economic environment could impact financial performance.
The earnings of the Company are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments, and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates, thereby affecting the strength of the economy, the level of inflation, or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on the Company’s business and earnings.
Strong competition within the Company'sCompany’s markets may significantly impact profitability.
The Company competes with an ever-increasing array of financial service providers. See the section entitled “Competition” of Item 1 of this Annual Report on Form 10-Kreport for additional competitor information. Competition from nationwide banks, as well as local institutions, continues to mount in the Company'sCompany’s markets. To compete, the Company focuses on quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. Failure to perform in any of these areas could significantly weaken the Company'sCompany’s competitive position, which could adversely affect growth and profitability.
Market changes may adversely affect demand for services and impact revenue, costs, and earnings.
Channels for servicing the Company’s customers are evolving rapidly, with less reliance on traditional branch facilities, increased use of e-commerce channels, and demand for universal bankers and other relationship managers who can service multiple product lines. The Company has an ongoing process for evaluating the profitability of its branch system and other office and operational facilities. The identification of unprofitable operations and facilities can lead to restructuring charges
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and introduce the risk of disruptions to revenues and customer relationships. The Company competes with larger financial institutions who are rapidly evolving their service channels and escalating the costs of evolving the service process.
Expansion, growth, and acquisitions could negatively impact earnings if not successful.
The Company may grow organically both by geographic expansion and through business line expansion, as well as through acquisitions. Success of these activities depends on the Company'sCompany’s ability to continue to maintain and develop an infrastructure appropriate to support and integrate such growth. Success may also depends on acceptance of the Bank by customers in these new markets and, in the case of expansion through acquisitions, these factors include the long-term recruitment and retention of key personnel and acquired customer relationships. Profitability depends on whether the marginal revenue generated in the new markets will offset the increased expenses of operating a larger entity, with more staff, more locations, and more product offerings. Failure to achieve any of these success factors may have a negative impact on the Company’s financial condition and results of operations.
The Company may be unableadversely affected by continuous technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to attractbetter serve customers and retain key personnel.
The introduction of new products and services can entail significant time and resources. The Company’s failure to manage risks and uncertainties associated with new products and services exposes it to enhanced risk of operational lapses which may result in the recognition of financial services industrystatement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be intensebrought to market in a manner that is timely and attractive to the Company’s clients. Products and services relying on internet and mobile technologies may expose the Company to fraud and its subsidiaries may not be ablecybersecurity risks. Failure to hiresuccessfully manage these risks in the development and implementation of new products or retain the key personnel that it depends upon for success. In addition, the Bank’s rural geographic marketplace, combined with relatively expensive real estate purchase prices within the area of the Bank’s principal office location in Bar Harbor, Maine, create additional risks for the Company and the Bank’s ability to attract and retain key personnel. The unexpected loss of services of one or more of key personnel could have a material adverse impact on the Company's business because of their skills, knowledge of the markets in which the Company operates, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
Legal, Regulatory Risk Factors
The Company is subject to extensive government regulation and supervision, which may interfere with the ability to conduct business and may negatively impact financial results.
The Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the Federal Deposit Insurance Fund and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer, and/or limit the pricing the Company may charge on certain banking services, among other things. Compliance personnel and resources may increase costs of operations and adversely impact earnings.
The Company is subject to possible claims and litigation pertaining to fiduciary responsibilities.
From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company'sCompany’s performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a favorable manner, they may result in significant financial liability and/or adversely affect the market perception of the Company and products and services as well as impact customer demand for products and services.
Failure to comply with laws, and regulations and differences in interpretation of tax laws and regulations may adversely impact the Company's financial statements.
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results of operations. While the Company has policies and procedures designed to fundsprevent any such violations, there can be no assurance that such violations will not occur.
Fee revenues from subsidiariesoverdraft protection programs constitute a significant portion of our noninterest income and may be restricted.
Revenues derived from transaction fees associated with overdraft protection programs offered to the Company’s customers represent a significant portion of its noninterest income. In response to recent increased congressional and regulatory scrutiny, and in anticipation of enhanced supervision and enforcement of overdraft protection practices in the future, certain banking organizations have begun to modify their overdraft protection programs, including by discontinuing the imposition of overdraft transaction fees. These competitive pressures, as well as any adoption by the Company’s regulators of new rules or supervisory guidance or more aggressive examination and enforcement policies in respect of banks' overdraft protection practices, could cause it to modify programs and practices in ways that authorize regulatory bodiesmay have a negative impact revenue and earnings.
General Risk Factors
Changes in the Company’s accounting policies or in accounting standards could materially affect its results of operations, and financial condition.
Accounting policies are fundamental to blockunderstanding the Company’s results of operations, and financial condition. Some of the accounting policies are critical because they require the Company to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or reduceusing different assumptions. The Company may experience material losses if such estimates or assumptions underlying in the flowCompany’s financial statements are incorrect.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of funds from those subsidiaries to Bar Harbor Bankshares,standards that govern the preparation of our external financial statements. These changes could materially impact how the Company’s reports its results of operations and financial condition. New or revised standards could also require retroactive application, which could impede access to funds it needs to make payments on its obligations or dividend payments.
Internal controls may become ineffective in preventing or detecting material errors
The Company regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is currently evaluatingbased in part on certain assumptions and can provide only reasonable, not absolute, assurances that the impact of adopting this standard on the consolidated financial statements. Any increase in the allowance for credit losses or expenses incurred to determine the appropriate levelobjectives of the allowance for loan losses maycontrols are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse affecteffect on the Company's financial condition andCompany’s business, results of operations.
The Company may be held liableunable to a governmental entityattract and retain key personnel.
The Company’s success depends, in large part, on its ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense and the Company and its subsidiaries may not be able to hire or to third partiesretain the key personnel that it depends upon for property damage, personal injury, investigation and restoration costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The cost associated with investigation or remediation activities could be substantial.success. In addition, as the owner or former owner of a contaminated site,Bank’s rural geographic marketplace, combined with relatively expensive real estate purchase prices in the many tourist communities the Company may be subjectserves, create additional risks for the Company’s ability to common law claims by third parties basedattract and retain key personnel. The unexpected loss of key personnel could have an adverse impact on damagesthe Company’s business because of their skills, knowledge of the markets in which the Company operates, years of industry experience and costs resulting from environmental contamination emanating from the property.difficulty of promptly finding qualified replacement personnel.
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ITEM 2. PROPERTIES
The Company’s principal executive offices and one branch areoffice is in a building owned by the Company located at 82 Main Street, Bar Harbor, Maine. The Bank provides full-banking services at an additional 4853 locations throughout Maine, New Hampshire and Vermont, of which 3033 are owned and 1820 are leased. The Bank also has twoone stand-alone drive-up windows in New Hampshire and onewindow in Vermont. In addition to banking offices, the Company also has an Operations CenterCenters located in Ellsworth, Maine, and Newport, New Hampshire that houseshouse the Company’s operations and data processing centers, as well as leased space in Hampden, Maine, Portland, Maine, Rockland, Maine and Bedford,Manchester, New Hampshire and owned space in Ellsworth, Maine and Bangor, Maine, where back office support for multiple lines of business and related functions are located. Additionally, the Bank has 1 leased and 2 owned Wealth Management offices in New Hampshire. In the opinion of management, the physical properties of the Company and the Bank are considered adequate to meet the needs of customers in the communities served.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company may become involved in legal proceedings or may be subject to claims arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common stock of the Company is traded on the NYSE American, under the trading symbol "BHB"“BHB”. As of March 8, 2019,11, 2022, there were 15,523,62815,012,606 shares of Bar Harbor Bankshares common stock, par value $2.00 per share, outstanding and approximately 1,6161,471 shareholders of record, as obtained through the Company’s transfer agent.
Recent Sale of Unregistered Securities and Use of Proceeds from Registered Securities
No unregistered equity securities were sold by the Company during the year ended December 31, 2018.2021.
On April 20, 2021, Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 747,000 shares.
The following table indicates that no shares were repurchased by the Company in the fourth quarter of 2021:
| | | | | | | | | |
| | | | | | Total number of shares | | Maximum number of | |
| | | | | | | purchased as a part of | | shares that may yet be |
| | Total number of | | Average price | publicly announced | purchased under | |||
Period | shares purchased | paid per share | plans or programs | the plans or programs | |||||
October 1-31, 2021 | — | | $ | — | — | 747,000 | |||
November 1-30, 2021 | — | | — | — | 747,000 | ||||
December 1-31, 2021 | — | | — | — | 747,000 | ||||
Total | — | | $ | — | — | 747,000 | |||
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Common Stock Performance Graph
The following graph illustrates the estimated yearly change in value of the Company'sCompany’s cumulative total stockholder return on its common stock for each of the last five years. Total shareholder return is computed by taking the difference between the ending price of the common stock at the end of the previous year and the current year, plus any dividends paid divided by the ending price of the common stock at the end of the previous year. For purposes of comparison, the graph also matches Bar Harbor Bankshares'Bankshares’ cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NYSE American Composite index, and the SNL Bank $1B to $5B Index. The graph tracks the performance of a $100 investment in the Company'sCompany’s common stock and in each index (with the reinvestment of all dividends) from December 31, 20132016 to December 31, 2018.2021.
| | | | | | | | | | | | |
| | Period Ending | ||||||||||
Index |
| 12/31/16 |
| 12/31/17 |
| 12/31/18 |
| 12/31/2019 |
| 12/31/2020 |
| 12/31/2021 |
Bar Harbor Bankshares | | 100.00 | | 87.92 | | 75.09 | | 87.97 | | 81.61 | | 107.99 |
NYSE American Composite Index |
| 100.00 |
| 118.56 |
| 104.61 |
| 118.96 |
| 113.34 |
| 168.18 |
S&P U.S. SmallCap Banks Index |
| 100.00 |
| 104.33 |
| 87.06 |
| 109.22 |
| 99.19 |
| 138.09 |
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| Period Ending | |||||||||||||||||
| Index | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | |||||||||||
| Bar Harbor Bankshares | 100.00 | 124.18 | 137.60 | 195.35 | 171.80 | 146.72 | |||||||||||
| NYSE American Composite Index | 100.00 | 103.76 | 94.00 | 104.00 | 123.29 | 108.79 | |||||||||||
| SNL Bank $1B - $5B Index | 100.00 | 104.56 | 117.04 | 168.38 | 179.51 | 157.27 | |||||||||||
| At or For the Years Ended December 31, | ||||||||||||||||||||
| (in millions, except ratios and per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Financial Condition Data: | ||||||||||||||||||||
| Total assets | $ | 3,608 | $ | 3,565 | $ | 1,755 | $ | 1,580 | $ | 1,459 | ||||||||||
Total earning assets(1) | 3,263 | 3,244 | 1,683 | 1,517 | 1,411 | |||||||||||||||
| Total investments | 761 | 755 | 554 | 526 | 492 | |||||||||||||||
| Total loans | 2,490 | 2,486 | 1,129 | 990 | 919 | |||||||||||||||
| Allowance for loan losses | 14 | 12 | 10 | 9 | 9 | |||||||||||||||
| Total goodwill and intangible assets | 108 | 108 | 5 | 5 | 5 | |||||||||||||||
| Total deposits | 2,483 | 2,352 | 1,050 | 943 | 858 | |||||||||||||||
| Total borrowings | 724 | 830 | 537 | 475 | 447 | |||||||||||||||
| Total shareholders' equity | 371 | 355 | 157 | 154 | 146 | |||||||||||||||
| Operating Data: | ||||||||||||||||||||
| Total interest and dividend income | $ | 127 | $ | 116 | $ | 57 | $ | 55 | $ | 54 | ||||||||||
| Total interest expense | 36 | 24 | 12 | 10 | 10 | |||||||||||||||
| Net interest income | 91 | 92 | 45 | 45 | 44 | |||||||||||||||
| Non-interest income | 28 | 26 | 13 | 9 | 8 | |||||||||||||||
Net Revenue(2) | 119 | 118 | 58 | 54 | 52 | |||||||||||||||
| Provision for loan losses | 3 | 3 | 1 | 2 | 2 | |||||||||||||||
| Total non-interest expense | 75 | 72 | 36 | 31 | 29 | |||||||||||||||
Income tax expense(3) | 8 | 17 | 6 | 6 | 6 | |||||||||||||||
| Net income | 33 | 27 | 15 | 15 | 15 | |||||||||||||||
| Ratios and Other Data: | ||||||||||||||||||||
| Per Common Share Data | ||||||||||||||||||||
| Basic earnings | $ | 2.13 | $ | 1.71 | $ | 1.65 | $ | 1.69 | $ | 1.64 | ||||||||||
| Diluted earnings | 2.12 | 1.70 | 1.63 | 1.67 | 1.63 | |||||||||||||||
| Total book value | 23.87 | 22.96 | 17.19 | 17.10 | 16.40 | |||||||||||||||
| Dividends | 0.79 | 0.75 | 0.73 | 0.67 | 0.60 | |||||||||||||||
| Common stock price: | ||||||||||||||||||||
| High | 30.95 | 33.41 | 33.25 | 25.32 | 21.91 | |||||||||||||||
| Low | 21.25 | 25.09 | 19.69 | 19.31 | 16.01 | |||||||||||||||
| Close | 22.43 | 27.01 | 31.55 | 22.95 | 21.33 | |||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||
| Basic | 15,488 | 15,184 | 9,069 | 8,970 | 8,890 | |||||||||||||||
| Diluted | 15,564 | 15,290 | 9,143 | 9,090 | 8,964 | |||||||||||||||
| At or For the Years Ended December 31, | ||||||||||||||||||||
| (in millions, except ratios and per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Performance Ratios:(4) | ||||||||||||||||||||
| Return on assets | 0.93 | % | 0.75 | % | 0.89 | % | 0.98 | % | 1.03 | % | ||||||||||
| Return on equity | 9.22 | 7.41 | 9.21 | 10.01 | 10.69 | |||||||||||||||
| Interest rate spread | 2.68 | 2.99 | 2.86 | 3.09 | 3.23 | |||||||||||||||
| Net interest margin (fully taxable equivalent) | 2.87 | 3.10 | 2.96 | 3.19 | 3.33 | |||||||||||||||
| Dividend payout ratio | 36.99 | 44.26 | 44.04 | 39.86 | 36.69 | |||||||||||||||
| Growth Ratios: | ||||||||||||||||||||
| Total commercial loans | 1.41 | % | 23.83 | % | 9.24 | % | 11.21 | % | 0.04 | % | ||||||||||
| Total loans | 0.19 | 13.14 | 14.04 | 7.73 | 7.76 | |||||||||||||||
| Total deposits | 5.58 | 14.39 | 11.40 | 9.88 | 2.68 | |||||||||||||||
| Asset Quality and Condition Ratios: | ||||||||||||||||||||
| Non-performing loans/total loans | 0.73 | % | 0.58 | % | 0.58 | % | 0.71 | % | 1.34 | % | ||||||||||
| Net charge-offs/average loans | 0.05 | 0.04 | — | 0.14 | 0.15 | |||||||||||||||
Allowance for loan losses/total loans(5) | 0.56 | 0.50 | 0.92 | 0.95 | 0.98 | |||||||||||||||
| Loans/deposits | 100.28 | 105.68 | 107.50 | 105.02 | 107.11 | |||||||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Tier 1 capital to average assets - Company | 8.53 | % | 8.10 | % | 8.94 | % | 9.37 | % | 9.30 | % | ||||||||||
| Tier 1 capital to risk-weighted assets - Company | 12.68 | 12.19 | 15.01 | 15.55 | 15.60 | |||||||||||||||
| Tier 1 capital to average assets - Bank | 8.74 | 8.58 | 9.06 | 9.49 | 9.40 | |||||||||||||||
| Tier 1 capital to risk-weighted assets - Bank | 12.99 | 12.92 | 15.20 | 15.77 | 15.77 | |||||||||||||||
| Shareholders equity to total assets | 10.27 | 9.95 | 8.93 | 9.76 | 10.02 | |||||||||||||||
ITEM 6.
| 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||
| (in millions, except ratios) | Average Balance | Interest(3) | Average Yield/Rate (3) | Average Balance | Interest(3) | Average Yield/Rate (3) | Average Balance | Interest(3) | Average Yield/Rate (3) | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 829.5 | $ | 37.8 | 4.56 | % | $ | 774.4 | $ | 32.9 | 4.24 | % | $ | 410.7 | $ | 15.2 | 3.71 | % | |||||||||||||||
| Commercial and industrial | 389.7 | 17.8 | 4.57 | 336.7 | 15.9 | 4.73 | 138.5 | 5.6 | 4.03 | ||||||||||||||||||||||||
| Residential real estate | 1,132.8 | 43.6 | 3.85 | 1,158.6 | 43.9 | 3.79 | 450.6 | 18.3 | 4.06 | ||||||||||||||||||||||||
| Consumer | 118.4 | 5.6 | 4.73 | 126.8 | 5.5 | 4.34 | 54.9 | 2.8 | 5.10 | ||||||||||||||||||||||||
Total loans (1) | 2,470.5 | 104.8 | 4.24 | 2,396.5 | 98.2 | 4.10 | 1,054.7 | 41.9 | 3.97 | ||||||||||||||||||||||||
Securities and other (2) | 762.1 | 24.6 | 3.23 | 757.4 | 23.5 | 3.10 | 546.7 | 17.7 | 3.24 | ||||||||||||||||||||||||
| Total earning assets | 3,232.6 | 129.4 | 4.00 | % | 3,153.9 | 121.7 | 3.86 | % | 1,601.4 | 59.6 | 3.72 | % | |||||||||||||||||||||
| Cash and due from banks | 58.2 | 66.5 | 5.4 | ||||||||||||||||||||||||||||||
| Allowance for loan losses | (13.3 | ) | (11.5 | ) | (10.0 | ) | |||||||||||||||||||||||||||
| Goodwill and other intangible assets | 108.0 | 107.6 | 5.4 | ||||||||||||||||||||||||||||||
| Other assets | 139.5 | 147.5 | 74.7 | ||||||||||||||||||||||||||||||
| Total assets | $ | 3,525.0 | $ | 3,464.0 | $ | 1,676.9 | |||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||
| NOW deposits | $ | 456.6 | $ | 1.9 | 0.42 | % | $ | 455.1 | $ | 1.1 | 0.25 | % | $ | 161.5 | $ | 0.3 | 0.20 | % | |||||||||||||||
| Savings deposits | 354.5 | 0.6 | 0.17 | 367.8 | 0.6 | 0.16 | 72.7 | 0.1 | 0.09 | ||||||||||||||||||||||||
| Money market deposits | 281.3 | 2.2 | 0.78 | 300.9 | 1.5 | 0.49 | 240.2 | 1.0 | 0.40 | ||||||||||||||||||||||||
| Time deposits | 902.5 | 14.8 | 1.64 | 760.5 | 8.1 | 1.07 | 414.4 | 5.3 | 1.29 | ||||||||||||||||||||||||
| Total interest bearing deposits | 1,994.9 | 19.5 | 0.98 | 1,884.3 | 11.3 | 0.60 | 888.8 | 6.7 | 0.75 | ||||||||||||||||||||||||
| Borrowings | 790.3 | 17.0 | 2.16 | 862.5 | 12.6 | 1.46 | 524.9 | 5.4 | 1.03 | ||||||||||||||||||||||||
| Total interest bearing liabilities | 2,785.2 | 36.5 | 1.31 | % | 2,746.8 | 23.9 | 0.87 | % | 1,413.7 | 12.1 | 0.86 | % | |||||||||||||||||||||
| Non-interest bearing demand deposits | 354.5 | 339.3 | 93.8 | ||||||||||||||||||||||||||||||
| Other liabilities | 28.3 | 27.2 | 7.3 | ||||||||||||||||||||||||||||||
| Total liabilities | 3,167.9 | 3,113.3 | 1,514.8 | ||||||||||||||||||||||||||||||
| Total shareholders' equity | 357.1 | 350.7 | 162.1 | ||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 3,525.0 | $ | 3,464.0 | $ | 1,676.9 | |||||||||||||||||||||||||||
| Net interest income | $ | 92.9 | $ | 97.8 | $ | 47.5 | |||||||||||||||||||||||||||
| Net interest margin | 2.87 | % | 3.10 | % | 2.96 | % | |||||||||||||||||||||||||||
| Net interest spread | 2.68 | 2.99 | 2.86 | ||||||||||||||||||||||||||||||
[Reserved]
| 2018 Compared with 2017 | 2017 Compared with 2016 | |||||||||||||||||||||||
| Increases (Decreases) due to | Increases (Decreases) due to | |||||||||||||||||||||||
| (in thousands) | Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Commercial real estate | $ | 2,583 | $ | 2,295 | $ | 4,878 | $ | 2,444 | $ | 15,145 | $ | 17,589 | ||||||||||||
Commercial and industrial(1) | (644 | ) | 2,553 | 1,909 | 1,122 | 9,236 | 10,358 | |||||||||||||||||
| Residential | 655 | (961 | ) | (306 | ) | (1,135 | ) | 26,802 | 25,667 | |||||||||||||||
| Consumer | 616 | (486 | ) | 130 | (347 | ) | 3,050 | 2,703 | ||||||||||||||||
| Total loans | 3,210 | 3,401 | 6,611 | 2,084 | 54,233 | 56,317 | ||||||||||||||||||
| Securities | 818 | 323 | 1,141 | (701 | ) | 6,488 | 5,787 | |||||||||||||||||
| Total interest income | $ | 4,028 | $ | 3,724 | $ | 7,752 | $ | 1,383 | $ | 60,721 | $ | 62,104 | ||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| NOW | $ | 736 | $ | 4 | $ | 740 | $ | 99 | $ | 717 | $ | 816 | ||||||||||||
| Savings | 113 | (72 | ) | 41 | 82 | 426 | 508 | |||||||||||||||||
| Money market | 842 | (98 | ) | 744 | 243 | 274 | 517 | |||||||||||||||||
| Time deposits | 5,163 | 1,525 | 6,688 | (710 | ) | 3,477 | 2,767 | |||||||||||||||||
| Total deposits | 6,854 | 1,359 | 8,213 | (286 | ) | 4,894 | 4,608 | |||||||||||||||||
| Borrowings | 5,507 | (1,067 | ) | 4,440 | 2,830 | 4,363 | 7,193 | |||||||||||||||||
| Total interest expense | $ | 12,361 | $ | 292 | $ | 12,653 | $ | 2,544 | $ | 9,257 | $ | 11,801 | ||||||||||||
| Change in net interest income | $ | (8,333 | ) | $ | 3,432 | $ | (4,901 | ) | $ | (1,161 | ) | $ | 51,464 | $ | 50,303 | |||||||||
| At or For The Years Ended December 31, | ||||||||||||||
| (in thousands, except ratios) | 2018 | 2017 | 2016 | |||||||||||
| GAAP net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||||
| Plus (less): | ||||||||||||||
| Loss (gain) on sale of securities, net | 924 | (19 | ) | (4,498 | ) | |||||||||
| Loss on sale of premises and equipment, net | — | 94 | 248 | |||||||||||
| Loss on other real estate owned | 20 | — | — | |||||||||||
| Acquisition, conversion and other expenses | 1,728 | 3,302 | 2,650 | |||||||||||
Income tax (expense) benefit(1) | (635 | ) | (1,269 | ) | 560 | |||||||||
| Tax reform charge | — | 3,988 | — | |||||||||||
Total adjusted income(2) | (A) | $ | 34,974 | $ | 32,089 | $ | 13,893 | |||||||
| GAAP net interest income | (B) | $ | 90,883 | $ | 92,155 | $ | 45,374 | |||||||
| Plus: Non-interest income | 27,935 | 25,982 | 12,349 | |||||||||||
Total Revenue(2) | 118,818 | 118,137 | 57,723 | |||||||||||
| Plus (less): Loss (gain) on sale of securities, net | 924 | (19 | ) | (4,498 | ) | |||||||||
Total adjusted revenue(2) | (C) | $ | 119,742 | $ | 118,118 | $ | 53,225 | |||||||
| GAAP total non-interest expense | $ | 75,539 | $ | 72,726 | $ | 35,935 | ||||||||
| Less: Loss on sale of premises and equipment, net | — | (94 | ) | (248 | ) | |||||||||
| Less: Loss on other real estate owned | (20 | ) | — | — | ||||||||||
| Less: Acquisition, conversion and other expenses | (1,728 | ) | (3,302 | ) | (2,650 | ) | ||||||||
Adjusted non-interest expense(2) | (D) | $ | 73,791 | $ | 69,330 | $ | 33,037 | |||||||
| (in millions) | ||||||||||||||
| Average earning assets | (E) | $ | 3,238 | $ | 3,154 | $ | 1,601 | |||||||
| Average assets | (F) | 3,525 | 3,464 | 1,677 | ||||||||||
| Average shareholders' equity | (G) | 357 | 351 | 162 | ||||||||||
Average tangible shareholders' equity(2)(3) | (H) | 249 | 243 | 157 | ||||||||||
Tangible shareholders' equity, period-end(2)(3) | (I) | 263 | 246 | 151 | ||||||||||
Tangible assets, period-end(2)(3) | (J) | 3,501 | 3,457 | 1,750 | ||||||||||
| (in thousands) | ||||||||||||||
| Common shares outstanding, period-end | (K) | 15,523 | 15,443 | 9,116 | ||||||||||
| Average diluted shares outstanding | (L) | 15,564 | 15,290 | 9,143 | ||||||||||
Adjusted earnings per share, diluted(2) | (A/L) | $ | 2.25 | $ | 2.10 | $ | 1.52 | |||||||
Tangible book value per share, period-end(2) | (I/K) | 16.94 | 15.94 | 16.61 | ||||||||||
Securities adjustment, net of tax(2)(4) | (M) | (8,663 | ) | 1,711 | (2,125 | ) | ||||||||
Tangible book value per share, excluding securities adjustment(2)(4) | (I+M)/K | 17.50 | 15.83 | 16.84 | ||||||||||
Tangible shareholders' equity/tangible assets(2) | (I/J) | 7.51 | 7.12 | 8.65 | ||||||||||
| At or For The Years Ended December 31, | ||||||||||||||
| (in thousands, except ratios) | 2018 | 2017 | 2016 | |||||||||||
| Performance ratios | ||||||||||||||
| GAAP return on assets | 0.93 | % | 0.75 | % | 0.89 | % | ||||||||
Adjusted return on assets(2) | (A/F) | 0.99 | 0.93 | 0.83 | ||||||||||
| GAAP return on equity | 9.22 | 7.41 | 9.21 | |||||||||||
Adjusted return on equity(2) | (A/G) | 9.79 | 9.15 | 8.57 | ||||||||||
Adjusted return on tangible equity(2)(3)(5) | (A/H) | 14.29 | 13.40 | 8.90 | ||||||||||
Efficiency ratio(2)(6) | (D-O-Q)/(C+N) | 59.27 | 55.44 | 58.90 | ||||||||||
Net interest margin(2) | (B+P)/E | 2.87 | 3.10 | 2.96 | ||||||||||
Supplementary data (in thousands) | ||||||||||||||
| Taxable equivalent adjustment for efficiency ratio | (N) | $ | 2,554 | $ | 4,391 | $ | 2,470 | |||||||
| Franchise taxes included in non-interest expense | (O) | 479 | 599 | 140 | ||||||||||
| Tax equivalent adjustment for net interest margin | (P) | 1,986 | 5,615 | 2,093 | ||||||||||
| Intangible amortization | (Q) | 828 | 812 | 92 | ||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management��s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysisinformation in this section should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying notesNotes contained in this Annual Reportreport.
SELECTED FINANCIAL DATA
| | | | | | | | | |
| | At or For the Years Ended December 31, | |||||||
(in millions, except ratios and share data) |
| 2021 |
| 2020 |
| 2019 | |||
Financial Condition Data: | | | | | | | | | |
Total assets(7) | | $ | 3,709 | | $ | 3,724 | | $ | 3,669 |
Total earning assets(1) | |
| 3,377 | |
| 3,371 | |
| 3,349 |
Total investments | |
| 626 | |
| 599 | |
| 684 |
Total loans | |
| 2,532 | |
| 2,563 | |
| 2,635 |
Allowance for credit losses | |
| 23 | |
| 19 | |
| 15 |
Total goodwill and intangible assets | |
| 126 | |
| 127 | |
| 127 |
Total deposits | |
| 3,049 | |
| 2,906 | |
| 2,696 |
Total borrowings | |
| 179 | |
| 336 | |
| 531 |
Total shareholders' equity(7) | |
| 424 | |
| 407 | |
| 396 |
| | | | | | | | | |
Operating Data: | |
|
| |
|
| |
|
|
Total interest and dividend income | | $ | 111 | | $ | 126 | | $ | 135 |
Total interest expense | |
| 15 | |
| 27 | |
| 46 |
Net interest income | |
| 96 | |
| 99 | |
| 90 |
Non-interest income | |
| 42 | |
| 43 | |
| 29 |
Net revenue(2) | |
| 138 | |
| 142 | |
| 119 |
Provision for credit losses | |
| (1) | |
| 6 | |
| 2 |
Total non-interest expense | |
| 91 | |
| 95 | |
| 90 |
Income tax expense(3) | |
| 9 | |
| 8 | |
| 4 |
Net income | |
| 39 | |
| 33 | |
| 23 |
| | | | | | | | | |
Ratios and Other Data: | |
|
| |
|
| |
|
|
Per Common Share Data | |
|
| |
|
| |
|
|
Basic earnings | | $ | 2.63 | | $ | 2.18 | | $ | 1.46 |
Diluted earnings | |
| 2.61 | |
| 2.18 | |
| 1.45 |
Total book value(6) | |
| 28.27 | |
| 27.29 | |
| 25.47 |
Dividends | |
| 0.94 | |
| 0.88 | |
| 0.86 |
Common stock price: | |
|
| |
|
| |
|
|
High | |
| 32.94 | |
| 25.55 | |
| 27.58 |
Low | |
| 21.26 | |
| 13.05 | |
| 21.24 |
Close | |
| 28.93 | |
| 22.59 | |
| 25.39 |
| | | | | | | | | |
Weighted average common shares outstanding (in thousands): | |
|
| |
|
| |
|
|
Basic | |
| 14,969 | |
| 15,246 | |
| 15,541 |
Diluted | |
| 15,045 | |
| 15,272 | |
| 15,587 |
30
| | | | | | | |
| | At or For the Years Ended December 31, |
| ||||
(in millions, except ratios and share data) |
| 2021 |
| 2020 |
| 2019 |
|
Performance Ratios:(4) | | | | | | | |
Return on assets |
| 1.06 | % | 0.88 | % | 0.62 | % |
Return on equity(6) |
| 9.50 |
| 8.29 |
| 5.82 | |
Interest rate spread |
| 2.74 |
| 2.92 |
| 2.53 | |
Net interest margin(5) |
| 2.88 |
| 2.97 |
| 2.77 | |
Dividend payout ratio |
| 35.81 |
| 40.36 |
| 59.09 | |
| | | | | | | |
Organic Growth Ratios: |
|
|
|
|
|
| |
Total commercial loans |
| 7 | % | 17 | % | 6 | % |
Total loans |
| (1) |
| (3) |
| 2 | |
Total deposits |
| 5 |
| 8 |
| (2) | |
| | | | | | | |
Asset Quality and Condition Ratios: |
|
|
|
|
|
| |
Non-accruing loans/total loans |
| 0.40 | % | 0.48 | % | 0.44 | % |
Net charge-offs/average loans |
| 0.01 |
| 0.07 |
| 0.03 | |
Allowance for credit losses/total loans |
| 0.90 |
| 0.74 |
| 0.58 | |
Loans/deposits |
| 83 |
| 88 |
| 98 | |
| | | | | | | |
Capital Ratios: |
|
|
|
|
|
| |
Tier 1 capital to average assets - Company |
| 8.66 | % | 8.12 | % | 8.13 | % |
Tier 1 capital to risk-weighted assets - Company |
| 11.90 |
| 11.28 |
| 11.39 | |
Tier 1 capital to average assets - Bank |
| 9.62 |
| 9.02 |
| 8.39 | |
Tier 1 capital to risk-weighted assets - Bank |
| 13.22 |
| 12.52 |
| 11.79 | |
Shareholders equity to total assets(6) |
| 11.43 |
| 11.04 |
| 10.80 | |
| (1) | Earning assets includes non-accruing loans and interest-bearing deposits with other banks. Securities are valued at amortized cost. |
| (2) | Net revenue is defined as net interest income plus non-interest income. |
| (3) | In December 2017, the Tax Cuts and Jobs Act of 2017 was enacted, and the Company recognized a $4.0 million write-down of its deferred tax assets and liabilities upon revaluation using the lower federal corporate income tax rate of 21.0% |
| (4) | All performance ratios are based on average balance sheet amounts, where applicable. |
| (5) | Fully taxable equivalent considers the impact of tax advantaged securities and loans. |
| (6) | Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures for additional information. |
| (7) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
31
AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and average rates and yields on Form 10-K.a fully taxable equivalent basis for the periods included:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |||||||||||||||||||||||||
| | 2021 | | 2020 |
| | 2019 | | |||||||||||||||||||
| | Average | | Interest | | Yield/ | | Average | | Interest | | Yield/ | | Average | | Interest | | Yield/ | |||||||||
(in millions, except ratios) |
| Balance |
| (3) |
| Rate(3) | | Balance |
| (3) |
| Rate(3) |
| Balance |
| (3) |
| Rate(3) | |||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning deposits with other banks | | $ | 219 | | $ | — | | 0.15 | % | | $ | 89 | | $ | — | | 0.15 | % | | $ | 17 | | $ | — | | 0.96 | % |
Securities available for sale and FHLB stock(2)(3) | | | 621 | | | 16 | | 2.63 | | | | 625 | | | 20 | | 3.20 | | | | 743 | | | 25 | | 3.42 | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 1,210 | | | 40 |
| 3.34 | | | | 993 | | | 40 |
| 4.02 | | | | 875 | | | 42 |
| 4.74 | |
Commercial and industrial(3) | |
| 348 | |
| 14 |
| 3.98 | | |
| 379 | |
| 21 |
| 5.62 | | |
| 411 | |
| 19 |
| 4.72 | |
Paycheck protection program | | | 51 | | | 6 | | 11.93 | | | | 109 | | | 5 | | 4.19 | | | | — | | | — | | — | |
Residential | |
| 825 | |
| 32 |
| 3.86 | | |
| 1,078 | |
| 41 |
| 3.78 | | |
| 1,158 | |
| 45 |
| 3.91 | |
Consumer | |
| 99 | |
| 4 |
| 3.77 | | |
| 124 | |
| 5 |
| 4.03 | | |
| 116 | |
| 6 |
| 5.10 | |
Total loans (1) | |
| 2,533 | |
| 96 |
| 3.78 | | |
| 2,683 | |
| 112 |
| 4.16 | | |
| 2,560 | |
| 112 |
| 4.38 | |
Total earning assets | |
| 3,373 | |
| 112 |
| 3.33 | % | |
| 3,397 | |
| 132 |
| 3.87 | % | |
| 3,320 | |
| 137 |
| 4.14 | % |
Cash and due from banks | | | 35 | | | | | | | | | 27 | | | | | | | | | 64 | | | | | | |
Allowance for credit losses | | | (23) | | | | | | | | | (17) | | | | | | | | | (15) | | | | | | |
Other assets(5) | |
| 333 | | | |
|
| | |
| 351 | | | |
|
| | |
| 277 | | | |
|
| |
Total assets(5) | | $ | 3,718 | | | |
|
| | | $ | 3,758 | | | |
|
| | | $ | 3,646 | | | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | |
|
| |
|
|
|
| | |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
NOW | | $ | 949 | | $ | 1 |
| 0.11 | % | | $ | 643 | | $ | 1 |
| 0.20 | % | | $ | 492 | | $ | 2 |
| 0.49 | % |
Savings | |
| 629 | |
| 1 |
| 0.09 | | |
| 467 | |
| 1 |
| 0.16 | | |
| 359 | |
| 1 |
| 0.19 | |
Money market | |
| 390 | |
| 1 |
| 0.12 | | |
| 396 | |
| 2 |
| 0.42 | | |
| 348 | |
| 5 |
| 1.32 | |
Time deposits | |
| 425 | |
| 6 |
| 1.51 | | |
| 796 | |
| 14 |
| 1.80 | | |
| 924 | |
| 19 |
| 2.09 | |
Total interest bearing deposits | |
| 2,393 | |
| 9 |
| 0.36 | | |
| 2,302 | |
| 18 |
| 0.78 | | |
| 2,123 | |
| 27 |
| 1.27 | |
Borrowings | |
| 175 | |
| 7 |
| 3.82 | | |
| 507 | |
| 9 |
| 1.75 | | |
| 708 | |
| 19 |
| 2.61 | |
Total interest bearing liabilities | |
| 2,568 | |
| 16 |
| 0.59 | % | |
| 2,809 | |
| 27 |
| 0.96 | % | |
| 2,831 | |
| 46 |
| 1.61 | % |
Non-interest bearing demand deposits | |
| 668 | |
|
|
|
| | |
| 481 | |
|
|
|
| | |
| 394 | |
|
|
|
| |
Other liabilities(5) | |
| 68 | |
|
|
|
| | |
| 67 | |
|
|
|
| | |
| 34 | |
|
|
|
| |
Total liabilities(5) | |
| 3,304 | |
|
|
|
| | |
| 3,357 | |
|
|
|
| | |
| 3,259 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total shareholders' equity(5) | |
| 414 | |
|
|
|
| | |
| 401 | |
|
|
|
| | |
| 387 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity(5) | | $ | 3,718 | |
|
|
|
| | | $ | 3,758 | |
|
|
|
| | | $ | 3,646 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | |
|
| | $ | 96 |
| | | |
|
| | $ | 105 |
| | | |
|
| | $ | 91 |
| | |
Net interest spread | | | | | | | | 2.74 | % | | | | | | | | 2.91 | % | | | | | | | | 2.53 | % |
Net interest margin | |
|
| |
|
|
| 2.88 | | |
|
| |
|
|
| 2.97 | | |
|
| |
|
|
| 2.77 | |
Adjusted net interest margin(4) | | | | | | | | 2.93 | | | | | | | | | 3.01 | | | | | | | | | 2.77 | |
32
| (1) | The average balances of loans include non-accrual loans and unamortized deferred fees and costs. |
| (2) | The average balance for securities is based on amortized cost. |
| (3) | Fully taxable equivalent considers the impact of tax-advantaged securities and loans. |
| (4) | Adjusted net interest margin excludes Paycheck Protection Program loans and interest-earning deposits with other banks. |
| (5) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
33
RATE/VOLUME ANALYSIS
The Company’s significant accounting policies are describedfollowing table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest- earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in Note 1 - Summary of Significant Accounting Policiesrate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the Consolidated Financial Statementschange due to the rate and the change due to volume.
| | | | | | | | | | | | | | | | | | |
| | 2021 Compared with 2020 | | 2020 Compared with 2019 | ||||||||||||||
| | Increases (Decreases) due to | | Increases (Decreases) due to | ||||||||||||||
(in thousands) |
| Rate |
| Volume |
| Net |
| Rate |
| Volume |
| Net | ||||||
Interest income: | | | | | | | | | | | | | | | | | | |
Interest-earning deposits with other banks | | $ | 11 | | $ | 191 | | $ | 202 | | $ | (246) | | $ | 305 | | $ | 59 |
Securities available for sale and FHLB stock | | | (3,560) | | | (139) | | | (3,699) | | | (1,305) | | | (4,031) | | | (5,336) |
Loans: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | (8,244) | | | 8,748 | | | 504 | | | (7,140) | | | 5,544 | | | (1,596) |
Commercial and industrial | |
| (5,712) | |
| (1,752) | |
| (7,464) | |
| 4,694 | |
| (1,388) | |
| 3,306 |
Paycheck protection program | | | 3,919 | | | (2,450) | | | 1,469 | | | — | | | 4,569 | | | 4,569 |
Residential | |
| 647 | |
| (9,566) | |
| (8,919) | |
| (1,407) | |
| (3,107) | |
| (4,514) |
Consumer | |
| (263) | |
| (1,011) | |
| (1,274) | |
| (1,320) | |
| 426 | |
| (894) |
Total loans | |
| (9,653) | |
| (6,031) | |
| (15,684) | |
| (5,173) | |
| 6,044 | |
| 871 |
Total interest income | | $ | (13,202) | | $ | (5,979) | | $ | (19,181) | | $ | (6,724) | | $ | 2,318 | | $ | (4,406) |
| | | | | | | | | | | | | | | | | | |
Interest expense: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Deposits: | | | | | | | | | | | | | | | | | | |
NOW | | $ | (842) | | $ | 617 | | $ | (225) | | $ | (1,807) | | $ | 731 | | $ | (1,076) |
Savings | |
| (452) | |
| 262 | |
| (190) | |
| (200) | |
| 219 | |
| 19 |
Money market | |
| (1,148) | |
| (23) | |
| (1,171) | |
| (3,631) | |
| 635 | |
| (2,996) |
Time deposits | |
| (1,230) | |
| (6,685) | |
| (7,915) | |
| (2,253) | |
| (2,682) | |
| (4,935) |
Total deposits | |
| (3,672) | |
| (5,829) | |
| (9,501) | |
| (7,891) | |
| (1,097) | |
| (8,988) |
Borrowings | |
| 3,619 | |
| (5,812) | |
| (2,193) | |
| (4,397) | |
| (5,269) | |
| (9,666) |
Total interest expense | | $ | (53) | | $ | (11,641) | | $ | (11,694) | | $ | (12,288) | | $ | (6,366) | | $ | (18,654) |
Change in net interest income | | $ | (13,149) | | $ | 5,662 | | $ | (7,487) | | $ | 5,564 | | $ | 8,684 | | $ | 14,248 |
34
NON-GAAP FINANCIAL MEASURES
This document contains certain non-GAAP financial measures in this Annual Report on Form 10-K. Please see those policiesaddition to results presented in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformityaccordance with accounting principles generally accepted in the United States requiresof America ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non- GAAP adjusted earnings can be of substantial importance to make estimatesthe Company’s results for any particular quarter or year. The Company’s non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company’s GAAP financial information.
The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and assumptionsexpense. These measures exclude amounts that affect the Company views as unrelated to its normalized operations, including gains/losses on securities, premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. Non-GAAP adjustments are presented net of an adjustment for income tax expense.
The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts reportedas important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company’s performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial statementsservices industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.
35
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items for the time periods presented:
| | | | | | | | | | | |
| | | | At or For The Years Ended December 31, | |||||||
(in thousands) |
| Calculations |
| | 2021 |
| | 2020 |
| | 2019 |
Net income |
|
| | $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
Non-recurring items: | | | | | | | | | | | |
Gain on sale of securities, net |
|
| |
| (2,870) | |
| (5,445) | |
| (237) |
Loss (gain) on sale of premises and equipment, net |
|
| |
| 378 | |
| (32) | |
| 18 |
Loss on other real estate owned |
|
| |
| — | |
| 355 | |
| 166 |
Loss on debt extinguishment | | | | | 2,851 | | | 1,351 | | | 1,096 |
Acquisition, conversion and other expenses |
|
| |
| 1,667 | |
| 5,801 | |
| 8,317 |
Income tax expense (1) |
|
| |
| (479) | |
| (481) | |
| (2,232) |
Total non-recurring items | | | | | 1,547 | | | 1,549 | | | 7,128 |
Total adjusted income(2) |
| (A) | | $ | 40,846 | | $ | 34,793 | | $ | 29,748 |
| | | | | | | | | | | |
Net interest income |
| (B) | | $ | 95,573 | | $ | 99,180 | | $ | 89,810 |
Plus: Non-interest income |
|
| |
| 42,261 | |
| 42,956 | |
| 29,069 |
Total Revenue |
| �� | |
| 137,834 | |
| 142,136 | |
| 118,879 |
Gain on sale of securities, net |
|
| |
| (2,870) | |
| (5,445) | |
| (237) |
Total adjusted revenue(2) |
| (C) | | $ | 134,964 | | $ | 136,691 | | $ | 118,642 |
| | | | | | | | | | | |
Total non-interest expense |
|
| | $ | 90,508 | | $ | 94,860 | | $ | 89,733 |
Non-recurring expenses: | | | | | | | | | | | |
(Loss) gain on sale of premises and equipment, net |
|
| |
| (378) | |
| 32 | |
| (18) |
Loss on other real estate owned |
|
| |
| — | |
| (355) | |
| (166) |
Loss on debt extinguishment | | | | | (2,851) | | | (1,351) | | | (1,096) |
Acquisition, conversion and other expenses |
|
| |
| (1,667) | |
| (5,801) | |
| (8,317) |
Total non-recurring expenses | | | | | (4,896) | | | (7,475) | | | (9,597) |
Adjusted non-interest expense(2) |
| (D) | | $ | 85,612 | | $ | 87,385 | | $ | 80,136 |
| | | | | | | | | | | |
Total revenue | | | | | 137,834 | | | 142,136 | | | 118,879 |
Total non-interest expense | | | | | 90,508 | | | 94,860 | | | 89,733 |
Pre-tax, pre-provision net revenue | | | | $ | 47,326 | | $ | 47,276 | | $ | 29,146 |
| | | | | | | | | | | |
Adjusted revenue(2) | | | | | 134,964 | | | 136,691 | | | 118,642 |
Adjusted non-interest expense(2) | | | | | 85,612 | | | 87,385 | | | 80,136 |
Adjusted pre-tax, pre-provision net revenue(2) | | | | $ | 49,352 | | $ | 49,306 | | $ | 38,506 |
| | | | | | | | | | | |
(in millions) |
|
| |
|
| |
|
| |
|
|
Average earning assets |
| (E) | | $ | 3,373 | | $ | 3,397 | | $ | 3,320 |
Average paycheck protection program (PPP) loans | | (R) | | | 51 | | | 109 | | | — |
Average interest-bearing deposits with other banks | | (U) | | | 219 | | | 89 | | | 17 |
Average earning assets, excluding PPP loans and interest-earning deposits with other banks | | (S) | | | 3,103 | | | 3,199 | | | 3,303 |
Average assets(8) |
| (F) | |
| 3,718 | |
| 3,758 | |
| 3,646 |
Average shareholders' equity(8) |
| (G) | |
| 414 | |
| 401 | |
| 387 |
Average tangible shareholders' equity(2)(3)(8) |
| (H) | |
| 288 | |
| 273 | |
| 278 |
Tangible shareholders' equity, period-end(2)(3)(8) |
| (I) | |
| 298 | |
| 284 | |
| 269 |
Tangible assets, period-end(2)(3)(8) |
| (J) | |
| 3,583 | |
| 3,598 | |
| 3,542 |
| | | | | | | | | | | |
36
| | | | | | | | | | | | |
| | | | At or For The Years Ended December 31, | | |||||||
| | Calculations |
| | 2021 |
| | 2020 |
| | 2019 | |
(in thousands) |
|
| | | | | | | | | | |
Common shares outstanding, period-end |
| (K) | | | 15,001 | | | 14,916 | | | 15,558 | |
Average diluted shares outstanding |
| (L) | | | 15,045 | | | 15,272 | | | 15,587 | |
| | | | | | | | | | | | |
Adjusted earnings per share, diluted(2) |
| (A/L) | | $ | 2.72 | | $ | 2.28 | | $ | 1.91 | |
Tangible book value per share, period-end(2)(8) |
| (I/K) | | | 19.86 | | | 18.77 | | | 17.30 | |
Securities adjustment, net of tax(1)(4) |
| (M) | | | 1,985 | | | 10,023 | | | 5,549 | |
Tangible book value per share, excluding securities adjustment(2)(4)(8) |
| (I+M)/K | | | 19.73 | | | 18.09 | | | 16.94 | |
Total tangible shareholders' equity/total tangible assets(2)(8) |
| (I/J) | | | 8.32 | | | 7.78 | | | 7.60 | |
| | | | | | | | | | | | |
Performance ratios(5) | | | | | | | | | | | | |
Return on assets | |
| | | 1.06 | % | | 0.88 | % | | 0.62 | % |
Adjusted return on assets(2) | | (A/F) | | | 1.10 | | | 0.93 | | | 0.82 | |
Pre-tax, pre-provision return on assets | | | | | 1.27 | | | 1.26 | | | 0.80 | |
Adjusted pre-tax, pre-provision return on assets (2) | | (U/F) | | | 1.33 | | | 1.31 | | | 1.06 | |
Return on equity(8) | |
| | | 9.50 | | | 8.29 | | | 5.82 | |
Adjusted return on equity(2)(8) | | (A/G) | | | 9.87 | | | 8.68 | | | 7.65 | |
Return on tangible equity(8) | | | | | 13.92 | | | 12.45 | | | 8.32 | |
Adjusted return on tangible equity(1)(2)(8) | | (A+Q)/H | | | 14.46 | | | 13.02 | | | 10.86 | |
Efficiency ratio(2)(6) | | (D-O-Q)/(C+N) | | | 61.29 | | | 61.71 | | | 64.95 | |
Net interest margin | | (B+P)/E | | | 2.88 | | | 2.97 | | | 2.77 | |
Adjusted net interest margin(2)(7) | | (B+P-T-V)/S | | | 2.93 | | | 3.01 | | | 2.77 | |
| | | | | | | | | | | | |
Supplementary data (in thousands) | |
| | |
| | |
| | |
| |
Taxable equivalent adjustment for efficiency ratio | | (N) | | $ | 2,330 | | $ | 2,477 | | $ | 2,692 | |
Franchise taxes included in non-interest expense | | (O) | | | 528 | | | 477 | | | 469 | |
Tax equivalent adjustment for net interest margin | | (P) | | | 1,653 | | | 1,853 | | | 2,048 | |
Intangible amortization | | (Q) | | | 940 | | | 1,024 | | | 861 | |
Interest and fees on PPP loans | | (T) | | | 6,039 | | | 4,569 | | | — | |
Interest and fees on interest-earning deposits with other banks | | (V) | | | 333 | | | 131 | | | — | |
| (1) | Assumes a marginal tax rate of 23.71% in 2021 and 2020, 23.87% in 2019. |
| (2) | Non-GAAP financial measure. |
| (3) | Tangible shareholders’ equity is computed by taking total shareholders’ equity less the intangible assets at period-end. Tangible assets is computed by taking total assets less the intangible assets at period-end. |
| (4) | Securities adjustment, net of tax represents the total unrealized gain on securities recorded on the Company’s consolidated balance sheets within total common shareholders’ equity. |
| (5) | All performance ratios are based on average balance sheet amounts, where applicable. |
| (6) | Efficiency ratio is computed by using adjusted non-interest expense net of franchise taxes and intangible amortization divided by adjusted revenue tax effected for tax-advantaged assets using a marginal tax rate of 23.71% in 2021 and 2020, and 23.87% in 2019. |
| (7) | Adjusted net interest margin excludes Paycheck Protection Program loans and interest-earning deposits with other banks. |
| (8) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
37
EXECUTIVE OVERVIEW
Bar Harbor Bankshares recorded 2021 net income of $39 million, or $2.61 per diluted share, compared to $33 million, or $2.18 per diluted share, in 2020. Adjusted income (non-GAAP measure) in 2021 was $41 million, or $2.72 per diluted share, and accompanying notes. While$35 million, or $2.28 per diluted share, for the same period of 2020. The Company’s return on assets ratio was 1.06% for 2021, up from 0.88% in the prior year.
Net interest margin (NIM) was 2.88% for 2021 compared with 2.97% in 2020. Excluding the effects of PPP fee acceleration, excess cash, and one-time items, adjusted NIM was 2.93% in 2021 compared to 3.01% in 2020. At year-end 2021, the Company estimateshad approximately $200 thousand of remaining PPP deferred fees which are based on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
In 2021, the Company prepaid $159 million of FHLB borrowings and sold $63 million of securities to offset prepayment penalties, which were replaced with relatively short-lived securities with an average duration of approximately 4 years. The transactions took place in the second half of 2021 and the net result is expected to be fully accretive to NIM and earnings per share starting in 2022.
Non-maturity deposits increased 19% during 2021 due to a significant amount of accounts were opened as new relationships were built and relationships with existing customers deepened. Wholesale funding has decreased to 4% of total funding, down from 18% at an appropriate market rateyear-end 2020. Non-maturity deposit reliance continues to expand, funding earning asset growth with a much more stabilized cost if rates do go up. At year-end 2021, $114 million of interest. wholesale funding remains, which represent longer durations or have associated hedges.
The Company continues to reevaluate reasonableness of expectations forfocus on profitability and fee-based revenue remains a priority. The growth seen during this past year has contributed to the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral-dependent loans with deteriorated credit quality, the Company estimates the fair valueexpansion of the underlying collateral. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.
Commercial real estate loans in 2017, while adjusted return on assets (non-GAAP measure) improved to 0.99%2021 grew 12% over the prior year driven by a balanced mix of new and existing customers that are proven operators and are strong relationships of the Bank. Similarly, the growth in 2018commercial and industrial loans of 5%, excluding paycheck protection program (PPP) loans, came from 0.93% in 2017. Innew and existing customers and represented a similar trend, return on equity was 9.22%variety of industries. Looking forward, the Company’s loan pipelines remain robust and it is seeing momentum continuing into the first quarter of 2022.
The Company adopted CECL effective January 1, 2021, which increased the allowance for 2018 compared to 7.41% in 2017credit losses (ACL) by $5.2 million and adjusted return on equity (non-GAAP measure) improved to 9.79% in 2018 from 9.15% in 2017. Credit quality remains strong with areserve for unfunded commitments by $1.6 million. Upon adoption, the coverage ratio of net charge-offsACL to averagetotal loans increased to 0.94% from 0.76% in the fourth quarter of 0.05%2020, excluding PPP loans. The provision for credit losses for 2021 was a credit of $1.3 million compared with expense of $5.6 million in 2018 compared to 0.04%2020. Steady improvements in 2017.
The Company continues to diligently explore various balance sheet strategiesbuild long term shareholder value while providing a favorable dividend rate relative to efficiently use capitalother community banks. The Company’s return on equity for 2021 rose to 9.50% from 8.29% in 2020. Credit metrics remained strong and enhance shareholder returns.stable throughout 2021. Non-performing loans continue to decline across all categories on a quarterly and year-over- year basis. There was also noteworthy reduction of criticized loans, down to 3% from 4% at year-end 2020. Moving into 2022, all of these trends are positive and are expected to continue based on the Company’s credit discipline.
38
In early 2021, the Company performed an intensive review of non-interest expense leveraging a strategic third-party partner. The goal of the review was to commercialidentify normalized expense run-rates that are optimal for the Company’s current size and industrial loans which grew at a rate of 5.4%. Deposits were $2.5 billion at the end of 2018, increasing 5.6% from 2017 withfootprint, and establish sustainable run-rates that allow for revenue growth in about equal partsthe future. Results of non-maturitythe study reduced salary and time deposits.
The Company continued to build shareholder value in 2018 with strong risk-based capital ratioswas named by Newsweek Magazine as one of "America's Best Banks." Best Bank winners were selected from over 2,500 financial institutions and increasing tangible book value per share excluding security adjustments (non-GAAP measure) by 11% to $17.50 per share. The Company increased dividends to $0.79 per share in 2018 from $0.75 per share in 2017.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 20182021 AND 2017
Cash and cash equivalents
Total cash and cash equivalents at the Company utilizes fundingend of 2021 were $250 million, compared to $226 million at December 31, 2020. Interest-earning cash held with other banks totaled $217 million compared to $198 million at year-end 2020 carrying a yield of 0.15% in both periods. The increase in cash balances reflects the growth in non-maturity deposits.
Securities
Securities totaled $626 million at the end of 2021 and capital resources within well-defined credit, investment, interest rate,$599 million at year-end 2020 representing 17% and liquidity risk guidelines. Loans16% of total assets, respectively. During 2021 security purchases totaled $250 million and investment securities are the Company’s primary earning assets with additional capacity invested in money market instruments. Net interest income from these products is the Company’s primary source of revenue. Funding of the Company’s earning assets is achieved through its management of liabilities, attempting to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. The Company’s objective is to optimize its balance sheet position and to enhance profitability through strategies promising sufficient reward for understood and controlled risk. The Company believes it maintains adequate liquidity under both prevailing and forecasted economic conditions, with an efficient and appropriate mix of core deposits, brokered deposits, and borrowed funds.
Loans
In 2021 total loans decreased by $31 million from year-end 2020. The decrease was the portfolio at December 31, 2017.
Allowance for LoanCredit Losses
The cash surrender value of the BOLI is included on the Company’s consolidated balance sheet.
Net charge-offs totaled $290 thousand in 2021, down from $1.9 million, or 0.07% of total average loans in 2020. Non-accruing loans improved to $10.2 million, or 0.40% of total loans at the end of 2021 from $12.2 million or 0.48% of total loans at year-end 2020. The allowance credit losses to total loans ratio was 0.90% at the end of 2021 compared to 0.74% at year-end 2021. The ratio of allowance for credit losses to non-accrual loans increased to 223% from 157% at year-end 2020. Increases in both credit quality ratios is primarily the result of $14.0the CECL implementation at the beginning of 2021 offset by improvement in economic forecasts throughout the year.
39
Other Assets
Total other assets were $318 million at the end of 2021 compared to $331 million as of December 31, 2020. The decrease is primarily from a $15 million decrease in the fair value in customer loan and municipal security derivatives offset by $2.2 million increase in community limited partnership investments. Additionally, derivative balances and deferred taxes have been restated for prior periods as described in Note 1– Summary of Significant Accounting policies.
Deposits and Borrowings
Total deposits were $3.0 billion at the end of 2021 compared to $2.9 billion at year-end 2020. Non-maturity deposits increased $415 million in purchases2021, or 19% due to growth in new accounts with over 4,884 new customer relationships added. Growth in non-maturity deposits in 2021 and the prepayment of new policies$159 million in FHLB borrowings resulted in a reduction of wholesale funding as a percentage of total funding to 4% from 18% at year-end 2020. Time deposits decreased $273 million to $426 million at year-end 2021 as $178 million of brokered deposits matured in of 2021 and were not replaced due to excess liquidity. Retail time deposits decreased $63.1 million as customers moved funds to transactional accounts upon contractual maturity. Total borrowings decreased by $157 million primarily from the aforementioned delever strategy.
Derivative Financial Instruments and Other Liabilities
The notional balance of derivative financial instruments increased to $944 million at year end 2021 from $877 million in the second halfprior year. The increase is principally due to a $50.0 million new hedge on variable rate loans tied to one-month LIBOR. The net fair value of 2018.
Other liabilities totaled $58 million at the end of 2021 compared to $75 million as of December 31, 2020. The decrease primarily reflects a $12 million increase in the wintercustomer loan derivatives and spring months anda $2.5 million wholesale hedge valuations on higher deposits in the summer and autumn months.
Equity
Total equity was $424 million, compared with growth$407 million at year-end 2020. The Company’s book value per share was $28.27 as of $131 million. Core deposits remain the primary funding source for loan growthDecember 31, 2021 compared with FHLB borrowings supplementing funding needs. Deposit growth for 2018 was 5.6% with non-maturity deposits growing 4.4%. Excluding the impact of acquired balances, total deposits increased 14.4% in 2017. Non-maturity deposits saw the largest growth in non-interest bearing demand deposits and interest bearing money market deposits of 6.3% and 10.0% respectively. The Company improved its loan-to-deposit ratio to 100%$27.29 at December 31, 2018 from 106%2020. Equity included net unrealized gains on securities, derivative and pension revaluations, net of tax, and totaling $2.3 million at December 31, 2017, which helpedthe end of 2021 compared to mitigate the overall rising cost of funds.
During 2021 and 2020, the Company declared and distributed regular cash dividends on its common stock in the aggregate amounts of $14 million and $13 million, respectively. The Company’s 2021 dividend payout ratio amounted to 36%, compared with 40% in 2020. Total cash dividends paid in 2021 was $16.94 at year end 2018$0.94 per common share of stock, compared with $0.88 in 2020.
On April 20, 2021, the Company’s Board of Directors authorized a share repurchase plan (the “Plan”). Under the terms of the Plan, the Company is authorized to $15.94 at year end 2017. Lower long-term rates had a positive impactrepurchase up to 5% of its outstanding common stock, representing approximately 747,000 shares. The Plan is authorized for twelve months expiring on March 31, 2022 and authorized based on the fair value adjustment tostrength of the Company’s securities portfolio recordedbalance sheet and capital position, and the Company’s belief in accumulated other comprehensive income. Excluding the impactintrinsic value of security fair value adjustments, tangible book value per share (non-GAAP measure) was $17.50the Company’s common stock. Given the current market for 2018, comparedbank stock prices, the Company believes this program is another tool to $15.83 in 2017, representing a 11% increase.enhance long-term shareholder value.
40
The Company and the Bank remained well-capitalized under regulatory guidelines at period end as further described in Note 13 -12 – Shareholders’ Equity and Earnings Per Common Shareon the Consolidated Financial Statements.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 20182021 AND 2017
Net Interest Income
Net interest income for 2021 was $96 million compared with $99 million in 2020. The net interest margin was 2.88% in 2021 compared to 2.97% in the prior year. The 2021 adjusted net interest margin (non-GAAP measure), which excludes PPP loans and excess cash was 2.93% compared to 3.01% for 2020. Acceleration of PPP loan fee amortization due to forgiveness contributed 14 basis points to NIM in 2021 and 4 basis points in the same period of 2020. Interest-bearing cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 19 basis points in the year and 8 basis points in 2020. The yield on earning assets totaled 3.33% compared to 3.87% in 2020. Excluding the impact of PPP and excess cash, the yield on earning assets totaled 3.42% and 3.97% for the same periods. The decrease was primarily due to lower yields on loans which the Company feels are near-bottom at year-end 2021. The yield on loans was 3.78% in 2021 and 4.16% in 2020. Excluding PPP loans the yield on loans was 3.62% in 2021, and 4.15% in 2020. Costs of interest-bearing liabilities decreased to 0.59% from 0.96% in 2020 due to increased core deposit levels, lower deposit rates and reduced wholesale borrowings.
Provision for Credit Losses
The provision in 2021 was a recapture of $1.3 million compared to and expense of $5.6 million in 2020. The benefit in 2021 is primarily due to the principal componentrecapture of the Company’sday 1 CECL allowance that was established January 1, 2021 given steady improvements in most macroeconomic drivers to the ACL. The provision also benefited from lower net charge-offs of $209 thousand in 2021 compared to $1.9 million in 2020. Overall credit quality remains strong and credit quality metrics improved with decreases in non-accruing and past due loans.
Non-Interest Income
Non-interest income streamin 2021 was $42 million compared to $43 million in 2020. The net change reflects an increase in fee income from operations offset by decreased gains on sales of securities. Non-interest income excluding gains on sales of securities increased 5% over the prior year. Trust management fees were $15 million compared to $13 million in 2020 driven by higher assets under management of $2.5 billion compared to $2.3 billion in 2020. Customer service fees increased 17% to $13 million in 2021, with 3,374 net new core deposit accounts opened during the year. The Company sold securities resulting in gains of $2.9 million during 2021 as part of its delever and representssecurity remix strategies. Mortgage banking activities contributed $6.5 million in 2021 and $6.9 million in 2020. The Company took advantage of volatility in the difference or spread between interest generated from earning assetsyield curve in 2021 and put residential mortgages on the interestbalance sheet when rates were higher and sold loans in the secondary market when rates were low.
Non-Interest Expense
Non-interest expense paid on depositswas $91 million in 2021 compared to $95 million in 2020. The decrease is principally due to lower salary and borrowed funds. Fluctuations in market interest ratesbenefit costs as well as volumedecreased non-recurring expenses. Salaries and mix changesbenefits expense decreased to $47 million compared to $49 million in earning assets and interest-bearing liabilities can materially impact net interest income.
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Income Tax Expense
Income tax expense was $9.3 million for the increase in customer service fees. Income from trust and investment management fees are principally derived from fee income through a range of fiduciary services including trust and estate administration, wealth advisory services, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. Revenue from financial services is derived from retail brokerage services conducted through Bar Harbor Financial Services, an independent third-party broker.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 20172020 AND 2016
Net Interest Income
Net interest income for 2020 was $99 million compared with $90 million in 2017 include operations acquired2019 primarily due to a lower cost of funds resulting from increased liquidity from growth in non-maturity deposits. The net interest margin expanded to 2.97% in 2020 compared to 2.77% in the prior year. Purchase loan accretion contributed 11 and 10 basis points to the margin in 2020 and 2019, respectively. Cost of deposits and borrowings also benefited from the Federal Reserve rate cuts in 2020 and changes in other key indexes in response to the pandemic. In total cost of funds decreased 65 basis points to 0.96% compared to 1.61% in 2019 due to the shift in funding sources to core deposits. Total interest-bearing deposit rates improved to 0.78% compared to 1.27% in 2019 from growth in core deposits and reductions in time deposits during 2020. Borrowing costs improved to 1.75% from 2.61% in 2019, on January 13, 2017reduced borrowing levels and interest rates.
The yield on earning assets was 3.87% compared to 4.14% in 2019 reflecting loan originations and repricing of variable rate products in a lower interest rate environment. Both securities yields and loan yields dropped 22 basis points to 3.20% and 4.16%, respectively for 2020. The 2020 adjusted net interest margin (non-GAAP measure), which excludes PPP loans was 2.93% compared to 2.77% for 2019, which included a drag of 16 basis points and one basis point, respectively from a business combination. Therefore, many measuresexcess liquidity reflected in interest-bearing deposits with other banks.
Loan Loss Provision
The provision was $6 million in 2020 compared to $2 million in 2019. Credit quality metrics improved with decreases in non-accruing and past due loans. Overall credit quality remains strong, the increase in the provision is indicative of revenue, expense,commercial loan growth and higher economic adjustments reflecting elevated risk from COVID-19.
Non-Interest Income
Non-interest income in 2020 increased to $43 million from $29 million in 2019 driven primarily by increases in mortgage banking income and average balances increased compared to prior periods. Additionally, per share measures were affected by the issuancegains on sold securities. The $5 million increase in mortgage banking income is associated with secondary market sales of common shares as merger consideration.
Non-Interest Expense
Non-interest expense was $95 million in 2016. Net income2020 compared to $90 million in 2016 benefited from security gains totaling $2.92019. The increase is primarily a result of a $4 million higher salary and benefit expense due to the expanded branch model and wealth management business. Salary and benefit expense was also impacted by larger accruals for incentives on an after-tax basis.
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Income Tax Expense
Income tax expense was $8 million to $92.2 million. The increase was driven by a $1.6 billion increase in average earning assets, which includes organic growth and the benefit of the business combination. Net interest margin increased to 3.10% in 2017 compared to 2.96% in 2016. Net interest spread increased 13 basis points mostly from the addition of acquired loans but also reflecting higher yields on commercial loans. Weighted average yields for commercial real estate and commercial and industrial loans increased to 4.24% and 4.73% in 2017 from 3.71% and 4.03% in 2016, respectively. Net interest margin in 2017 also benefited from purchased loan accretion totaling $3.7 million in the year.
LIQUIDITY AND CASH FLOWS
Liquidity is measured by the Company’s ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.
The Bank actively manages its liquidity position through target ratios established under its Asset Liability Management Policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank’s policy is to maintain a liquidity position of at least 4%8% of total assets. A portion of the Bank’s deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.
The Bank maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’s liquidity position.
The Company believes the existing cash and cash equivalents (including an interest-bearing deposit at the FRB Boston), securities available for sale and cash flows from operating activities will be sufficient to meet anticipated cash needs for at least the next twelve months. Future working capital needs will depend on many factors, including the rate of business and revenue growth. To the extent cash and cash equivalents, securities available for sale and cash flows from operating activities are insufficient to fund future activities, the Company may need to raise additional funds through debt arrangements or public or private debt or equity financings. The Company also may need to raise additional funds in the event it is determined in the future to effect one or more acquisitions of banks or businesses. If additional funding is required, Thethe Company may not be able to obtain debt arrangements or to effect an equity or debt financing on terms acceptable to the Company or at all.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable organization, at December 31, 2018,2021, the Company maintained its strong capital position and continued to be a “well-capitalized” financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.
The Bank has capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the FRB.Company’s liquidity position remains strong. At December 31, 2018,2021, available same-day liquidity totaled approximately $1.2 billion, including cash, borrowing capacity at FHLB and the Bank’s available secured lineFederal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company's amortizing securities and loan portfolios. The Company had unused borrowing capacity at the FHLB of $472 million, unused borrowing capacity at the Federal Reserve of $65 million and unused lines of credit at the FRB stood at $118.6totaling $51 million, or 3.3% of the Bank’s totalin addition to over $200 million in unencumbered, liquid investment portfolio assets. The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.
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Purchase Obligations
In the normal course of conducting its banking and financial services business, and in connection with providing products and services to its customers, the Company has entered into a variety of traditional third-party contracts for support services. Examples of such contractual agreements include, but are not limited to: services providing core
| (in thousands) | Total | Less than One Year | One to Three Years | Three to Five Years | After Five Years | |||||||||||||||
| FHLB Borrowings | $ | 644,612 | $ | 611,683 | $ | 31,604 | $ | 1,000 | $ | 325 | ||||||||||
| Subordinated Notes | 42,973 | — | — | — | 42,973 | |||||||||||||||
| Operating lease obligations | 11,306 | 929 | 1,802 | 1,821 | 6,754 | |||||||||||||||
| Purchase obligations | 20,139 | 3,621 | 5,324 | 4,528 | 6,666 | |||||||||||||||
| Total Contractual Obligations | $ | 719,030 | $ | 616,233 | $ | 38,730 | $ | 7,349 | $ | 56,718 | ||||||||||
| (in thousands) | 2018 | 2017 | ||||||
| Commitments to originate new loans | $ | 20,431 | $ | 52,438 | ||||
| Unused funds on commercial and other lines of credit | 169,063 | 134,408 | ||||||
| Unadvanced funds on home equity lines of credit | 110,682 | 108,745 | ||||||
| Unadvanced funds on construction and real estate loans | 128,569 | 87,915 | ||||||
| Commercial letters of credit | 1,171 | 928 | ||||||
| Standby letters of credit | 486 | 486 | ||||||
| Total | $ | 430,402 | $ | 384,920 | ||||
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Please refer to the notes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in Note 1 -
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 – Summary of Significant Accounting Policies to the Company's Audited Consolidated Financial Statements for the year ended December 31, 2021 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company's financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition.
Allowance for credit losses on loans.
Effective January 1, 2021, the Company adopted CECL, which replaced the incurred loss allowance methodology with an expected loss allowance methodology. See Note 1– Summary of Significant Accounting Policies and Note 3 – Loans and Allowance for Credit Losses to the consolidated financial statements for information about CECL adoption, areas of judgment and methodologies used in establishing the allowance.
The allowance is sensitive to a number of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The allowance is also sensitive to external factors such as the general health of the economy, as evidenced by changes in unemployment rates, home pricing index, gross domestic product, retail sales, multi-housing starts and changes in commercial real estate values. The Company considers these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts.
Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. Additionally, changes in circumstances related to individually large credits, or certain macroeconomic forecast assumptions may result in volatility.
It is difficult to estimate how potential changes in any one economic factor might affect the overall allowance because a wide variety of factors and inputs are considered in the allowance estimate. Changes in the factors and inputs may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to consider the impact of a hypothetical stressed forecast, the Company estimated the allowance using forecast inputs that were severely unfavorable to the expected scenario for each macroeconomic variable. This unfavorable scenario resulted in an allowance that is approximately $8.8 million higher than the allowance using the expected scenario.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Company’s business activities.
The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee (“ALCO”), chaired by the Chief Financial Officer and composed of various members of senior management. ALCO meets regularly to review balance sheet structure, formulate strategies in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.
Interest Rate Risk:
Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank's net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and and/or cash flow characteristics of assets and liabilities. Management's objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promote sufficient reward for understood and controlled risk.
The Bank's interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off-balance sheet instruments as each relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the Company’s Board of Directors.
The Bank's Asset Liability Management Policy, approved annually by the Bank’s Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat, and decreasing rate scenarios. It is the role of the ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.
Interest Rate Sensitivity Modeling:
The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense for all balance sheet and off-balance sheet instruments, under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.
The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product-specific assumptions for deposit accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with calloption provisions are examined on an individual basis in each rate environment to estimate the likelihood of a call.exercise. Prepayment assumptions for mortgage loans andare calibrated using specific Bank experience while mortgage-backed securities are developed from industry median estimatesstandard models of prepayment speeds, based upon similar coupon ranges and degree of seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest rate conditions including:conditions.
The simulation models a parallel and pro rata shift in rates over a 12-month period. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual “rate ramp” and a “rate shock” have on earnings
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expectations. Our net interest rate scenario in which current prevailing rates are locked in and the onlyincome sensitivity analysis reflects changes to net interest income assuming no balance sheet fluctuations that occur are due to cash flows, maturities, new volumes,growth and re-pricing volumes consistent with this flat rate assumption;
In 2020, behavioral assumptions regarding both core deposits and actions are takenresidential loans were modified to maintainincorporate the balance sheet interest rate risk within established policy guidelines.
The following table presents the changes in sensitivities on net interest income for the years ended December 31, 20182021 and 2017:
| Change in Interest Rates-Basis Points (Rate Ramp) | 1 - 12 Months | 13 - 24 Months | ||||||||||||
| (in thousands, except ratios) | $ Change | % Change | $ Change | % Change | ||||||||||
| At December 31, 2018 | ||||||||||||||
| -100 | $ | 1,471 | 1.7 | % | $ | 603 | 70 | % | ||||||
| +200 | (3,220 | ) | (3.72 | ) | (7,161 | ) | (8.27 | ) | ||||||
| At December 31, 2017 | ||||||||||||||
| -100 | $ | 130 | 0.14 | % | $ | 301 | 0.32 | % | ||||||
| +200 | (3,211 | ) | (3.44 | ) | (7,521 | ) | (8.07 | ) | ||||||
| | | | | | | | | | | |
Change in Interest Rates-Basis Points (Rate Ramp) | | 1 - 12 Months | | 13 - 24 Months |
| ||||||
(in thousands, except ratios) | | $ Change | | % Change | | $ Change | | % Change |
| ||
At December 31, 2021 |
| |
|
|
|
| |
|
|
| |
-100 | | $ | (1,939) | | (2.0) | % | $ | (5,945) | | (6.4) | % |
+200 | |
| 9,413 | | 10.0 | | | 22,220 | | 24.0 | |
At December 31, 2020 | |
|
|
|
| |
| |
|
| |
-100 | |
| (2,368) |
| (2.6) | | | (5,849) |
| (6.6) | |
+200 | |
| 7,080 |
| 7.7 | |
| 19,812 |
| 22.2 | |
Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will improve slightlydeteriorate over the one year horizon with awhile deteriorating further modest improvementfrom that level over the two-year horizon. Should the yield curve steepen as rates fall, the model suggests that accelerated earning asset prepayments will slow, resulting in a more stabilized level of net interest income. Management anticipates that moderate to strong earning asset growth will be needed to meaningfully increase the Bank’s current level of net interest income should both long-term and short-term interest rates decline in parallel.
Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will decline moderatelyimprove over both the one and two-year horizons as increased funding costs outpace increases in earning asset yields. The interest rate sensitivity simulation model suggests that as interest rates rise, the Bank’s funding costs will initially re-price disproportionately with earning asset yields to a moderate degree. As funding costs begin to stabilize early in the third year of the simulation, the model suggests that the earning asset portfolios will continue to re-price at prevailing interest rate levels and cash flows from the Bank’s earning asset portfolios will be reinvested into higher yielding earning assets, resulting in a widening of spreads and a stabilization of net interest income over the three-year horizon and beyond. Management believes moderate to strong earning asset growth will be necessary to meaningfully increase the current level of net interest income over the one-year and two-year horizons should short-term and long-term interest rates rise in parallel.
As compared to December 31, 2017, the year-one sensitivity in2020, the down 100 basis points scenario is improved year-over-year, while the year-two sensitivity in the down 100 basis points scenario also showed further improvement.both years 1 and 2. In the year-one up 200 basis points scenario, results were modestly down versus the prior year, while year-two, up 200 basis points results were slightly more negative. On balance, the current aggregate position is consistent with the prior year’s position.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape;shape, prepayment speeds on loans and securities;securities, deposit rates;rates, pricing decisions on loans and deposits;deposits, reinvestment or replacement of asset and liability cash flows;flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipation ofanticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
To the Shareholders and the Board of Directors of Bar Harbor Bankshares:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bar Harbor Bankshares and its subsidiariesSubsidiaries (the Company) as of December 31, 20182021 and 2017,2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in
Adoption of New Accounting Standard
As discussed in Note 1 and 3 to the financial statements, the Company has changed its method of accounting for credit losses on financial instruments in 2021 due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Allowance for Credit Losses on Loans
As described in Notes 1 and 3 to the consolidated financial statements, the allowance for credit losses on loans is established through a provision for credit losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans. The Company’s consolidated allowance for credit losses on loans balance was $22.7 million at December 31, 2021. The allowance for credit losses on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans and troubled debt restructurings.
The Company uses the discounted cash flow method to estimate expected credit losses for all loan portfolio segments measured on a pool basis wherein payment expectations are adjusted for estimated prepayment speeds, probability of default (PD), and loss given default (LGD). The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime PD. This analysis also determines how expected PD and LGD will react to forecasted levels of the loss drivers. Management utilizes various economic indicators such as changes in unemployment rates, gross domestic product (GDP), property values and other relevant factors as loss drivers and has determined that, due to historical volatility in economic data, two quarters currently represents a reasonable and supportable forecast period, followed by a six-period reversion to historical mean levels for each of the various economic indicators. The allowance evaluation also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii) delinquency and other credit quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of the Company’s business impacting the loan portfolio, (v) and other external factors, that may include, but are not limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster. The development of the loan loss allocation for pools of loans with similar risk characteristics requires a significant amount of judgement by management and the assumptions utilized are subject to changing economic conditions.
We identified the Company’s allowance for credit losses on loans as a critical audit matter, specifically the economic forecasts and qualitative factors, because they involved complex auditor judgement in the evaluation of the Company’s methodology and assumptions. Specifically, complex auditor judgement was required to examine the methodology that underpins the allowance for credit losses on pools of loans with similar risk characteristics. This includes modeling of PD, LGD, economic forecasts, and qualitative factors.
Our audit procedures related to this critical audit matter included the following at implementation date and period end, among others:
•We obtained an understanding of the relevant controls related to the allowance for credit losses on loans and tested such controls for design and operating effectiveness, including those over model approval, validation and approval of key data inputs such as economic forecasts and qualitative factors.
•We tested the completeness and accuracy of data used by management in determining inputs to the PD and LGD, such as prepayment speed, by agreeing those inputs to internal or external information sources.
•We evaluated management’s forecasts of future economic indicators for reasonableness, which include unemployment, housing price index, retail sales, and national GDP growth, among others, by comparing these forecasts to external and internal information sources.
•We evaluated management’s judgments and assumptions used in the development of the qualitative factors for reasonableness, and tested the reliability of the underlying data on which these factors are based, by comparing information to source documents and external information sources.
/s/ RSM US LLP
We have served as the Company's auditor since 2015.
Boston, Massachusetts
March 14, 2022
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CONSOLIDATED BALANCE SHEETS
| | | | | | |
(in thousands, except share data) |
| December 31, 2021 |
| December 31, 2020 | ||
Assets |
| |
|
| |
|
Cash and cash equivalents: | | | | | | |
Cash and due from banks | | $ | 33,508 | | $ | 27,566 |
Interest-earning deposits with other banks | |
| 216,881 | |
| 198,441 |
Total cash and cash equivalents | |
| 250,389 | |
| 226,007 |
| | | | | | |
Securities: | | | | | | |
Securities available for sale | |
| 618,276 | |
| 585,046 |
Federal Home Loan Bank stock | |
| 7,384 | |
| 14,036 |
Total securities | |
| 625,660 | |
| 599,082 |
| | | | | | |
Loans held for sale | | | 5,523 | | | 23,988 |
| | | | | | |
Total loans | |
| 2,531,910 | |
| 2,562,885 |
Less: Allowance for credit losses | |
| (22,718) | |
| (19,082) |
Net loans | |
| 2,509,192 | |
| 2,543,803 |
| | | | | | |
Premises and equipment, net | |
| 49,382 | |
| 52,458 |
Goodwill | |
| 119,477 | |
| 119,477 |
Other intangible assets | |
| 6,733 | |
| 7,670 |
Cash surrender value of bank-owned life insurance | |
| 79,020 | |
| 77,870 |
Deferred tax assets, net(1) | |
| 5,547 | |
| 3,047 |
Other assets(1) | |
| 58,310 | |
| 70,873 |
Total assets(1) | | $ | 3,709,233 | | $ | 3,724,275 |
| | | | | | |
Liabilities | |
|
| |
|
|
Deposits: | |
|
| |
|
|
Demand | | $ | 664,420 | | $ | 544,636 |
NOW | |
| 940,631 | |
| 738,849 |
Savings | |
| 628,670 | |
| 521,638 |
Money market | |
| 389,291 | |
| 402,731 |
Time | |
| 425,532 | |
| 698,361 |
Total deposits | |
| 3,048,544 | |
| 2,906,215 |
| | | | | | |
Borrowings: | |
|
| |
|
|
Senior | |
| 118,400 | |
| 276,062 |
Subordinated | |
| 60,124 | |
| 59,961 |
Total borrowings | |
| 178,524 | |
| 336,023 |
| | | | | | |
Other liabilities(1) | |
| 58,018 | |
| 74,972 |
Total liabilities(1) | |
| 3,285,086 | |
| 3,317,210 |
| | | | | | |
49
| | | | | | |
(in thousands, except share data) |
| December 31, 2021 |
| December 31, 2020 | ||
Shareholders’ equity |
| | |
| | |
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at December 31, 2021 and December 31, 2020 |
| | 32,857 |
| | 32,857 |
Additional paid-in capital |
| | 190,876 |
| | 190,084 |
Retained earnings |
| | 215,592 |
| | 195,607 |
Accumulated other comprehensive income(1) |
| | 2,303 |
| | 6,740 |
Less: 1,427,059 and 1,512,465 shares of treasury stock at December 31, 2021 and December 31, 2020, respectively |
| | (17,481) |
| | (18,223) |
Total shareholders’ equity(1) |
| | 424,147 |
| | 407,065 |
Total liabilities and shareholders’ equity(1) | | $ | 3,709,233 | | $ | 3,724,275 |
| (in thousands, except share data) | December 31, 2018 | December 31, 2017 | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | 35,208 | $ | 34,262 | ||||
| Interest-bearing deposit with the Federal Reserve Bank | 63,546 | 56,423 | ||||||
| Total cash and cash equivalents | 98,754 | 90,685 | ||||||
| Securities available for sale, at fair value | 725,837 | 717,242 | ||||||
| Federal Home Loan Bank stock | 35,659 | 38,105 | ||||||
| Total securities | 761,496 | 755,347 | ||||||
| Loans: | ||||||||
| Commercial real estate | 826,699 | 826,746 | ||||||
| Commercial and industrial | 404,870 | 379,423 | ||||||
| Residential real estate | 1,144,698 | 1,155,682 | ||||||
| Consumer | 113,960 | 123,762 | ||||||
| Total loans | 2,490,227 | 2,485,613 | ||||||
| Less: Allowance for loan losses | (13,866 | ) | (12,325 | ) | ||||
| Net loans | 2,476,361 | 2,473,288 | ||||||
| Premises and equipment, net | 48,804 | 47,708 | ||||||
| Other real estate owned | 2,351 | 122 | ||||||
| Goodwill | 100,085 | 100,085 | ||||||
| Other intangible assets, net | 7,459 | 8,383 | ||||||
| Cash surrender value of bank-owned life insurance | 73,810 | 57,997 | ||||||
| Deferred tax assets, net | 9,514 | 7,180 | ||||||
| Other assets | 29,853 | 24,389 | ||||||
| Total assets | $ | 3,608,487 | $ | 3,565,184 | ||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Demand | $ | 370,889 | $ | 349,055 | ||||
| NOW | 484,717 | 466,610 | ||||||
| Savings | 358,888 | 364,799 | ||||||
| Money market | 335,951 | 305,275 | ||||||
| Time | 932,793 | 866,346 | ||||||
| Total deposits | 2,483,238 | 2,352,085 | ||||||
| Borrowings: | ||||||||
| Senior | 680,823 | 786,688 | ||||||
| Subordinated | 42,973 | 43,033 | ||||||
| Total borrowings | 723,796 | 829,721 | ||||||
| Other liabilities | 30,874 | 28,737 | ||||||
| Total liabilities | 3,237,908 | 3,210,543 | ||||||
| (continued) | ||||||||
| Shareholders’ equity | ||||||||
| Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at December 31, 2018 and December 31, 2017, respectively | 32,857 | 32,857 | ||||||
| Additional paid-in capital | 187,653 | 186,702 | ||||||
| Retained earnings | 166,526 | 144,977 | ||||||
| Accumulated other comprehensive loss | (11,802 | ) | (4,554 | ) | ||||
| Less: 905,201 and 985,462 shares of treasury stock at December 31, 2018 and December 31, 2017, respectively, at cost | (4,655 | ) | (5,341 | ) | ||||
| Total shareholders’ equity | 370,579 | 354,641 | ||||||
| Total liabilities and shareholders’ equity | $ | 3,608,487 | $ | 3,565,184 | ||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements.
50
| Years Ended December 31, | ||||||||||||
| (in thousands, except per share data) | 2018 | 2017 | 2016 | |||||||||
| Interest and dividend income | ||||||||||||
| Loans | $ | 104,015 | $ | 94,976 | $ | 41,653 | ||||||
| Securities and other | 23,436 | 21,093 | 15,834 | |||||||||
| Total interest and dividend income | 127,451 | 116,069 | 57,487 | |||||||||
| Interest expense | ||||||||||||
| Deposits | 19,521 | 11,307 | 6,699 | |||||||||
| Borrowings | 17,047 | 12,607 | 5,414 | |||||||||
| Total interest expense | 36,568 | 23,914 | 12,113 | |||||||||
| Net interest income | 90,883 | 92,155 | 45,374 | |||||||||
| Provision for loan losses | 2,780 | 2,788 | 979 | |||||||||
| Net interest income after provision for loan losses | 88,103 | 89,367 | 44,395 | |||||||||
| Non-interest income | ||||||||||||
| Trust and investment management fee income | 11,985 | 12,270 | 3,829 | |||||||||
| Insurance brokerage service income | — | 1,097 | — | |||||||||
| Customer service fees | 9,538 | 8,484 | 2,648 | |||||||||
| (Loss) gain on sales of securities, net | (924 | ) | 19 | 4,498 | ||||||||
| Bank-owned life insurance income | 1,821 | 1,539 | 703 | |||||||||
| Other income | 5,515 | 2,573 | 671 | |||||||||
| Total non-interest income | 27,935 | 25,982 | 12,349 | |||||||||
| Non-interest expense | ||||||||||||
| Salaries and employee benefits | 40,964 | 39,589 | 19,775 | |||||||||
| Occupancy and equipment | 12,386 | 11,061 | 4,610 | |||||||||
| Loss on premises and equipment, net | — | 94 | 248 | |||||||||
| Outside services | 2,408 | 3,000 | 767 | |||||||||
| Professional services | 1,474 | 1,655 | 1,489 | |||||||||
| Communication | 804 | 1,289 | 586 | |||||||||
| Amortization of intangible assets | 828 | 812 | 92 | |||||||||
| Acquisition, conversion and other expenses | 1,728 | 3,302 | 2,650 | |||||||||
| Other expenses | 14,947 | 11,924 | 5,718 | |||||||||
| Total non-interest expense | 75,539 | 72,726 | 35,935 | |||||||||
| Income before income taxes | 40,499 | 42,623 | 20,809 | |||||||||
| Income tax expense | 7,562 | 16,630 | 5,876 | |||||||||
| Net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 2.13 | $ | 1.71 | $ | 1.65 | ||||||
| Diluted | $ | 2.12 | $ | 1.70 | $ | 1.63 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 15,488 | 15,184 | 9,069 | |||||||||
| Diluted | 15,564 | 15,290 | 9,143 | |||||||||
| | | | | | | | | |
| | | | | | ||||
| | Years Ended December 31, | |||||||
(in thousands, except earnings per share data) |
| 2021 |
| 2020 |
| 2019 | |||
Interest and dividend income | | | | | | | | | |
Loans | | $ | 95,236 | | $ | 107,085 | | $ | 111,042 |
Securities and other | |
| 15,568 | |
| 19,019 | |
| 24,349 |
Total interest and dividend income | |
| 110,804 | |
| 126,104 | |
| 135,391 |
Interest expense | |
|
| |
|
| |
|
|
Deposits | |
| 8,543 | |
| 18,043 | |
| 27,034 |
Borrowings | |
| 6,688 | |
| 8,881 | |
| 18,547 |
Total interest expense | |
| 15,231 | |
| 26,924 | |
| 45,581 |
Net interest income | |
| 95,573 | |
| 99,180 | |
| 89,810 |
Provision for credit losses | |
| (1,302) | |
| 5,625 | |
| 2,317 |
Net interest income after provision for credit losses | |
| 96,875 | |
| 93,555 | |
| 87,493 |
| | | | | | | | | |
Non-interest income | |
|
| |
|
| |
|
|
Trust and investment management fee income | |
| 15,179 | |
| 13,378 | |
| 12,063 |
Customer service fees | |
| 13,212 | |
| 11,327 | |
| 10,127 |
Gain on sales of securities, net | |
| 2,870 | |
| 5,445 | |
| 237 |
Mortgage banking income | | | 6,536 | | | 6,884 | | | 1,626 |
Bank-owned life insurance income | |
| 2,179 | |
| 2,007 | |
| 2,053 |
Customer derivative income | |
| 1,010 | |
| 2,503 | |
| 2,028 |
Other income | |
| 1,275 | |
| 1,412 | |
| 935 |
Total non-interest income | |
| 42,261 | |
| 42,956 | |
| 29,069 |
| | | | | | | | | |
Non-interest expense | |
|
| |
|
| |
|
|
Salaries and employee benefits | |
| 47,117 | |
| 48,920 | |
| 45,000 |
Occupancy and equipment | |
| 16,356 | |
| 16,751 | |
| 14,214 |
Loss (gain) on sales of premises and equipment, net | |
| 378 | |
| (32) | |
| 18 |
Outside services | |
| 1,943 | |
| 1,985 | |
| 1,818 |
Professional services | |
| 1,756 | |
| 2,060 | |
| 2,191 |
Communication | |
| 912 | |
| 892 | |
| 821 |
Marketing | |
| 1,541 | |
| 1,385 | |
| 1,872 |
Amortization of intangible assets | |
| 940 | |
| 1,024 | |
| 861 |
Loss on debt extinguishment | | | 2,851 | | | 1,351 | | | 1,096 |
Acquisition, conversion and other expenses | |
| 1,667 | |
| 5,801 | |
| 8,317 |
Other expenses | |
| 15,047 | |
| 14,723 | |
| 13,525 |
Total non-interest expense | |
| 90,508 | |
| 94,860 | |
| 89,733 |
| | | | | | | | | |
Income before income taxes | |
| 48,628 | |
| 41,651 | |
| 26,829 |
Income tax expense | |
| 9,329 | |
| 8,407 | |
| 4,209 |
Net income | | $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
| | | | | | | | | |
Earnings per share: | |
|
| |
|
| |
|
|
Basic | | $ | 2.63 | | $ | 2.18 | | $ | 1.46 |
Diluted | | $ | 2.61 | | $ | 2.18 | | $ | 1.45 |
| | | | | | | | | |
Weighted average common shares outstanding: | |
|
| |
|
| |
|
|
Basic | |
| 14,969 | |
| 15,246 | |
| 15,541 |
Diluted | |
| 15,045 | |
| 15,272 | |
| 15,587 |
The accompanying notes are an integral part of these consolidated financial statements.
51
| | | | | | | | | |
|
| |
| | | ||||
| | Years Ended December 31, | |||||||
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Net income | | $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
Other comprehensive (loss) income, before tax: | |
|
| |
|
| |
|
|
Changes in unrealized (loss) gain on securities available for sale | |
| (10,489) | |
| 5,819 | |
| 18,646 |
Changes in unrealized gain (loss) on hedging derivatives(1) | |
| 3,562 | |
| (1,651) | |
| 2,060 |
Changes in unrealized gain (loss) on pension | |
| 1,132 | |
| (338) | |
| (350) |
| | | | | | | | | |
Income taxes related to other comprehensive income: | |
| | |
|
| |
|
|
Changes in unrealized loss (gain) on securities available for sale | |
| 2,451 | |
| (1,345) | |
| (4,434) |
Changes in unrealized (gain) loss on hedging derivatives(1) | |
| (827) | |
| 386 | |
| (411) |
Changes in unrealized (gain) loss on pension | |
| (266) | |
| 77 | |
| 83 |
Total other comprehensive (loss) income(1) | |
| (4,437) | |
| 2,948 | |
| 15,594 |
Total comprehensive income(1) | | $ | 34,862 | | $ | 36,192 | | $ | 38,214 |
| Years Ended December 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||
| Other comprehensive income (loss), before tax: | ||||||||||||
| Changes in unrealized loss on securities available for sale | (8,563 | ) | 528 | (12,059 | ) | |||||||
| Changes in unrealized loss on derivative hedges | 654 | (838 | ) | (272 | ) | |||||||
| Changes in unrealized loss on post-retirement plans | (216 | ) | (328 | ) | 90 | |||||||
| Income taxes related to other comprehensive income (loss): | ||||||||||||
| Changes in unrealized loss on securities available for sale | 1,978 | (114 | ) | 4,221 | ||||||||
| Changes in unrealized loss on derivative hedges | (168 | ) | 386 | 95 | ||||||||
| Changes in unrealized loss on post-retirement plans | 47 | 138 | (30 | ) | ||||||||
| Total other comprehensive loss | (6,268 | ) | (228 | ) | (7,955 | ) | ||||||
| Total comprehensive income | $ | 26,669 | $ | 25,765 | $ | 6,978 | ||||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies –Revision of Previously Issued Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements.
52
| | | | | | | | | | | | | | | | | | |
|
| |
| | | |
| | | | Accumulated |
| | |
| | | |
| | Common | | Additional | | | | | other | | | | | | | |||
| | stock | | paid-in | | Retained | | comprehensive | | Treasury | | | | |||||
(in thousands, except per share data) |
| amount |
| capital |
| earnings |
| income (loss)(1) |
| stock |
| Total(1) | ||||||
Balance at December 31, 2018 | | $ | 32,857 | | $ | 187,653 | | $ | 166,526 | | $ | (11,802) | | $ | (4,655) | | $ | 370,579 |
Net income | |
| — | |
| — | |
| 22,620 | |
| — | |
| — | |
| 22,620 |
Other comprehensive income | | | — | |
| — | |
| — | |
| 15,594 | |
| — | | | 15,594 |
Cash dividends declared ($0.86 per share) | | | — | |
| — | |
| (13,366) | |
| — | |
| — | | | (13,366) |
Treasury stock purchased (9,195 shares) | |
| — | |
| — | |
| — | |
| — | |
| (239) | |
| (239) |
Net issuance (34,944 shares) to employee stock plans, including related tax effects | |
| — | |
| (490) | |
| — | |
| — | |
| 217 | |
| (273) |
Recognition of stock based compensation | |
| — | |
| 1,373 | |
| — | |
| — | |
| — | |
| 1,373 |
Balance at December 31, 2019 | | $ | 32,857 | | $ | 188,536 | | $ | 175,780 | | $ | 3,792 | | $ | (4,677) | | $ | 396,288 |
| | | | | | | | | | | | | | | | | | |
Net income | |
| — | |
| — | |
| 33,244 | |
| — | |
| — | |
| 33,244 |
Other comprehensive income | |
| — | |
| — | |
| — | |
| 2,948 | |
| — | |
| 2,948 |
Cash dividends declared ($0.88 per share) | |
| — | |
| — | |
| (13,417) | |
| — | |
| — | |
| (13,417) |
Treasury stock purchased (733,567 shares) | |
| — | |
| — | |
| — | |
| — | |
| (14,188) | |
| (14,188) |
Net issuance (91,359 shares) to employee stock plans, including related tax effects | |
| — | |
| (22) | |
| — | |
| — | |
| 642 | |
| 620 |
Recognition of stock based compensation | |
| — | |
| 1,570 | |
| — | |
| — | |
| — | |
| 1,570 |
Balance at December 31, 2020 | | $ | 32,857 | | $ | 190,084 | | $ | 195,607 | | $ | 6,740 | | $ | (18,223) | | $ | 407,065 |
| | | | | | | | | | | | | | | | | | |
Net income | |
| — | |
| — | |
| 39,299 | |
| — | |
| — | |
| 39,299 |
Other comprehensive income | |
| — | |
| — | |
| — | |
| (4,437) | |
| — | |
| (4,437) |
Allowance for credit losses cumulative-effect adjustment - ASU 2016-13 (Note 1) | | | — | | | — | | | (5,242) | | | — | | | — | | | (5,242) |
Cash dividends declared ($0.94 per share) | |
| — | |
| — | |
| (14,072) | |
| — | |
| — | |
| (14,072) |
Net issuance (85,406 shares) to employee stock plans, including related tax effects | |
| — | |
| (1,357) | |
| — | |
| — | |
| 742 | |
| (615) |
Recognition of stock based compensation | |
| — | |
| 2,149 | |
| — | |
| — | |
| — | |
| 2,149 |
Balance at December 31, 2021 | | $ | 32,857 | | $ | 190,876 | | $ | 215,592 | | $ | 2,303 | | $ | (17,481) | | $ | 424,147 |
| (in thousands, except share data) | Common stock amount | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Treasury stock | Total | ||||||||||||||||||
| Balance at December 31, 2015 | $ | 13,577 | $ | 21,624 | $ | 122,260 | $ | 3,629 | $ | (6,938 | ) | $ | 154,152 | |||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | — | — | 14,933 | — | — | 14,933 | ||||||||||||||||||
| Other comprehensive loss | — | — | — | (7,955 | ) | — | (7,955 | ) | ||||||||||||||||
| Total comprehensive income | — | — | 14,933 | (7,955 | ) | — | 6,978 | |||||||||||||||||
| Cash dividends declared ($0.73 per share) | — | — | (6,577 | ) | — | — | (6,577 | ) | ||||||||||||||||
| Treasury stock purchased (23,072 shares) | — | — | — | — | (497 | ) | (497 | ) | ||||||||||||||||
| Net issuance (123,349 shares) to employee stock plans, including related tax effects | — | 125 | (127 | ) | — | 1,408 | 1,406 | |||||||||||||||||
| Recognition of stock based compensation | — | 1,278 | — | — | — | 1,278 | ||||||||||||||||||
| Balance at December 31, 2016 | $ | 13,577 | $ | 23,027 | $ | 130,489 | $ | (4,326 | ) | $ | (6,027 | ) | $ | 156,740 | ||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | — | — | 25,993 | — | — | 25,993 | ||||||||||||||||||
| Other comprehensive loss | — | — | — | (228 | ) | — | (228 | ) | ||||||||||||||||
| Total comprehensive income | — | — | 25,993 | (228 | ) | — | 25,765 | |||||||||||||||||
| Cash dividends declared ($0.75 per share) | — | — | (11,505 | ) | — | — | (11,505 | ) | ||||||||||||||||
| Acquisition of Lake Sunapee Bank Group (6,245,780 shares) | 8,328 | 173,591 | — | — | — | 181,919 | ||||||||||||||||||
| Treasury stock purchased (9,603 shares) | — | — | — | — | (282 | ) | (282 | ) | ||||||||||||||||
| Net issuance (91,517 shares) to employee stock plans, including related tax effects | — | (222 | ) | — | — | 968 | 746 | |||||||||||||||||
| Three-for-two stock split | 10,952 | (10,968 | ) | — | — | — | (16 | ) | ||||||||||||||||
| Recognition of stock based compensation | — | 1,274 | — | — | — | 1,274 | ||||||||||||||||||
| Balance at December 31, 2017 | $ | 32,857 | $ | 186,702 | $ | 144,977 | $ | (4,554 | ) | $ | (5,341 | ) | $ | 354,641 | ||||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | — | — | 32,937 | — | — | 32,937 | ||||||||||||||||||
| Other comprehensive loss | — | — | — | (6,268 | ) | — | (6,268 | ) | ||||||||||||||||
| Total comprehensive income | — | — | 32,937 | (6,268 | ) | — | 26,669 | |||||||||||||||||
| Cash dividends declared ($0.79 per share) | — | — | (12,184 | ) | — | — | (12,184 | ) | ||||||||||||||||
| Treasury stock purchased (10,899 shares) | — | — | — | — | (324 | ) | (324 | ) | ||||||||||||||||
| Net issuance (101,460 shares) to employee stock plans, including related tax effects | — | (395 | ) | — | — | 1,010 | 615 | |||||||||||||||||
| Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606 | — | — | (184 | ) | — | — | (184 | ) | ||||||||||||||||
| Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02 | — | — | 980 | (980 | ) | — | — | |||||||||||||||||
| Recognition of stock based compensation | — | 1,346 | — | — | — | 1,346 | ||||||||||||||||||
| Balance at December 31, 2018 | $ | 32,857 | $ | 187,653 | $ | 166,526 | $ | (11,802 | ) | $ | (4,655 | ) | $ | 370,579 | ||||||||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies –Revision of Previously Issued Financial Statements. |
The accompanying notes are an integral part of these consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Cash flows from operating activities: |
|
|
| | |
| | |
|
Net income |
| $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
| |
|
|
Originations of loans held for sale | | | (170,758) | | | (240,858) | | | (69,070) |
Proceeds from loan sales | | | 193,468 | | | 228,626 | | | 63,232 |
Gain on sale of loans | | | (4,131) | | | (5,257) | | | (493) |
Provision for credit losses | |
| (1,302) | |
| 5,625 | |
| 2,317 |
Net amortization of securities | |
| 4,471 | |
| 3,367 | |
| 3,341 |
Deferred tax expense (benefit) | | | 427 | | | (38) | | | 1,020 |
Change in unamortized net loan costs and premiums | |
| (1,354) | |
| (122) | |
| (555) |
Premises and equipment depreciation | |
| 4,596 | |
| 4,771 | |
| 4,136 |
Stock-based compensation expense | |
| 2,149 | |
| 1,570 | |
| 1,373 |
Accretion of purchase accounting entries, net | |
| (2,274) | |
| (749) | |
| (3,806) |
Amortization of other intangibles | |
| 940 | |
| 1,025 | |
| 861 |
Income from cash surrender value of bank-owned life insurance policies | |
| (2,179) | |
| (2,007) | |
| (2,053) |
Gain on sales of securities, net | |
| (2,870) | |
| (5,445) | |
| (237) |
Decrease (increase) in right-of-use lease assets | | | 1,064 | | | (715) | | | (632) |
(Decrease) increase in lease liabilities | | | (984) | | | 976 | | | 660 |
(Gain) loss on other real estate owned | |
| — | |
| (355) | |
| 166 |
Loss (gain) on premises and equipment, net | |
| 378 | |
| (32) | |
| 18 |
Net change in other assets and liabilities | |
| (462) | |
| (2,942) | |
| 7,174 |
Net cash provided by operating activities | |
| 60,478 | |
| 20,684 | |
| 30,072 |
| | | | | | | | | |
Cash flows from investing activities: | |
|
| |
|
| |
|
|
Proceeds from sales of securities available for sale | |
| 92,723 | |
| 153,200 | |
| 92,315 |
Proceeds from maturities, calls and prepayments of securities available for sale | |
| 111,552 | |
| 151,829 | |
| 115,334 |
Purchases of securities available for sale | |
| (249,595) | |
| (215,567) | |
| (129,189) |
Net change in loans | |
| 33,707 | |
| 70,617 | |
| (144,821) |
Recoveries of previously charged off loans | | | 608 | | | 272 | | | 321 |
Purchase of FHLB stock | |
| (2,565) | |
| (4,105) | |
| (11,687) |
Proceeds from sale of FHLB stock | |
| 9,217 | |
| 10,748 | |
| 26,667 |
Purchase of premises and equipment, net | |
| (1,716) | |
| (6,776) | |
| (9,185) |
Proceeds from premises held for sale | | | 288 | | | 903 | | | — |
Net investment in community limited partnerships | | | (1,310) | | | (2,750) | | | (22) |
Proceeds from death benefit of bank-owned life insurance policy | |
| 1,029 | |
| — | |
| — |
Acquisitions, net of cash acquired | | | — | | | (340) | | | (18,383) |
Proceeds from sale of other real estate owned | | | — | | | 2,205 | | | — |
Net cash (used in) provided by investing activities | |
| (6,062) | |
| 160,236 | |
| (78,650) |
| | | | | | | | | |
Cash flows from financing activities: | |
|
| |
|
| |
|
|
Net change in deposits | |
| 142,329 | |
| 210,464 | |
| 212,693 |
Net change in short-term senior borrowings | | | 9,324 | | | (248,262) | | | (308,380) |
Proceeds from long-term senior borrowings | | | — | | | 148,199 | | | 328,097 |
Repayments of long-term senior borrowings | | | (159,023) | | | (78,186) | | | (237,719) |
Net change in short-term other borrowings | |
| (7,977) | |
| (17,053) | |
| 8,621 |
Proceeds from subordinated debt issuance | | | — | | | — | | | 40,000 |
Repayments of subordinated debt | | | — | | | — | | | (22,000) |
Payment of subordinated debt issuance costs | | | — | | | — | | | (700) |
Exercise of stock options | | | (615) | | | 620 | | | (273) |
Purchase of treasury and common stock | | | — | | | (14,188) | | | (239) |
Cash dividends paid on common stock | |
| (14,072) | |
| (13,417) | |
| (13,366) |
Net cash (used in) provided by financing activities | |
| (30,034) | |
| (11,823) | |
| 6,734 |
(continued) | |||||||||
54
| Years Ended December 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for loan losses | 2,780 | 2,788 | 979 | |||||||||
| Net amortization of securities | 3,945 | 5,214 | 3,415 | |||||||||
| Deferred tax benefit | (443 | ) | 6,886 | 470 | ||||||||
| Change in unamortized net loan costs and premiums | (600 | ) | (933 | ) | (557 | ) | ||||||
| Premises and equipment depreciation | 3,704 | 3,553 | 1,551 | |||||||||
| Stock-based compensation expense | 1,346 | 1,274 | 1,278 | |||||||||
| Accretion of purchase accounting entries, net | (3,512 | ) | (3,337 | ) | — | |||||||
| Amortization of other intangibles | 828 | 812 | 92 | |||||||||
| Income from cash surrender value of bank-owned life insurance policies | (1,821 | ) | (1,539 | ) | (703 | ) | ||||||
| Loss (gain) on sales of securities, net | 924 | (19 | ) | (4,498 | ) | |||||||
| Loss on premises and equipment, net | — | 94 | — | |||||||||
| Net change in other assets and liabilities | (2,366 | ) | (654 | ) | (169 | ) | ||||||
| Net cash provided by operating activities | 37,722 | 40,132 | 16,791 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from sales of securities available for sale | 29,107 | 1,599 | 66,583 | |||||||||
| Proceeds from maturities, calls and prepayments of securities available for sale | 95,629 | 121,583 | 109,377 | |||||||||
| Purchases of securities available for sale | (146,763 | ) | (172,116 | ) | (210,824 | ) | ||||||
| Net change in loans | 116,756 | (126,828 | ) | (10,042 | ) | |||||||
| Purchase of loans | (121,914 | ) | (18,621 | ) | (128,951 | ) | ||||||
| Purchase of Federal Home Loan Bank stock | (2,676 | ) | (1,325 | ) | (3,852 | ) | ||||||
| Proceeds from sale of Federal Home Loan Bank stock | 5,122 | — | — | |||||||||
| Purchase of premises and equipment, net | (4,793 | ) | (3,157 | ) | (4,296 | ) | ||||||
| Purchase of bank-owned life insurance | (14,000 | ) | — | — | ||||||||
| Acquisitions, net of cash acquired | — | 39,537 | — | |||||||||
| Net investment in tax credit limited partnerships | (585 | ) | — | — | ||||||||
| Proceeds from sale of other real estate owned | 153 | 322 | 119 | |||||||||
| Net cash used in investing activities | (43,964 | ) | (159,006 | ) | (181,886 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase in deposits | 131,981 | 151,900 | 107,513 | |||||||||
| Net change in short-term advances from the Federal Home Loan Bank | 3,246 | 213,593 | 59,700 | |||||||||
| Net change in long-term advances from the Federal Home Loan Bank | (104,528 | ) | (153,332 | ) | 1,234 | |||||||
| Net change in short-term other borrowings | (4,495 | ) | (222 | ) | 871 | |||||||
| Exercise of stock options | 615 | 968 | 1,570 | |||||||||
| Purchase of treasury stock | (324 | ) | (282 | ) | (497 | ) | ||||||
| Cash dividends paid on common stock | (12,184 | ) | (11,505 | ) | (6,577 | ) | ||||||
| Net cash provided by financing activities | 14,311 | 201,120 | 163,814 | |||||||||
| Net change in cash and cash equivalents | 8,069 | 82,246 | (1,281 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 90,685 | 8,439 | 9,720 | |||||||||
| Cash and cash equivalents at end of year | $ | 98,754 | $ | 90,685 | $ | 8,439 | ||||||
| (continued) | ||||||||||||
| Supplemental cash flow information: | ||||||||||||
| Interest paid | $ | 36,511 | $ | 21,399 | $ | 11,944 | ||||||
| Income taxes paid, net | 9,891 | 9,084 | 6,286 | |||||||||
| Acquisition of non-cash assets and liabilities: | ||||||||||||
| Assets acquired | — | 1,454,076 | — | |||||||||
| Liabilities assumed | — | 1,406,672 | — | |||||||||
| Other non-cash changes: | ||||||||||||
| Real estate owned acquired in settlement of loans | 2,380 | 32 | — | |||||||||
| | | | | | | | | |
| | Year Ended December 31, | |||||||
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Net change in cash and cash equivalents | |
| 24,382 | |
| 169,097 | |
| (41,844) |
Cash and cash equivalents at beginning of year | |
| 226,007 | |
| 56,910 | |
| 98,754 |
Cash and cash equivalents at end of period | | $ | 250,389 | | $ | 226,007 | | $ | 56,910 |
| | | | | | | | | |
Supplemental cash flow information: | |
|
| |
|
| |
|
|
Interest paid | | $ | 16,354 | | $ | 27,423 | | $ | 45,755 |
Income taxes paid, net | |
| 8,859 | |
| 10,045 | |
| 2,371 |
| | | | | | | | | |
Acquisition of non-cash assets and liabilities: | | | | | | | | | |
Assets acquired | | | — | | | 1,171 | | | 243,676 |
Liabilities acquired | | | — | | | (343) | | | 261,814 |
| | | | | | | | | |
Other non-cash changes: | |
|
| |
|
| |
|
|
Real estate owned acquired in settlement of loans | |
| — | |
| — | |
| 250 |
Initial recognition of operating lease right-of-use assets | | | — | | | — | | | 8,991 |
Initial recognition of operating lease liabilities | |
| — | |
| — | |
| 8,991 |
The accompanying notes are an integral part of these consolidated financial statements.
55
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The consolidated financial statements (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company” or “Bar Harbor”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Bar Harbor Bankshares is a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such, is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include the accounts of the Company, its wholly-owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Bank’s consolidated subsidiaries. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless U.S. GAAP requires otherwise.Consolidation:
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The consolidated financial statements include the accounts of Bar Harbor Bankshares and its wholly-ownedReclassifications:
Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation. The reclassifications had no impact on net income in the Company’s consolidated income statement.Use of estimates:
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near term relate to theSubsequentEvents:TheCompanyhasevaluatedeventsandtransactionssubsequenttoDecember31,2021forpotentialrecognitionordisclosureasrequiredbyGAAP.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks,Securities:
All securities held at December 31,Premiums and discounts on securities are amortized and accreted over the term of the securities using the interest method. Gains and losses on the sale of securities are recognized at the trade date using the specific-identification method and are shown separately in the Consolidated Statements of Income.
56
Allowance for Credit Loss on InvestmentAFS Debt Securities: TheUpon adoption of CECL, effective January 1, 2021, the Company conducts an OTTI analysismonitors the credit quality of investmentavailable for sale (AFS) debt securities on a quarterly basis or more often if a potential loss-triggering event occurs. A write-downthrough credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a debt security is recorded when fair value is below amortized cost in circumstances where: (1)and are utilized by the Company to make informed decisions. Securities are triggered for further review in the quarter if the security has the intent to sell a security; (2) it is more likely than not thatsignificant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, the Company willutilizes other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be required to sellcollected from the security before recovery of its amortized cost basis; or (3)are compared to the Company does not expect to recover the entire amortized cost basis of the security. If the Company intendspresent value of cash flows expected to sell a security or if itbe collected is more likelyless than not that the Company will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis, and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representinga credit loss which is recognized in earnings,exists and an allowance on AFS debt securities is recorded for the credit loss, limited by the amount relatedthat the fair value is less than the amortized cost basis. When assessing an AFS debt security for credit loss, securities with identical CUSIPs are pooled together to all other factors, whichassess for impairment using the average cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income. To determine
A change in the amount related toallowance on AFS debt securities may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losslosses on athe consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an AFS debt security is confirmed based on the Company applies a methodology similarabove described analysis. As of December 31, 2021 and January 1, 2021 (i.e. ASU 2016-13 adoption), there was no allowance carried on the Company’s AFS debt securities. Refer to that usedNote 2 – Securities Available for evaluatingSale of the impairment of loans.
Federal Home Loan Bank Stock:
The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). The Bank uses the FHLB for most of its wholesale funding needs. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock,The Company periodically evaluates its investment in FHLB stock for impairment based on among other things, the capital adequacy of the FHLB and its overall financial condition. Based on the capital adequacy, liquidity position and sustained profitability of the FHLB, management believes there is no impairment related to the carrying amount of the Bank’s FHLB stock as of December 31, 2018.
Loans Held for Sale:
Loans:Loans held for sale are recognized in non-interest income or non-interest expense as earned or incurred.
For originated loans, is accrued and credited to income based on the principal amount of loans outstanding.
For acquired loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized
57
based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.
Purchase Credit Deteriorated (PCD) Loans: Loans that the Company acquired in acquisitions are initially recorded at fair value with no carryover of the relatedinclude some loans that have experienced more than insignificant credit deterioration since origination. The initial allowance for credit losses. Determininglosses is determined on a collective basis and allocated to the fair valueindividual loans. The sum of the loans involves estimating the amountloan’s purchase price and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.
The excessCompany adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the definition of PCD assets as of the loan’s contractually required paymentsdate of adoption. On January 1, 2021, the amortized cost basis of the PCD assets representing the noncredit discount will be accreted into interest income using the level-yield method over the cash flows expected to be collected isestimated lives of the non-accretable difference.related loans. The non-accretable difference is not recognized asconverted PCD assets of $12.5 million were then pooled by call report coding and an adjustment of yield, a loss accrual, or a valuation allowance. The Company evaluates quarterly whether the timing and cash to be collected are reasonably expected. Subsequent significant increases in cash flows the Company expects to collect will first reduce any previously recognized valuationadditional allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not
Non-performing loans:
Residential real estate and home equity loans are generally placed on non-accrual status when reaching 90 days past due, or in process of foreclosure, or sooner if considered appropriate by management. Consumer loans are generally placed on non-accrual when reaching 90 days or more past due, or sooner if considered appropriate by management. Secured consumer loans are written down to net realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management.When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on the loan. The interest on non-accrual loans is accounted for using the cash-basis or cost-recovery method depending on corresponding credit risk, until qualifying for return to accrual status. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months.
Previously, acquired loans that met the criteria for non-accrual of interest prior to the acquisition were considered performing upon acquisition, regardless of whether the customer is considered impaired when, based on current information and events, it is probable thatcontractually delinquent, if the Company will not be able to collect all amounts due fromcould reasonably estimate the borrower in accordance with the contractual termstiming and amount of the loan, including scheduled interest payments.
Loans Modified in a Troubled Debt Restructuring:
Loans are considered to have been modified in a troubled debt restructuring when, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of at least 6 months to demonstrate that the borrower is able to meet the terms of the modified loan.However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.
Loan Modifications under the CARES Act: The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that may otherwise be categorized as a troubled debt
58
restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.
Allowance for LoanCredit Losses: The allowance for loancredit losses (the “allowance”) is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The Allowance is comprised of the allowance for loan losses and the allowance for off-balance sheet credit exposures, which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the allowance represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.
Upon adoption of ASC 326 or CECL effective January 1, 2021, the Company replaced the incurred loss impairment model that recognized losses when it became probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged- off. The allowance is availablecomprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans and TDRs.
The Company uses the discounted cash flow (DCF) method to absorbestimate expected credit losses inherent in the currentfor all loan portfolio segments measured on a collective (pool) basis. For each loan segment, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, probability of default, and loss given default. The modeling of prepayment speeds is maintainedbased on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes various economic indicators such as changes in unemployment rates, gross domestic product, property values, housing starts, and other relevant factors as loss drivers. For all DCF models, management has determined that due to historic volatility in economic data, two quarters currently represents a reasonable and supportable forecast period, followed by a six-period reversion to historical mean levels for each of the various economic indicators.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at a levelthe instrument level. Specific instrument effective yields are calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that in management’s judgment,effective yield to produce an instrument-level Net Present Value (NPV). An allowance is appropriateestablished for the amountdifference between the instrument’s NPV and amortized cost basis.
The allowance evaluation also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii) delinquency and other credit quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of risk inherent inthe Company's business impacting the loan portfolio, given past(v) and present conditions. The allowance is increasedother external factors, that may include, but are not limited to, results of internal loan reviews, stress testing, examinations by provisions charged to operating expense and by recoveries on loans previously charged off, and is decreased by loans charged offbank regulatory agencies, or other events such as uncollectible.
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated regularly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration.
Individually Evaluated Loans: Prior to the allowance,adoption of CECL effective January 1, 2021, a loan was individually evaluated when the loan was considered impaired. Impaired loans were based on current information availableand events, it is probable that the Company will not be able to themcollect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.
59
With the adoption of CECL, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the timemeasurement date exceeds the amortized cost basis of their examination.
Accrued Interest. Upon adoption of CECL, effective January 1, 2021, the Company made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances within other assets on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the allowance for credit losses, including investments and loans; and (iii) continue to Note 4 -
Allowance for Loan Losses
Premises and Equipment:
Land is carried at cost. Premises and equipment and related improvements are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the lesser of the lease term or estimated useful lives of related assets; generallyTransfers of Financial Assets: Transfers of an entire financial asset, group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and Identifiable Intangible Assets:
Other Real Estate Owned: Other real estate owned consists of properties acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure. These properties are recorded at fair value less estimated costs to sell the property. Initially at transfer if the recorded investment in the loan exceeds the property’s fair value at the time of acquisition, a charge-off is recorded against the allowance. If the fair value of the property initially at transfer exceeds the carrying amount of the loan, the excess is recorded either as a recovery to the allowance if a charge-off had previously been recorded, or as a gain on initial transfer in other non-interest income. Subsequent decreases in the property’s fair value and operating expenses of the property are recognized through charges to other non-interest expense. The fair value of the property acquired and ongoing valuation is based on third-party appraisals, broker price opinions, recent sales activity, or a combination thereof, subject to management judgment. Due to changing market conditions the amount ultimately realized on the other real estate owned may differ from the amounts reflected in the financial statements.
Goodwill: In connection with acquisitions, the Company generally records as assets on its consolidated financial statements both goodwill and identifiableother intangible assets, such as core deposit and acquired customer relationship intangibles.
60
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in accordance with the purchase method of accounting for business combinations. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, or more frequently, if an event occurs or circumstances change that reduce
Other Intangible Assets: Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The fair value of these assets are generally determined based on appraisals and management assesses the recoverability of these intangible assets included in other assets on the consolidated balance sheet, consist of core deposit intangibles amortized over their estimated useful lives on a straight-line method, which approximates the economic benefits to the Company. These assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that thetheir carrying amount of the assetvalue may not be recoverable. The determination of whichThese other intangible assets have finite lives is subjective, as is the determinationprimarily consist of the amortization period for such intangible assets.
Bank-Owned Life Insurance:
Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain current and retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received in excess of the cash value, are recorded in other non-interest income, and are not subject to income taxes.Capitalized Servicing Right
s:Capitalized servicing rights are recognized as assets whenThe Company’s capitalized servicing rights are accounted for under the amortization method and are initially recorded at fair value. Fair values are established by using a discounted cash flow model to calculate the present value of estimated future net servicing income. Changes in the fair value of capitalized servicing rights are primarily due to changes in valuation inputs, assumptions, and the collection and realization of expected cash flows. However, these capitalized servicing rights are amortized in proportion to and over the period of estimated net servicing income, which includes prepayment assumptions. An impairment analysis is prepared on a quarterly basis by estimating the fair value of the capitalized servicing rights and comparing that value to the carrying amount. A valuation allowance is established when the carrying amount of these capitalized servicing rights exceeds fair value.
Derivative Financial Instruments:
The Company recognizes all derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.Changes in the fair value of derivative instruments that are highly effective and qualify as cash flow hedge are recorded in other comprehensive income/income (loss). Any ineffective portion is recorded in earnings. For fair value hedges that are highly effective, the gain or loss on the derivative and the loss or gain on the hedged item attributable to the hedged risk are both recognized in earnings, with the differences (if any) representing hedge ineffectiveness. The Company discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense based on the item being hedged. Net cash settlements on derivatives that do not quality for hedge accounting are reporting in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as cash flows of the items being hedged.
61
The Company enters into commitments to fund mortgage loans with borrowers (interest rate locks) and forward commitments for the future delivery of these mortgage loans for sale on the secondary market. These mortgage banking derivatives are classified as free standing derivatives to hedge against inherent interest rate and pricing risk associated with selling loans. The commitments to lend generally terminate once the loan is funded, the lock period expires or the borrower decides not to contract for the loan. The forward commitments generally terminate once the loan is sold or the commitment period expires. These commitments are considered derivatives which are accounted for by recognizing their estimated fair value on the Consolidated Balance Sheets in either other assets or other liabilities.
Senior and Subordinated Borrowings: The Company’s senior borrowings include retail and wholesale repurchase agreements, FHLB overnight, FHLB short-term and long-term advances, federal funds purchased, credit facilities, and line of credit advances. Subordinated borrowings consist of subordinated notes issued to investors. The Company is required to post collateral for certain borrowings, for which it, generally, posts loans and/or investment securities as collateral.
Off-Balance Sheet Financial Instruments: In the ordinary course of business, the Company has entered into off-balanceoff- balance sheet financial instruments consisting of commitments to extend credit, unused or unadvanced loan funds and letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.
Stock Based Compensation:
The Company has equity award plans that include stockEmployee Stock Purchase Plan: The Company recognizes expense based difference between the market price of shares and the discounted price of the plan from participant enrollment over each six month enrollment period.
Employee Benefit Plans:
The Company has non-qualified supplemental executive retirement agreements with certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company recognized the net present value of payments associated with the agreements over the service periods of the participating officers. Interest costs continue to be recognized on the benefit obligations. The Company also has a supplemental executive retirement agreement with a certain current executive officer. This agreement provides a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the participating executive leaves the Company following a change of control event. The Company recognizes the net present value of payments associated with these agreements over the service periods of the participating executive officers. Upon retirement, interest costs will continue to be recognized on the benefit obligation.The Company recognizes the over-funded or under-funded status of post-retirement benefit plans as a liability or asset on the balance sheet in other liabilities or other assets and recognizes changes in that funded status through other comprehensive income/income (loss). Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit costs are recognized in accumulated other comprehensive income/(loss), net of tax effects, until they are amortized as a component of net periodic cost. The measurement date, which is the date at which the benefit obligation and plan assets are measured, is the Company'sCompany’s fiscal year end.
Employee 401(k) expenses are recognized for the amount of the Company’s matching contributions.
Income Taxes:
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information indicates that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in62
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Treasury Stock: Shares of the Company’s common stock that are repurchased are recorded in treasury stock at cost. On the date of subsequent re-issuance, the treasury stock account is reduced by the cost of such stock on an average cost basis.
Earnings Per Share:
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, such as the Company’s dilutive stock options.Revenue Recognition:
The Company recognizes revenue in accordance with ASC 606, "Revenue from Contracts with Customers." ASC 606 requires the Company to follow a five step process: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the Company satisfies a performance obligation. Revenue recognition under ASC 606 depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or service. See NoteWealth Management:Wealth management assets held in a fiduciary or agent capacity are not included in the accompanying Consolidated Balance Sheets because they are not assets of the Company. Trust and investment management fees are primarily comprised of fees earned from consultative investment management, trust administration, tax return preparation, and financial planning. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based on the daily accrual of the market value of the investment accounts and the applicable fee rate.
Marketing Costs: Marketing costs are expensed as incurred.
Segment Reporting:
An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company has determined that its operations are solely in the community banking industry and include traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and third-party brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities. Accordingly, segment information is not presented in the Consolidated Financial Statements.
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Impact of Adoption
The following table illustrates the adoption of CECL effective January 1, 2021:
| | | | | | | | | | | | | | | |
| | | | | Reclassification | | Pre-CECL | | Post-CECL | | | | |||
| | | | | to CECL | | Adoption | | Adoption | | Impact of | ||||
| | Pre-CECL | | Portfolio | | Portfolio | | Portfolio | | CECL | |||||
(in thousands) |
| Adoption |
| Segmentation |
| Segmentation |
| Segmentation |
| Adoption | |||||
Assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Loans: |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial construction | | $ | 131,123 | | $ | (13,241) | | $ | 117,882 | | $ | 117,882 | | $ | — |
Commercial real estate | |
| 953,258 | |
| (953,258) | |
| — | |
| — | |
| — |
Commercial real estate owner occupied | |
| — | |
| 219,217 | |
| 219,217 | |
| 219,217 | |
| — |
Commercial real estate non-owner occupied | |
| — | |
| 716,776 | |
| 716,776 | |
| 716,776 | |
| — |
Tax exempt | |
| 63,431 | |
| (15,569) | |
| 47,862 | |
| 47,862 | |
| — |
Commercial and industrial | |
| 377,638 | |
| (21,954) | |
| 355,684 | |
| 355,684 | |
| — |
Residential real estate | |
| 923,891 | |
| 71,325 | |
| 995,216 | |
| 995,216 | |
| — |
Home equity | |
| 102,464 | |
| (2,368) | |
| 100,096 | |
| 100,096 | |
| — |
Consumer other | |
| 11,080 | |
| (928) | |
| 10,152 | |
| 10,152 | |
| — |
Total loans | | $ | 2,562,885 | | $ | — | | $ | 2,562,885 | | $ | 2,562,885 | | $ | — |
| | | | | | | | | | | | | | | |
Allowance for credit losses on loans | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial construction | | $ | 1,044 | | $ | (220) | | $ | 824 | | $ | 2,020 | | $ | 1,196 |
Commercial real estate | |
| 10,199 | |
| (10,199) | |
| — | |
| — | |
| — |
Commercial real estate owner occupied | |
| — | |
| 1,783 | |
| 1,783 | |
| 2,491 | |
| 708 |
Commercial real estate non-owner occupied | |
| — | |
| 7,864 | |
| 7,864 | |
| 5,856 | |
| (2,008) |
Tax exempt | |
| 80 | |
| (22) | |
| 58 | |
| 98 | |
| 40 |
Commercial and industrial | |
| 3,302 | |
| (165) | |
| 3,137 | |
| 6,133 | |
| 2,996 |
Residential real estate | |
| 4,078 | |
| 932 | |
| 5,010 | |
| 6,742 | |
| 1,732 |
Home equity | |
| 258 | |
| 27 | |
| 285 | |
| 888 | |
| 603 |
Consumer other | |
| 121 | |
| — | |
| 121 | |
| 82 | |
| (39) |
Total allowance for credit losses on loans | | $ | 19,082 | | $ | — | | $ | 19,082 | | $ | 24,310 | | $ | 5,228 |
| | | | | | | | | | | | | | | |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Allowance for credit losses on unfunded commitments | | $ | 359 | | $ | — | | $ | 359 | | $ | 1,975 | | $ | 1,616 |
| | | | | | | | | | | | | | | |
Total allowance for credit losses | | $ | 19,441 | | $ | — | | $ | 19,441 | | $ | 26,285 | | $ | 6,844 |
| | | | | | | | | | | | | | | |
Retained earnings: | |
|
| |
|
| |
|
| |
|
| |
|
|
Total increase in Allowance for credit losses | |
|
| |
|
| |
|
| |
|
| | $ | 6,844 |
Tax effect | |
|
| |
|
| |
|
| |
|
| |
| (1,602) |
Decrease to retained earnings | |
|
| |
|
| |
|
| |
|
| | $ | 5,242 |
Revision of Previously Issued Financial Statements
The Company has revised amounts reported in previously issued financial statements for the periods presented in this Annual Report on Form 10-K related to errors. The revised amounts relate to derivatives that were incorrectly presented as assets instead of liabilities and related equity effects net of tax and the related effects on comprehensive income and shareholders’ equity.
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The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of errors:
| | | | | | | | | |
Consolidated Balance Sheets | | | | | | | | | |
| | | | | | | | | |
December 31, 2020 | | As Reported | | Adjustment | | As Revised | |||
Deferred tax assets, net | | $ | 1,745 | | $ | 1,302 | | $ | 3,047 |
Other assets | | | 73,662 | | | (2,789) | | | 70,873 |
Total assets | | $ | 3,725,762 | | $ | (1,487) | | $ | 3,724,275 |
| | | | | | | | | |
Other liabilities | | $ | 72,183 | | $ | 2,789 | | $ | 74,972 |
Total liabilities | | | 3,314,421 | | | 2,789 | | | 3,317,210 |
Total shareholders' equity | | | 411,341 | | | (4,276) | | | 407,065 |
Total liabilities and shareholders' equity | | $ | 3,725,762 | | $ | (1,487) | | $ | 3,724,275 |
| | | | | | | | | |
Consolidated Statements of Comprehensive Income | |||||||||
| | | | | | | | | |
Twelve months ended December 31, 2019 | | As Reported | | Adjustment | | As Revised | |||
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain (loss) on hedging derivatives | | $ | 2,216 | | $ | (156) | | $ | 2,060 |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized (gain) loss on hedging derivatives | | | (448) | | | 37 | | | (411) |
Total other comprehensive income | | | 15,713 | | | (119) | | | 15,594 |
Total comprehensive income | | $ | 38,333 | | $ | (119) | | $ | 38,214 |
| | | | | | | | | |
Twelve months ended December 31, 2020 | | As Reported | | Adjustment | | As Revised | |||
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain (loss) on hedging derivatives | | $ | 3,772 | | $ | (5,423) | | $ | (1,651) |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized (gain) loss on hedging derivatives | | | (880) | | | 1,266 | | | 386 |
Total other comprehensive income | | | 7,105 | | | (4,157) | | | 2,948 |
Total comprehensive income | | $ | 40,349 | | $ | (4,157) | | $ | 36,192 |
| | | | | | | | | |
Consolidated Statements of Changes in Shareholder's Equity | |||||||||
| | | | | | | | | |
| | As Reported | | Adjustment | | As Revised | |||
Balance at December 31, 2019 | | $ | 396,407 | | $ | (119) | | $ | 396,288 |
Beginning accumulated other comprehensive income | | | 3,911 | | | (119) | | | 3,792 |
Other comprehensive income | | | 7,105 | | | (4,157) | | | 2,948 |
Ending accumulated other comprehensive income | | | 11,016 | | | (4,276) | | | 6,740 |
| | | | | | | | | |
Balance at December 31, 2020 | | $ | 411,341 | | $ | (4,276) | | $ | 407,065 |
65
Recent Accounting Pronouncements
The following table provides a brief description of accounting standards that could have a material impact to the Company’s consolidated financial statements upon adoption:
| | | | | | | | | |
Standard | |||||||||
Description | Required Date | Effect on financial statements | |||||||
Standards Adopted in | | | | ||||||
ASU 2016-13, Measurement of Credit Losses on Financial Instruments ASU 2018‑19, Codification Improvements to ASU 2016-13 | | | This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach | ||
While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. | |||||
| The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than interest income over time. The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets. | |||||
| | ||||||||
January 1, | | | Adoption of this ASU | ||||||
The ASU was originally effective for the Company beginning in the first quarter of 2020; however, after the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted on March 27, 2020, the Securities and Exchange Commission (SEC) staff clarified that once the deferral was elected by | a registrant, Dec. 31, 2020, adoption of CECL was required, retrospective to Jan. 1, 2020 (ignoring an early termination of the national emergency). Under the amendments, a registrant electing the delay under the CARES Act is further delayed until Jan. 1, 2022, effective as of Jan. 1, 2022 (absent an early termination of the national emergency). With regard to the amendments to Section 4014, the SEC staff indicated it would not object to a registrant early adopting on Dec. 31, 2020, retrospective to Jan. 1, 2020, or Jan. 1, 2021, effective as of Jan. 1, 2021. The Company adopted CECL effective January 1, | ||||||||
ASU 2018-14 Compensation- Disclosure Requirements for Defined Pension Plans Topic 715-20 | | | This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans. | | | January 1, 2021 | | | Adoption of this |
66
| | | | | | | | | |
Standard | Description | Required Date | Effect on financial statements | ||||||
Standards Adopted in 2021 | | | | ||||||
ASU 2020-01, Investments—Equity Securities, Investments Equity Method and Joint Ventures, and Derivatives and Hedging | | | In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments – Equity Securities, and made targeted improvements to address certain aspects of accounting for financial instruments. The amendments in this Update affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. | | | December 15, 2020 | | | The adoption had no material impact on the Company's consolidated financial statements. The Company’s equity method investments which primarily consist of community limited partnership investments are in compliance with the new guidance prospectively in 2021. |
Standard | Description | Required Date | Effect on financial statements | ||||||
Standards Not Yet Adopted | | | | ||||||
ASU 2020-04 Facilitation of the Effects of Reference Rate Reform, Topic 848, as amended in ASU 2021-01 | | | This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). For instance, companies can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. A company that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Companies can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, companies can (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. | | | May be elected through December 31, 2022. | | | The Company is |
67
| | | | | | | | | |
Rate Reform Elections
Adherence to ISDA Fallback Protocol
The ISDA 2020 IBOR Fallbacks Protocol (the “ISDA Fallback Protocol”) was made available for adherence on October 23, 2020 with an effective date of January 25, 2021. Once adhered to by both counterparties in a bilateral relationship and the effective date is reached, the ISDA Fallback Protocol represents a change to the contractual terms of derivatives governed by each respective ISDA agreement between the Company and a derivative counterparty. The change relates to reference rate reform and represents the potential for addition of or changes to contractual terms and was developed by a private-sector working group convened by a regulator as referenced in 848-20-15-5(g). For all of the Company’s interest rate swaps that meet the scope requirements of 848-10-15-3 and 848-10-15-3A and for which the Company adhered to the ISDA Fallback Protocol, the Company makes the following elections:
• Modification related elections
• Option to not reassess a previous accounting determination (paragraph 848-20-35-4)
• Hedge accounting related modifications
• | Option to not dedesignate a hedging relationship due to a change in a critical term (paragraph 848-30-25-3) |
• | Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5) |
Cash flow hedges
The Company amends the hedge documentation, without dedesignating and redesignating, for all outstanding cash flow hedging relationships for the following elections:
• | Probability of forecasted transactions: The Company elects the expedient in ASC 848-50-25-2 to assert probability of the hedged interest payments/receipts regardless of any expected modification in terms related to reference rate reform. |
• | Assessment of effectiveness: In accordance with ASC 848-30-25-4, ASC 848-30-25-8, and ASC 848-50-35-1 through 35-24 the Company has the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848. At this time the Company elects to continue the method of assessing effectiveness as documented in the original hedge documentation and elects to apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to the date of this memorandum, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not be replaced for the remainder of the hedging relationship. |
New hedging activity
The Company makes the same elections for each hedging relationship designated subsequent to March 31, 2021. Any hedging relationship-specific elections beyond the elections noted above will be documented in the respective inception hedge documentation. Subsequent election of optional expedients and exceptions after March 31, 2021 will be documented in accordance with the elections being made here.
1
68
NOTE 2. SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale:
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| December 31, 2018 | ||||||||||||||||
| Securities available for sale | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| US Government-sponsored enterprises | $ | 413,492 | $ | 904 | $ | 9,444 | $ | 404,952 | ||||||||
| US Government agency | 111,938 | 509 | 1,935 | 110,512 | ||||||||||||
| Private label | 20,353 | 113 | 84 | 20,382 | ||||||||||||
| Obligations of states and political subdivisions thereof | 133,260 | 1,081 | 2,076 | 132,265 | ||||||||||||
| Corporate bonds | 58,098 | 264 | 636 | 57,726 | ||||||||||||
| Total securities available for sale | $ | 737,141 | $ | 2,871 | $ | 14,175 | $ | 725,837 | ||||||||
| December 31, 2017 | ||||||||||||||||
| Securities available for sale | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Obligations of US Government sponsored enterprises | $ | 6,967 | $ | 5 | $ | — | $ | 6,972 | ||||||||
| Mortgage-backed securities: | ||||||||||||||||
| US Government-sponsored enterprises | 447,081 | 1,738 | 5,816 | 443,003 | ||||||||||||
| US Government agency | 96,357 | 413 | 1,174 | 95,596 | ||||||||||||
| Private label | 529 | 150 | 5 | 674 | ||||||||||||
| Obligations of states and political subdivisions thereof | 138,522 | 2,407 | 729 | 140,200 | ||||||||||||
| Corporate bonds | 30,527 | 323 | 53 | 30,797 | ||||||||||||
| Total securities available for sale | $ | 719,983 | $ | 5,036 | $ | 7,777 | $ | 717,242 | ||||||||
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | | | | Unrealized | | Unrealized | | | | ||
(in thousands) |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||
December 31, 2021 |
| |
|
| |
|
| |
|
| |
|
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 237,283 | | $ | 2,289 | | $ | (3,455) | | $ | 236,117 |
US Government agency | |
| 79,143 | |
| 1,016 | |
| (522) | |
| 79,637 |
Private label | |
| 68,691 | |
| 142 | |
| (138) | |
| 68,695 |
Obligations of states and political subdivisions thereof | |
| 140,585 | |
| 1,489 | |
| (298) | |
| 141,776 |
Corporate bonds | |
| 89,994 | |
| 2,479 | |
| (422) | |
| 92,051 |
Total securities available for sale | | $ | 615,696 | | $ | 7,415 | | $ | (4,835) | | $ | 618,276 |
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | | | | Unrealized | | Unrealized | | | | ||
(in thousands) |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||
December 31, 2020 | |
|
| |
|
| |
|
| |
|
|
Mortgage-backed securities: | |
|
| |
|
| |
|
| |
|
|
US Government-sponsored enterprises | | $ | 206,834 | | $ | 6,018 | | $ | (462) | | $ | 212,390 |
US Government agency | |
| 82,878 | |
| 2,870 | |
| (116) | |
| 85,632 |
Private label | |
| 19,810 | |
| 40 | |
| (141) | |
| 19,709 |
Obligations of states and political subdivisions thereof | |
| 164,766 | |
| 4,244 | |
| (6) | |
| 169,004 |
Corporate bonds | |
| 97,689 | |
| 1,465 | |
| (843) | |
| 98,311 |
Total securities available for sale | | $ | 571,977 | | $ | 14,637 | | $ | (1,568) | | $ | 585,046 |
The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at December 31, 20182021 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.
| Available for sale | ||||||||
| (in thousands) | Amortized Cost | Fair Value | ||||||
| Within 1 year | $ | 425 | $ | 427 | ||||
| Over 1 year to 5 years | 23,312 | 23,311 | ||||||
| Over 5 years to 10 years | 62,111 | 62,055 | ||||||
| Over 10 years | 105,510 | 104,198 | ||||||
| Total bonds and obligations | 191,358 | 189,991 | ||||||
| Mortgage-backed securities | 545,783 | 535,846 | ||||||
| Total securities available for sale | $ | 737,141 | $ | 725,837 | ||||
| | | | | | |
| | Available for sale | ||||
(in thousands) |
| Amortized Cost |
| Fair Value | ||
Within 1 year |
| $ | 4,999 | | $ | 5,047 |
Over 1 year to 5 years | |
| 24,530 | |
| 25,112 |
Over 5 years to 10 years | |
| 61,955 | |
| 60,534 |
Over 10 years | |
| 139,095 | |
| 143,134 |
Total bonds and obligations | |
| 230,579 | |
| 233,827 |
Mortgage-backed securities | |
| 385,117 | |
| 384,449 |
Total securities available for sale | | $ | 615,696 | | $ | 618,276 |
The following table summarizes proceeds from the sale of AFS securities and realized gains and losses:
| | | | | | | | | | | | |
| | Proceeds from Sale | | | | | | | | | | |
| | of Securities | | | | | | | | | | |
(in thousands) |
| Available for Sale |
| Realized Gains |
| Realized Losses |
| Net | ||||
2021 | | $ | 92,723 | | $ | 2,933 | | $ | (63) | | $ | 2,870 |
2020 | | | 153,200 | | | 5,492 | | | (47) | | | 5,445 |
2019 | |
| 92,315 | | | 993 | | | (756) | | | 237 |
69
| (in thousands) | Proceeds from Sale of Securities Available for Sale | Realized Gains | Realized Losses | Net | ||||||||||||
| 2018 | $ | 29,107 | $ | — | $ | 924 | $ | (924 | ) | |||||||
| 2017 | 1,599 | 19 | — | 19 | ||||||||||||
| 2016 | 66,583 | 4,498 | — | 4,498 | ||||||||||||
Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
| Less Than Twelve Months | Over Twelve Months | Total | ||||||||||||||||||||||
| (in thousands) | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | ||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| US Government-sponsored enterprises | $ | 155 | $ | 19,367 | $ | 9,289 | $ | 297,569 | $ | 9,444 | $ | 316,936 | ||||||||||||
| US Government agency | 16 | 2,570 | 1,919 | 68,266 | 1,935 | 70,836 | ||||||||||||||||||
| Private label | 79 | 10,393 | 5 | 47 | 84 | 10,440 | ||||||||||||||||||
| Obligations of states and political subdivisions thereof | 43 | 6,784 | 2,033 | 47,930 | 2,076 | 54,714 | ||||||||||||||||||
| Corporate bonds | 224 | 11,759 | 412 | 14,460 | 636 | 26,219 | ||||||||||||||||||
| Total securities available for sale | $ | 517 | $ | 50,873 | $ | 13,658 | $ | 428,272 | $ | 14,175 | $ | 479,145 | ||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| US Government-sponsored enterprises | $ | 1,895 | $ | 189,486 | $ | 3,921 | $ | 117,156 | $ | 5,816 | $ | 306,642 | ||||||||||||
| US Government agency | 559 | 45,221 | 615 | 30,155 | 1,174 | 75,376 | ||||||||||||||||||
| Private label | — | 8 | 5 | 130 | 5 | 138 | ||||||||||||||||||
| Obligations of states and political subdivisions thereof | 58 | 8,298 | 671 | 27,727 | 729 | 36,025 | ||||||||||||||||||
| Corporate bonds | 53 | 8,943 | — | — | 53 | 8,943 | ||||||||||||||||||
| Total securities available for sale | $ | 2,565 | $ | 251,956 | $ | 5,212 | $ | 175,168 | $ | 7,777 | $ | 427,124 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Over Twelve Months | | Total | ||||||||||||
| | Gross |
| | |
| Gross |
| | |
| Gross |
| | | |||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
(in thousands) |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
December 31, 2021 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 1,589 | | $ | 127,780 | | $ | 1,866 | | $ | 39,717 | | $ | 3,455 | | $ | 167,497 |
US Government agency | |
| 381 | |
| 32,628 | |
| 141 | |
| 4,548 | |
| 522 | |
| 37,176 |
Private label | |
| 133 | |
| 44,372 | |
| 5 | |
| 16 | |
| 138 | |
| 44,388 |
Obligations of states and political subdivisions thereof | |
| 187 | |
| 36,878 | |
| 111 | |
| 6,129 | |
| 298 | |
| 43,007 |
Corporate bonds | |
| 94 | |
| 21,358 | |
| 328 | |
| 11,922 | |
| 422 | |
| 33,280 |
Total securities available for sale | | $ | 2,384 | | $ | 263,016 | | $ | 2,451 | | $ | 62,332 | | $ | 4,835 | | $ | 325,348 |
| | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Over Twelve Months | | Total | ||||||||||||
|
| Gross |
| | |
| Gross |
| | |
| Gross |
| | | |||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
(in thousands) | | Losses | | Value | | Losses | | Value | | Losses | | Value | ||||||
December 31, 2020 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 209 | | $ | 40,285 | | $ | 253 | | $ | 4,323 | | $ | 462 | | $ | 44,608 |
US Government agency | |
| 45 | |
| 6,776 | |
| 71 | |
| 3,297 | |
| 116 | |
| 10,073 |
Private label | |
| — | |
| — | |
| 141 | |
| 19,514 | |
| 141 | |
| 19,514 |
Obligations of states and political subdivisions thereof | |
| 6 | |
| 5,577 | |
| — | |
| — | |
| 6 | |
| 5,577 |
Corporate bonds | |
| 555 | |
| 21,774 | |
| 288 | |
| 11,712 | |
| 843 | |
| 33,486 |
Total securities available for sale | | $ | 815 | | $ | 74,412 | | $ | 753 | | $ | 38,846 | | $ | 1,568 | | $ | 113,258 |
A summary of securities pledged as collateral for certain deposits and borrowing arrangements as of the years ended December 31, 20182021 and December 31, 20172020 is as follows:
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||
|
| Carrying |
| Estimated |
| Carrying |
| Estimated | ||||
(in thousands) | | Value | | Fair Value | | Value | | Fair Value | ||||
Securities pledged for deposits | | $ | 15,326 | | $ | 17,214 | | $ | 83,805 | | $ | 92,862 |
Securities pledged for repurchase agreements | |
| 25,693 | |
| 28,431 | |
| 37,444 | |
| 39,119 |
Securities pledged for borrowings (1) | |
| 45,005 | |
| 47,568 | |
| 48,725 | |
| 51,913 |
Total securities pledged | | $ | 86,024 | | $ | 93,213 | | $ | 169,974 | | $ | 183,894 |
| (1) | The Bank pledged securities as collateral for certain borrowing arrangements with the Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston. |
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| (in thousands) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||
| Securities pledged for deposits | $ | 128,949 | $ | 126,649 | $ | 195,921 | $ | 194,681 | ||||||||
| Securities pledged for repurchase agreements | 55,656 | 54,189 | 98,407 | 98,050 | ||||||||||||
Securities pledged for other borrowings (1) | 270,252 | 265,334 | 213,379 | 212,089 | ||||||||||||
| Total securities pledged | $ | 454,857 | $ | 446,172 | $ | 507,707 | $ | 504,820 | ||||||||
| Twelve Months Ended December 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Estimated credit losses as of prior year-end, | $ | 1,697 | $ | 1,697 | $ | 3,180 | ||||||
| Reductions for securities paid off during the period | — | — | 1,483 | |||||||||
| Estimated credit losses at end of the period | $ | 1,697 | $ | 1,697 | $ | 1,697 | ||||||
The Company expects to recover its amortized cost basis on all debt securities in its AFS portfolio, as unrealized losses are the result of changes in the interest rate environment and other market factors.portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of December 31, 2018,2021, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.
70
The following summarizes, by investment security type, the basis for the conclusion that the debtimpact of securities in an unrealized loss position within the Company’s AFS were not other-than-temporarily impairedfor greater than 12 months at December 31, 2018:
US Government-sponsored enterprises
27 out of the total 759533 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 2.9%1.46% of the amortized cost of securities in unrealized loss positions.Thepositions. The FNMA and FHLMC guarantee the contractual cash flows of all of the Company’s US Government-sponsoredGovernment- sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the year. All securities are performing.
US Government agencies
7 out of the total 194156 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 2.7%0.66% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US government agency securities. The securities are rated investment grade and there were no material underlying credit downgrades during the year. All securities are performing.
Private-label
4 of the total 2333 securities in the Company’s portfolio of AFS private-label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.8%0.20% of the amortized cost of securities in unrealized loss positions. Based upon the foregoing considerations, and the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.
Obligations of states and political subdivisions thereof
2 of the total 25793 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.7%0.21% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company believes the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying credit downgrades during the year. All securities are performing.
Corporate bonds
3 of the total 2129 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 2.4%0.47% of the amortized cost of bondssecurities in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.
71
Upon adoption of ASC 326 or CECL, effective January 1, 2021, the Company evaluates its risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan portfolio is comprisedtypes. Prior to the adoption of ASC 326, under the incurred loss model, the Company evaluated its risk characteristics of loans based on purpose of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans include multi-family, commercial construction and land, and other commercial real estate classes. Commercial and industrial loans include loans to commercial businesses, agricultural and other loans to farmers, and tax exempt loans. Residential real estate loans consist of mortgages for 1-to-4 family housing. Consumer loans include home equity loans, auto and other installment loans.
The following is a summary of total loans, as of December 31, 2018 and December 31, 2017:
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
| (in thousands) | Business Activities Loans | Acquired Loans | Total | Business Activities Loans | Acquired Loans | Total | ||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||
| Construction and land development | $ | 23,754 | $ | 2,890 | $ | 26,644 | $ | 28,892 | $ | 16,781 | $ | 45,673 | ||||||||||||
| Other commercial real estate | 555,980 | 244,075 | 800,055 | 505,119 | 275,954 | 781,073 | ||||||||||||||||||
| Total commercial real estate | 579,734 | 246,965 | 826,699 | 534,011 | 292,735 | 826,746 | ||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||
| Other Commercial | 234,757 | 52,470 | 287,227 | 198,051 | 68,069 | 266,120 | ||||||||||||||||||
| Agricultural | 22,317 | — | 22,317 | 27,588 | — | 27,588 | ||||||||||||||||||
| Tax exempt | 56,588 | 38,738 | 95,326 | 42,365 | 43,350 | 85,715 | ||||||||||||||||||
| Total commercial and industrial | 313,662 | 91,208 | 404,870 | 268,004 | 111,419 | 379,423 | ||||||||||||||||||
| Total commercial loans | 893,396 | 338,173 | 1,231,569 | 802,015 | 404,154 | 1,206,169 | ||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||
| Residential mortgages | 670,189 | 474,509 | 1,144,698 | 591,411 | 564,271 | 1,155,682 | ||||||||||||||||||
| Total residential real estate | 670,189 | 474,509 | 1,144,698 | 591,411 | 564,271 | 1,155,682 | ||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Home equity | 57,898 | 45,291 | 103,189 | 51,376 | 62,217 | 113,593 | ||||||||||||||||||
| Other consumer | 9,414 | 1,357 | 10,771 | 7,828 | 2,341 | 10,169 | ||||||||||||||||||
| Total consumer | 67,312 | 46,648 | 113,960 | 59,204 | 64,558 | 123,762 | ||||||||||||||||||
| Total loans | $ | 1,630,897 | $ | 859,330 | $ | 2,490,227 | $ | 1,452,630 | $ | 1,032,983 | $ | 2,485,613 | ||||||||||||
| | | | | | |
| | December 31, | | December 31, | ||
(in thousands) |
| 2021 |
| 2020 | ||
Commercial construction | | $ | 56,263 | | $ | 117,882 |
Commercial real estate owner occupied | |
| 257,122 | |
| 219,217 |
Commercial real estate non-owner occupied | |
| 887,092 | |
| 716,776 |
Tax exempt | |
| 41,280 | |
| 47,862 |
Commercial and industrial | |
| 307,112 | |
| 355,684 |
Residential real estate | |
| 888,263 | |
| 995,216 |
Home equity | |
| 86,657 | |
| 100,096 |
Consumer other | |
| 8,121 | |
| 10,152 |
Total loans | |
| 2,531,910 | |
| 2,562,885 |
Allowance for credit losses | |
| 22,718 | |
| 19,082 |
Net loans | | $ | 2,509,192 | | $ | 2,543,803 |
Total unamortized net costs and premiums included in the year-end total for business activity loans were the following at December 31, 2018 and December 31, 2017:
| (in thousands) | 2018 | 2017 | ||||||
| Unamortized net loan origination costs | $ | 3,064 | $ | 2,445 | ||||
| Unamortized net premium on purchased loans | (127 | ) | (123 | ) | ||||
| Total unamortized net costs and premiums | $ | 2,937 | $ | 2,322 | ||||
| Twelve Months Ended December 31, | ||||||||
| (in thousands) | 2018 | 2017 | ||||||
| Balance at beginning of period | $ | 3,509 | $ | — | ||||
| Acquisitions | — | 3,398 | ||||||
| Reclassification from nonaccretable difference for loans with improved cash flows | 2,240 | 1,925 | ||||||
| Changes in expected cash flows that do not affect the nonaccretable difference | — | — | ||||||
| Reclassification to TDR | (30 | ) | — | |||||
| Accretion | (1,342 | ) | (1,814 | ) | ||||
| Balance at end of period | $ | 4,377 | $ | 3,509 | ||||
| (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | 23,754 | $ | 23,754 | $ | — | ||||||||||||||
| Other commercial real estate | 1,146 | — | 6,725 | 7,871 | 548,109 | 555,980 | — | |||||||||||||||||||||
| Total commercial real estate | 1,146 | — | 6,725 | 7,871 | 571,863 | 579,734 | — | |||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||
| Other Commercial | 395 | 60 | 402 | 857 | 233,900 | 234,757 | 50 | |||||||||||||||||||||
| Agricultural | 65 | 6 | 25 | 96 | 22,221 | 22,317 | — | |||||||||||||||||||||
| Tax exempt | — | — | — | — | 56,588 | 56,588 | — | |||||||||||||||||||||
| Total commercial and industrial | 460 | 66 | 427 | 953 | 312,709 | 313,662 | 50 | |||||||||||||||||||||
| Total commercial loans | 1,606 | 66 | 7,152 | 8,824 | 884,572 | 893,396 | 50 | |||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Residential mortgages | 3,565 | 641 | 1,309 | 5,515 | 664,674 | 670,189 | — | |||||||||||||||||||||
| Total residential real estate | 3,565 | 641 | 1,309 | 5,515 | 664,674 | 670,189 | — | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 72 | — | — | 72 | 57,826 | 57,898 | — | |||||||||||||||||||||
| Other consumer | 17 | — | 11 | 28 | 9,386 | 9,414 | — | |||||||||||||||||||||
| Total consumer | 89 | — | 11 | 100 | 67,212 | 67,312 | — | |||||||||||||||||||||
| Total loans | $ | 5,260 | $ | 707 | $ | 8,472 | $ | 14,439 | $ | 1,616,458 | $ | 1,630,897 | $ | 50 | ||||||||||||||
| (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Acquired Credit Impaired | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | 164 | $ | 2,890 | $ | — | ||||||||||||||
| Other commercial real estate | 631 | 99 | 211 | 941 | 6,143 | 244,075 | — | |||||||||||||||||||||
| Total commercial real estate | 631 | 99 | 211 | 941 | 6,307 | 246,965 | — | |||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||
| Other commercial | 149 | 26 | 494 | 669 | 679 | 52,470 | — | |||||||||||||||||||||
| Agricultural | — | — | — | — | — | — | — | |||||||||||||||||||||
| Tax exempt | — | — | — | — | — | 38,738 | — | |||||||||||||||||||||
| Total commercial and industrial | 149 | 26 | 494 | 669 | 679 | 91,208 | — | |||||||||||||||||||||
| Total commercial loans | 780 | 125 | 705 | 1,610 | 6,986 | 338,173 | — | |||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Residential mortgages | 3,419 | 254 | 1,792 | 5,465 | 3,095 | 474,509 | — | |||||||||||||||||||||
| Total residential real estate | 3,419 | 254 | 1,792 | 5,465 | 3,095 | 474,509 | — | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 198 | — | 66 | 264 | 22 | 45,291 | 7 | |||||||||||||||||||||
| Other consumer | 17 | — | — | 17 | 3 | 1,357 | 189 | |||||||||||||||||||||
| Total consumer | 215 | — | 66 | 281 | 25 | 46,648 | 196 | |||||||||||||||||||||
| Total loans | $ | 4,414 | $ | 379 | $ | 2,563 | $ | 7,356 | $ | 10,106 | $ | 859,330 | $ | 196 | ||||||||||||||
| (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||
| Construction and land development | $ | — | $ | — | $ | 637 | $ | 637 | $ | 28,255 | $ | 28,892 | $ | — | ||||||||||||||
| Other commercial real estate | 965 | 1,659 | 5,065 | 7,689 | 497,430 | 505,119 | 119 | |||||||||||||||||||||
| Total commercial real estate | 965 | 1,659 | 5,702 | 8,326 | 525,685 | 534,011 | 119 | |||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||
| Other commercial | 186 | 329 | 702 | 1,217 | 196,834 | 198,051 | 21 | |||||||||||||||||||||
| Agricultural | 42 | 159 | 198 | 399 | 27,189 | 27,588 | 155 | |||||||||||||||||||||
| Tax exempt | — | — | — | — | 42,365 | 42,365 | — | |||||||||||||||||||||
| Total commercial and industrial | 228 | 488 | 900 | 1,616 | 266,388 | 268,004 | 176 | |||||||||||||||||||||
| Total commercial loans | 1,193 | 2,147 | 6,602 | 9,942 | 792,073 | 802,015 | 295 | |||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Residential mortgages | 3,096 | 711 | 975 | 4,782 | 586,629 | 591,411 | — | |||||||||||||||||||||
| Total residential real estate | 3,096 | 711 | 975 | 4,782 | 586,629 | 591,411 | — | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 515 | — | 199 | 714 | 50,662 | 51,376 | 199 | |||||||||||||||||||||
| Other consumer | 36 | 24 | — | 60 | 7,768 | 7,828 | — | |||||||||||||||||||||
| Total consumer | 551 | 24 | 199 | 774 | 58,430 | 59,204 | 199 | |||||||||||||||||||||
| Total loans | $ | 4,840 | $ | 2,882 | $ | 7,776 | $ | 15,498 | $ | 1,437,132 | $ | 1,452,630 | $ | 494 | ||||||||||||||
| (in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Acquired Credit Impaired | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||
| Construction and land development | $ | 124 | $ | 9 | $ | — | $ | 133 | $ | 258 | $ | 16,781 | $ | — | ||||||||||||||
| Other commercial real estate | 278 | — | 411 | 689 | 8,397 | 275,954 | — | |||||||||||||||||||||
| Total commercial real estate | 402 | 9 | 411 | 822 | 8,655 | 292,735 | — | |||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||
| Other commercial | 125 | 14 | 49 | 188 | 632 | 68,069 | — | |||||||||||||||||||||
| Agricultural | — | — | — | — | — | — | — | |||||||||||||||||||||
| Tax exempt | — | — | — | — | — | 43,350 | — | |||||||||||||||||||||
| Total commercial and industrial | 125 | 14 | 49 | 188 | 632 | 111,419 | — | |||||||||||||||||||||
| Total commercial loans | 527 | 23 | 460 | 1,010 | 9,287 | 404,154 | — | |||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||
| Residential mortgages | 752 | 388 | 614 | 1,754 | 3,259 | 564,271 | — | |||||||||||||||||||||
| Total residential real estate | 752 | 388 | 614 | 1,754 | 3,259 | 564,271 | — | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | 125 | 117 | 80 | 322 | 38 | 62,217 | 16 | |||||||||||||||||||||
| Other consumer | 2 | — | — | 2 | 3 | 2,341 | — | |||||||||||||||||||||
| Total consumer | 127 | 117 | 80 | 324 | 41 | 64,558 | 16 | |||||||||||||||||||||
| Total loans | $ | 1,406 | $ | 528 | $ | 1,154 | $ | 3,088 | $ | 12,587 | $ | 1,032,983 | $ | 16 | ||||||||||||||
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
| (in thousands) | Business Activities Loans | Acquired Loans | Total | Business Activities Loans | Acquired Loans | Total | ||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||
| Construction and land development | $ | 1 | $ | — | $ | 1 | $ | 637 | $ | — | $ | 637 | ||||||||||||
| Other commercial real estate | 7,873 | 282 | 8,155 | 7,146 | 560 | 7,706 | ||||||||||||||||||
| Total commercial real estate | 7,874 | 282 | 8,156 | 7,783 | 560 | 8,343 | ||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||
| Other commercial | 1,423 | 643 | 2,066 | 703 | 463 | 1,166 | ||||||||||||||||||
| Agricultural | 265 | — | 265 | 43 | — | 43 | ||||||||||||||||||
| Tax exempt | — | — | — | — | — | — | ||||||||||||||||||
| Total commercial and industrial | 1,688 | 643 | 2,331 | 746 | 463 | 1,209 | ||||||||||||||||||
| Total commercial loans | 9,562 | 925 | 10,487 | 8,529 | 1,023 | 9,552 | ||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||
| Residential mortgages | 4,213 | 2,997 | 7,210 | 3,408 | 858 | 4,266 | ||||||||||||||||||
| Total residential real estate | 4,213 | 2,997 | 7,210 | 3,408 | 858 | 4,266 | ||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Home equity | 246 | 201 | 447 | 130 | 217 | 347 | ||||||||||||||||||
| Other consumer | 90 | 1 | 91 | 95 | 58 | 153 | ||||||||||||||||||
| Total consumer | 336 | 202 | 538 | 225 | 275 | 500 | ||||||||||||||||||
| Total loans | $ | 14,111 | $ | 4,124 | $ | 18,235 | $ | 12,162 | $ | 2,156 | $ | 14,318 | ||||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| December 31, 2018 | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 9,835 | $ | 1,445 | $ | 2,562 | $ | 13 | $ | 13,855 | ||||||||||
| Collectively evaluated | 569,899 | 312,217 | 667,627 | 67,299 | 1,617,042 | |||||||||||||||
| Total | $ | 579,734 | $ | 313,662 | $ | 670,189 | $ | 67,312 | $ | 1,630,897 | ||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| December 31, 2018 | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 188 | $ | 426 | $ | 744 | $ | — | $ | 1,358 | ||||||||||
| Purchased credit impaired | 6,307 | 679 | 3,095 | 25 | 10,106 | |||||||||||||||
| Collectively evaluated | 240,470 | 90,103 | 470,670 | 46,623 | 847,866 | |||||||||||||||
| Total | $ | 246,965 | $ | 91,208 | $ | 474,509 | $ | 46,648 | $ | 859,330 | ||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 7,604 | $ | 626 | $ | 1,404 | $ | 13 | $ | 9,647 | ||||||||||
| Collectively evaluated | 526,407 | 267,378 | 590,007 | 59,191 | 1,442,983 | |||||||||||||||
| Total | $ | 534,011 | $ | 268,004 | $ | 591,411 | $ | 59,204 | $ | 1,452,630 | ||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 241 | $ | 571 | $ | 271 | $ | 63 | $ | 1,146 | ||||||||||
| Purchased credit impaired | 8,655 | 632 | 3,259 | 41 | 12,587 | |||||||||||||||
| Collectively evaluated | 283,839 | 110,216 | 560,741 | 64,454 | 1,019,250 | |||||||||||||||
| Total | $ | 292,735 | $ | 111,419 | $ | 564,271 | $ | 64,558 | $ | 1,032,983 | ||||||||||
| | | | | | |
| | December 31, | | December 31, | ||
(in thousands) |
| 2021 |
| 2020 | ||
Net Unamortized loan origination costs | | $ | 3,014 | | $ | 1,660 |
Net Unamortized fair value discount on acquired loans | |
| (4,758) | |
| (7,032) |
Total | | $ | (1,744) | | $ | (5,372) |
The following is a summary of impaired loans at December 31, 2018 and December 31, 2017:
| December 31, 2018 | ||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
| With no related allowance: | ||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | ||||||
| Other commercial real estate | 8,209 | 8,301 | — | |||||||||
| Other commercial | 649 | 669 | — | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 1,671 | 1,709 | — | |||||||||
| Home equity | — | — | — | |||||||||
| Other consumer | — | — | — | |||||||||
| With an allowance recorded: | ||||||||||||
| Construction and land development | $ | 1 | $ | 1 | $ | 1 | ||||||
| Other commercial real estate | 1,625 | 1,660 | 421 | |||||||||
| Other commercial | 796 | 855 | 78 | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 891 | 916 | 111 | |||||||||
| Home equity | 13 | 13 | — | |||||||||
| Other consumer | — | — | — | |||||||||
| Total | ||||||||||||
| Commercial real estate | $ | 9,835 | $ | 9,962 | $ | 422 | ||||||
| Commercial and industrial | 1,445 | 1,524 | 78 | |||||||||
| Residential real estate | 2,562 | 2,625 | 111 | |||||||||
| Consumer | 13 | 13 | ��� | |||||||||
| Total impaired loans | $ | 13,855 | $ | 14,124 | $ | 611 | ||||||
| December 31, 2018 | ||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
| With no related allowance: | ||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | ||||||
| Other commercial real estate | 188 | 187 | — | |||||||||
| Other commercial | 426 | 510 | — | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 375 | 524 | — | |||||||||
| Home equity | — | — | — | |||||||||
| Other consumer | — | — | — | |||||||||
| With an allowance recorded: | ||||||||||||
| Construction and land development | $ | — | ||||||||||
| Other commercial real estate | — | — | — | |||||||||
| Other commercial | — | — | — | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 369 | 379 | 41 | |||||||||
| Home equity | — | — | — | |||||||||
| Other consumer | — | — | — | |||||||||
| Total | ||||||||||||
| Commercial real estate | $ | 188 | $ | 187 | $ | — | ||||||
| Commercial and industrial | 426 | 510 | — | |||||||||
| Residential real estate | 744 | 903 | 41 | |||||||||
| Consumer | — | — | — | |||||||||
| Total impaired loans | $ | 1,358 | $ | 1,600 | $ | 41 | ||||||
| December 31, 2017 | ||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
| With no related allowance: | ||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | ||||||
| Other commercial real estate | 5,896 | 5,903 | — | |||||||||
| Other commercial | 218 | 217 | — | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 1,247 | 1,260 | — | |||||||||
| Home equity | 13 | 13 | — | |||||||||
| Other consumer | — | — | — | |||||||||
| With an allowance recorded: | ||||||||||||
| Construction and land development | $ | 637 | $ | 2,563 | $ | 59 | ||||||
| Other commercial real estate | 1,071 | 1,132 | 388 | |||||||||
| Other commercial | 408 | 408 | 3 | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 157 | 157 | 9 | |||||||||
| Home equity | — | — | — | |||||||||
| Other consumer | — | — | — | |||||||||
| Total | ||||||||||||
| Commercial real estate | $ | 7,604 | $ | 9,598 | $ | 447 | ||||||
| Commercial and industrial | 626 | 625 | 3 | |||||||||
| Residential real estate | 1,404 | 1,417 | 9 | |||||||||
| Consumer | 13 | 13 | — | |||||||||
| Total impaired loans | $ | 9,647 | $ | 11,653 | $ | 459 | ||||||
| December 31, 2017 | ||||||||||||
| (in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
| With no related allowance: | ||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | ||||||
| Other commercial real estate | 241 | 352 | — | |||||||||
| Other commercial | 571 | 584 | — | |||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | 271 | 278 | — | |||||||||
| Home equity | 63 | 156 | — | |||||||||
| Other consumer | — | — | — | |||||||||
| With an allowance recorded: | ||||||||||||
| Construction and land development | $ | — | ||||||||||
| Other commercial real estate | — | — | — | |||||||||
| Other commercial | — | — | ||||||||||
| Agricultural | — | — | — | |||||||||
| Tax exempt | — | — | — | |||||||||
| Residential real estate | — | — | — | |||||||||
| Home equity | — | — | — | |||||||||
| Other consumer | — | — | — | |||||||||
| Total | ||||||||||||
| Commercial real estate | $ | 241 | $ | 352 | $ | — | ||||||
| Commercial and industrial | 571 | 584 | — | |||||||||
| Residential real estate | 271 | 278 | — | |||||||||
| Consumer | 63 | 156 | — | |||||||||
| Total impaired loans | $ | 1,146 | $ | 1,370 | $ | — | ||||||
| Twelve Months Ended December 31, 2018 | Twelve Months Ended December 31, 2017 | |||||||||||||||
| (in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
| With no related allowance: | ||||||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | $ | — | ||||||||
| Other commercial real estate | 6,878 | 77 | 2,541 | 66 | ||||||||||||
| Other commercial | 634 | 9 | 382 | 6 | ||||||||||||
| Agricultural | — | — | 113 | 1 | ||||||||||||
| Tax exempt | — | — | — | — | ||||||||||||
| Residential real estate | 1,693 | 39 | 2,174 | 39 | ||||||||||||
| Home equity | — | — | 27 | — | ||||||||||||
| Other consumer | — | — | 53 | 3 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Construction and land development | $ | 1 | $ | — | $ | 637 | $ | — | ||||||||
| Other commercial real estate | 1,140 | — | 735 | — | ||||||||||||
| Other commercial | 735 | — | 105 | 1 | ||||||||||||
| Agricultural | — | — | — | — | ||||||||||||
| Tax exempt | — | — | — | — | ||||||||||||
| Residential real estate | 826 | 9 | 157 | 5 | ||||||||||||
| Home equity | 13 | 1 | — | — | ||||||||||||
| Other consumer | — | — | — | — | ||||||||||||
| Total | ||||||||||||||||
| Commercial real estate | $ | 8,019 | $ | 77 | $ | 3,913 | $ | 66 | ||||||||
| Commercial and industrial | 1,369 | 9 | 600 | 8 | ||||||||||||
| Residential real estate | 2,519 | 48 | 2,331 | 44 | ||||||||||||
| Consumer | 13 | 1 | 80 | 3 | ||||||||||||
| Total impaired loans | $ | 11,920 | $ | 135 | $ | 6,924 | $ | 121 | ||||||||
| Twelve Months Ended December 31, 2018 | Twelve Months Ended December 31, 2017 | |||||||||||||||
| (in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
| With no related allowance: | ||||||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | $ | — | ||||||||
| Other commercial real estate | 112 | 1 | 136 | — | ||||||||||||
| Other commercial | 441 | 1 | 264 | 1 | ||||||||||||
| Agricultural | — | — | — | — | ||||||||||||
| Tax exempt | — | — | — | — | ||||||||||||
| Residential real estate | 442 | — | 140 | 1 | ||||||||||||
| Home equity | — | — | 58 | — | ||||||||||||
| Other consumer | — | — | — | — | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Construction and land development | $ | — | $ | — | $ | — | $ | — | ||||||||
| Other commercial real estate | — | — | — | — | ||||||||||||
| Other commercial | — | — | — | — | ||||||||||||
| Agricultural | — | — | — | — | ||||||||||||
| Tax exempt | — | — | — | — | ||||||||||||
| Residential real estate | 218 | 3 | — | — | ||||||||||||
| Home equity | — | — | — | — | ||||||||||||
| Other consumer | — | — | — | — | ||||||||||||
| Total | ||||||||||||||||
| Commercial real estate | $ | 112 | $ | 1 | $ | 136 | $ | — | ||||||||
| Commercial and industrial | 441 | 1 | 264 | 1 | ||||||||||||
| Residential real estate | 660 | 3 | 140 | 1 | ||||||||||||
| Consumer | — | — | 58 | — | ||||||||||||
| Total impaired loans | $ | 1,213 | $ | 5 | $ | 598 | $ | 2 | ||||||||
| Twelve Months Ended December 31, 2018 | |||||||||||||||
| (in thousands, except modifications) | Number of Modifications | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||
| Troubled Debt Restructurings | |||||||||||||||
| Construction and land development | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||
| Other commercial real estate | 9 | 1,896 | 1,564 | 153 | |||||||||||
| Other commercial | 7 | 556 | 486 | 55 | |||||||||||
| Agricultural | 1 | 167 | — | — | |||||||||||
| Tax exempt | — | — | — | — | |||||||||||
| Residential mortgages | 19 | 3,348 | 2,752 | 145 | |||||||||||
| Home equity | 1 | 100 | 100 | — | |||||||||||
| Other consumer | 3 | 13 | 11 | — | |||||||||||
| Total | 41 | $ | 6,081 | $ | 4,914 | $ | 354 | ||||||||
| Twelve Months Ended December 31, 2017 | |||||||||||||||
| (in thousands, except modifications) | Number of Modifications | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||
| Troubled Debt Restructurings | |||||||||||||||
| Construction and land development | — | $ | — | $ | — | $ | — | ||||||||
| Other commercial real estate | 6 | 388 | 222 | — | |||||||||||
| Other commercial | 6 | 563 | 545 | — | |||||||||||
| Agricultural | 1 | 19 | 18 | — | |||||||||||
| Tax exempt | — | — | — | — | |||||||||||
| Residential mortgages | 3 | 692 | 670 | — | |||||||||||
| Home equity | 1 | 13 | 13 | — | |||||||||||
| Other consumer | 1 | 38 | 36 | — | |||||||||||
| Total | 18 | $ | 1,713 | $ | 1,504 | $ | — | ||||||||
| Twelve Months Ended December 31, 2016 | |||||||||||||||
| (in thousands, except modifications) | Number of Modifications | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||
| Troubled Debt Restructurings | |||||||||||||||
| Construction and land development | — | $ | — | $ | — | $ | — | ||||||||
| Other commercial real estate | 6 | 1,459 | 1,354 | — | |||||||||||
| Other commercial | 2 | 38 | 48 | — | |||||||||||
| Agricultural | 3 | 29 | 44 | — | |||||||||||
| Tax exempt | — | — | — | — | |||||||||||
| Residential mortgages | — | — | — | — | |||||||||||
| Home equity | — | — | — | — | |||||||||||
| Other consumer | 2 | 11 | 11 | 9 | |||||||||||
| Total | 13 | $ | 1,537 | $ | 1,457 | $ | 9 | ||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||
| (in thousands, except modifications) | Number of Modifications | Post-Modification Outstanding Recorded Investment | Number of Modifications | Post-Modification Outstanding Recorded Investment | Number of Modifications | Post-Modification Outstanding Recorded Investment | |||||||||||||||
| Interest rate and maturity concession | 1 | $ | 16 | 6 | $ | 725 | 6 | $ | 440 | ||||||||||||
| Amortization and maturity concession | 1 | 286 | 6 | 490 | — | — | |||||||||||||||
| Amortization concession | — | — | 1 | 94 | 4 | 981 | |||||||||||||||
| Amortization, interest rate and maturity concession | — | — | 1 | 36 | — | — | |||||||||||||||
| Amortization and interest rate concession | — | — | — | — | 1 | 9 | |||||||||||||||
| Forbearance | 3 | 271 | — | — | — | — | |||||||||||||||
| Forbearance and interest only payments | 6 | 121 | — | — | — | — | |||||||||||||||
| Forbearance and interest rate concession | 1 | 49 | — | — | — | — | |||||||||||||||
| Forbearance and maturity concession | 20 | 2,030 | — | — | — | — | |||||||||||||||
| Maturity concession | 2 | 440 | — | — | — | — | |||||||||||||||
| Restructure without concession | 5 | 1,419 | — | — | — | — | |||||||||||||||
| Court ordered | — | — | — | — | 1 | 1 | |||||||||||||||
| Other | 2 | 282 | 4 | 159 | 1 | 26 | |||||||||||||||
| Total | 41 | 4,914 | 18 | 1,504 | 13 | 1,457 | |||||||||||||||
The CARES Act and subsequent legislation established the Payroll Protection Program (PPP), administered directly by the Small Business Administration (SBA). The Company has participated in both 2020 and 2021 rounds of foreclosure as of December 31, 2018 and December 31, 2017 totaled $1.5 million and $843 thousand, respectively.funding. As of December 31, 2017, bank-owned non-residential2021 and 2020, the Company had 61 and 746 PPP loans outstanding, with an outstanding principal balance of $6.7 million and $53.8 million, respectively. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible costs. PPP loans are included in the commercial and industrial portfolio segment.
For purposes of determining the ACL on loans, the Company disaggregates its loans into portfolio segments. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. Characteristics of each loan portfolio segment are as follows:
Commercial construction - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties. Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than existing structures. Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.
72
Commercial real estate property totaling $90 thousand.
Tax exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made in these borrowers may provide the Company with tax-exempt income. While governed and underwritten similar to commercial loans, they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.
Commercial and industrial loans - 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 in this segment. Generally loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets. Some loans in this category may be unsecured or guaranteed by government agencies such as the SBA. Loans are primarily paid by the operating cash flow of the borrower.
Residential real estate - All loans in this segment are collateralized by one-to-four family homes. Residential real estate loans held in the Company's total loan portfolio compared with 9.4%
| (in thousands) | 2018 | 2017 | ||||||
| Beginning balance | $ | 10,487 | $ | 10,620 | ||||
Changes in composition (1) | — | 249 | ||||||
| New Loans | — | 1,124 | ||||||
| Less: repayments | (2,092 | ) | (1,506 | ) | ||||
| Ending balance | $ | 8,395 | $ | 10,487 | ||||
Home equity - All loans and lines of these loans.credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The Bank earns fees for the servicing provided. At year end 2018 and 2017, the Company was servicing loans for participants totaling $496.5 million and $497.9 million, respectively. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. Contractually-specified servicing fees were $1.3 million, $1.2 million, and $28 thousand for the years ended 2018, 2017, and 2016, respectively,home equity loan has a fixed rate and is includedbilled 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 componentpercentage 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 other - Loans in this segment include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, recreational equipment, overdraft protection or other consumer loans. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within non-interest income.
| At or for the Twelve Months Ended December 31, | ||||||||
| (in thousands) | 2018 | 2017 | ||||||
| Balance at beginning of year | $ | 3,232 | $ | 5 | ||||
| Acquired | — | 3,417 | ||||||
| Additions | 99 | 134 | ||||||
| Amortization | (245 | ) | (324 | ) | ||||
| Balance at end of year | $ | 3,086 | $ | 3,232 | ||||
Allowance for sale loansCredit Losses
The Allowance for Credit Losses (ACL) is comprised of $168 thousand and $13.4 million at December 31, 2018 and 2017, respectively. The net gains on sales of loans at December 31, 2018 and 2017 were $121 thousand and $222 thousand, respectively, and included as a component of other income within non-interest income.
Upon adoption of CECL effective January 1, 2021, the Company believes collectability has declinedreplaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a point where therefinancial asset is originated or purchased. The allowance for credit losses is a distinct possibilityvaluation account that is deducted from the amortized cost basis of some lossloans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of principalamounts previously charged off and interest. While the Company uses the best information availableexpected to make the evaluation, future adjustments may be necessary if there are significant changes in conditions.
73
The Company's policy is to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained.
| | | | | | | | | | | | | | | | | | |
| | At or for the Year Ended December 31, 2021 | ||||||||||||||||
| | Balance at | | | | | | | | | | | | | | | | |
| | Beginning of | | Impact of ASC | | | | | | | | | | | Balance at | |||
(in thousands) |
| Period |
| 326 |
| Charge Offs |
| Recoveries |
| Provision |
| End of Period | ||||||
Commercial construction | | $ | 824 | | $ | 1,196 | | $ | — | | $ | 18 | | $ | 73 | | $ | 2,111 |
Commercial real estate owner occupied | |
| 1,783 | |
| 708 | |
| (403) | |
| 290 | |
| 373 | |
| 2,751 |
Commercial real estate non-owner occupied | |
| 7,864 | |
| (2,008) | |
| — | |
| 4 | |
| (210) | |
| 5,650 |
Tax exempt | |
| 58 | |
| 40 | |
| — | |
| — | |
| (12) | |
| 86 |
Commercial and industrial | |
| 3,137 | |
| 2,996 | |
| (59) | |
| 77 | |
| (782) | |
| 5,369 |
Residential real estate | |
| 5,010 | |
| 1,732 | |
| (77) | |
| 159 | |
| (962) | |
| 5,862 |
Home equity | |
| 285 | |
| 603 | |
| (154) | |
| 51 | |
| 29 | |
| 814 |
Consumer other | |
| 121 | |
| (39) | |
| (205) | |
| 9 | |
| 189 | |
| 75 |
Total | | $ | 19,082 | | $ | 5,228 | | $ | (898) | | $ | 608 | | $ | (1,302) | | $ | 22,718 |
| | | | | | | | | | | | | | | |
| | | |||||||||||||
| | At or For the Year Ended December 30, 2020 | |||||||||||||
| | Balance at | | | | | | | | | | | | | |
| | Beginning of | | | | | | | | | | | Balance at | ||
(in thousands) |
| Period |
| Charge Offs |
| Recoveries |
| Provision |
| End of Period | |||||
Commercial construction | | $ | 317 | | $ | — | | $ | — | | $ | 507 | | $ | 824 |
Commercial real estate owner occupied | |
| 2,368 | |
| — | |
| — | |
| (585) | |
| 1,783 |
Commercial real estate non-owner occupied | |
| 4,695 | |
| (1,137) | |
| 173 | |
| 4,133 | |
| 7,864 |
Tax exempt | |
| 67 | |
| — | |
| — | |
| (9) | |
| 58 |
Commercial and industrial | |
| 3,262 | |
| (593) | | | 30 | |
| 438 | |
| 3,137 |
Residential real estate | |
| 4,213 | |
| (54) | |
| 13 | |
| 838 | |
| 5,010 |
Home equity | |
| 320 | |
| — | |
| — | |
| (35) | |
| 285 |
Consumer other | |
| 111 | |
| (384) | |
| 56 | |
| 338 | |
| 121 |
Total | | $ | 15,353 | | $ | (2,168) | | $ | 272 | | $ | 5,625 | | $ | 19,082 |
The LEP is generated utilizing a charge-off look-back analysis, which evaluates the time from the first indication of elevated risk of repayment (or other early event indicating a problem) to eventual charge-off to support the LEP considered in the allowance calculation. This reserving methodology establishes the approximate number of months of LEP that represents incurred losses for each loan portfolio within each portfolio segment in addition to the qualitative reserves.
| | | | | | | | | | | | | | | |
| | At or for the Year Ended December 31, 2019 | |||||||||||||
|
| Commercial |
| Commercial |
| Residential |
| | |
| | | |||
(in thousands) | | real estate | | and industrial | | real estate | | Consumer | | Total | |||||
Balance at beginning of period | | $ | 6,984 | | $ | 2,415 | | $ | 4,059 | | $ | 408 | | $ | 13,866 |
Charged-off loans | |
| (212) | |
| (359) | |
| (349) | |
| (233) | |
| (1,153) |
Recoveries on charged-off loans | |
| 194 | |
| 65 | |
| 55 | |
| 9 | |
| 323 |
Provision (release) for loan losses | |
| 849 | |
| 1,493 | |
| (220) | |
| 195 | |
| 2,317 |
Balance at end of period | | $ | 7,815 | | $ | 3,614 | | $ | 3,545 | | $ | 379 | | $ | 15,353 |
Individually evaluated for impairment | |
| 1,243 | |
| 164 | |
| 106 | |
| — | |
| 1,513 |
Collectively evaluated | |
| 6,572 | |
| 3,450 | |
| 3,439 | |
| 379 | |
| 13,840 |
Total | | $ | 7,815 | | $ | 3,614 | | $ | 3,545 | | $ | 379 | | $ | 15,353 |
74
Unfunded Commitments
The Company’s allowance for credit losses on unfunded commitments is recognized as a liability (other liabilities on the consolidated balance sheet), with adjustments to the reserve recognized in other non-interest expense in the consolidated statement of operations. The Company’s activity in the allowance for credit losses on unfunded commitments for the periods ended December 31, 2018, 2017 and 2016 was as follows:
| Business Activities Loans | At or for the Twelve Months Ended December 31, 2018 | |||||||||||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| Balance at beginning of period | $ | 6,037 | $ | 2,373 | $ | 3,357 | $ | 386 | $ | 12,153 | ||||||||||
| Charged-off loans | (417 | ) | (111 | ) | (225 | ) | (629 | ) | (1,382 | ) | ||||||||||
| Recoveries on charged-off loans | 275 | 76 | 166 | 18 | 535 | |||||||||||||||
| Provision/(releases) for loan losses | 916 | 42 | 684 | 633 | 2,275 | |||||||||||||||
| Balance at end of period | $ | 6,811 | $ | 2,380 | $ | 3,982 | $ | 408 | $ | 13,581 | ||||||||||
| Individually evaluated for impairment | 422 | 78 | 111 | — | 611 | |||||||||||||||
| Collectively evaluated | 6,389 | 2,302 | 3,871 | 408 | 12,970 | |||||||||||||||
| Total | $ | 6,811 | $ | 2,380 | $ | 3,982 | $ | 408 | $ | 13,581 | ||||||||||
| Acquired Loans | At or for the Twelve Months Ended December 31, 2018 | |||||||||||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| Balance at beginning of period | $ | 97 | $ | 16 | $ | 59 | $ | — | $ | 172 | ||||||||||
| Charged-off loans | (136 | ) | (166 | ) | (158 | ) | (65 | ) | (525 | ) | ||||||||||
| Recoveries on charged-off loans | 43 | 7 | — | 83 | 133 | |||||||||||||||
| Provision/(releases) for loan losses | 169 | 178 | 176 | (18 | ) | 505 | ||||||||||||||
| Balance at end of period | $ | 173 | $ | 35 | $ | 77 | $ | — | $ | 285 | ||||||||||
| Individually evaluated for impairment | — | — | 41 | — | 41 | |||||||||||||||
| Collectively evaluated | 173 | 35 | 36 | — | 244 | |||||||||||||||
| Total | $ | 173 | $ | 35 | $ | 77 | $ | — | $ | 285 | ||||||||||
| Business Activities Loans | At or for the Twelve Months Ended December 31, 2017 | |||||||||||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| Balance at beginning of period | $ | 5,145 | $ | 1,952 | $ | 2,721 | $ | 601 | $ | 10,419 | ||||||||||
| Charged-off loans | (124 | ) | (189 | ) | (226 | ) | (162 | ) | (701 | ) | ||||||||||
| Recoveries on charged-off loans | 49 | 11 | 65 | 18 | 143 | |||||||||||||||
| Provision/(releases) for loan losses | 967 | 599 | 797 | (71 | ) | 2,292 | ||||||||||||||
| Balance at end of period | $ | 6,037 | $ | 2,373 | $ | 3,357 | $ | 386 | $ | 12,153 | ||||||||||
| Individually evaluated for impairment | 447 | 3 | 9 | — | 459 | |||||||||||||||
| Collectively evaluated | 5,590 | 2,370 | 3,348 | 386 | 11,694 | |||||||||||||||
| Total | $ | 6,037 | $ | 2,373 | $ | 3,357 | $ | 386 | $ | 12,153 | ||||||||||
| Acquired Loans | At or for the Twelve Months Ended December 31, 2017 | |||||||||||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| Balance at beginning of period | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Charged-off loans | (151 | ) | (18 | ) | (29 | ) | (127 | ) | (325 | ) | ||||||||||
| Recoveries on charged-off loans | 1 | — | — | — | 1 | |||||||||||||||
| Provision/(releases) for loan losses | 247 | 34 | 88 | 127 | 496 | |||||||||||||||
| Balance at end of period | $ | 97 | $ | 16 | $ | 59 | $ | — | $ | 172 | ||||||||||
| Individually evaluated for impairment | — | — | — | — | — | |||||||||||||||
| Collectively evaluated | 97 | 16 | 59 | — | 172 | |||||||||||||||
| Total | $ | 97 | $ | 16 | $ | 59 | $ | — | $ | 172 | ||||||||||
| Business Activities Loans | At or for the Twelve Months Ended December 31, 2016 | |||||||||||||||||||
| (in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
| Balance at beginning of period | $ | 4,430 | $ | 1,590 | $ | 2,747 | $ | 672 | $ | 9,439 | ||||||||||
| Charged-off loans | (133 | ) | (90 | ) | (141 | ) | (47 | ) | (411 | ) | ||||||||||
| Recoveries on charged-off loans | 40 | 289 | 44 | 39 | 412 | |||||||||||||||
| Provision/(releases) for loan losses | 808 | 163 | 71 | (63 | ) | 979 | ||||||||||||||
| Balance at end of period | $ | 5,145 | $ | 1,952 | $ | 2,721 | $ | 601 | $ | 10,419 | ||||||||||
| Individually evaluated for impairment | 193 | 173 | 49 | 9 | 424 | |||||||||||||||
| Collectively evaluated | 4,952 | 1,779 | 2,672 | 592 | 9,995 | |||||||||||||||
| Total | $ | 5,145 | $ | 1,952 | $ | 2,721 | $ | 601 | $ | 10,419 | ||||||||||
| | | | | | | | | |
| | At or for the Years Ended December 31, | |||||||
(in thousands) | | 2021 |
| 2020 | | 2019 | |||
Beginning Balance | | $ | 359 | | $ | 314 | | $ | 304 |
Impact of CECL adoption | | | 1,616 | | | — | | | — |
Provision for credit losses | |
| 177 | |
| 45 | |
| 10 |
Ending Balance | | $ | 2,152 | | $ | 359 | | $ | 314 |
Loan Origination/Risk Management:
The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. The Company’s Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Company's Board of Directors with frequent reports related to loan production, loan quality,
Credit Quality Indicators/Classified Loans:
The following are the definitions of the Company’s credit quality indicators:
Pass:
Loans the Company considers in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered
Special Mention:
Loans the Company considers having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Company to sufficient risks to warrant classification.
Substandard:
Loans theCompany considers as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.
Doubtful:
Loans the Company considers as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the75
collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).
Loss:
Loans the Company considers as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.
The following tables presentCompany periodically reassesses asset quality indicators to reflect appropriately the risk composition of the Company’s commercialloan portfolio. Based on the most recent analysis performed the Company’s loans by year of origination, loan segmentation and risk rating atindicator as of December 31, 2018 and December 31, 2017:2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
(in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | |||||||
Commercial construction |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Risk rating: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Pass | | $ | 22,866 | | $ | 4,787 | | $ | 19,211 | | $ | 9,399 | | $ | — | | $ | — | | $ | 56,263 |
Special mention | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | 22,866 | | $ | 4,787 | | $ | 19,211 | | $ | 9,399 | | $ | — | | $ | — | | $ | 56,263 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial real estate owner occupied | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 12,940 | | $ | 25,240 | | $ | 34,782 | | $ | 49,136 | | $ | 19,292 | | $ | 103,144 | | $ | 244,534 |
Special mention | |
| — | |
| — | |
| 760 | |
| — | |
| — | |
| 2,659 | |
| 3,419 |
Substandard | |
| — | |
| — | |
| 1 | |
| 853 | |
| 247 | |
| 7,737 | |
| 8,838 |
Doubtful | | | — | | | — | | | — | | | 167 | | | — | | | 164 | | | 331 |
Total | | $ | 12,940 | | $ | 25,240 | | $ | 35,543 | | $ | 50,156 | | $ | 19,539 | | $ | 113,704 | | $ | 257,122 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial real estate non-owner occupied | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 235,646 | | $ | 172,785 | | $ | 119,326 | | $ | 39,663 | | $ | 136,120 | | $ | 165,329 | | $ | 868,869 |
Special mention | |
| — | |
| — | |
| 174 | |
| — | |
| — | |
| 14,789 | |
| 14,963 |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 3,097 | |
| 3,097 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | 163 | | | 163 |
Total | | $ | 235,646 | | $ | 172,785 | | $ | 119,500 | | $ | 39,663 | | $ | 136,120 | | $ | 183,378 | | $ | 887,092 |
| | | | | | | | | | | | | | | | | | | | | |
Tax exempt | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 1,249 | | $ | 299 | | $ | 968 | | $ | 14,408 | | $ | 5,329 | | $ | 19,027 | | $ | 41,280 |
Special mention | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | 1,249 | | $ | 299 | | $ | 968 | | $ | 14,408 | | $ | 5,329 | | $ | 19,027 | | $ | 41,280 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 77,608 | | $ | 80,569 | | $ | 33,405 | | $ | 16,457 | | $ | 33,413 | | $ | 61,594 | | $ | 303,046 |
Special mention | |
| — | |
| — | |
| 584 | |
| 468 | |
| 172 | |
| 1,396 | |
| 2,620 |
Substandard | |
| 58 | |
| 3 | |
| 512 | |
| — | |
| 48 | |
| 578 | |
| 1,199 |
Doubtful | | | — | | | — | | | — | | | — | | | 92 | | | 155 | | | 247 |
Total | | $ | 77,666 | | $ | 80,572 | | $ | 34,501 | | $ | 16,925 | | $ | 33,725 | | $ | 63,723 | | $ | 307,112 |
| | | | | | | | | | | | | | | | | | | | | |
(continued) | |||||||||||||||||||||
76
| Construction and land development | Commercial real estate other | Total commercial real estate | ||||||||||||||||||||||
| (in thousands) | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||
| Grade: | ||||||||||||||||||||||||
| Pass | $ | 23,680 | $ | 28,180 | $ | 532,386 | $ | 483,711 | $ | 556,066 | $ | 511,891 | ||||||||||||
| Special mention | 73 | 73 | 8,319 | 5,706 | 8,392 | 5,779 | ||||||||||||||||||
| Substandard | — | 639 | 13,914 | 15,702 | 13,914 | 16,341 | ||||||||||||||||||
| Doubtful | 1 | — | 1,361 | — | 1,362 | — | ||||||||||||||||||
| Total | $ | 23,754 | $ | 28,892 | $ | 555,980 | $ | 505,119 | $ | 579,734 | $ | 534,011 | ||||||||||||
| Commercial other | Agricultural and other loans to farmers | Tax exempt loans | Total commercial and industrial | |||||||||||||||||||||||||||||
| (in thousands) | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||
| Grade: | ||||||||||||||||||||||||||||||||
| Pass | $ | 226,353 | $ | 194,147 | $ | 21,680 | $ | 27,046 | $ | 56,588 | $ | 42,208 | $ | 304,621 | $ | 263,401 | ||||||||||||||||
| Special mention | 6,730 | 1,933 | 215 | 63 | — | 157 | 6,945 | 2,153 | ||||||||||||||||||||||||
| Substandard | 924 | 1,971 | 422 | 479 | — | — | 1,346 | 2,450 | ||||||||||||||||||||||||
| Doubtful | 750 | — | — | — | — | — | 750 | — | ||||||||||||||||||||||||
| Total | $ | 234,757 | $ | 198,051 | $ | 22,317 | $ | 27,588 | $ | 56,588 | $ | 42,365 | $ | 313,662 | $ | 268,004 | ||||||||||||||||
| Residential real estate | Home equity | Other consumer | Total residential real estate and consumer | |||||||||||||||||||||||||||||
| (in thousands) | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||||||||||
| Performing | $ | 665,976 | $ | 588,003 | $ | 57,652 | $ | 51,246 | $ | 9,324 | $ | 7,733 | $ | 732,952 | $ | 646,982 | ||||||||||||||||
| Non-performing | 4,213 | 3,408 | 246 | 130 | 90 | 95 | 4,549 | 3,633 | ||||||||||||||||||||||||
| Total | $ | 670,189 | $ | 591,411 | $ | 57,898 | $ | 51,376 | $ | 9,414 | $ | 7,828 | $ | 737,501 | $ | 650,615 | ||||||||||||||||
| Commercial construction and land development | Commercial real estate other | Total commercial real estate | ||||||||||||||||||||||
| (in thousands) | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||
| Grade: | ||||||||||||||||||||||||
| Pass | $ | 2,626 | $ | 16,523 | $ | 236,393 | $ | 266,477 | $ | 239,019 | $ | 283,000 | ||||||||||||
| Special mention | — | 235 | 1,574 | 2,440 | 1,574 | 2,675 | ||||||||||||||||||
| Substandard | 264 | 23 | 6,009 | 7,037 | 6,273 | 7,060 | ||||||||||||||||||
| Doubtful | — | — | 99 | — | 99 | — | ||||||||||||||||||
| Total | $ | 2,890 | $ | 16,781 | $ | 244,075 | $ | 275,954 | $ | 246,965 | $ | 292,735 | ||||||||||||
| Commercial other | Agricultural and other loans to farmers | Tax exempt loans | Total commercial and industrial | |||||||||||||||||||||||||||||
| (in thousands) | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||
| Grade: | ||||||||||||||||||||||||||||||||
| Pass | $ | 46,120 | $ | 60,300 | $ | — | $ | — | $ | 38,738 | $ | 43,350 | $ | 84,858 | $ | 103,650 | ||||||||||||||||
| Special mention | 4,825 | 5,753 | — | — | — | — | 4,825 | 5,753 | ||||||||||||||||||||||||
| Substandard | 1,222 | 2,016 | — | — | — | — | 1,222 | 2,016 | ||||||||||||||||||||||||
| Doubtful | 303 | — | — | — | — | — | 303 | — | ||||||||||||||||||||||||
| Total | $ | 52,470 | $ | 68,069 | $ | — | $ | — | $ | 38,738 | $ | 43,350 | $ | 91,208 | $ | 111,419 | ||||||||||||||||
| Residential real estate | Home equity | Other consumer | Total residential real estate and consumer | |||||||||||||||||||||||||||||
| (in thousands) | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||||||||||
| Performing | $ | 470,497 | $ | 562,516 | $ | 45,090 | $ | 62,000 | $ | 1,356 | $ | 2,283 | $ | 516,943 | $ | 626,799 | ||||||||||||||||
| Non-performing | 4,012 | 1,755 | 201 | 217 | 1 | 58 | 4,214 | 2,030 | ||||||||||||||||||||||||
| Total | $ | 474,509 | $ | 564,271 | $ | 45,291 | $ | 62,217 | $ | 1,357 | $ | 2,341 | $ | 521,157 | $ | 628,829 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | |||||||
Residential real estate |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 191,466 | | $ | 120,495 | | $ | 83,044 | | $ | 62,299 | | $ | 59,642 | | $ | 364,482 | | $ | 881,428 |
Nonperforming | |
| — | |
| — | |
| — | |
| 286 | |
| 178 | |
| 6,371 | |
| 6,835 |
Total | | $ | 191,466 | | $ | 120,495 | | $ | 83,044 | | $ | 62,585 | | $ | 59,820 | | $ | 370,853 | | $ | 888,263 |
| | | | | | | | | | | | | | | | | | | | | |
Home equity | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 12,770 | | $ | 10,461 | | $ | 9,005 | | $ | 7,855 | | $ | 6,474 | | $ | 38,823 | | $ | 85,388 |
Nonperforming | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 1,269 | |
| 1,269 |
Total | | $ | 12,770 | | $ | 10,461 | | $ | 9,005 | | $ | 7,855 | | $ | 6,474 | | $ | 40,092 | | $ | 86,657 |
| | | | | | | | | | | | | | | | | | | | | |
Consumer other | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 2,525 | | $ | 1,659 | | $ | 792 | | $ | 669 | | $ | 92 | | $ | 2,379 | | $ | 8,116 |
Nonperforming | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 5 | |
| 5 |
Total | | $ | 2,525 | | $ | 1,659 | | $ | 792 | | $ | 669 | | $ | 92 | | $ | 2,384 | | $ | 8,121 |
| | | | | | | | | | | | | | | | | | | | | |
Total Loans | | $ | 557,128 | | $ | 416,298 | | $ | 302,564 | | $ | 201,660 | | $ | 261,099 | | $ | 793,161 | | $ | 2,531,910 |
The following table summarizes credit risk exposure indicators by portfolio segment, under the incurred loss methodology, as of the period indicated:
| | | | | | | | | | | | | | | |
|
| December 31, 2020 | |||||||||||||
| | Commercial | | Commercial | | Residential | |
| | |
| | |||
(in thousands) | | Real Estate | | and Industrial | | Real Estate | | Consumer | | Total | |||||
Grade: |
| |
| |
|
| |
|
| |
|
| |
| |
Pass |
| $ | 1,053,773 | | $ | 422,016 | | $ | — | | $ | — | | $ | 1,475,789 |
Performing | | | — | | | — | | | 914,749 | | | 112,190 | | | 1,026,939 |
Special mention |
| | 6,075 | | | 2,771 | | | — | | | — | | | 8,846 |
Substandard |
| | 22,267 | | | 15,180 | | | — | | | — | | | 37,447 |
Doubtful |
| | 2,265 | | | 1,100 | | | — | | | — | | | 3,365 |
Loss |
| | 1 | | | 2 | | | — | | | — | | | 3 |
Non-performing | | | — | | | — | | | 9,142 | | | 1,354 | | | 10,496 |
Total |
| $ | 1,084,381 | | $ | 441,069 | | $ | 923,891 | | $ | 113,544 | | $ | 2,562,885 |
Past Dues
The following is a summary of past due loans for the periods ended:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||||||||
(in thousands) |
| 30-59 |
| 60-89 |
| 90+ |
| Total Past Due |
| Current |
| Total Loans | ||||||
Commercial construction | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 56,263 | | $ | 56,263 |
Commercial real estate owner occupied | |
| 1,190 | |
| 7 | |
| 1 | |
| 1,198 | |
| 255,924 | |
| 257,122 |
Commercial real estate non-owner occupied | |
| — | |
| — | |
| — | |
| — | |
| 887,092 | |
| 887,092 |
Tax exempt | |
| — | |
| — | |
| — | |
| — | |
| 41,280 | |
| 41,280 |
Commercial and industrial | |
| 31 | |
| 318 | |
| 185 | |
| 534 | |
| 306,578 | |
| 307,112 |
Residential real estate | |
| 5,010 | |
| 1,238 | |
| 1,416 | |
| 7,664 | |
| 880,599 | |
| 888,263 |
Home equity | |
| 699 | |
| 149 | |
| 101 | |
| 949 | |
| 85,708 | |
| 86,657 |
Consumer other | |
| 29 | |
| — | |
| 2 | |
| 31 | |
| 8,090 | |
| 8,121 |
Total | | $ | 6,959 | | $ | 1,712 | | $ | 1,705 | | $ | 10,376 | | $ | 2,521,534 | | $ | 2,531,910 |
77
| | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||||||||
(in thousands) |
| 30-59 |
| 60-89 |
| 90+ |
| Total Past Due |
| Current |
| Total Loans | ||||||
Commercial construction | | $ | 74 | | $ | — | | $ | 1 | | $ | 75 | | $ | 117,807 | | $ | 117,882 |
Commercial real estate owner occupied | |
| 1,309 | |
| 464 | |
| 438 | |
| 2,211 | |
| 217,006 | |
| 219,217 |
Commercial real estate non-owner occupied | |
| 503 | |
| 674 | |
| 624 | |
| 1,801 | |
| 714,975 | |
| 716,776 |
Tax exempt | |
| — | |
| — | |
| — | |
| — | |
| 47,862 | |
| 47,862 |
Commercial and industrial | |
| 161 | |
| — | |
| 193 | |
| 354 | |
| 355,330 | |
| 355,684 |
Residential real estate | |
| 9,178 | |
| 2,511 | |
| 3,200 | |
| 14,889 | |
| 980,327 | |
| 995,216 |
Home equity | |
| 1,062 | |
| 614 | |
| 375 | |
| 2,051 | |
| 98,045 | |
| 100,096 |
Consumer other | |
| 20 | |
| — | |
| 2 | |
| 22 | |
| 10,130 | |
| 10,152 |
Total | | $ | 12,307 | | $ | 4,263 | | $ | 4,833 | | $ | 21,403 | | $ | 2,541,482 | | $ | 2,562,885 |
Non-Accrual Loans
The following is a summary of non-accrual loans for the periods ended:
| | | | | | | | | |
| | December 31, 2021 | |||||||
| | | | | Nonaccrual With No | | 90+ Days Past | ||
(in thousands) |
| Nonaccrual |
| Related Allowance |
| Due and Accruing | |||
Commercial construction | | $ | — | | $ | — | | $ | — |
Commercial real estate owner occupied | |
| 783 | |
| 424 | |
| — |
Commercial real estate non-owner occupied | |
| 622 | |
| 459 | |
| — |
Tax exempt | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 677 | |
| 542 | |
| 30 |
Residential real estate | |
| 6,835 | |
| 2,537 | |
| 41 |
Home equity | |
| 1,269 | |
| 305 | |
| 63 |
Consumer other | |
| 5 | |
| — | |
| — |
Total | | $ | 10,191 | | $ | 4,267 | | $ | 134 |
| | | | | | | | | |
| | December 31, 2020 | |||||||
| | | | | Nonaccrual With No | | 90+ Days Past | ||
(in thousands) |
| Nonaccrual |
| Related Allowance |
| Due and Accruing | |||
Commercial construction | | $ | 258 | | $ | — | | $ | — |
Commercial real estate owner occupied | |
| 3,038 | |
| 929 | |
| — |
Commercial real estate non-owner occupied | |
| 383 | |
| 118 | |
| — |
Tax exempt | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 1,223 | |
| 1,065 | |
| — |
Residential real estate | |
| 5,883 | |
| 4,948 | |
| — |
Home equity | |
| 1,345 | |
| 1,346 | |
| 267 |
Consumer other | |
| 58 | |
| 58 | |
| — |
Total | | $ | 12,188 | | $ | 8,464 | | $ | 267 |
The Company's policy is to reverse previously recorded interest income when a loan is placed on non-accrual, as such, the Company did not record any interest income on its non-accrual for the year ended December 31, 2021 and 2020.
Collateral Dependent Loans
Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent-financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.
78
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended.
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||
(in thousands) |
| Real Estate |
| Other |
| Real Estate |
| Other | ||||
Commercial construction | | $ | — | | $ | — | | $ | 259 | | $ | — |
Commercial real estate owner occupied | |
| 783 | |
| — | |
| 3,441 | |
| — |
Commercial real estate non-owner occupied | |
| 622 | |
| — | |
| 383 | |
| — |
Tax exempt | |
| — | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 385 | |
| 292 | |
| 625 | |
| 607 |
Residential real estate | |
| 6,835 | |
| — | |
| 7,432 | |
| — |
Home equity | |
| 1,269 | |
| — | |
| 1,493 | |
| — |
Consumer other | |
| 5 | |
| — | |
| 60 | |
| — |
Total | | $ | 9,899 | | $ | 292 | | $ | 13,693 | | $ | 607 |
Pre Adoption of ASC 326 – Impaired Loans
For periods prior to the adoption of CECL, loans were considered impaired when, based on current information about totaland events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. The Company identified loan relationships having aggregate balances in excess of $150 thousand with potential credit weaknesses. Such loan relationships were identified primarily through the Company's analysis of internal loan evaluations, past due loan reports, TDRs and loans adversely classified. Each loan so identified was then individually evaluated for impairment. Substantially all impaired loans have historically been collateral dependent, meaning repayment of the loan was expected or was considered to be provided solely from the sale of the loan's underlying collateral. For such loans, the Company measured impairment based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve was established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell. The Company's policy was to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained.
79
The tables reflects the activity associated with impaired loans in 2020 prior to the adoption of CECL.
| | | | | | | | | | | | | | | |
|
| December 31, 2020 | |||||||||||||
| | Recorded |
| Unpaid Principal |
| Related |
| Average Recorded |
| Interest | |||||
(in thousands) | | Investment | | Balance | | Allowance | | Investment | | Income Recognized | |||||
With no related allowance: |
| |
|
| |
|
| |
|
| |
|
| |
|
Construction and land development | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Other commercial real estate | |
| 2,001 | |
| 2,047 | |
| — | |
| 1,610 | |
| — |
Commercial | |
| 1,095 | |
| 1,254 | |
| — | |
| 1,140 | |
| 4 |
Agricultural | |
| 361 | |
| 150 | |
| — | |
| 114 | |
| 2 |
Tax exempt loans | |
| — | |
| — | |
| — | |
| — | |
| — |
Residential real estate | |
| 2,745 | |
| 3,165 | |
| — | |
| 1,077 | |
| 17 |
Home equity | |
| — | |
| — | |
| — | |
| — | |
| — |
Other consumer | |
| — | |
| — | |
| — | |
| — | |
| — |
| | | | | | | | | | | | | | | |
With an allowance recorded: | |
|
| |
|
| |
|
| |
|
| |
|
|
Construction and land development | |
| 258 | |
| 258 | |
| 205 | |
| 203 | |
| — |
Other commercial real estate | |
| 1,963 | |
| 2,108 | |
| 1,038 | |
| 1,973 | |
| 17 |
Commercial | |
| 282 | |
| 289 | |
| 164 | |
| 73 | |
| — |
Agricultural | |
| — | |
| — | |
| — | |
| — | |
| — |
Tax exempt loans | |
| — | |
| — | |
| — | |
| — | |
| — |
Residential real estate | |
| 887 | |
| 944 | |
| 106 | |
| 1,865 | |
| 37 |
Home equity | |
| 13 | |
| 13 | |
| — | |
| 12 | |
| 1 |
Other consumer | |
| — | |
| — | |
| — | |
| — | |
| — |
| | | | | | | | | | | | | | | |
Total | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial real estate | |
| 4,222 | |
| 4,413 | |
| 1,243 | |
| 3,786 | |
| 17 |
Commercial and industrial | |
| 1,738 | |
| 1,693 | |
| 164 | |
| 1,327 | |
| 6 |
Residential real estate | |
| 3,632 | |
| 4,109 | |
| 106 | |
| 2,942 | |
| 54 |
Consumer | |
| 13 | |
| 13 | |
| — | |
| 12 | |
| 1 |
Total impaired loans | | $ | 9,605 | | $ | 10,228 | | $ | 1,513 | | $ | 8,067 | | $ | 78 |
Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and criticizedmay only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.
The following tables include the recorded investment and number of modifications identified during the periods ended. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. There were 0 modifications qualifying as TDR’s for the year ended December 31, 2021.
80
| | | | | | | | | | | |
| | Year Ended December 31, 2020 | |||||||||
| | | | Pre-Modification | | Post-Modification | | | | ||
| | Number of | | Outstanding | | Outstanding | | | | ||
(in thousands) |
| Modifications |
| Balance |
| Balance |
| Reserve | |||
Commercial construction | | — | | $ | — | | $ | — | | $ | — |
Commercial real estate owner occupied |
| — | |
| — | |
| — | |
| — |
Commercial real estate non-owner occupied |
| 1 | |
| 54 | |
| 244 | |
| 24 |
Tax exempt |
| — | |
| — | |
| — | |
| — |
Commercial and industrial |
| 7 | |
| 315 | |
| 325 | |
| — |
Residential real estate |
| — | |
| — | |
| — | |
| — |
Home equity |
| 1 | |
| 26 | |
| 24 | |
| — |
Consumer other |
| 1 | |
| 9 | |
| 8 | |
| — |
Total |
| 10 | | $ | 404 | | $ | 601 | | $ | 24 |
| | | | | | | | | | | |
| | Year Ended December 31, 2019 | |||||||||
| | | | Pre-Modification | | Post-Modification | | | | ||
| | Number of | | Outstanding | | Outstanding | | | | ||
(in thousands) |
| Modifications |
| Balance |
| Balance |
| Reserve | |||
Commercial construction | | — | | $ | — | | $ | — | | $ | — |
Commercial real estate owner occupied |
| — | |
| — | |
| — | |
| — |
Commercial real estate non-owner occupied |
| 10 | |
| 630 | |
| 529 | |
| 69 |
Tax exempt |
| — | |
| — | |
| — | |
| — |
Commercial and industrial |
| 9 | |
| 866 | |
| 774 | |
| — |
Residential real estate |
| 12 | |
| 1,427 | |
| 1,327 | |
| — |
Home equity |
| — | |
| — | |
| — | |
| — |
Consumer other |
| — | |
| — | |
| — | |
| — |
Total |
| 31 | | $ | 2,923 | | $ | 2,630 | | $ | 69 |
The following tables summarize the types of loan concessions made for the periods presented:
| | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | ||||||
|
| |
| Post-Modification |
| |
| Post-Modification | ||
| | Number of | | Outstanding | | Number of | | Outstanding | ||
(in thousands) | | Modifications | | Balance | | Modifications | | Balance | ||
Interest only payments and maturity concession |
| — | | $ | — |
| 2 | | $ | 73 |
Interest rate, forbearance and maturity concession |
| 4 | | | 384 |
| — | |
| — |
Amortization and maturity concession |
| — | |
| — |
| 4 | |
| 273 |
Amortization concession |
| — | |
| — |
| — | |
| — |
Amortization, interest rate and maturity concession |
| — | |
| — |
| 5 | |
| 539 |
Forbearance |
| — | |
| — |
| 5 | |
| 346 |
Forbearance and interest only payments |
| 1 | |
| 24 |
| 7 | |
| 692 |
Forbearance and maturity concession |
| — | |
| — |
| 4 | |
| 472 |
Forbearance, amortization and maturity concession |
| — | |
| — |
| — | |
| — |
Maturity concession |
| 5 | |
| 193 |
| — | |
| — |
Other |
| — | |
| — |
| 4 | |
| 235 |
Total |
| 10 | | $ | 601 |
| 31 | | $ | 2,630 |
For the year ended December 31, 2021 there were 0 loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.
Modifications in response to COVID-19
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs.
81
Foreclosure
Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of December 31, 20182021 and December 31, 2017.2020 totaled $574 thousand and $633 thousand, respectively.
Loan Concentrations
Loan concentrations in specific industries may occasionally emerge as a result of economic conditions, changes in local demands, natural loan growth and runoff. At December 31, 2021 the largest industry concentration outside of commercial real estate was the hospitality industry which represents 11% or $283.3 million of the Company’s total loan portfolio, compared with 11% or $276.4 million at December 31, 2020.
Loans to Related Parties
In the ordinary course of business, the Bank has made loans at prevailing rates and terms to directors, officers and other related parties. In management’s opinion, such loans do not present more than the normal risk of collectability or incorporate other unfavorable features, and were made under terms that are consistent with the Bank’s lending policies.
Loan to related parties at December 31, 2021 and December 31, 2020 are summarized below:
| | | | | | |
(in thousands) | | 2021 | | 2020 | ||
Beginning balance | | $ | 6,131 | | $ | 8,209 |
New loans | |
| 335 | | | 1,589 |
Less: repayments | |
| (3,087) | | | (3,667) |
Ending balance | | $ | 3,379 | | $ | 6,131 |
Mortgage Banking
Loans sold
For the years ended December 31, 2021 and 2020, the Company sold $189.3 million and $226.4 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $4.1 million and $5.3 million, respectively.
Loans Held for Sale
The Company had identified and designated loans with an unpaid principal balance of $5.4 million and $24.0 million as residential loans held for sale at December 31, 2021 and 2020, respectively. The Company elected the fair value option of accounting for its loans designated as held for sale as of December 31, 2021 and the total adjustment was $113 thousand. At December 31, 2020 loans designated as held for sale were accounted for at the lower of fair value or amortized cost. The interest rate exposure on loans held for sale are mitigated through forward delivery commitments with certain approved secondary market investors. Forward delivery commitments were $14.8 million, and $50.6 million, respectively. Refer to Note 10 for further discussion of the Company's forward delivery commitments.
Servicing Assets
The Bank sells loans in the secondary market and retains the ability to service many of these loans. The Bank earns fees for the servicing provided. At year end 2021 and 2020, the Company was servicing loans for participants totaling $653.4 million and $596.3 million, respectively. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. Contractually-specified servicing fees were $1.6 million for the year ended 2021 and $1.3 million for the years ended, 2020, and 2019, and is included as a component of other income within non- interest income.
82
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
| (in thousands) | Business Activities Loans | Acquired Loans | Total | Business Activities Loans | Acquired Loans | Total | ||||||||||||||||||
| Non-accrual | $ | 14,111 | $ | 4,124 | $ | 18,235 | $ | 12,140 | $ | 2,156 | $ | 14,296 | ||||||||||||
| Substandard accruing | 7,810 | 7,987 | 15,797 | 10,284 | 7,833 | 18,117 | ||||||||||||||||||
| Doubtful accruing | — | — | — | — | — | — | ||||||||||||||||||
| Total classified | 21,921 | 12,111 | 34,032 | 22,424 | 9,989 | 32,413 | ||||||||||||||||||
| Special mention | 15,337 | 6,399 | 21,736 | 7,932 | 8,428 | 16,360 | ||||||||||||||||||
| Total Criticized | $ | 37,258 | $ | 18,510 | $ | 55,768 | $ | 30,356 | $ | 18,417 | $ | 48,773 | ||||||||||||
Servicing rights activity during 2021 and 2020, included in other assets, was as follows:
| | | | | | |
| | At or for the Twelve Months Ended | ||||
| | December 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Balance at beginning of year | | $ | 3,353 | | $ | 3,001 |
Additions | |
| 565 | |
| 597 |
Amortization | |
| (245) | |
| (245) |
Balance at end of year | | $ | 3,673 | | $ | 3,353 |
NOTE 5.
Premises and equipment at December 31, 20182021 and December 31, 20172020 are summarized as follows:
| (in thousands, except years) | 2018 | 2017 | Estimated Useful Life | |||||||
| Land | $ | 4,837 | $ | 4,849 | N/A | |||||
| Buildings and improvements | 50,933 | 48,952 | 5 -39 years | |||||||
| Furniture and equipment | 9,098 | 6,972 | 3 - 7 years | |||||||
| Premises and equipment, gross | 64,868 | 60,773 | ||||||||
| Accumulated depreciation | (16,064 | ) | (13,065 | ) | ||||||
| Premises and equipment, net | $ | 48,804 | $ | 47,708 | ||||||
| | | | | | | | |
|
| | |
| | | | Estimated Useful |
(in thousands, except years) |
| | 2021 |
| | 2020 |
| Life |
Land | | $ | 4,949 | | $ | 5,531 |
| N/A |
Buildings and improvements | |
| 55,499 | |
| 55,366 |
| 5-39 years |
Furniture and equipment | |
| 14,661 | |
| 13,865 |
| 3-8 years |
Premises and equipment, gross | |
| 75,109 | |
| 74,762 |
|
|
Accumulated depreciation | |
| (25,727) | |
| (22,304) |
|
|
Premises and equipment, net | | $ | 49,382 | | $ | 52,458 |
|
|
Depreciation expense for the years ended December 31, 2018, 20172021, 2020 and 20162019 amounted to $3.7$4.6 million, $3.5$4.8 million and $1.5$4.1 million, respectively.
Premises held for sale for the years ended December 31, 2021 and 2020 were $226 thousand and $962 thousand, respectively and are included in other assets. The Company measures assets held for sale at the lower of amortized cost or estimated fair value less 6% selling costs. The Company sold $579 thousand of premises held for sale in 2021 for a net loss of $291 thousand. The Company sold $802 thousand of premises held for sale in 2020 at a gain of $122 thousand, there were 0 sales in 2019. There were $157 thousand of impairment charges recognized in 2021 due to the demolition of a building and 0 impairment charges recognized in 2020 and 2019.
83
NOTE 6.
The activity impacting goodwill in 20182021 and 20172020 is as follows:
| (in thousands) | 2018 | 2017 | ||||||
| Balance at beginning of year | $ | 100,085 | $ | 4,935 | ||||
| Acquisition | — | 95,150 | ||||||
| Balance at end of year | $ | 100,085 | $ | 100,085 | ||||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Balance at beginning of year | | $ | 119,477 | | $ | 118,649 |
Acquisition | |
| — | |
| 828 |
Balance at end of year | | $ | 119,477 | | $ | 119,477 |
In 2018,the fourth quarter of 2021, the Company completed its annual goodwill impairment testing using balance sheet and market data as of September 30, 2018.2021. The analysis was performed at the consolidated Bank level of the Company, which is considered the smallest reporting unit carrying goodwill. The step one analysis under the guidance of ASC 350 was passed, and therefore step two of the goodwill impairment test was not performed and no0 goodwill impairment was recognized for the year ended December 31, 2018. No2021. NaN impairment was recorded in 20172020 and 2016.
The components of other intangible assets in 20182021 and 20172020 are as follows:
| 2018 | ||||||||||||
| (in thousands) | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | |||||||||
| Core deposit intangible (non-maturity deposits) | $ | 8,586 | $ | (1,878 | ) | $ | 6,708 | |||||
| Customer list and other intangibles | 919 | (168 | ) | 751 | ||||||||
| Total | $ | 9,505 | $ | (2,046 | ) | $ | 7,459 | |||||
| 2017 | ||||||||||||
| (in thousands) | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | |||||||||
| Core deposit intangible (non-maturity deposits) | $ | 8,585 | $ | (1,136 | ) | $ | 7,449 | |||||
| Customer list and other intangibles | 1,016 | (82 | ) | 934 | ||||||||
| Total | $ | 9,601 | $ | (1,218 | ) | $ | 8,383 | |||||
| | | | | | | | | |
| | 2021 | |||||||
| | Gross | | Accumulated | | Net Intangible | |||
(in thousands) |
| Intangible Assets |
| Amortization |
| Assets | |||
Core deposit intangible (non-maturity deposits) | | $ | 9,483 | | $ | (4,210) | | $ | 5,273 |
Customer list and other intangibles | |
| 2,118 | |
| (658) | |
| 1,460 |
Total | | $ | 11,601 | | $ | (4,868) | | $ | 6,733 |
| | | | | | | | | |
| | 2020 | |||||||
| | Gross | | Accumulated | | Net Intangible | |||
(in thousands) |
| Intangible Assets |
| Amortization |
| Assets | |||
Core deposit intangible (non-maturity deposits) | | $ | 9,483 | | $ | (3,465) | | $ | 6,018 |
Customer list and other intangibles | |
| 2,118 | |
| (466) | |
| 1,652 |
Total | | $ | 11,601 | | $ | (3,931) | | $ | 7,670 |
Other intangible assets are amortized on a straight-line basis over their estimated lives, which range from eight and a half5 years to twelve11 years. Amortization expenses related to intangibles totaled $828$940 thousand in 2018, $8122021, $1.0 million in 2020 and $861 thousand in 2017 and $92 thousand in 2016.
The estimated aggregate future amortization expense for other intangible assets remaining at year end 20182021 is as follows:
| | | |
| | Other Intangible | |
(in thousands) |
| Assets | |
2022 | | $ | 932 |
2023 | |
| 932 |
2024 | |
| 932 |
2025 | |
| 932 |
2026 | |
| 932 |
and thereafter | |
| 2,073 |
Total | | $ | 6,733 |
84
| (in thousands) | Other Intangible Assets | ||
| 2019 | 827 | ||
| 2020 | 827 | ||
| 2021 | 742 | ||
| 2022 | 734 | ||
| 2023 | 734 | ||
| and thereafter | 3,595 | ||
| Total other intangible assets | 7,459 | ||
A summary of time deposits at December 31, 20182021 and December 31, 2017 were2020 are as follows:
| (in thousands) | December 31, 2018 | December 31, 2017 | ||||||
| Time less than $100,000 | $ | 622,478 | $ | 579,856 | ||||
| Time $100,000 through $250,000 | 193,535 | 167,145 | ||||||
| Time $250,000 or more | 116,780 | 119,345 | ||||||
| Total time deposits | $ | 932,793 | $ | 866,346 | ||||
| | | | | | |
(in thousands) |
| December 31, 2021 |
| December 31, 2020 | ||
Time less than $100,000 | | $ | 181,586 | | $ | 325,646 |
Time $100,000 through $250,000 | |
| 169,645 | |
| 278,940 |
Time $250,000 or more | |
| 74,301 | |
| 93,775 |
Total | | $ | 425,532 | | $ | 698,361 |
At December 31, 20182021 and December 31, 2017,2020, the scheduled maturities by year for time deposits wereare as follows:
| (in thousands) | December 31, 2018 | December 31, 2017 | ||||||
| Within 1 year | $ | 505,313 | $ | 406,295 | ||||
| Over 1 year to 2 years | 258,176 | 305,895 | ||||||
| Over 2 years to 3 years | 123,337 | 115,878 | ||||||
| Over 3 years to 4 years | 14,494 | 24,459 | ||||||
| Over 4 years to 5 years | 31,353 | 13,685 | ||||||
| Over 5 years | 120 | 134 | ||||||
| Total | $ | 932,793 | $ | 866,346 | ||||
| | | | | | |
(in thousands) |
| December 31, 2021 | | December 31, 2020 | ||
Within 1 year | | $ | 318,692 | | $ | 574,007 |
Over 1 year to 2 years | |
| 71,247 | |
| 61,584 |
Over 2 years to 3 years | |
| 18,201 | |
| 41,145 |
Over 3 years to 4 years | |
| 8,498 | |
| 12,875 |
Over 4 years to 5 years | |
| 6,751 | |
| 8,728 |
Over 5 years | |
| 2,143 | |
| 22 |
Total | | $ | 425,532 | | $ | 698,361 |
Included in time deposits are brokered deposits of $466.9$16.1 million and $378.7$193.7 million at December 31, 20182021 and December 31, 2017,2020, respectively. Also included in time deposits are reciprocal deposits of $52.4$17.3 million and $49.7$8.1 million at December 31, 20182021 and December 31, 2017,2020, respectively.
Borrowed funds at December 31, 20182021 and December 31, 20172020 are summarized, as follows:
| December 31, 2018 | December 31, 2017 | |||||||||||||
| (in thousands, except ratios) | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||
| Short-term borrowings | ||||||||||||||
| Advances from the FHLB | $ | 611,683 | 2.47 | % | $ | 608,792 | 1.49 | % | ||||||
| Other borrowings | 36,211 | 1.09 | 40,706 | 0.59 | ||||||||||
| Total short-term borrowings | 647,894 | 2.39 | 649,498 | 1.43 | ||||||||||
| Long-term borrowings | ||||||||||||||
| Advances from the FHLB | 32,929 | 1.86 | 137,190 | 1.72 | ||||||||||
| Subordinated borrowings | 37,973 | 5.58 | 38,033 | 4.88 | ||||||||||
| Junior subordinated borrowings | 5,000 | 5.96 | 5,000 | 4.89 | ||||||||||
| Total long-term borrowings | 75,902 | 3.99 | 180,223 | 2.47 | ||||||||||
| Total | $ | 723,796 | 2.56 | % | $ | 829,721 | 1.66 | % | ||||||
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| |||||||
| | | | | Weighted | | | | | Weighted | | |
(dollars in thousands) |
| Carrying Value |
| Average Rate | | Carrying Value |
| Average Rate |
| |||
Short-term borrowings | |
| | |
| | |
| | |
|
|
Advances from the FHLB | | $ | 75,000 |
| 0.30 | % | | $ | 65,676 |
| 1.19 | % |
Other borrowings | |
| 19,802 |
| 0.17 | | |
| 27,779 |
| 0.15 | |
Total short-term borrowings | |
| 94,802 |
| 0.21 | | |
| 93,455 |
| 0.44 | |
Long-term borrowings | |
|
|
|
| | |
|
|
|
| |
Advances from the FHLB | |
| 23,598 |
| 1.08 | | |
| 182,607 |
| 1.73 | |
Subordinated borrowings | |
| 60,124 |
| 4.34 | | |
| 59,961 |
| 4.34 | |
Total long-term borrowings | |
| 83,722 |
| 3.42 | | |
| 242,568 |
| 2.37 | |
Total | | $ | 178,524 |
| 0.91 | % | | $ | 336,023 |
| 1.41 | % |
Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with an originala remaining maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no0 outstanding balance on the FHLB line of credit for the years ended December 31, 20182021 and 2017.
The BankCompany also has capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At December 31, 2018,2021, the Bank’sCompany’s available secured line of credit at the FRB was $118.6$64.7 million. The BankCompany has pledged certain loans and securities to the FRB to support this arrangement. There were no0 borrowings with the FRB for the periods endedas of December 31, 20182021 and December 31, 2017.2020.
85
The Company maintains an unused unsecured federal funds line of credit with a correspondent bank that has an aggregate overnight borrowing capacity of $50 million as of December 31, 2021 and December 31, 2020. There was 0 outstanding balance on the line of credit as of December 31, 2021 and December 31, 2020.
Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at December 31, 20182021 include no$20.0 million of callable advances and $330$298 thousand of amortizing advances. The advances outstanding at December 31, 20172020 include $20.0 million of callable advances totaling $27.0 million, and $683.0$307 thousand of amortizing advances. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.
A summary of maturities of FHLB advances as of December 31, 20182021 is as follows:
| December 31, 2018 | |||||||
| (in thousands, except rates) | Amount | Weighted Average Rate | |||||
| Fixed rate advances maturing: | |||||||
| 2019 | $ | 611,683 | 2.47 | % | |||
| 2020 | 29,956 | 1.87 | |||||
| 2021 | 1,648 | 2.34 | |||||
| 2022 | — | — | |||||
| 2023 | 1,000 | — | |||||
| 2024 and thereafter | 325 | 3.97 | |||||
| Total FHLB advances | $ | 644,612 | 2.44 | % | |||
| | | | | | |
|
| | |
| Weighted Average |
|
(in thousands, except rates) | | Amount | | Rate |
| |
2022 | | $ | 75,000 |
| 0.30 | % |
2023 | |
| — |
| — | |
2024 | |
| 1,000 |
| — | |
2025 | |
| 2,300 |
| — | |
2026 | |
| 20,000 |
| 1.21 | |
2027 and thereafter | |
| 298 |
| 4.20 | |
Total FHLB advances | | $ | 98,598 |
| 0.49 | % |
The Company has $17.0 million of subordinated debt issued on October 29, 2014, in connection with the execution ofexecuted a Subordinated Note Purchase Agreement with an aggregate of $17.0$40.0 million of subordinated notes (the “Notes”"Notes") to the accredited investors.investors on November 26, 2019. The Notes have a maturity date of NovemberDecember 1, 2029 and bear a fixed interest rate of 4.63% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and will bearthereafter the interest at a fixed rate of 6.75%shall be reset quarterly to an interest rate per annum.annum equal to the then current three-month Secured Overnight Financing Rate ("SOFR") plus 3.27%. The Company may, at itshas the option beginning with the interest payment date of NovemberDecember 1, 2019,2024, and on any interestscheduled payment date thereafter, to redeem the Notes, in whole or in part at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among allupon prior approval of the noteholders.Federal Reserve. The Notestransaction included debt issuance costs of $496 thousand and $659 thousand net of amortization as of December 31, 2021 and 2020 respectively, that are not subject to repayment atnetted against the option of the noteholders. The Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors.
The Company also has $20.6 million in floating Junior Subordinated Deferrable Interest Debentures (“Debentures”) issued by NHTB Capital Trust II (“Trust II”) and NHTB Capital Trust III (“Trust III”), which are both Connecticut statutory trusts. The Debentures were issued on March 30, 2014,2004, carry a variable interest rate of three-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.
Repurchase Agreements
The Company can raise additional liquidity by entering into repurchase agreements at its discretion. In a security repurchase agreement transaction, the Company will generally sell a security, agreeing to repurchase either the same or substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded as interest expense on the consolidated statements of income. The securities underlying the agreements are delivered to counterparties as security for the repurchase obligations. Since the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transactions do not meet the criteria to be classified as sales, and are therefore considered secured borrowing transactions for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement the Company is subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, the Company either deals with established firms when entering into these transactions or with customers whose agreements stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by the Company's safekeeping agents.
86
The Company’s repurchase agreements accounted for as secured borrowings, as of December 31, 2021 and December 31, 2020 is as follows:
| | | | | | |
|
| December 31, | ||||
(in thousands) | | 2021 | | 2020 | ||
Customer Repurchase Agreements |
| |
| |
|
|
US Government-sponsored enterprises | | $ | 19,802 | | $ | 27,779 |
Total | | $ | 19,802 | | $ | 27,779 |
NOTE 9.
Pension Plans
The Company maintains a legacy, employer-sponsored defined benefit pension plan (the “Plan”) for which participation and benefit accruals were frozen on January 13, 2017. The Plan was assumed in connection with a business combination in 2017. Accordingly, no employees are permitted to commence participation in the Plan and future salary increases and years of credited service are not considered when computing an employee’s benefits under the Plan. As of December 31, 2018,2021, all minimum Employee Retirement Income Security Act (“ERISA”) funding requirements have been met. The Company did not have any defined benefit pension plans prior to 2017.
The following tables set forth information about the plan for the year ended December 31, 20182021 and 2017:2020:
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Change in projected benefit obligation: | | | | | | |
Projected benefit obligation at beginning of year | | $ | 9,650 |
| $ | 8,926 |
Service cost | |
| — |
| | — |
Interest cost | |
| 233 |
| | 282 |
Actuarial loss | |
| (406) |
| | 913 |
Benefits paid | |
| (326) |
| | (319) |
Settlements | |
| (550) |
| | (152) |
Projected benefit obligation at end of year | |
| 8,601 |
| | 9,650 |
| | | | | | |
Change in fair value of plan assets: | |
|
|
| |
|
Fair value of plan assets at beginning of year | |
| 12,040 |
| | 11,078 |
Expected return on plan assets | |
| 1,258 |
| | 1,433 |
Contributions by employer | |
| — |
| | — |
Benefits paid | |
| (326) |
| | (319) |
Settlements | |
| (550) |
| | (152) |
Fair value of plan assets at end of year | |
| 12,422 |
| | 12,040 |
| | | | | | |
Overfunded status | | $ | (3,821) |
| $ | (2,390) |
| | | | | | |
Amounts recognized in consolidated balance sheet: | |
|
|
| |
|
Other assets | | $ | 3,821 |
| $ | 2,390 |
87
| (in thousands) | 2018 | 2017 | ||||||
| Change in projected benefit obligation: | ||||||||
| Projected benefit obligation at beginning of year | $ | 9,020 | $ | 8,642 | ||||
| Service cost | — | — | ||||||
| Interest cost | 315 | 334 | ||||||
| Actuarial (gain) loss | (771 | ) | 662 | |||||
| Benefits paid | (291 | ) | (269 | ) | ||||
| Settlements | (264 | ) | (349 | ) | ||||
| Projected benefit obligation at end of year | 8,009 | 9,020 | ||||||
| Change in fair value of plan assets: | ||||||||
| Fair value of plan assets at beginning of year | 11,026 | 10,622 | ||||||
| Expected return on plan assets | (481 | ) | 1,022 | |||||
| Contributions by employer | — | — | ||||||
| Benefits paid | (291 | ) | (269 | ) | ||||
| Settlements | (264 | ) | (349 | ) | ||||
| Fair value of plan assets at end of year | 9,990 | 11,026 | ||||||
| Overfunded status | $ | (1,981 | ) | $ | (2,006 | ) | ||
| Amounts recognized in consolidated balance sheet: | ||||||||
| Other assets | $ | 1,981 | $ | 2,006 | ||||
Net periodic pension cost is comprised of the following for the year ended December 31, 20182021 and 2017:
| (in thousands) | 2018 | 2017 | ||||||
| Interest cost | $ | 315 | $ | 334 | ||||
| Expected return on plan assets | (706 | ) | (706 | ) | ||||
| Settlement Charge | — | 13 | ||||||
| Net periodic pension benefit cost (credit) | $ | (391 | ) | $ | (359 | ) | ||
| (in thousands) | 2018 | 2017 | ||||||
| Net actuarial loss (gain) | $ | 415 | $ | 346 | ||||
| Settlement charge | — | (13 | ) | |||||
| Net period pension benefit cost (credit) | (391 | ) | (359 | ) | ||||
| Total recognized in net periodic benefit cost (credit) and other comprehensive loss (income) | $ | 24 | $ | (26 | ) | |||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Interest cost | | $ | 233 | | $ | 282 |
Expected return on plan assets | |
| (712) | |
| (708) |
Settlement Charge | |
| 0 | |
| 0 |
Net periodic pension benefit credit | | $ | (479) | | $ | (426) |
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Net actuarial (gain) loss | | $ | (953) | | $ | 178 |
Settlement charge | |
| 0 | |
| 0 |
Net period pension benefit (credit) | |
| (479) | |
| (426) |
Total recognized in net periodic benefit (credit) and other comprehensive income | | $ | (1,432) | | $ | (248) |
Change in plan assets and benefit obligations recognized in accumulated other comprehensive income as of December 31, 20182021 and 20172020 are as follows:
| (in thousands) | 2018 | 2017 | ||||||
| Net actuarial loss (gain) | $ | 415 | $ | 346 | ||||
| Settlement charge | — | (13 | ) | |||||
| Prior service cost (credit) | 333 | — | ||||||
| Total accumulated other comprehensive loss (pre-tax) | $ | 748 | $ | 333 | ||||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Net actuarial (gain) loss | | $ | (953) | | $ | 178 |
Settlement charge | |
| — | |
| — |
Prior service cost | |
| 1,072 | |
| 893 |
Total accumulated other comprehensive loss (pre-tax) | | $ | 119 | | $ | 1,071 |
The after tax components of accumulated other comprehensive loss, which have not yet been recognized in net periodic pension cost, related to the Plan are a net loss of $573$91 thousand. The Company expects to make no0 cash contributions to the pension trust during the 20192022 fiscal year. The amount expected to be amortized from accumulated other comprehensive loss into net periodic pension cost over the next fiscal year is zero.
The principal actuarial assumptions used at December 31, 20182021 and 20172020 were as follows:
| 2018 | 2017 | |||||
| Projected benefit obligation | ||||||
| Discount rate | 4.23 | % | 3.56 | % | ||
| Net periodic pension cost | ||||||
| Discount rate | 3.56 | % | 4.09 | % | ||
| Long-term rate of return on plan assets | 6.50 | 7.00 | ||||
| | | | | | |
|
| 2021 |
| | 2020 |
|
Projected benefit obligation |
|
|
| |
| |
Discount rate |
| 2.80 | % | | 2.46 | % |
Net periodic pension cost | | | | | | |
Discount rate |
| 2.46 | % | | 3.23 | % |
Long-term rate of return on plan assets |
| 6.00 |
| | 6.00 | |
The discount rate that is used in the measurement of the pension obligation is determined by comparing the expected future retirement payment cash flows of the plan to the Citigroup Above Median Double-A Curve as of the measurement date. The expected long-term rate of return on Plan assets reflects expectations of future returns as applied to the plan’s target allocation of asset classes. In estimating that rate, appropriate consideration was given to historical returns earned by equities and fixed income securities.
The Company’s overall investment strategy with respect to the Plan’s assets is to maintain assets at a level that will sufficiently cover future beneficiary obligations while achieving long term growth in assets. The Plan’s targeted asset allocation is 48%20% equity securities and 52%80% fixed-income securities primarily consisting of intermediate-termlong-term products.
The fair values for investment securities are determined by quoted prices in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
88
The fair value of the Plan'sPlan’s assets by category and level within fair value hierarchy are as follows at December 31, 20182021 and 2017:
| 2018 | ||||||||||||
| (in thousands) | Total | Level 1 | Level 2 | |||||||||
| Asset Category | ||||||||||||
| Equity mutual funds: | ||||||||||||
| Large-cap | $ | 1,730 | $ | 1,730 | $ | — | ||||||
| Mid-cap | 477 | 477 | — | |||||||||
| Small-cap | 469 | 469 | — | |||||||||
| International | 845 | 845 | ||||||||||
| Fixed income funds: | ||||||||||||
| Fixed-income - core plus | 3,945 | 3,945 | — | |||||||||
| Intermediate duration | 1,321 | 1,321 | — | |||||||||
| Common stock | 506 | 506 | — | |||||||||
| Common/collective trusts - large-cap | 469 | — | 469 | |||||||||
| Cash equivalents - money market | 228 | 228 | — | |||||||||
| Total | $ | 9,990 | $ | 9,521 | $ | 469 | ||||||
| 2017 | ||||||||||||
| (in thousands) | Total | Level 1 | Level 2 | |||||||||
| Asset Category | ||||||||||||
| Equity mutual funds: | ||||||||||||
| Large-cap | $ | 2,143 | $ | 2,143 | $ | — | ||||||
| Mid-cap | 612 | 612 | — | |||||||||
| Small-cap | 613 | 613 | — | |||||||||
| International | 1,150 | 1,150 | ||||||||||
| Fixed income funds: | ||||||||||||
| Fixed-income - core plus | 3,896 | 3,896 | — | |||||||||
| Intermediate duration | 1,316 | 1,316 | — | |||||||||
| Common stock | 610 | 610 | — | |||||||||
| Common/collective trusts - large-cap | 555 | — | 555 | |||||||||
| Cash equivalents - money market | 130 | 130 | — | |||||||||
| Total | $ | 11,025 | $ | 10,470 | $ | 555 | ||||||
| | | | | | | | | |
|
| 2021 | |||||||
(in thousands) |
| Total |
| Level 1 |
| Level 2 | |||
Equity mutual funds: | | |
|
| |
|
| |
|
Large-cap | | $ | 952 | | $ | 952 | | $ | — |
Mid-cap | |
| 296 | |
| 296 | |
| — |
Small-cap | |
| 302 | |
| 302 | |
| — |
International | |
| 573 | |
| 573 | |
|
|
Fixed income funds: | |
|
| |
|
| |
|
|
Fixed-income - core plus | |
| — | |
| — | |
| — |
Intermediate duration | |
| — | |
| — | |
| — |
Long duration | | | 9,042 | | | 9,042 | | | — |
Common stock | |
| 653 | |
| 653 | |
| — |
Common/collective trusts - large-cap | |
| 244 | |
| — | |
| 244 |
Cash equivalents - money market | |
| 360 | |
| 360 | |
| — |
Total | | $ | 12,422 | | $ | 12,178 | | $ | 244 |
| | | | | | | | | |
|
| 2020 | |||||||
(in thousands) |
| Total |
| Level 1 |
| Level 2 | |||
Equity mutual funds: |
| |
|
| |
|
| |
|
Large-cap | | $ | 2,364 | | $ | 2,364 | | $ | — |
Mid-cap | |
| 744 | |
| 744 | |
| — |
Small-cap | |
| 765 | |
| 765 | |
| — |
International | |
| 1,499 | |
| 1,499 | |
|
|
Fixed income funds: | |
|
| |
|
| |
|
|
Fixed-income - core plus | |
| 3,880 | |
| 3,880 | |
| — |
Intermediate duration | |
| 1,338 | |
| 1,338 | |
| — |
Common stock | |
| 510 | |
| 510 | |
| — |
Common/collective trusts - large-cap | |
| 620 | |
| — | |
| 620 |
Cash equivalents - money market | |
| 320 | |
| 320 | |
| — |
Total | | $ | 12,040 | | $ | 11,420 | | $ | 620 |
The Plan did not hold any assets classified as Level 3, and there were no0 transfers between levels during 20182021 and 2017.
Estimated benefit payments under the Company'sCompany’s pension plan over the next 10 years at December 31, 20182021 are as follows:
| Year | Payments in Thousands | |||
| 2019 | $ | 357 | ||
| 2020 | 383 | |||
| 2021 | 382 | |||
| 2022 | 400 | |||
| 2023 | 396 | |||
| 2024-2028 | 2,239 | |||
| | | |
(in thousands) |
| Payments | |
2022 | | $ | 350 |
2023 | |
| 346 |
2024 | |
| 353 |
2025 | |
| 348 |
2026 | |
| 412 |
2027-2031 | |
| 2,192 |
Total | | $ | 4,001 |
Non-qualified Supplemental Executive Retirement Plan
The Company has non-qualified supplemental executive retirement agreements with certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. This agreement provides a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the participating executive leaves the Company following a change of control event.
89
The following table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the plan as of and for the years ended December 31, 20182021 and December 31, 2017:
| (in thousands) | 2018 | 2017 | ||||||
| Change in benefit obligation: | ||||||||
| Projected benefit obligation at beginning of year | $ | 3,451 | $ | 3,670 | ||||
| Service cost | — | — | ||||||
| Interest cost | 102 | 116 | ||||||
| Actuarial loss/(gain) | (142 | ) | 16 | |||||
| Benefits paid | (378 | ) | (351 | ) | ||||
| Projected benefit obligation at end of year | $ | 3,033 | $ | 3,451 | ||||
| Change in fair value of plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | — | $ | — | ||||
| Expected return on plan assets | — | — | ||||||
| Contributions by employer | 378 | 351 | ||||||
| Benefits paid | (378 | ) | (351 | ) | ||||
| Fair value of plan assets at end of year | $ | — | $ | — | ||||
| Underfunded status | $ | 3,033 | $ | 3,451 | ||||
| Amounts recognized in consolidated balance sheet | ||||||||
| Other liabilities | $ | 3,033 | $ | 3,451 | ||||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Change in benefit obligation: |
| |
|
| |
|
Projected benefit obligation at beginning of year | | $ | 2,969 | | $ | 2,979 |
Service cost | |
| — | |
| — |
Interest cost | |
| 44 | |
| 81 |
Actuarial (gain) loss | |
| (147) | |
| 202 |
Benefits paid | |
| (260) | |
| (293) |
Projected benefit obligation at end of year | | $ | 2,606 | | $ | 2,969 |
| | | | | | |
Change in fair value of plan assets: | |
|
| |
|
|
Fair value of plan assets at beginning of year | | $ | — | | $ | — |
Expected return on plan assets | |
| — | |
| — |
Contributions by employer | |
| 260 | |
| 293 |
Benefits paid | |
| (260) | |
| (293) |
Fair value of plan assets at end of year | | $ | — | | $ | — |
| | | | | | |
Underfunded status | | $ | 2,606 | | $ | 2,969 |
| | | | | | |
Amounts recognized in consolidated balance sheet | |
|
| |
|
|
Other liabilities | | $ | 2,606 | | $ | 2,969 |
Net periodic benefit cost is comprised of the following for the years ended December 31, 20182021 and 2017:
| (in thousands) | 2018 | 2017 | ||||||
| Interest cost | $ | 102 | $ | 116 | ||||
| Expected return on plan assets | — | — | ||||||
| Amortization of unrecognized actuarial loss | 29 | 21 | ||||||
| Net periodic benefit cost | $ | 131 | $ | 137 | ||||
| (in thousands) | 2018 | 2017 | ||||||
| Net actuarial loss (gain) | $ | (142 | ) | $ | 16 | |||
| Amortization of unrecognized actuarial loss | (29 | ) | (21 | ) | ||||
| Total recognized in net periodic benefit cost and other comprehensive loss | $ | (171 | ) | $ | (5 | ) | ||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Interest cost | | $ | 44 | | $ | 81 |
Expected return on plan assets | |
| — | |
| — |
Amortization of unrecognized actuarial loss | |
| 43 | |
| 42 |
Net periodic benefit cost | | $ | 87 | | $ | 123 |
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Net actuarial (gain) loss | | $ | (137) | | $ | 202 |
Amortization of unrecognized actuarial loss | |
| (43) | |
| (42) |
Total recognized in net periodic benefit cost and other comprehensive loss | | $ | (180) | | $ | 160 |
Change in plan assets and benefit obligations recognized in accumulated other comprehensive income in 20182021 and 20172020 are as follows:
| (in thousands) | 2018 | 2017 | ||||||
| Accumulated other comprehensive income at beginning of the year (pre-tax) | $ | 585 | $ | 590 | ||||
| Actuarial loss (gain) | (142 | ) | 16 | |||||
| Amortization of actuarial loss | (29 | ) | (21 | ) | ||||
| Accumulated other comprehensive income at end of year (pre-tax) | $ | 414 | $ | 585 | ||||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Accumulated other comprehensive loss at beginning of the year (pre-tax) | | $ | 779 | | $ | 619 |
Actuarial (gain) loss | |
| (137) | |
| 202 |
Amortization of actuarial loss | |
| (43) | |
| (42) |
Accumulated other comprehensive loss at end of year (pre-tax) | | $ | 599 | | $ | 779 |
The after tax components of accumulated other comprehensive loss, which have not yet been recognized in net periodic benefit cost, related to the non-qualified supplemental executive retirement agreements are a net loss of $317$461 thousand. The amount expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over thenthe next fiscal year is $15$37 thousand.
90
The principal actuarial assumptions used at December 31, 20182021 and December 31, 20172020 were as follows:
| 2018 | 2017 | |||||
| Discount rate beginning of year | 3.13 | % | 3.31 | % | ||
| Discount rate end of year | 3.83 | 3.13 | ||||
| | | | | |
|
| 2021 |
| 2020 |
|
Discount rate beginning of year |
| 1.56 | % | 2.65 | % |
Discount rate end of year |
| 2.12 |
| 1.56 | |
The discount rate used in the measurement of the non-qualified supplemental executive retirement plan obligation is determined by comparing the expected future retirement payment cash flows to the Citigroup Above Median Double-ADouble- A Curve as of the measurement date.
The Company expects to contribute the following amounts to fund benefit payments under the supplemental executive retirement plans:
| (in thousands) | Payments | |||
| 2019 | $ | 378 | ||
| 2020 | 293 | |||
| 2021 | 260 | |||
| 2022 | 260 | |||
| 2023 | 260 | |||
| 2024-2036 | 2,518 | |||
| | | |
(in thousands) |
| Payments | |
2022 | | $ | 260 |
2023 | |
| 260 |
2024 | |
| 260 |
2025 | |
| 260 |
2026 | |
| 231 |
2027-2031 | |
| 2,027 |
Total | | $ | 3,298 |
401(k) Plan
The Company maintains a Section 401(k) savings plan for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the first day of any quarter following their date of hire and attainment of age 21 ½21½ . Under the plan, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plan allows for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. The total expense for this plan in 2018, 2017,2021, 2020, and 20162019 was $1.0$1.2 million, , $970 thousand,$1.2 million, and $439 thousand,$1.1 million, respectively.
Other Plans
As a result of the acquisition of a business combination in 2017, the Company assumed salary continuation agreements for supplemental retirement income with certain prior executives and senior officers along with an executive indexed supplemental retirement plan for one1 prior executive. The total liability for these agreements included in other liabilities was $7.3$8.0 million at December 31, 20182021 and $8.1$8.8 million at December 31, 2017. Expense2020. Income recorded in 20182021 was $312 thousand and 2017expense recorded in 2020 and 2019 under these agreements was $752$793 thousand and $581$779 thousand, respectively.
The Company also assumed split-dollar life insurance agreements withfrom the 2017 business combination with an accrued liability of $671 thousand as of year-end at December 31, 2018 and $687$876 thousand at December 31, 2017. Expense2021 and $919 thousand at December 31, 2020. The Company recorded income for the split-dollar life insurance agreements of $22 thousand in 2018 was $57 thousand. In 2017, a net benefit2021 and expense of $9$65 thousand relating to split-dollar life insurance agreements was recognized.and $163 thousand in 2020 and 2019, respectively.
91
The following table summarizes the current and deferred components of income tax expense (benefit) for each of the years ended December 31, 2018, 20172021, 2020 and 2016:
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Current: | ||||||||||||
| Federal tax expense | $ | 6,775 | $ | 8,705 | $ | 5,189 | ||||||
| State tax expense | 1,230 | 1,039 | 217 | |||||||||
| Total current tax expense | 8,005 | 9,744 | 5,406 | |||||||||
| Deferred tax expense | (443 | ) | 2,898 | 470 | ||||||||
| Impact of federal tax reform enactment | — | 3,988 | — | |||||||||
| Total income tax expense | $ | 7,562 | $ | 16,630 | $ | 5,876 | ||||||
| | | | | | | | | |
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Current: |
| |
|
| |
|
| |
|
Federal tax expense | | $ | 7,796 | | $ | 7,165 | | $ | 2,639 |
State tax expense | |
| 1,106 | |
| 1,280 | |
| 550 |
Total current tax expense | |
| 8,902 | |
| 8,445 | |
| 3,189 |
| | | | | | | | | |
Deferred tax expense | |
| 427 | |
| (38) | |
| 1,020 |
Total income tax expense | | $ | 9,329 | | $ | 8,407 | | $ | 4,209 |
The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate of 21%, 35% for years prior to 2018)) to recorded income tax expense for the years ended December 31, 2018, 20172021, 2020 and 2016:2019:
| | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| |||||||||
(in thousands, except ratios) | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| |||
Statutory tax rate |
| $ | 10,210 |
| 21.00 | % | $ | 8,747 |
| 21.00 | % | $ | 5,633 |
| 21.00 | % |
Increase (decrease) resulting from: |
| |
|
| |
| |
|
| |
| |
|
|
| |
State taxes, net of federal benefit |
| | 1,280 |
| 2.63 |
| | 1,120 |
| 2.69 |
| | 547 |
| 2.04 | |
Tax exempt interest |
| | (1,240) |
| (2.55) |
| | (1,301) |
| (3.12) |
| | (1,375) |
| (5.13) | |
Federal tax credits |
| | (582) |
| (1.20) |
| | (330) |
| (0.79) |
| | (282) |
| (1.05) | |
Officers' life insurance |
| | (466) |
| (0.96) |
| | (403) |
| (0.97) |
| | (431) |
| (1.61) | |
Gain of disposal of low income housing tax credit investments |
| | — |
| — |
| | 147 |
| 0.35 |
| | — |
| — | |
Stock-based compensation plans |
| | (73) |
| (0.15) |
| | 52 |
| 0.12 |
| | (20) |
| (0.07) | |
Other |
| | 200 |
| 0.42 |
| | 375 |
| 0.90 |
| | 137 |
| 0.51 | |
Effective tax rate | | $ | 9,329 |
| 19.19 | % | $ | 8,407 |
| 20.18 | % | $ | 4,209 |
| 15.69 | % |
The net deferred tax asset was $5.5 million at December 31, 2021 and $3.0 million at December 31, 2020.
92
| 2018 | 2017 | 2016 | |||||||||||||||||||
| (in thousands, except ratios) | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||
| Statutory tax rate | $ | 8,505 | 21.00 | % | $ | 14,918 | 35.00 | % | $ | 7,283 | 35.00 | % | |||||||||
| Increase (decrease) resulting from: | |||||||||||||||||||||
| State taxes, net of federal benefit | 908 | 2.24 | 986 | 2.31 | 141 | 0.68 | |||||||||||||||
| Tax exempt interest | (1,315 | ) | (3.25 | ) | (2,074 | ) | (4.87 | ) | (1,388 | ) | (6.67 | ) | |||||||||
| Federal tax credits | (125 | ) | (0.31 | ) | (130 | ) | (0.3 | ) | — | — | |||||||||||
| Officers' life insurance | (382 | ) | (0.94 | ) | (538 | ) | (1.26 | ) | (244 | ) | (1.17 | ) | |||||||||
| Acquisition costs | — | — | 89 | 0.21 | 289 | 1.39 | |||||||||||||||
| Stock-based compensation plans | (120 | ) | (0.30 | ) | (241 | ) | (0.57 | ) | — | — | |||||||||||
| Impact of federal tax reform enactment | — | — | 3,988 | 9.36 | — | — | |||||||||||||||
| Other | 91 | 0.23 | (368 | ) | (0.86 | ) | (205 | ) | (0.99 | ) | |||||||||||
| Effective tax rate | $ | 7,562 | 18.67 | % | $ | 16,630 | 39.02 | % | $ | 5,876 | 28.24 | % | |||||||||
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 20182021 and 20172020 are summarized below. The net deferred tax asset, which is included in other assets, amounted to $9.5 million at December 31, 2018 and $7.2 million at December 31, 2017.
| | | | | | | | | | | | |
| | 2021 | | 2020 | ||||||||
(in thousands) | | Assets | | Liabilities | | Assets | | Liabilities | ||||
Allowance for credit losses |
| $ | 5,214 |
| $ | — |
| $ | 4,464 |
| $ | — |
Deferred compensation | |
| 3,965 | |
| — | |
| 4,129 | |
| — |
Unrealized gain or loss on securities available for sale | |
| — | |
| 1,055 | |
| — | |
| 3,046 |
Unrealized gain or loss on derivatives(1) | |
| 201 | |
| — | |
| 567 | |
| — |
Depreciation | |
| — | |
| 2,033 | |
| — | |
| 2,261 |
Deferred loan origination fees, net(2) | |
| 432 | |
| — | |
| 451 | |
| — |
Non-accrual interest | |
| 593 | |
| — | |
| 492 | |
| — |
Branch acquisition costs and goodwill | |
| — | |
| 1,326 | |
| — | |
| 1,034 |
Core deposit intangible | |
| — | |
| 929 | |
| — | |
| 1,078 |
Acquisition fair value adjustments(2) | |
| 208 | |
| — | |
| 192 | |
| — |
Prepaid expenses | |
| — | |
| 205 | |
| — | |
| 301 |
Mortgage servicing rights | |
| — | |
| 843 | |
| — | |
| 784 |
Equity compensation | |
| 668 | |
| — | |
| 432 | |
| — |
Prepaid pension | |
| — | |
| 739 | |
| — | |
| 377 |
Contract incentives | |
| 820 | |
| — | |
| 1,017 | |
| — |
Right of use asset | |
| — | |
| 2,129 | |
| — | |
| 2,419 |
Lease liability | |
| 2,213 | |
| — | |
| 2,487 | |
| — |
Other | |
| 492 | |
| — | |
| 116 | |
| — |
Total | | $ | 14,806 | | $ | 9,259 | | $ | 14,347 | | $ | 11,300 |
| 2018 | 2017 | |||||||||||||||
| (in thousands) | Assets | Liabilities | Assets | Liabilities | ||||||||||||
| Allowance for loan losses | $ | 3,085 | $ | — | $ | 2,729 | $ | — | ||||||||
| Deferred compensation | 3,242 | — | 3,333 | — | ||||||||||||
| Unrealized gain or loss on securities available for sale | 2,641 | — | 649 | — | ||||||||||||
| Unrealized gain or loss on derivatives | 685 | — | 853 | — | ||||||||||||
| Depreciation | — | 1,517 | — | 1,356 | ||||||||||||
| Deferred loan origination costs | — | 725 | — | 655 | ||||||||||||
| Non-accrual interest | 374 | — | 273 | — | ||||||||||||
| Branch acquisition costs and goodwill | — | 784 | — | 737 | ||||||||||||
| Core deposit intangible | — | 1,309 | — | 1,525 | ||||||||||||
| Acquisition fair value adjustments | 3,171 | — | 4,000 | — | ||||||||||||
| Prepaid expenses | — | 215 | — | 302 | ||||||||||||
| Interest rate cap premium amortization | — | 257 | — | 276 | ||||||||||||
| Mortgage servicing rights | — | 721 | — | 769 | ||||||||||||
| Equity compensation | 335 | — | 297 | — | ||||||||||||
| Prepaid pension | — | 366 | — | 345 | ||||||||||||
| Contract incentives | 1,658 | — | 594 | — | ||||||||||||
| Other | 217 | — | 417 | — | ||||||||||||
| Total | $ | 15,408 | $ | 5,894 | $ | 13,145 | $ | 5,965 | ||||||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies –Revision of Previously Issued Financial Statements. |
| (2) | With the adoption of CECL, premiums and discounts on acquired loans are presented along with deferred loan origination fees, net. |
The Company has determined that a valuation allowance is not required for its net deferred tax asset since it is more likely than not that this asset is realizable principally through future taxable income and future reversal of existing temporary differences.
GAAP requires the measurement of unrecorded tax benefits related to uncertain tax positions. An unrecorded tax benefit is the difference between the tax benefit of a position taken, or expected to be taken, on a tax return and the benefit recorded for accounting purposes. At December 31, 2021 and 2020, the Company had 0 unrecorded tax benefits and does not expect its position to significantly change within the next twelve months.
The Company is subject to income tax in the U.S. federal jurisdiction and also in the states of Maine, New Hampshire and Massachusetts. The Company is no longer subject to examination by taxing authorities for years before 2015.2018.
93
NOTE 11.10. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the changes in interest rates do not have a significant effect on net interest income.
The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.
The Company discontinues hedge accounting when it is determinedoffers derivative products in the form of interest rate swaps, to commercial loan customers to facilitate their risk management strategies. These instruments are executed through Master Netting Arrangements ("MNA") with financial institution counterparties or Risk Participation Agreements ("RPA") with commercial bank counterparties, for which the Company assumes a pro rata share of the credit exposure associated with a borrower’s performance related to the derivative is no longer effective in offsetting changes ofcontract with the hedged risk on the hedged item, or management determines the designation of the derivative as a hedging instrument is no longer appropriate.
Information about derivative assets and liabilities at December 31, 20182021 and December 31, 2017,2020, follows:
| | | | | | | | | | | |
| | December 31, 2021 | |||||||||
| | | | Weighted | | |
| | |||
| | Notional | | Average | | Fair Value | | Location Fair | |||
| | Amount | | Maturity | | Asset (Liability) |
| Value Asset | |||
|
| (in thousands) |
| (in years) |
| (in thousands) |
| (Liability) | |||
Cash flow hedges: | | | | | | | | | | | |
Interest rate swap on wholesale fundings | | $ | 75,000 |
| | 3.0 | | $ | (121) | | Other liabilities |
Interest rate swap on variable rate loans | | | 50,000 | | | 4.2 | | | (756) | | Other liabilities |
Total cash flow hedges | |
| 125,000 |
| | | | | (877) | | |
| | | | | | | | | | | |
Fair value hedges: | | | | | | | | | | | |
Interest rate swap on securities | |
| 37,190 |
| | 7.6 | |
| (530) | | Other liabilities |
Total fair value hedges | |
| 37,190 |
| | | | | (530) | | |
| | | | | | | | | | | |
Economic hedges: | | | | | | | | | | | |
Forward sale commitments | |
| 16,600 |
| | 0.1 | |
| 15 | | Other assets |
Customer Loan Swaps-MNA Counterparty | | | 260,102 | | | 6.2 | | | (9,429) | | Other liabilities |
Customer Loan Swaps-RPA Counterparty | | | 115,285 | | | 6.7 | | | (4,421) | | Other liabilities |
Customer Loan Swaps-Customer | | | 375,387 | | | 6.4 | | | 13,850 | | Other assets |
Total economic hedges | |
| 767,374 |
| | | | | 15 | | |
| | | | | | | | | | �� | |
Non-hedging derivatives: | | | | | | | | | | | |
Interest rate lock commitments | |
| 14,059 |
| | 0.1 | |
| 283 | | Other assets |
Total non-hedging derivatives | |
| 14,059 |
| | | | | 283 | | |
| | | | | | | | | | | |
Total | | $ | 943,623 | | | | | $ | (1,109) | | |
94
| | | | | | | | | | | |
| | December 31, 2020 | |||||||||
| | | | Weighted | | |
| | |||
| | Notional | | Average | | Fair Value | | Location Fair | |||
| | Amount | | Maturity | | Asset (Liability) |
| Value Asset | |||
|
| (in thousands) |
| (in years) |
| (in thousands) |
| (Liability) | |||
Cash flow hedges: |
| |
|
| |
|
| |
| | |
Interest rate swap on wholesale fundings | | $ | 75,000 |
| | 4.0 | | $ | (2,664) | | Other liabilities |
Total cash flow hedges | |
| 75,000 |
| | | | | (2,664) | | |
| | | | | | | | | | | |
Fair value hedges: | | | | | | | | | | | |
Interest rate swap on securities(1) | |
| 37,190 |
| | 8.6 | |
| (2,789) | | Other liabilities |
Total fair value hedges | |
| 37,190 |
| | | | | (2,789) | | |
| | | | | | | | | | | |
Economic hedges: | | | | | | | | | | | |
Forward sale commitments | | | 50,629 |
| | 0.2 | |
| (95) | | Other liabilities |
Customer Loan Swaps-MNA Counterparty | | | 235,947 | | | 6.8 | | | (15,938) | | Other liabilities |
Customer Loan Swaps-RPA Counterparty | | | 119,285 | | | 7.9 | | | (9,957) | | Other liabilities |
Customer Loan Swaps-Customer | | | 355,232 | | | 7.1 | | | 25,895 | | Other assets |
Total economic hedges | |
| 761,093 |
| | | | | (95) | | |
| | | | | | | | | | | |
Non-hedging derivatives: | |
| | | | | | | | | |
Interest rate lock commitments | |
| 3,320 |
| | 0.1 | |
| 22 | | Other assets |
Total non-hedging derivatives | |
| 3,320 |
| | | | | 22 | | |
| | | | | | | | | | | |
Total | | $ | 876,603 | | | | | $ | (5,526) | | |
| December 31, 2018 | ||||||||||
Notional Amount | Weighted Average Maturity | Estimated Fair Value Asset (Liability) | ||||||||
| (in thousands) | (in years) | (in thousands) | ||||||||
| Cash flow hedges: | ||||||||||
| Interest rate caps agreements | $ | 90,000 | 4.1 | $ | 803 | |||||
| Total cash flow hedges | 90,000 | 4.1 | 803 | |||||||
| Non-hedging derivatives: | ||||||||||
| Interest rate lock commitments | 957 | 0.1 | 8 | |||||||
| Customer loan derivative liability | 45,641 | 9.9 | (1,353 | ) | ||||||
| Customer loan derivative asset | 45,641 | 9.9 | 1,353 | |||||||
| Total non-hedging derivatives | 92,239 | 8 | ||||||||
| Total | $ | 182,239 | $ | 811 | ||||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies –Revision of Previously Issued Financial Statements. |
As of December 31, 2021, and 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | | |
|
| |
| | |
| Cumulative Amount of Fair | |
| | Location of Hedged Item on | | Carrying Amount of Hedged | | Value Hedging Adjustment in | ||
|
| Balance Sheet |
| Assets |
| Carrying Amount | ||
December 31, 2021 |
|
|
| |
|
| |
|
Interest rate swap on securities |
| Securities Available for Sale | | $ | 39,726 | | $ | 2,536 |
| | | | | | | | |
December 31, 2020 |
|
| |
|
| |
|
|
Interest rate swap on securities |
| Securities Available for Sale | | $ | 40,209 | | $ | 3,019 |
95
| December 31, 2017 | ||||||||||
Notional Amount | Weighted Average Maturity | Estimated Fair Value Asset (Liability) | ||||||||
| (in thousands) | (in years) | (in thousands) | ||||||||
| Cash flow hedges: | ||||||||||
| Interest rate caps agreements | $ | 90,000 | 5.1 | $ | 669 | |||||
| Total cash flow hedges | 90,000 | 669 | ||||||||
| Economic hedges: | ||||||||||
| Forward sale commitments | 20,352 | 0.2 | (221 | ) | ||||||
| Total economic hedges | 20,352 | (221 | ) | |||||||
| Non-hedging derivatives: | ||||||||||
| Interest rate lock commitments | 19,853 | 0.2 | (1 | ) | ||||||
| Total non-hedging derivatives | 19,853 | (1 | ) | |||||||
| Total | $ | 130,205 | $ | 447 | ||||||
Information about derivative assets and liabilities for December 31, 20182021 and December 31, 2017,2020, follows:
| | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | |||||||||||
|
| Amount of |
| |
| Amount of |
| |
| | |||
| | Gain (Loss) | | | | Gain (Loss) | | | | | |||
| | Recognized in | | | | Reclassified | | Location of | | Amount of | |||
| | Other | | Location of Gain (Loss) | | from Other | | Gain (Loss) | | Gain (Loss) | |||
| | Comprehensive | | Reclassified from Other | | Comprehensive | | Recognized in | | Recognized | |||
(in thousands) |
| Income |
| Comprehensive Income |
| Income |
| Income |
| in Income | |||
Cash flow hedges: |
| |
|
|
|
| |
|
|
|
| |
|
Interest rate swap on wholesale funding | | $ | 1,950 | | Interest expense | | $ | — |
| Interest expense | | $ | (727) |
Interest rate swap on variable rate loans | | | (582) | | Interest income | | | — | | Interest income | | | 211 |
Total cash flow hedges | |
| 1,368 |
| | |
| — |
|
| |
| (516) |
| | | | | | | | | | | | | |
Fair value hedges: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| 3,087 |
| Interest income | |
| — |
| Interest income | |
| (566) |
Total fair value hedges | |
| 3,087 |
| | |
| — |
|
| |
| (566) |
| | | | | | | | | | | | | |
Economic hedges: | |
|
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Other income | |
| 110 |
Total economic hedges | |
| — |
| | |
| — |
|
| |
| 110 |
| | | | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Other income | |
| 261 |
Total non-hedging derivatives | |
| — |
| | |
| — |
|
| |
| 261 |
| | | | | | | | | | | | | |
Total | | $ | 4,455 | | | | $ | — |
|
| | $ | (711) |
| Twelve Months Ended December 31, | ||||||||
| (in thousands) | 2018 | 2017 | ||||||
| Cash flow hedges: | ||||||||
| Interest rate cap agreements | ||||||||
| Realized in interest expense | $ | (519 | ) | $ | (257 | ) | ||
| Economic hedges: | ||||||||
| Forward commitments | ||||||||
| Realized gain (loss) in other non-interest income | 221 | (77 | ) | |||||
| Non-hedging derivatives: | ||||||||
| Interest rate lock commitments | ||||||||
| Realized gain (loss) in other non-interest income | 9 | (22 | ) | |||||
| (1) | As of December 31, 2021 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months. |
96
| | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | |||||||||||
|
| Amount of |
| |
| Amount of |
| |
| | |||
| | Gain (Loss) | | | | Gain (Loss) | | | | | |||
| | Recognized in | | | | Reclassified | | Location of | | Amount of | |||
| | Other | | Location of Gain (Loss) | | from Other | | Gain (Loss) | | Gain (Loss) | |||
| | Comprehensive | | Reclassified from Other | | Comprehensive | | Recognized in | | Recognized | |||
(in thousands) | | Income(1) | | Comprehensive Income | | Income | | Income | | in Income | |||
Cash flow hedges: |
| |
|
|
| |
|
|
|
|
| |
|
Interest rate swap on wholesale funding | | $ | (2,876) |
| Interest expense | | $ | (3,935) |
| Interest expense | | $ | (829) |
Total cash flow hedges | | | (2,876) | | | |
| (3,935) |
| | |
| (829) |
| |
| | | | | | | | | | | |
Fair value hedges: | | |
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| (208) |
| Interest income | |
| — |
| Interest income | |
| (281) |
Total economic hedges | | | (208) | | | |
| — |
|
| |
| (281) |
| | | | | | | | | | | | | |
Economic hedges: | | |
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Other income | |
| (11) |
Total economic hedges | | | — | | | |
| — |
|
| |
| (11) |
| |
| | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Other Income | |
| (37) |
Total non-hedging derivatives | | | — | | | |
| — |
|
| |
| (37) |
| | | | | | | | | | | | | |
Total | | $ | (3,084) |
|
| | $ | (3,935) |
|
| | $ | (1,158) |
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies –Revision of Previously Issued Financial Statements. |
97
The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | |||||||||||||
| | Interest and Dividend Income | | Interest Expense | | | | ||||||||
(in thousands) |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income | |||||
Income and expense line items presented in the consolidated statements of income |
| $ | 95,236 | | | 15,568 | | $ | 8,543 | | | 6,688 | | $ | 42,261 |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | (669) | | | (58) | | | — |
Interest rate swap on variable rate loans | |
| 211 | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (566) | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | |||||||||||||
| | Interest and Dividend Income | | Interest Expense | | | | ||||||||
(in thousands) |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income | |||||
Income and expense line items presented in the consolidated statements of income |
| $ | 107,085 | | | 19,019 | | $ | 18,043 | | | 8,881 | | $ | 42,956 |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | (793) | | | (37) | | | — |
Interest rate swap on variable rate loans | |
| — | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (281) | | | — | | | — | | | — |
Cash flow hedges
Interest rate swaps on wholesale funding
As of December 31, 2021 the Company has 2 interest rate cap agreements were purchasedswaps on wholesale borrowings (the "SWAPS") to limit the Company’sits exposure to rising interest rates over a five year term on four rolling, three-month3-month FHLB borrowings indexed to three-month LIBOR. Under the termsor brokered certificates, or a combination thereof at each maturity date. The first of the 2 agreements were entered in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered on April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company paid total premiums of $4.6 million forinterest on the right to receivethree-month LIBOR rate. The Company designated the swaps as a cash flow payments if three-month LIBOR rises abovehedge.
Interest rate swap on variable rate loans
In March 2021, the capsCompany entered into a contract with a counterparty to manage interest rate risk associated with its variable rate loans. The instrument is specifically designed to hedge the risk of 3.00%, thus effectively ensuringchanges in its cash flows from interest expensereceipts attributable to changes in a contractually specified interest rate, on the borrowings at maximum rates of 3.00% for the durationan amount of the agreements.Company’s variable rate loan assets equal to $50 million. The interest rate cap agreements wereswap will effectively fix the Company’s interest rate on $50 million of 1
98
month USD-LIBOR-BBA (or LIBOR less two days) based loan assets at 0.806% plus the credit spread on the loans that reprices on weighted average basis. The Company designated the swap as a cash flow hedge.
Fair value hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The Company utilizes interest rate swaps designated as cash flow hedges. Thefair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rate cap agreementsrates to LIBOR-based variable interest rates. These derivatives are included in other assetsdesignated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, the Company entered into 8 swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, netvalues of tax.fixed rate securities. The premiums paidfixed rates on the interest rate cap agreements are being recognized as increases in interest expense over the durationtransactions have a weighted average of the agreements using the caplet method.
Economic hedges
Forward sale commitments
The Company utilizes forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings.derivatives. The Company typically uses a combination of best efforts and mandatory delivery contracts. The contracts which are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly afterjust prior to the loan closesclosing with a customer.
Customer loan derivatives
The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.
The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $12.0 million with counterparties.
The below table describes the potential effect of master netting arrangements on the consolidated balance sheet and the financial collateral pledged for these arrangements:
| | | | | | | | | | | | |
| | Gross Amounts Offset in the Consolidated Balance Sheet | ||||||||||
| | Derivative | | | | Cash Collateral | | | | |||
(in thousands) |
| Liabilities |
| Derivative Assets |
| Pledged |
| Net Amount | ||||
As of December 31, 2021 | |
| | |
| | |
| | |
| |
Customer Loan Derivatives: |
| |
|
| |
|
| |
|
| |
|
MNA counterparty | | $ | (9,429) | | $ | 9,429 | | $ | 12,000 | | $ | 12,000 |
RPA counterparty | |
| (4,421) | |
| 4,421 | |
| — | |
| — |
Total | | $ | (13,850) | | $ | 13,850 | | $ | 12,000 | | $ | 12,000 |
Non-hedging derivatives
Interest rate lock commitments
The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate
99
to the origination of residential mortgage loans that are held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
NOTE 12.11. OTHER COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES
Customer Obligations
The Company is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to extend credit, unused or unadvanced loan funds, and letters of credit. The Company uses the same lending policies and procedures to make such commitments as it uses for other lending products. Customer’s creditworthiness is evaluated on a case-by-case basis.
Commitments to originate loans, including unused or unadvanced loan funds, are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require customer payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company. Typically these letters of credit expire if unused; therefore the total amounts do not necessarily represent future cash requirements.
The following table summarizes the contractual amounts of commitments and contingent liabilities to customers as of December 31, 20182021 and December 31, 2017:
| (in thousands) | 2018 | 2017 | ||||||
| Commitments to originate new loans | $ | 20,431 | $ | 52,438 | ||||
| Unused funds on commercial and other lines of credit | 169,063 | 134,408 | ||||||
| Unadvanced funds on home equity lines of credit | 106,121 | 108,745 | ||||||
| Unadvanced funds on construction and real estate loans | 133,130 | 87,915 | ||||||
| Commercial letters of credit | 1,171 | 928 | ||||||
| Standby letters of credit | 486 | 486 | ||||||
| Total | $ | 430,402 | $ | 384,920 | ||||
| (in thousands) | Amount | |||
| 2019 | $ | 929 | ||
| 2020 | 902 | |||
| 2021 | 900 | |||
| 2022 | 916 | |||
| 2023 | 905 | |||
| 2024 and thereafter | 6,754 | |||
| Total | $ | 11,306 | ||
| | | | | | |
(in thousands) |
| 2021 |
| 2020 | ||
Commitments to originate new loans | | $ | 115,563 | | $ | 71,857 |
Unused funds on commercial and other lines of credit |
| | 98,993 |
| | 202,217 |
Unadvanced funds on home equity lines of credit | | | 117,351 | | | 117,198 |
Unadvanced funds on construction and real estate loans | |
| 168,883 | |
| 106,935 |
Commercial and standby letters of credit | | | 3,061 | | | 3,481 |
Letters of credit securing municipal deposits | | | 221,804 | | | 181,150 |
Total | | $ | 725,655 | | $ | 682,838 |
Legal Claims
Various legal claims arise from time to time in the normal course of business. As of December 31, 2018,2021, neither the Company nor its subsidiaries were involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans, and other issues incident in the normal course of the Company'sCompany’s business. However, neither the Company nor its subsidiaries are a party to any pending legal proceedings that it believes, in the aggregate, would have a material adverse effect on the financial condition or operations of the Company. Additionally, an estimate of future, probable losses cannot be estimated as of December 31, 2018.2021.
100
NOTE 13.12. SHAREHOLDERS’ EQUITY AND EARNINGS PER COMMON SHARE
The actual and required capital ratios at December 31, 20182021 and December 31, 20172020 were as follows:
| 2018 | |||||||||||||||||||||
| Actual | Minimum Capital Requirement | Minimum to be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||
| (in thousands, except ratios) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
| Company (consolidated) | |||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 331,628 | 14.23 | % | $ | 186,405 | 8.00 | % | $ | 244,656 | 10.00 | % | |||||||||
| Common equity tier 1 capital to risk-weighted assets | 274,838 | 11.80 | 104,853 | 4.50 | 151,454 | 6.50 | |||||||||||||||
| Tier 1 capital to risk-weighted assets | 295,458 | 12.68 | 139,803 | 6.00 | 186,404 | 8.00 | |||||||||||||||
| Tier 1 capital to average assets | 295,458 | 8.53 | 138,482 | 4.00 | 173,102 | 5.00 | |||||||||||||||
| Bank | |||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 321,390 | 13.82 | % | $ | 186,092 | 8.00 | % | $ | 244,246 | 10.00 | % | |||||||||
| Common equity tier 1 capital to risk-weighted assets | 302,220 | 12.99 | 104,677 | 4.50 | 151,200 | 6.50 | |||||||||||||||
| Tier 1 capital to risk-weighted assets | 302,220 | 12.99 | 139,569 | 6.00 | 186,092 | 8.00 | |||||||||||||||
| Tier 1 capital to average assets | 302,220 | 8.74 | 138,392 | 4.00 | 172,990 | 5.00 | |||||||||||||||
| 2017 | |||||||||||||||||||||
| Actual | Minimum Capital Requirement | Minimum to be Well-Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||
| (in thousands, except ratios) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
| Company (consolidated) | |||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 307,305 | 13.73 | % | $ | 179,047 | 8.00 | % | $ | 234,999 | 10.50 | % | |||||||||
| Common equity tier 1 capital to risk-weighted assets | 252,096 | 11.26 | 100,714 | 4.50 | 145,476 | 6.50 | |||||||||||||||
| Tier 1 capital to risk-weighted assets | 272,716 | 12.19 | 134,286 | 6.00 | 179,047 | 8.00 | |||||||||||||||
| Tier 1 capital to average assets | 272,716 | 8.10 | 134,758 | 4.00 | 168,447 | 5.00 | |||||||||||||||
| Bank | |||||||||||||||||||||
| Total capital to risk-weighted assets | $ | 306,495 | 13.71 | % | $ | 178,868 | 8.00 | % | $ | 234,764 | 10.50 | % | |||||||||
| Common equity tier 1 capital to risk-weighted assets | 288,906 | 12.92 | 100,613 | 4.50 | 145,331 | 6.50 | |||||||||||||||
| Tier 1 capital to risk-weighted assets | 288,906 | 12.92 | 134,151 | 6.00 | 178,868 | 8.00 | |||||||||||||||
| Tier 1 capital to average assets | 288,906 | 8.58 | 134,702 | 4.00 | 168,378 | 5.00 | |||||||||||||||
| | | | | | | | | | | | |
| | 2021 | | |||||||||
| | | | | | | | Regulatory Minimum to | | |||
| | Actual | | be "Well-Capitalized" | | |||||||
(in thousands, except ratios) |
| Amount |
| Ratio | | Amount |
| Ratio | | |||
Company (consolidated) | | | | | | | | | | |
| |
Total capital to risk-weighted assets | | $ | 380,690 | | 14.32 | % | | $ | 265,845 | | 10.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 295,635 | | 11.12 | | |
| 172,808 | | 6.50 | |
Tier 1 capital to risk-weighted assets | |
| 316,255 | | 11.90 | | |
| 212,608 | | 8.00 | |
Tier 1 capital to average assets | |
| 316,255 | | 8.66 | | |
| 182,595 | | 5.00 | |
| | | | | | | | | | | | |
Bank | | | | | | | | | | | | |
Total capital to risk-weighted assets | | $ | 375,435 | | 14.14 | % | | $ | 265,513 | | 10.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 351,000 | | 13.22 | | |
| 172,579 | | 6.50 | |
Tier 1 capital to risk-weighted assets | |
| 351,000 | | 13.22 | | |
| 212,405 | | 8.00 | |
Tier 1 capital to average assets | |
| 351,000 | | 9.62 | | |
| 182,432 | | 5.00 | |
| | | | | | | | | | | | |
| | 2020 | | |||||||||
| | | | | | | | Regulatory Minimum to | | |||
| | Actual | | be "Well-Capitalized" | | |||||||
(in thousands, except ratios) |
| Amount |
| Ratio | | Amount |
| Ratio | | |||
Company (consolidated) | | | | | | | | | | |
| |
Total capital to risk-weighted assets | | $ | 353,239 | | 13.56 | % | | $ | 260,457 | | 10.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 273,178 | | 10.49 | | |
| 169,297 | | 6.50 | |
Tier 1 capital to risk-weighted assets | |
| 273,178 | | 11.28 | | |
| 193,742 | | 8.00 | |
Tier 1 capital to average assets | |
| 273,178 | | 8.12 | | |
| 168,147 | | 5.00 | |
| | | | | | | | | | | | |
Bank | | | | | | | | | | | | |
Total capital to risk-weighted assets | | $ | 345,397 | | 13.27 | % | | $ | 260,284 | | 10.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 325,956 | | 12.52 | | |
| 169,226 | | 6.50 | |
Tier 1 capital to risk-weighted assets | |
| 325,956 | | 12.52 | | |
| 208,279 | | 8.00 | |
Tier 1 capital to average assets | |
| 325,956 | | 9.02 | | |
| 180,685 | | 5.00 | |
At each date shown, the Company and the Bank met the conditions to be classified as “well capitalized”“well-capitalized” under the relevant regulatory framework. To be categorized as well capitalized,“well-capitalized”, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.
The Company and the Bank becameare subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk weighted assets and the Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of common equity tier 1 capital, of 2.5% of risk weighted assets, to be phased-in over three years and applied to the common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly,“well-capitalized.” All banking organizations on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%6.5%, a minimum Tier 1 risk-based capital ratio of 8.5%8.0% and a minimum Total risk-basedrisk- based capital ratio of 10.5%10.0%.
101
Components of accumulated other comprehensive lossincome at December 31, 20182021 and December 31, 20172020 are as follows:
| | | | | | |
(in thousands) |
| December 31, 2021 |
| December 31, 2020 | ||
Accumulated other comprehensive income, before tax: |
| |
|
| |
|
Net unrealized gain on AFS securities | | $ | 2,580 | | $ | 13,069 |
Net unrealized gain (loss) on hedging derivatives(1) | |
| 1,130 | |
| (2,432) |
Net unrealized loss on post-retirement plans | |
| (718) | |
| (1,850) |
| | | | | | |
Income taxes related to items of accumulated other comprehensive income: | |
|
| |
|
|
Net unrealized gain on AFS securities | |
| (595) | |
| (3,046) |
Net unrealized (gain) loss on hedging derivatives(1) | |
| (260) | |
| 567 |
Net unrealized loss on post-retirement plans | |
| 166 | |
| 432 |
Accumulated other comprehensive income(1) | | $ | 2,303 | | $ | 6,740 |
| (in thousands) | 2018 | 2017 | ||||||
| Other accumulated comprehensive loss, before tax: | ||||||||
| Net unrealized loss on AFS securities | $ | (11,304 | ) | $ | (2,741 | ) | ||
| Net unrealized loss on derivative hedges | (2,934 | ) | (3,604 | ) | ||||
| Net unrealized loss on post-retirement plans | (1,162 | ) | (950 | ) | ||||
| Income taxes related to items of accumulated other comprehensive loss: | ||||||||
| Net unrealized loss on AFS securities | 2,641 | 1,030 | ||||||
| Net unrealized loss on derivative hedges | 685 | 1,354 | ||||||
| Net unrealized loss on post-retirement plans | 272 | 357 | ||||||
| Accumulated other comprehensive loss | $ | (11,802 | ) | $ | (4,554 | ) | ||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies –Revision of Previously Issued Financial Statements. |
The following table presents the components of other comprehensive income in 2018, 20172021, 2020 and 2016:
| | | | | | | | | |
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Year Ended December 31, 2021 |
| |
|
| |
|
| |
|
Net unrealized loss on AFS securities: |
| |
|
| |
|
| |
|
Net unrealized loss arising during the period | | $ | (7,619) | | $ | 1,779 | | $ | (5,840) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 2,870 | |
| (672) | |
| 2,198 |
Net unrealized loss on AFS securities | |
| (10,489) | |
| 2,451 | |
| (8,038) |
| | | | | | | | | |
Net unrealized gain on hedging derivatives: | |
| | |
|
| |
|
|
Net unrealized gain arising during the period | |
| 3,562 | |
| (827) | |
| 2,735 |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on hedging derivatives | |
| 3,562 | |
| (827) | |
| 2,735 |
| | | | | | | | | |
Net unrealized gain on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | |
| 1,132 | |
| (266) | |
| 866 |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on post-retirement plans | |
| 1,132 | |
| (266) | |
| 866 |
Other comprehensive loss | | $ | (5,795) | | $ | 1,358 | | $ | (4,437) |
| | | | | | | | | |
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Year Ended December 31, 2020 | |
|
| |
|
| |
|
|
Net unrealized gain on AFS securities: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | | $ | 11,264 | | $ | (2,636) | | $ | 8,628 |
Less: reclassification adjustment for gains realized in net income | |
| 5,445 | |
| (1,291) | |
| 4,154 |
Net unrealized gain on AFS securities | |
| 5,819 | |
| (1,345) | |
| 4,474 |
| | | | | | | | | |
Net unrealized loss on hedging derivatives: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period(1) | |
| (6,503) | |
| 1,303 | |
| (5,200) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| (4,852) | |
| 917 | |
| (3,935) |
Net unrealized loss on cash flow hedging derivatives(1) | |
| (1,651) | |
| 386 | |
| (1,265) |
| | | | | | | | | |
Net unrealized gain on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period | |
| (338) | |
| 77 | |
| (261) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| (338) | |
| 77 | |
| (261) |
Other comprehensive income(1) | | $ | 3,830 | | $ | (882) | | $ | 2,948 |
| 2018 | ||||||||||||
| (in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||
| Net unrealized gain on AFS securities: | ||||||||||||
| Net unrealized gain arising during the period | $ | (9,487 | ) | $ | 2,194 | $ | (7,293 | ) | ||||
| Less: reclassification adjustment for gains (losses) realized in net income | (924 | ) | 216 | (708 | ) | |||||||
| Net unrealized gain on AFS securities | (8,563 | ) | 1,978 | (6,585 | ) | |||||||
| Net unrealized loss on derivative hedges: | ||||||||||||
| Net unrealized loss arising during the period | 654 | (168 | ) | 486 | ||||||||
| Less: reclassification adjustment for gains (losses) realized in net income | — | — | — | |||||||||
| Net unrealized loss on derivative hedges | 654 | (168 | ) | 486 | ||||||||
| Net unrealized loss on post-retirement plans: | ||||||||||||
| Net unrealized loss arising during the period | (245 | ) | 54 | (191 | ) | |||||||
| Less: reclassification adjustment for gains (losses) realized in net income | (29 | ) | 7 | (22 | ) | |||||||
| Net unrealized loss on post-retirement plans | (216 | ) | 47 | (169 | ) | |||||||
| Other comprehensive loss | $ | (8,125 | ) | $ | 1,857 | $ | (6,268 | ) | ||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
102
| | | | | | | | | |
| | 2019 | |||||||
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Net unrealized gain on AFS securities: |
| |
|
| |
|
| |
|
Net unrealized gain arising during the period | | $ | 18,883 | | $ | (4,489) | | $ | 14,394 |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 237 | |
| (55) | |
| 182 |
Net unrealized gain on AFS securities | |
| 18,646 | |
| (4,434) | |
| 14,212 |
| | | | | | | | | |
Net unrealized loss on hedging derivatives: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period(1) | |
| (1,096) | |
| 326 | |
| (770) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| (3,156) | |
| 737 | |
| (2,419) |
Net unrealized loss on hedging derivatives(1) | |
| 2,060 | |
| (411) | |
| 1,649 |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period | |
| (350) | |
| 83 | |
| (267) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| (350) | |
| 83 | |
| (267) |
Other comprehensive income(1) | | $ | 20,356 | | $ | (4,762) | | $ | 15,594 |
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
| 2017 | ||||||||||||
| (in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||
| Net unrealized loss on AFS securities: | ||||||||||||
| Net unrealized loss arising during the period | $ | 545 | $ | (121 | ) | $ | 424 | |||||
| Less: reclassification adjustment for gains (losses) realized in net income | 19 | (7 | ) | 12 | ||||||||
| Net unrealized loss on AFS securities | 526 | (114 | ) | 412 | ||||||||
| Net unrealized loss on derivative hedges: | ||||||||||||
| Net unrealized loss arising during the period | (838 | ) | 386 | (452 | ) | |||||||
| Less: reclassification adjustment for gains (losses) realized in net income | — | — | — | |||||||||
| Net unrealized loss on derivative hedges | (838 | ) | 386 | (452 | ) | |||||||
| Net unrealized loss on post-retirement plans: | ||||||||||||
| Net unrealized gain arising during the period | (347 | ) | 146 | (201 | ) | |||||||
| Less: reclassification adjustment for gains (losses) realized in net income | (21 | ) | 8 | (13 | ) | |||||||
| Net unrealized gain on post-retirement plans | (326 | ) | 138 | (188 | ) | |||||||
| Other comprehensive loss | $ | (638 | ) | $ | 410 | $ | (228 | ) | ||||
103
| 2016 | ||||||||||||
| (in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||
| Net unrealized loss on AFS securities: | ||||||||||||
| Net unrealized loss arising during the period | $ | (7,561 | ) | $ | 2,647 | $ | (4,914 | ) | ||||
| Less: reclassification adjustment for gains (losses) realized in net income | 4,498 | (1,574 | ) | 2,924 | ||||||||
| Net unrealized loss on AFS securities | (12,059 | ) | 4,221 | (7,838 | ) | |||||||
| Net unrealized loss on derivative hedges: | ||||||||||||
| Net unrealized loss arising during the period | (272 | ) | 95 | (177 | ) | |||||||
| Less: reclassification adjustment for gains (losses) realized in net income | — | — | — | |||||||||
| Net unrealized loss on derivative hedges | (272 | ) | 95 | (177 | ) | |||||||
| Net unrealized loss on post-retirement plans: | ||||||||||||
| Net unrealized gain arising during the period | 62 | (20 | ) | 42 | ||||||||
| Less: reclassification adjustment for gains (losses) realized in net income | (28 | ) | 10 | (18 | ) | |||||||
| Net unrealized gain on post-retirement plans | 90 | (30 | ) | 60 | ||||||||
| Other comprehensive loss | $ | (12,241 | ) | $ | 4,286 | $ | (7,955 | ) | ||||
The following table presents the changes in each component of accumulated other comprehensive income/(loss) in 2018, 20172021, 2020 and 2016:
| | | | | | | | | | | | |
|
| 2021 | ||||||||||
|
| Net unrealized |
| Net loss on |
| Net unrealized |
| | | |||
| | gain | | effective cash | | loss | | | | |||
| | on AFS | | flow hedging | | on pension | | | | |||
(in thousands) | | Securities | | derivatives | | plans | | Total(1) | ||||
Year Ended December 31, 2021 | |
|
| |
|
| |
|
| |
| |
Balance at beginning of period | | $ | 10,023 | | $ | (1,865) | | $ | (1,418) | | $ | 6,740 |
Other comprehensive loss before reclassifications | |
| (5,840) | |
| 2,735 | |
| 866 | |
| (2,239) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 2,198 | |
| — | |
| — | |
| 2,198 |
Total other comprehensive (loss) income | |
| (8,038) | |
| 2,735 | |
| 866 | |
| (4,437) |
Balance at end of period | | $ | 1,985 | | $ | 870 | | $ | (552) | | $ | 2,303 |
| | | | | | | | | | | | |
|
| 2020 | ||||||||||
|
| Net unrealized |
| Net loss on |
| Net unrealized |
| | | |||
| | (loss) gain | | effective cash | | loss | | | | |||
| | on AFS | | flow hedging | | on pension | | | | |||
(in thousands) | | Securities | | derivatives(1) | | plans | | Total | ||||
Balance at beginning of period | | $ | 5,549 | | $ | (600) | | $ | (1,157) | | $ | 3,792 |
Other comprehensive (loss) gain before reclassifications | |
| 8,628 | |
| (5,200) | |
| (261) | |
| 3,167 |
Less: amounts reclassified from accumulated other comprehensive income | |
| 4,154 | |
| (3,935) | |
| — | |
| 219 |
Total other comprehensive income (loss) | |
| 4,474 | |
| (1,265) | |
| (261) | |
| 2,948 |
Balance at end of period | | $ | 10,023 | | $ | (1,865) | | $ | (1,418) | | $ | 6,740 |
| 2018 | ||||||||||||||||
| (in thousands) | Net unrealized gain on AFS Securities | Net loss on effective derivative hedges | Net unrealized loss on post-retirement plans | Total | ||||||||||||
| Balance at beginning of period | $ | (1,713 | ) | $ | (2,250 | ) | $ | (591 | ) | $ | (4,554 | ) | ||||
| Other comprehensive gain/(loss) before reclassifications | (7,293 | ) | 486 | (191 | ) | (6,998 | ) | |||||||||
| Less: amounts reclassified from accumulated other comprehensive income | (708 | ) | — | (22 | ) | (730 | ) | |||||||||
| Total other comprehensive loss | (6,585 | ) | 486 | (169 | ) | (6,268 | ) | |||||||||
| Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02 | (367 | ) | (485 | ) | (128 | ) | (980 | ) | ||||||||
| Balance at end of period | $ | (8,665 | ) | $ | (2,249 | ) | $ | (888 | ) | $ | (11,802 | ) | ||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
| | | | | | | | | | | | |
|
| 2019 | ||||||||||
|
| Net unrealized |
| Net loss on | �� | Net unrealized |
| | | |||
| | (loss) gain | | effective cash | | loss | | | | |||
| | on AFS | | flow hedging | | on pension | | | | |||
(in thousands) | | Securities | | derivatives(1) | | plans | | Total | ||||
Balance at beginning of period | | $ | (8,663) | | $ | (2,249) | | $ | (890) | | $ | (11,802) |
Other comprehensive (loss) gain before reclassifications | |
| 14,394 | |
| (770) | |
| (267) | |
| 13,357 |
Less: amounts reclassified from accumulated other comprehensive income | |
| 182 | |
| (2,419) | |
| — | |
| (2,237) |
Total other comprehensive (loss) income | |
| 14,212 | |
| 1,649 | |
| (267) | |
| 15,594 |
Balance at end of period | | $ | 5,549 | | $ | (600) | | $ | (1,157) | | $ | 3,792 |
| 2017 | ||||||||||||||||
| (in thousands) | Net unrealized gain on AFS Securities | Net loss on effective derivative hedges | Net unrealized loss on post-retirement plans | Total | ||||||||||||
| Balance at beginning of period | $ | (2,125 | ) | $ | (1,798 | ) | $ | (403 | ) | $ | (4,326 | ) | ||||
| Other comprehensive gain/(loss) before reclassifications | 424 | (452 | ) | (201 | ) | (229 | ) | |||||||||
| Less: amounts reclassified from accumulated other comprehensive income | 12 | — | (13 | ) | (1 | ) | ||||||||||
| Total other comprehensive loss | 412 | (452 | ) | (188 | ) | (228 | ) | |||||||||
| Balance at end of period | $ | (1,713 | ) | $ | (2,250 | ) | $ | (591 | ) | $ | (4,554 | ) | ||||
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
104
| 2016 | ||||||||||||||||
| (in thousands) | Net unrealized gain on AFS Securities | Net loss on effective derivative hedges | Net unrealized loss on post-retirement plans | Total | ||||||||||||
| Balance at beginning of period | $ | 5,713 | $ | (1,621 | ) | $ | (463 | ) | $ | 3,629 | ||||||
| Other comprehensive gain/(loss) before reclassifications | (4,914 | ) | (177 | ) | 42 | (5,049 | ) | |||||||||
| Less: amounts reclassified from accumulated other comprehensive income | 2,924 | — | (18 | ) | 2,906 | |||||||||||
| Total other comprehensive loss | (7,838 | ) | (177 | ) | 60 | (7,955 | ) | |||||||||
| Balance at end of period | $ | (2,125 | ) | $ | (1,798 | ) | $ | (403 | ) | $ | (4,326 | ) | ||||
The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) in 2018, 20172021, 2020 and 2016:
| (in thousands) | 2018 | 2017 | 2016 | Affected Line Item where Net Income is Presented | ||||||||||
| Realized gains on AFS securities: | ||||||||||||||
| Before tax | $ | (924 | ) | $ | 19 | $ | 4,498 | Non-interest income | ||||||
| Tax effect | 216 | (7 | ) | (1,574 | ) | Tax expense | ||||||||
| Total reclassifications for the period | $ | (708 | ) | $ | 12 | $ | 2,924 | Net of tax | ||||||
| (in thousands) | 2018 | 2017 | 2016 | Affected Line Item where Net Income is Presented | ||||||||||
| Realized loss on post-retirement plans: | ||||||||||||||
| Before tax | $ | (29 | ) | $ | (21 | ) | $ | (28 | ) | Salaries and benefits | ||||
| Tax effect | 7 | 8 | 10 | Tax benefit | ||||||||||
| Total reclassifications for the period | $ | (22 | ) | $ | (13 | ) | $ | (18 | ) | Net of tax | ||||
| | | | | | | | | | | |
| | | | | | | | | | | Affected Line Item where |
(in thousands) |
| 2021 |
| 2020 |
| 2019 |
| Net Income is Presented | |||
Net realized gains on AFS securities: | |
| | |
| | |
| | |
|
Before tax (1) | | $ | 2,870 | | $ | 5,445 | | $ | 237 |
| Non-interest income |
Tax effect | |
| (672) | |
| (1,275) | |
| (55) |
| Tax expense |
Total reclassifications for the period | | $ | 2,198 | | $ | 4,170 | | $ | 182 | | |
| | | | | | | | | | | |
| | | | | | | | | | | Affected Line Item where |
(in thousands) |
| 2021 |
| 2020 |
| 2019 |
| Net Income is Presented | |||
Net realized loss on hedging derivatives: | |
| | |
| | |
| | |
|
Before tax | | $ | — | | $ | (4,852) | | $ | — |
| Non-interest income |
Tax effect | |
| — | |
| 917 | |
| — |
| Tax expense |
Total reclassifications for the period | | $ | — | | $ | (3,935) | | $ | — | | |
| | | | | | | | | | | |
| | | | | | | | | | | Affected Line Item where |
(in thousands) |
| 2021 |
| 2020 |
| 2019 |
| Net Income is Presented | |||
Realized loss on post-retirement plans: | |
| | |
| | |
| | |
|
Before tax | | $ | — | | $ | — | | $ | — |
| Non-interest expense |
Tax effect | |
| — | |
| — | |
| — |
| Tax expense |
Total reclassifications for the period | | $ | — | | $ | — | | $ | — |
| |
Earnings per Share
Earnings per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):following:
| | | | | | | | | |
| | | | | | ||||
| | | | | | ||||
(in thousands, except per share and share data) |
| 2021 |
| 2020 |
| 2019 | |||
Net income | | $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
| | | | | | | | | |
Average number of basic common shares outstanding | |
| 14,968,973 | |
| 15,245,728 | |
| 15,540,884 |
Plus: dilutive effect of stock options and awards outstanding | |
| 76,189 | |
| 25,819 | |
| 46,109 |
Average number of diluted common shares outstanding(1) | |
| 15,045,162 | |
| 15,271,547 | |
| 15,586,993 |
| | | | | | | | | |
Earnings per share: | |
|
| |
|
| |
|
|
Basic | | $ | 2.63 | | $ | 2.18 | | $ | 1.46 |
Diluted | | $ | 2.61 | | $ | 2.18 | | $ | 1.45 |
| (1) | Average diluted shares outstanding are computed using the treasury stock method. |
105
| (in thousands, except per share and share data) | 2018 | 2017 | 2016 | |||||||||
| Net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||
| Average number of basic common shares outstanding | 15,487,686 | 15,183,615 | 9,068,624 | |||||||||
| Plus: dilutive effect of stock options and awards outstanding | 76,778 | 106,795 | 74,029 | |||||||||
| Average number of diluted common shares outstanding | 15,564,464 | 15,290,410 | 9,142,653 | |||||||||
| Anti-dilutive options excluded from earnings calculation | 7,991 | 8,659 | 90,249 | |||||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 2.13 | $ | 1.71 | $ | 1.65 | ||||||
| Diluted | $ | 2.12 | $ | 1.70 | $ | 1.63 | ||||||
NOTE 14.
The Company has several stock-based compensation plans that allow for grants of restricted stock, restricted shares, performance share units, performance shares and restricted stock units to its employees and non-employee directors. The Company's stock-based compensation plans are administered by the shareholdersCompensation Committee of the Company approvedBoard of Directors. For the Bar Harbor Banksharesyears ended December 31, 2021, 2020 and Subsidiaries Incentive Stock Option Plan2019, all common stock issuances in connection with stock-based compensation arrangements were issued from unissued shares. As of 2000 (the “ISOP”) for its officers and employees, which provided forDecember 31, 2021, total shares authorized under the issuance of up to 1,012,500 shares of common stock. The purchase price of the stock covered by each option must be at least 100% of the trading value on the date such option was granted. Vesting terms ranged from three to seven years. According to the ISOP no option shall be granted after October 3, 2010, ten years after the effective date of the ISOP.
Compensation expense recognized in connection with the stock basedstock-based compensation plans are presented in the following table for the years ended December 31, 2018, 2017,2021, 2020, and 2016:
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Stock options and restricted stock awards | $ | 350 | $ | 399 | $ | 543 | ||||||
| Performance stock units | 237 | 290 | 304 | |||||||||
| Restricted stock units | 711 | 585 | 431 | |||||||||
| Total compensation expense | $ | 1,298 | $ | 1,274 | $ | 1,278 | ||||||
| | | | | | | | | |
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Stock options | | $ | — | | $ | 12 | | $ | 28 |
Restricted stock awards | | | 357 | | | 275 | | | 300 |
Performance stock units | |
| 317 | |
| 225 | |
| 182 |
Restricted stock units | |
| 1,391 | |
| 960 | |
| 841 |
Total compensation expense | | $ | 2,065 | | $ | 1,472 | | $ | 1,351 |
Tax benefits recognized associated with stock options and restricted stock awardsfrom stock-based compensation plans for the years ended 2018, 2017December 31, 2021, 2020, and 2016 was $81 thousand, $308 thousand and $274 thousand, respectively.2019 are, as follows:
| | | | | | | | | |
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Stock options(1) | | $ | 77 | | $ | 9 | | $ | 23 |
Restricted stock awards | | | 84 | | | 65 | | | 72 |
Performance stock units | |
| 79 | |
| 49 | |
| 56 |
Restricted stock units | |
| 344 | |
| 190 | |
| 198 |
Total tax benefit | | $ | 584 | | $ | 313 | | $ | 349 |
(1) The totalCompany does not receive a tax benefit recognized associated with restricted stock units and performance stock units for the years ended 2018, 2017 and 2016 was $221 thousand, $423 thousand and $320 thousand, respectively.
Stock Option and Restricted Stock Awards Activity:
A summary combined status of the stock option and restricted stock awardsoptions as of December 31, 20182021 and 2017,2020, and changes during the year then ended is presented below:
| | | | | | | | |
| | Number of | | Weighted | | Aggregate | ||
| | Stock Options | | Average | | Intrinsic Value | ||
Stock Options |
| Outstanding |
| Exercise Price |
| (in thousands) | ||
Outstanding at January 1, 2021 |
| 94,566 | | $ | 20.29 |
| |
|
Granted |
| — | |
| — |
| |
|
Exercised |
| (36,441) | |
| 19.38 |
| |
|
Forfeited |
| — | |
| — |
| |
|
Expired | | (161) | | | 13.27 | | | |
Outstanding at December 31, 2021 |
| 57,964 | | $ | 20.89 | | $ | 466 |
| | | | | | | | |
Ending vested and expected to vest December 31, 2021 |
| 57,964 | | $ | 20.89 | | $ | 466 |
Exercisable at December 31, 2021 |
| 57,962 | |
| 20.89 | |
| 466 |
106
| Stock Options | Number of Stock Options Outstanding | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||
| Outstanding at January 1, 2018 | 169,921 | $ | 18.95 | ||||||||
| Granted | — | — | |||||||||
| Exercised | (47,534 | ) | 16.32 | ||||||||
| Forfeited | (750 | ) | 22.16 | ||||||||
| Outstanding at December 31, 2018 | 121,637 | $ | 19.96 | $ | 313 | ||||||
| Ending vested and expected to vest December 31, 2018 | 121,637 | $ | 19.96 | $ | 313 | ||||||
| Exercisable at December 31, 2018 | 101,554 | 20.66 | 192 | ||||||||
| Stock Options | Number of Stock Options Outstanding | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||
| Outstanding at January 1, 2017 | 236,763 | $ | 17.99 | ||||||||
| Granted | — | — | |||||||||
| Exercised | (55,725 | ) | 15.19 | ||||||||
| Forfeited | (11,117 | ) | 17.38 | ||||||||
| Outstanding at December 31, 2017 | 169,921 | $ | 18.95 | 1,370 | |||||||
| Ending vested and expected to vest December 31, 2017 | 169,921 | $ | 18.95 | $ | 1,370 | ||||||
| Exercisable at December 31, 2017 | 100,317 | 18.66 | 838 | ||||||||
| Restricted Stock Awards | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value | |||||
| Outstanding at January 1, 2018 | — | — | |||||
| Awarded | 12,420 | $ | 24.14 | ||||
| Vested | (12,420 | ) | 24.14 | ||||
| Forfeited | — | — | |||||
| Outstanding at December 31, 2018 | — | $ | — | ||||
| Restricted Stock Awards | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value | |||||
| Outstanding at January 1, 2017 | — | — | |||||
| Awarded | 8,004 | $ | 29.96 | ||||
| Vested | (8,004 | ) | 29.96 | ||||
| Forfeited | — | — | |||||
| Outstanding at December 31, 2017 | — | $ | — | ||||
| | | | | | | | |
| | Number of | | Weighted | | Aggregate | ||
| | Stock Options | | Average | | Intrinsic Value | ||
Stock Options |
| Outstanding |
| Exercise Price |
| (in thousands) | ||
Outstanding at January 1, 2020 |
| 107,784 | | $ | 20.15 |
| |
|
Granted |
| — | |
| — |
| |
|
Exercised |
| (9,860) | |
| 18.42 |
| |
|
Forfeited |
| (483) | |
| 16.96 |
| |
|
Expired | | (2,875) | | | 21.90 | | | |
Outstanding at December 31, 2020 |
| 94,566 | | $ | 20.29 | | $ | 226 |
| | | | | | | | |
Ending vested and expected to vest December 31, 2020 |
| 94,566 | | $ | 20.29 | | $ | 226 |
Exercisable at December 31, 2020 |
| 92,956 | |
| 20.35 | |
| 217 |
All outstanding options were fully vested with 0 unrecognized compensation cost as of December 31, 2021. The intrinsic value of the options exercised under both plans for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, was approximately $913$331 thousand, $760$39 thousand and $708$94 thousand, respectively.
Restricted Stock Awards
Restricted stock awards (RSAs) are granted to certain directors and executive officers and vest immediately. A summary of RSAs as of December 31, 2018,2021 and 2020, and changes during the year then ended is presented below:
| | | | | |
| | Number of | | | |
| | Restricted Stock | | Weighted Average | |
| | Awards | | Grant Date Fair | |
Restricted Stock Awards |
| Outstanding |
| Value | |
Outstanding at January 1, 2021 |
| — | | $ | — |
Awarded |
| 11,418 | |
| 31.29 |
Vested |
| (11,418) | |
| 31.29 |
Forfeited |
| — | |
| — |
Outstanding at December 31, 2021 |
| — | | $ | — |
| | | | | |
| | | | | |
| | | | | |
| | Number of | | | |
| | Restricted Stock | | Weighted Average | |
| | Awards | | Grant Date Fair | |
Restricted Stock Awards |
| Outstanding |
| Value | |
Outstanding at January 1, 2020 |
| — | | $ | — |
Awarded |
| 39,565 | |
| 23.59 |
Vested |
| (39,565) | |
| 23.59 |
Forfeited |
| — | |
| — |
Outstanding at December 31, 2020 |
| — | | $ | — |
As RSAs are granted and vest on the same day there was approximately $8 thousandis no remaining contractual maturity or unrecognized expense to report as of unrecognized compensation cost related to unvested stock option awards, netDecember 31, 2021. As there is 0 exercise price, RSAs also have 0 intrinsic value as of estimated forfeitures. This amount is expected to be recognized as expense over the next six years, with a weighted average recognition period of 1.36 years.
Performance Stock Units
The Company has a long-term incentive plan where performance stock unit awards were(PSUs) are granted to certain executive officers providing the opportunity to earn shares of common stock of the Company collectively ranging from zero to 28,082 shares, based on the Company’sits performance compared to peers. Participants in the plan were collectively granted PSUs ranging from 0 to 49,625 in 2021 and from 0 to 37,562 in 2020. The performance stock unitsPSUs granted will vest only if the performance measures are achieved.achieved over a three year performance period. Failure to achieve the performance measures will result in all or a portion of shares being forfeited. The performance shares grantedOn the grant dates in 2021 and 2020, PSUs had a weighted average fair value per share of $26.30 at$23.18 and $25.07, respectively. Expense is recognized over the date of grant,performance period and will be earned over a three year performance period.
107
| Performance Stock Units | Number of Performance Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
| Nonvested at January 1, 2018 | 33,627 | $ | 25.21 | ||||
| Awarded | 23,011 | 26.30 | |||||
| Vested and exercised | (15,017 | ) | 22.25 | ||||
| Forfeited | (3,756 | ) | 27.94 | ||||
| Nonvested at December 31, 2018 | 37,865 | $ | 26.77 | ||||
| Performance Stock Units | Number of Performance Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
| Nonvested at January 1, 2017 | 34,246 | $ | 21.25 | ||||
| Awarded | 17,711 | 26.74 | |||||
| Vested and exercised | (15,121 | ) | 18.84 | ||||
| Forfeited | (3,209 | ) | 21.51 | ||||
| Nonvested at December 31, 2017 | 33,627 | $ | 25.21 | ||||
| | | | | |
| | Number of | | Weighted Average | |
| | Performance Stock | | Grant Date Fair | |
Performance Stock Units |
| Units Outstanding |
| Value | |
Nonvested at January 1, 2021 |
| 56,328 | | $ | 24.98 |
Awarded |
| 33,083 | |
| 23.18 |
Vested and exercised |
| (7,694) | |
| 26.79 |
Forfeited |
| (11,252) | |
| 25.33 |
Nonvested at December 31, 2021 |
| 70,465 | | $ | 23.88 |
| | | | | |
| | Number of | | Weighted Average | |
| | Performance Stock | | Grant Date Fair | |
Performance Stock Units |
| Units Outstanding |
| Value | |
Nonvested at January 1, 2020 |
| 43,058 | | $ | 26.01 |
Awarded |
| 25,041 | |
| 25.07 |
Vested and exercised |
| (10,369) | |
| 18.51 |
Forfeited |
| (1,402) | |
| 29.13 |
Nonvested at December 31, 2020 |
| 56,328 | | $ | 24.98 |
Unrecognized expense for non-vested PSUs totaled $445 thousand as of December 31, 2021, which is expected to be recognized over the weighted average remaining contractual maturity term of 2.0 years. PSU’s do not carry an exercise price and therefore have 0 intrinsic value as of the performanceDecember 31, 2021.
Restricted Stock Units
During 2021 and 2020, restricted stock units vested and exercised for the years ended December 31, 2018, 2017 and 2016, was $337 thousand, $285 thousand and $336 thousand, respectively.
The following table summarizes restricted stock units activity in 20182021 and 2017:
| Restricted Stock Units | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
| Outstanding at January 1, 2018 | 74,168 | $ | 26.60 | ||||
| Granted | 46,743 | 28.66 | |||||
| Vested and exercised | (26,489 | ) | 24.36 | ||||
| Forfeited | (13,682 | ) | 28.28 | ||||
| Outstanding at December 31, 2018 | 80,740 | $ | 28.24 | ||||
| Restricted Stock Units | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
| Outstanding at January 1, 2017 | 40,681 | $ | 22.03 | ||||
| Granted | 57,561 | 28.48 | |||||
| Vested and exercised | (12,667 | ) | 21.49 | ||||
| Forfeited | (11,407 | ) | 25.43 | ||||
| Outstanding at December 31, 2017 | 74,168 | $ | 26.60 | ||||
| | | | | |
| | Number of | | Weighted Average | |
| | Restricted Stock | | Grant Date Fair | |
|
| Units Outstanding |
| Value | |
Outstanding at January 1, 2021 | | 131,398 |
| $ | 23.57 |
Granted | | 59,401 | | | 25.51 |
Vested and exercised | | (38,202) | | | 27.33 |
Forfeited | | (18,980) | | | 22.72 |
Outstanding at December 31, 2021 | | 133,617 | | $ | 23.48 |
| | | | | |
| | Number of | | Weighted Average | |
| | Restricted Stock | | Grant Date Fair | |
|
| Units Outstanding |
| Value | |
Outstanding at January 1, 2020 | | 106,552 |
| $ | 25.82 |
Granted | | 63,667 | | | 21.98 |
Vested and exercised | | (31,565) | | | 27.38 |
Forfeited | | (7,256) | | | 25.60 |
Outstanding at December 31, 2020 | | 131,398 | | $ | 23.57 |
Restricted stock units include cash-based restricted stock units (CRSUs), total CRSUs vested and exercised during 2022 and 2020 were 20,568 and 13,290 shares, respectively. Unrecognized expense for the years ended December 31, 2018, 2017 and 2016, was $594 thousand, $272 thousand and $235 thousand, respectively.non-vested RSUs totaled $2.1 million
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as of December 31, 2018, there was $1.8 million of total unrecognized compensation cost related to nonvested restricted stock units and performance stock units granted under the Plans. That cost2021, which is expected to be recognized over athe weighted average remaining contractual maturity term of 1.9 years.
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan (ESPP) under which employees, through payroll deductions, are able to purchase shares of Company common stock. The purchase price is 92% of the lower of the market price on the first or last day of the offering period. The maximum number of shares issuable during any offering period is 200,000 shares however, as of 2.0 years.December 31, 2021, December 31, 2020 and December 31, 2019, there were 167,502, 186,983 and 200,000 shares available for issuance under the ESPP, respectively. Participants may not purchase more than 400 shares during any offering period and, in any event, no more than $25 thousand worth of common stock in any calendar year. The ESPP has been determined to be non-compensatory in nature. As a result, the Company expects that expenses related to the ESPP will not be material. During the years ended December 31, 2021, 2020 and 2019, there were 19,481, 13,017 and 0 shares of common stock issued under the ESPP, respectively.
109
NOTE 15.14. FAIR VALUE MEASUREMENTS
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.
Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 20182021 and December 31, 2017,2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
| December 31, 2018 | ||||||||||||||||
| (in thousands) | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | ||||||||||||
| Available for sale securities: | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| US Government-sponsored enterprises | $ | — | $ | 404,952 | $ | — | $ | 404,952 | ||||||||
| US Government agency | — | 110,512 | — | 110,512 | ||||||||||||
| Private label | — | 20,382 | — | 20,382 | ||||||||||||
| Obligations of states and political subdivisions thereof | — | 132,265 | — | 132,265 | ||||||||||||
| Corporate bonds | — | 57,726 | — | 57,726 | ||||||||||||
| Derivative assets | — | 2,156 | 8 | 2,164 | ||||||||||||
| Derivative liabilities | — | (1,353 | ) | — | (1,353 | ) | ||||||||||
| December 31, 2017 | ||||||||||||||||
| (in thousands) | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | ||||||||||||
| Available for sale securities: | ||||||||||||||||
| Obligations of US Government sponsored enterprises | $ | — | $ | 6,972 | $ | — | $ | 6,972 | ||||||||
| Mortgage-backed securities: | ||||||||||||||||
| US Government-sponsored enterprises | — | 443,003 | — | 443,003 | ||||||||||||
| US Government agency | — | 95,596 | — | 95,596 | ||||||||||||
| Private label | — | 674 | — | 674 | ||||||||||||
| Obligations of states and political subdivisions thereof | — | 140,200 | — | 140,200 | ||||||||||||
| Corporate bonds | — | 30,797 | — | 30,797 | ||||||||||||
| Derivative assets | — | 669 | — | 669 | ||||||||||||
| Derivative liabilities | — | (222 | ) | (222 | ) | |||||||||||
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
(in thousands) | | Inputs | | Inputs | | Inputs | | Fair Value | ||||
Available for sale securities: | | | | |
| | |
| | |
| |
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 0 | | $ | 236,117 | | $ | 0 | | $ | 236,117 |
US Government agency | |
| 0 | |
| 79,637 | |
| 0 | |
| 79,637 |
Private label | |
| 0 | |
| 68,695 | |
| 0 | |
| 68,695 |
Obligations of states and political subdivisions thereof | |
| 0 | |
| 141,776 | |
| 0 | |
| 141,776 |
Corporate bonds | |
| 0 | |
| 92,051 | |
| 0 | |
| 92,051 |
Loans held for sale | | | 0 | | | 5,523 | | | 0 | | | 5,523 |
Derivative assets | |
| 0 | |
| 13,850 | |
| 298 | |
| 14,148 |
Derivative liabilities | |
| 0 | |
| (15,257) | |
| 0 | |
| (15,257) |
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
(in thousands) | | Inputs | | Inputs | | Inputs | | Fair Value | ||||
Available for sale securities: | |
| | |
| | |
| | |
| |
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | — | | $ | 212,390 | | $ | — | | $ | 212,390 |
US Government agency | |
| — | |
| 85,632 | |
| — | |
| 85,632 |
Private label | |
| — | |
| 19,709 | |
| — | |
| 19,709 |
Obligations of states and political subdivisions thereof | |
| — | |
| 169,004 | |
| — | |
| 169,004 |
Corporate bonds | |
| — | |
| 98,311 | |
| — | |
| 98,311 |
Derivative assets(1) | |
| — | |
| 25,895 | |
| 22 | |
| 25,917 |
Derivative liabilities(1) | |
| — | |
| (31,348) | |
| (95) | |
| (31,443) |
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
Securities Available for Sale:
All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.Loans Held for Sale:The valuation of the Company’s loans held for sale are determined on an individual basis using quoted secondary market prices and are classified as Level 2 measurements.
110
Cash Flow Hedges. The valuation of the Company’s cash flow hedges are obtained from a third party. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The inputs used to value the Company’s cash flow hedges are all classified as Level 2 measurements.
Interest Rate Lock Commitments.
The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihoodForward Sale Commitments
. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’sCustomer Loan Derivatives.
The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its ownAlthough the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2018,2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis in 20182021 and 2017.2020.
| | | | | | |
| | Assets (Liabilities) | ||||
| | Interest Rate Lock | | Forward | ||
(in thousands) |
| Commitments |
| Commitments | ||
Year Ended December 31, 2021 | |
|
| |
|
|
Balance at beginning of period | | $ | 22 | | $ | (95) |
Realized gain recognized in non-interest income | |
| 261 | |
| 110 |
Balance at end of period | | $ | 283 | | $ | 15 |
| | | | | | |
Year Ended December 31, 2020 | |
|
| |
|
|
Balance at beginning of period | | $ | 59 | | $ | (84) |
Realized loss recognized in non-interest income | |
| (37) | |
| (11) |
Balance at end of period | | $ | 22 | | $ | (95) |
| | | | | | |
111
| Assets (Liabilities) | ||||||||
| (in thousands) | Interest Rate Lock Commitments | Forward Commitments | ||||||
| December 31, 2016 | $ | — | $ | — | ||||
| Business combination, January 13, 2017 | 96 | 23 | ||||||
| Goodwill adjustment for business combination | (75 | ) | (167 | ) | ||||
| Realized loss recognized in non-interest income | (22 | ) | (77 | ) | ||||
| December 31, 2017 | $ | (1 | ) | $ | (221 | ) | ||
| Realized gain recognized in non-interest income | 9 | 221 | ||||||
| December 31, 2018 | $ | 8 | $ | — | ||||
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
| (in thousands, except ratios) | Fair Value December 31, 2018 | Valuation Techniques | Unobservable Inputs | Significant Unobservable Input Value | ||||||||
| Assets (Liabilities) | ||||||||||||
| Interest Rate Lock Commitment | $ | 8 | Historical trend | Closing Ratio | 90 | % | ||||||
| Pricing Model | Origination Costs, per loan | $ | 1.7 | |||||||||
| Forward Commitments | — | Quoted prices for similar loans in active markets. | Freddie Mac pricing system | Pair-off contract price | ||||||||
| Total | $ | 8 | ||||||||||
| | | | | | | | | | | | | | |
|
| Fair Value | | Fair Value | | |
| |
| Significant |
| |||
| | December 31, | | December 31, | | Valuation | | Unobservable | | Unobservable | | |||
(in thousands, except ratios) |
| 2021 |
| 2020 | | Techniques |
| Inputs |
| Input Value | | |||
Assets (Liabilities) | |
| | |
| | |
| |
| |
| |
|
Interest Rate Lock Commitment |
| $ | 283 | | $ | 22 | | Pull-through Rate Analysis |
| Closing Ratio |
| | 85 | % |
| |
| | |
| | | Pricing Model | | Origination Costs, per loan | | $ | 1.7 | |
| | | | | | | | Discount Cash Flows | | Mortgage Servicing Asset | | | 1.0 | % |
| | | | | | | | |
| | | | | |
Forward Commitments | |
| 15 | |
| (95) | | Quoted prices for similar loans in active markets |
| Freddie Mac pricing system | |
| $99.8 to $103.2 | |
Total | | $ | 298 | | $ | (73) | |
|
|
| |
|
| |
There were no level 3 assets and liabilities that were measured at fair value on a recurring basis in 20182021 and 2017.
Non-Recurring Fair Value Measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with U.S. GAAP. The following is a summary of applicable non-recurring fair value measurements asmeasurements.
| | | | | | | | | | | |
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2021 | | Fair Value Measurement Date as of December 31, 2021 | |||
| | Level 3 | | Level 3 | | Total | | Level 3 | |||
(in thousands) |
| Inputs |
| Inputs |
| Gains (Losses) |
| Inputs | |||
Assets | |
| | |
| | |
| | |
|
Individually evaluated loans | | $ | 8,324 | | $ | 8,746 | | $ | (422) | | December 2021 |
Capitalized servicing rights | |
| 5,263 | | | 3,605 |
| | 1,658 |
| December 2021 |
Premises held for sale | |
| 226 | | | 962 |
| | (736) |
| December 2021 |
Total | | $ | 13,813 | | $ | 13,313 | | $ | 500 |
|
|
112
| December 31, 2018 | December 31, 2017 | December 31, 2018 | Fair Value Measurement Date as of December 31, 2018 | |||||||||||
| (in thousands) | Level 3 Inputs | Level 3 Inputs | Total Gains (Losses) | Level 3 Inputs | ||||||||||
| Assets | ||||||||||||||
| Impaired loans | $ | 15,213 | $ | 10,793 | $ | (4,420 | ) | December 2018 | ||||||
| Capitalized servicing rights | 4,882 | 4,158 | — | December 2018 | ||||||||||
| Other real estate owned | 2,351 | 122 | (20 | ) | April 2018 | |||||||||
| Total | $ | 22,446 | $ | 15,073 | $ | (4,440 | ) | |||||||
Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets as of December 31, 20182021 and December 31, 20172020 is as follows:
| | | | | | | | | | | |
| | | | | | | | |
| ||
(in thousands, except ratios) |
| Fair Value December 31, 2021 |
| Valuation Techniques |
| Unobservable Inputs |
| Range (Weighted Average)(a) |
| ||
Assets |
| |
|
|
|
|
| | |
| |
Individually evaluated loans | | $ | 4,780 |
| Fair value of collateral-appraised value |
| Loss severity | | | 10% to 70% | |
| | | | | |
| Appraised value | | | $71 to $1,792 | |
| | | | | | | | | | | |
Individually evaluated loans | |
| 3,544 |
| Discount cash flow |
| Discount rate |
| | 2.88% to 9.50% | |
| | | | | |
| Cash flows | | | $6 to $931 | |
| | | | | | | | | | | |
Capitalized servicing rights | |
| 5,263 |
| Discounted cash flow |
| Constant prepayment rate (CPR) |
| | 12.47% | |
| |
|
|
|
|
| Discount rate |
| | 9.53% | |
| | | | | | | | | | | |
Premises held for sale | |
| 226 |
| Fair value of asset less selling costs |
| Appraised value | | | $240 | |
| |
| |
|
|
| Selling Costs |
| | 6% | |
Total | | $ | 13,813 |
|
|
|
|
| |
| |
| Fair Value | Range (Weighted Average) (a) | |||||||||||
| (in thousands, except ratios) | December 31, 2018 | Valuation Techniques | Unobservable Inputs | |||||||||
| Assets | ||||||||||||
| Impaired loans | $ | 11,676 | Fair value of collateral - appraised value | Loss severity | 0% to 55.00% | |||||||
| Appraised value | $0 to $6,915 | |||||||||||
| Impaired loans | 3,537 | Discounted cash flow | Discount rate | 2.88% to 9.50% | ||||||||
| Cash flows | $22 to $1,072 | |||||||||||
| Capitalized servicing rights | 4,882 | Discounted cash flow | Constant prepayment rate (CPR) | 8.19 | % | |||||||
| Discount rate | 10.08 | % | ||||||||||
| Other real estate owned | 2,351 | Fair value of collateral less selling costs | Appraised value | $2,700 | ||||||||
| Selling costs | 12.93 | % | ||||||||||
| Total | $ | 22,446 | ||||||||||
| (a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties. |
| | | | | | | | | | | |
| | | | | | | | | | ||
(in thousands, except ratios) |
| Fair Value December 31, 2020 |
| Valuation Techniques |
| Unobservable Inputs |
| Range (Weighted Average)(a) | | ||
Assets | | | | | | | | | | | |
Individually evaluated loans | | $ | 6,128 | | Fair value of collateral-appraised value | | Loss severity | | | 0% to 70% | |
| | | | | | | Appraised value | | | $0 to $1,730 | |
| | | | | | | | | | | |
Individually evaluated loans | |
| 2,618 | | Discount cash flow | | Discount rate |
| | 3.50% to 9.50% | |
| | | | | | | Cash flows | | | $19 to $953 | |
| | | | | | | | | | | |
Capitalized servicing rights | |
| 3,605 | | Discounted cash flow | | Constant prepayment rate (CPR) |
| | 18.53% | |
| | | | | | | Discount rate |
| | 10.05% | |
| | | | | | | | | | | |
Premises held for sale | |
| 962 | | Fair value of asset less selling costs | | Appraised value |
| | $220 to $386 | |
| | | | | | | Selling Costs |
| | 6% | |
Total | | $ | 13,313 | | | | | | | | |
| Fair Value | Range (Weighted Average) (a) | |||||||||||
| (in thousands, except ratios) | December 31, 2017 | Valuation Techniques | Unobservable Inputs | |||||||||
| Assets | ||||||||||||
| Impaired loans | $ | 8,586 | Fair value of collateral - appraised value | Loss severity | 15.70% to 45.28% | |||||||
| Appraised value | $100 to $7,545 | |||||||||||
| Impaired loans | 2,207 | Discount cash flow | Discount rate | 2.63% to 9.50% | ||||||||
| Cash flows | $6 to $320 | |||||||||||
| Capitalized servicing rights | 4,158 | Discounted cash flow | Constant prepayment rate (CPR) | 10.97 | % | |||||||
| Discount rate | 10.10 | % | ||||||||||
| Other real estate owned | 122 | Fair value of collateral less selling costs | Appraised value | $136 | ||||||||
| Selling costs | 10.00 | % | ||||||||||
| Total | $ | 15,073 | ||||||||||
| (a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties. |
There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended December 31, 20182021 and December 31, 2017.2020.
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Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, non-recurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.
Capitalized loan servicing rights
. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.Other real estate owned (“OREO”).
OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.Premises held for sale. Premises held for sale, identified as part of the Company’s strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale fair values are primarily determined based on Level 3 data including sales comparables and appraisals.
114
The following table represents estimated fair values, and related carrying amounts of the Company’s financial instruments as of December 31, 20182021 and December 31, 2017.2020. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
| | | | | | | | | | | | | | | |
| | December 31, 2021 | |||||||||||||
| | Carrying | | Fair | | | | | | | | | | ||
(in thousands) |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 250,389 | | $ | 250,389 | | $ | 250,389 | | $ | 0 | | $ | 0 |
Securities available for sale | |
| 618,276 | |
| 618,276 | |
| 0 | |
| 618,276 | |
| 0 |
FHLB stock | |
| 7,384 | |
| 7,384 | |
| 0 | |
| 7,384 | |
| 0 |
Loans held for sale | | | 5,523 | | | 5,523 | | | 0 | | | 5,523 | | | 0 |
Net loans | |
| 2,509,192 | |
| 2,442,741 | |
| 0 | |
| 0 | |
| 2,442,741 |
Accrued interest receivable | |
| 2,712 | |
| 2,712 | |
| 0 | |
| 2,712 | |
| 0 |
Cash surrender value of bank-owned life insurance policies | |
| 79,020 | |
| 79,020 | |
| 0 | |
| 79,020 | |
| 0 |
Derivative assets | |
| 14,148 | |
| 14,148 | |
| 0 | |
| 13,850 | |
| 298 |
| | | | | | | | | | | | | | | |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Non-maturity deposits | | $ | 2,623,012 | | $ | 2,853,000 | | $ | 0 | | $ | 2,853,000 | | $ | 0 |
Time deposits | | | 425,532 | | | 424,000 | | | 0 | | | 424,000 | | | 0 |
Securities sold under agreements to repurchase | | | 19,802 | | | 19,802 | | | 0 | | | 19,802 | | | 0 |
FHLB advances | |
| 98,598 | |
| 98,439 | |
| 0 | |
| 98,439 | |
| 0 |
Subordinated borrowings | |
| 60,124 | |
| 61,884 | |
| 0 | |
| 61,884 | |
| 0 |
Derivative liabilities | |
| 15,257 | |
| 15,257 | |
| 0 | |
| 15,257 | |
| 0 |
| | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||
| | Carrying | | Fair | | | | | | | | | | ||
(in thousands) |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 226,007 | | $ | 226,007 | | $ | 226,007 | | $ | — | | $ | — |
Securities available for sale | |
| 585,046 | |
| 585,046 | |
| — | |
| 585,046 | |
| — |
FHLB stock | |
| 14,036 | |
| 14,036 | |
| — | |
| 14,036 | |
| — |
Loans held for sale | | | 23,988 | | | 24,163 | | | — | | | 24,163 | | | — |
Net loans | |
| 2,543,803 | |
| 2,547,970 | |
| — | |
| — | |
| 2,547,970 |
Accrued interest receivable | |
| 2,964 | |
| 2,964 | |
| — | |
| 2,964 | |
| — |
Cash surrender value of bank-owned life insurance policies | |
| 77,870 | |
| 77,870 | |
| — | |
| 77,870 | |
| — |
Derivative assets(1) | |
| 25,895 | |
| 25,895 | |
| — | |
| 25,917 | |
| 22 |
| | | | | | | | | | | | | | | |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Non-maturity deposits | | $ | 2,207,854 | | $ | 2,122,222 | | $ | — | | $ | 2,122,222 | | $ | — |
Time deposits | | | 698,361 | | | 694,700 | | | — | | | 694,700 | | | — |
Short-term other borrowings | |
| 27,779 | |
| 27,779 | |
| — | |
| 27,779 | |
| — |
FHLB advances | |
| 248,283 | |
| 252,698 | |
| — | |
| 252,698 | |
| — |
Subordinated borrowings | |
| 59,961 | |
| 57,091 | |
| — | |
| 57,091 | |
| — |
Derivative liabilities(1) | |
| 31,348 | |
| 31,348 | |
| — | |
| 31,443 | |
| 95 |
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
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| December 31, 2018 | ||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 98,754 | $ | 98,754 | $ | 98,754 | $ | — | $ | — | ||||||||||
| Securities available for sale | 725,837 | 725,837 | — | 725,837 | — | |||||||||||||||
| FHLB bank stock | 35,659 | 35,659 | — | 35,659 | — | |||||||||||||||
| Net loans | 2,476,361 | 2,415,863 | — | — | 2,415,863 | |||||||||||||||
| Accrued interest receivable | 3,533 | 3,533 | — | 3,533 | — | |||||||||||||||
| Cash surrender value of bank-owned life insurance policies | 73,810 | 73,810 | — | 73,810 | — | |||||||||||||||
| Derivative assets | 2,164 | 2,164 | — | 2,156 | 8 | |||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Total deposits | $ | 2,483,238 | $ | 2,404,250 | $ | — | $ | 2,404,250 | $ | — | ||||||||||
| Other short-term borrowings | 36,211 | 36,171 | — | 36,171 | — | |||||||||||||||
| Federal Home Loan Bank advances | 644,611 | 643,065 | — | 643,065 | — | |||||||||||||||
| Subordinated borrowings | 37,973 | 37,973 | — | 37,973 | — | |||||||||||||||
| Junior subordinated borrowings | 5,000 | 3,923 | — | 3,923 | — | |||||||||||||||
| Derivative liabilities | (1,353 | ) | (1,353 | ) | — | — | (1,353 | ) | ||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 90,685 | $ | 90,685 | $ | 90,685 | $ | — | $ | — | ||||||||||
| Securities available for sale | 717,242 | 717,242 | — | 717,242 | — | |||||||||||||||
| FHLB bank stock | 38,105 | 38,105 | — | 38,105 | — | |||||||||||||||
| Net loans | 2,473,288 | 2,433,557 | — | — | 2,433,557 | |||||||||||||||
| Accrued interest receivable | 3,347 | 3,347 | — | 3,347 | — | |||||||||||||||
| Cash surrender value of bank-owned life insurance policies | 57,997 | 57,997 | — | 57,997 | — | |||||||||||||||
| Derivative assets | 669 | 669 | — | 669 | — | |||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Total deposits | $ | 2,352,085 | $ | 2,348,574 | $ | — | $ | 2,348,574 | $ | — | ||||||||||
| Other short-term borrowings | 40,706 | 40,680 | — | 40,680 | — | |||||||||||||||
| Federal Home Loan Bank advances | 745,982 | 744,006 | — | 744,006 | — | |||||||||||||||
| Subordinated borrowings | 38,033 | 38,033 | — | 38,033 | — | |||||||||||||||
| Junior subordinated borrowings | 5,000 | 3,782 | — | 3,782 | — | |||||||||||||||
| Derivative liabilities | (222 | ) | (222 | ) | — | — | (222 | ) | ||||||||||||
NOTE 15. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company has accounted for the coupon rates, remaining maturities, prepayment speeds, liquidity premiums, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. As of December 31, 2017, the fair value of loans was estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.
| (in thousands) | Balance at December 31, 2017 | Adjustments due to Topic 606 | Balance at January 1, 2018 | |||||||||
| Balance Sheet | ||||||||||||
| Other Assets | $ | 24,389 | $ | 57 | $ | 24,446 | ||||||
| Other Liabilities | 28,737 | 241 | 28,978 | |||||||||
| Retained Earnings | 144,977 | (184 | ) | 144,793 | ||||||||
Disaggregation of Revenue
The following tables disaggregatespresent disaggregation of the Company’s non-interest revenue by major business line and timing of revenue recognition for the transfer of products or services:
| (in thousands) | Twelve Months Ended December 31, 2018 | |||
| Major Products/Service Lines | ||||
| Trust management fees | $ | 11,017 | ||
| Financial services fees | 968 | |||
| Interchange fees | 4,434 | |||
| Customer deposit fees | 3,800 | |||
| Other customer service fees | 1,304 | |||
| Total | $ | 21,523 | ||
| (in thousands) | Twelve Months Ended December 31, 2018 | |||
| Timing of Revenue Recognition | ||||
| Products and services transferred at a point in time | $ | 9,766 | ||
| Products and services transferred over time | 11,757 | |||
| Total | $ | 21,523 | ||
| | | | | | |
| | Year Ended December 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Major Products/Service Lines |
| |
|
| |
|
Trust management fees | | $ | 13,495 | | $ | 12,246 |
Financial services fees | |
| 1,684 | |
| 1,132 |
Interchange fees | |
| 7,368 | |
| 6,668 |
Customer deposit fees | |
| 4,905 | |
| 3,746 |
Other customer service fees | |
| 939 | |
| 913 |
Total | | $ | 28,391 | | $ | 24,705 |
| | | | | | |
| | Year Ended December 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Timing of Revenue Recognition |
| |
|
| |
|
Products and services transferred at a point in time | | $ | 14,250 | | $ | 11,992 |
Products and services transferred over time | |
| 14,141 | |
| 12,713 |
Total | | $ | 28,391 | | $ | 24,705 |
Trust Management Fees
The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. Revenue from these servicesThese fees are primarily earned over time as the Company charges its customers on a monthly or quarterly basis in accordance with its investment advisory agreements. Fees are generally recognized over time and is typicallyassessed based on a time elapsed measuretiered scale of progress.the market value of assets under management at month end. Certain fees, such as bill paying fees, distribution fees, real estate sale fees, and supplemental tax service fees, are recorded as revenue at a point in time upon the completion of the service.
Financial Services Fees
Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker dealer offering securities and insurance products not affiliated with the Company or its subsidiaries. The Company has a revenue sharing agreement with Infinex for any financial service fee income generated. Financial services fees are recognized at a point in time upon the completion of monthly service requirements.
Interchange Fees
The Company earns interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from the merchant.their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction.
Customer Deposit Fees
The Customer Depositcustomer deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor relateddepositor-related services provided to customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized by the Company at a point in time upon the completion of the service.
116
The Company has certain incentive and referral fee arrangements with independent third parties in which fees are earned for new account activity, product sales, or transaction volume generated for the respective third parties. The Company also earns a percentage of the fees generated from third partythird-party credit card plans promoted through the Bank. Revenue from these incentive and referral fee arrangements are recognized over time using the right to invoice measure of progress.
Contract Balances with Customers
The following table provides information about receivables, contract assets or receivables and contract liabilities or deferred revenues from contracts with customers.
| (in thousands) | Balance at December 31, 2018 | Balance at December 31, 2017 | ||||||
| Other Assets | $ | 2,866 | $ | 972 | ||||
| Other Liabilities | 4,923 | 342 | ||||||
| | | | | | |
|
| |
| | ||
(in thousands) | | December 31, 2021 | | December 31, 2020 | ||
Balances from contracts with customers only: |
| |
|
| |
|
Other Assets | | $ | 1,184 | | $ | 1,121 |
Other Liabilities | |
| 2,324 | |
| 2,785 |
The timing of revenue recognition, billings and cash collections results in receivables, contract assets or receivables and contract liabilities or deferred revenue on the Consolidated Balance Sheets.consolidated balance sheets. For most customer contracts, fees are deducted directly from customer accounts and, therefore, there is no associated impact on the accounts receivable balance. For certain types of service contracts, the Company has an unconditional right to consideration under the service contract and an accounts receivable balance is recorded for services completed. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.
Costs to Obtain and Fulfill a Contract
The Company currently expenses contract costs for processing and administrative fees for debit card transactions. The Company also expenses custody fees and transactional costs associated with securities transactions as well as third party tax preparation fees. The Company has elected the practical expedient in ASC 340-40-25-4, whereby the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets the Company otherwise would have recognized is one year or less.
NOTE 16. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases pursuant to which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2040. All leases are classified as operating leases, and are recognized on the consolidated balance sheets as a right- of-use (“ROU”) asset with a corresponding lease liability.
The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities:
| | | | | | | | |
(in thousands) |
| Classification |
| December 31, 2021 |
| December 31, 2020 | ||
Lease Right-of-Use Assets |
| | | |
| | |
|
Operating lease right-of-use assets |
| Other assets | | $ | 9,274 | | $ | 10,338 |
| | | | | | | | |
Lease Liabilities |
|
| |
|
| |
|
|
Operating lease liabilities |
| Other liabilities | |
| 9,643 | |
| 10,627 |
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used for the present value of the minimum lease payments. The Company’s lease agreements
117
often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability.
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
Weighted-average remaining lease term (in years) | |
| | |
| |
Operating leases | | 8.03 | | | 9.26 | |
| | | | | | |
Weighted-average discount rate | |
| | |
| |
Operating leases | | 3.07 | % | | 3.15 | % |
The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as real estate taxes, common area maintenance and utilities.
| | | | | | | | | | |
| | | Year Ended | |||||||
(in thousands) | |
| December 31, 2021 |
| December 31, 2020 | | December 31, 2019 | |||
Lease Costs | |
| |
|
| |
| | |
|
Operating lease cost | | | $ | 1,295 | | $ | 1,285 | | $ | 698 |
Variable lease cost | | |
| 229 | |
| 271 | |
| 711 |
Total lease cost | | | $ | 1,524 | | $ | 1,556 | | $ | 1,409 |
Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2021 are, as follows:
| | | |
(in thousands) | Payments | ||
Twelve Months Ended: | | ||
December 31, 2022 | | $ | 1,344 |
December 31, 2023 | | 1,343 | |
December 31, 2024 | | 1,316 | |
December 31, 2025 | | 1,092 | |
December 31, 2026 | | 987 | |
Thereafter | | 4,074 | |
Total future minimum lease payments | | 10,156 | |
Amounts representing interest | | (513) | |
Present value of net future minimum lease payments | | $ | 9,643 |
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NOTE 17.
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANYThe condensed balance sheets of Bar Harbor Bankshares as of December 31, 20182021 and 2017,2020, and the condensed statements of income and cash flows for the years ended December 31, 2018, 20172021, 2020 and 20162019 are presented below:
CONDENSED BALANCE SHEETS
| | | | | | |
| | December 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Assets |
| |
|
| |
|
Cash | | $ | 2,572 | | $ | 10,741 |
Investment in subsidiaries(1) | |
| 479,914 | |
| 460,369 |
Premises and equipment | |
| 792 | |
| 756 |
Other assets | |
| 7,078 | |
| 1,934 |
Total assets | | $ | 490,356 | | $ | 473,800 |
| | | | | | |
Liabilities and Shareholders’ Equity | |
|
| |
|
|
Subordinated notes | | $ | 60,124 | | $ | 59,961 |
Accrued expenses | |
| 6,085 | |
| 6,774 |
Shareholders’ equity(1) | |
| 424,147 | |
| 407,065 |
Total liabilities and shareholders’ equity(1) | | $ | 490,356 | | $ | 473,800 |
| (1) | Prior period has been revised, see Note 1 – Summary of Significant Accounting Policies – Revision of Previously Issued Financial Statements. |
| December 31, | ||||||||
| (in thousands) | 2018 | 2017 | ||||||
| Assets | ||||||||
| Cash due from Bar Harbor Bank and Trust | $ | 9,993 | $ | 2,400 | ||||
| Investment in subsidiaries | 398,821 | 392,073 | ||||||
| Premises and equipment | 687 | 687 | ||||||
| Other assets | 3,416 | 939 | ||||||
| Total assets | $ | 412,917 | $ | 396,099 | ||||
| Liabilities and Shareholders Equity | ||||||||
| Subordinated notes | $ | 37,973 | $ | 38,033 | ||||
| Accrued expenses | 4,365 | 3,425 | ||||||
| Shareholders equity | 370,579 | 354,641 | ||||||
| Total Liabilities and shareholders equity | $ | 412,917 | $ | 396,099 | ||||
CONDENSED STATEMENTS OF INCOME
| | | | | | | | | |
| | Years Ended December 31, | |||||||
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Income: | | | | | | | | | |
Dividends from subsidiaries | | $ | 15,557 | | $ | 8,024 | | $ | 21,734 |
Other income | |
| 740 | |
| 742 | |
| 337 |
Total income | |
| 16,297 | |
| 8,766 | |
| 22,071 |
Interest expense | |
| 2,632 | |
| 2,750 | |
| 2,188 |
Non-interest expense | |
| 5,455 | |
| 4,465 | |
| 3,208 |
Total expense | |
| 8,087 | |
| 7,215 | |
| 5,396 |
Income before taxes and equity in undistributed income of subsidiaries | |
| 8,210 | |
| 1,552 | |
| 16,675 |
Income tax benefit | |
| (1,741) | |
| (1,539) | |
| (1,100) |
Income before equity in undistributed income of subsidiaries | |
| 9,951 | |
| 3,091 | |
| 17,775 |
Equity in undistributed income of subsidiaries | |
| 29,348 | |
| 30,153 | |
| 4,845 |
Net income | | $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
119
| Years Ended December 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Income: | ||||||||||||
| Dividends from subsidiaries | $ | 23,705 | $ | 13,907 | $ | 6,473 | ||||||
| Other | 31 | 25 | — | |||||||||
| Total income | 23,736 | 13,932 | 6,473 | |||||||||
| Interest expense | 2,121 | 1,857 | — | |||||||||
| Non-interest expense | 3,147 | 2,979 | 2,949 | |||||||||
| Total expense | 5,268 | 4,836 | 2,949 | |||||||||
| Income before taxes and equity in undistributed income of subsidiaries | 18,468 | 9,096 | 3,524 | |||||||||
| Income tax benefit | (1,136 | ) | (1,210 | ) | (1,029 | ) | ||||||
| Income before equity in undistributed income of subsidiaries | 19,604 | 10,306 | 4,553 | |||||||||
| Equity in undistributed income of subsidiaries | 13,333 | 15,687 | 10,380 | |||||||||
| Net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
| | Years Ended December 31, | |||||||
(in thousands) |
| 2021 |
| 2020 |
| 2019 | |||
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 39,299 | | $ | 33,244 | | $ | 22,620 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
|
| |
|
| |
|
|
Equity in undistributed income of subsidiaries | |
| (29,348) | |
| (30,153) | |
| (4,845) |
Other, net | |
| (5,582) | |
| 3,840 | |
| (1,040) |
Net cash provided by operating activities | |
| 4,369 | |
| 6,931 | |
| 16,735 |
| | | | | | | | | |
Cash flows from investing activities: | |
|
| |
|
| |
|
|
Acquisitions, net of cash paid | |
| — | |
| — | |
| — |
Purchase of securities | |
| — | |
| — | |
| — |
Capital contribution to subsidiary | |
| — | |
| — | |
| (8,000) |
Net cash (used in) investing activities | |
| — | |
| — | |
| (8,000) |
| | | | | | | | | |
Cash flows from financing activities: | |
|
| |
|
| |
|
|
Proceeds from issuance of subordinated debt | |
| — | |
| — | |
| 40,000 |
Repayment of subordinated debt | |
| — | |
| — | |
| (17,000) |
Net proceeds from common stock | |
| 1,534 | |
| 2,192 | |
| 883 |
Net proceeds from reissuance of treasury stock | |
| — | |
| (14,188) | |
| (22) |
Common stock cash dividends paid | |
| (14,072) | |
| (13,417) | |
| (13,366) |
Net cash (used in) provided by financing activities | |
| (12,538) | |
| (25,413) | |
| 10,495 |
| | | | | | | | | |
Net change in cash and cash equivalents | |
| (8,169) | |
| (18,482) | |
| 19,230 |
Cash and cash equivalents at beginning of year | |
| 10,741 | |
| 29,223 | |
| 9,993 |
Cash and cash equivalents at end of year | | $ | 2,572 | | $ | 10,741 | | $ | 29,223 |
120
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company has revised amounts reported in previously issued quarterly financial statements of 2021 and 2020 related to errors. The revised amounts relate to derivatives that were incorrectly presented as assets instead of liabilities and related equity effects net of tax and the related effects on comprehensive income and shareholders’ equity.
The following tables present the revisions to comprehensive income from our previously issued financial statements to reflect the correction of errors:
| | | | | | | | | |
| | As | | | | As | |||
(in thousands) |
| Reported |
| Adjustment |
| Revised | |||
Three Months Ended March 31, 2021 | | | | | | | | | |
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized loss on hedging derivatives | | $ | (2,659) | | $ | 5,052 | | $ | 2,393 |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized loss on hedging derivatives | | | 620 | | | (1,176) | | | (556) |
Total other comprehensive loss | | | (7,552) | | | 3,876 | | | (3,676) |
Total comprehensive income | | $ | 1,928 | | $ | 3,876 | | $ | 5,804 |
| | | | | | | | | |
Three Months Ended June 30, 2021 | | | | | | | | | |
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain on hedging derivatives | | $ | 1,963 | | $ | (1,842) | | $ | 121 |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized gain on hedging derivatives | | | (460) | | | 430 | | | (30) |
Total other comprehensive income | | | 4,230 | | | (1,412) | | | 2,818 |
Total comprehensive income | | $ | 13,255 | | $ | (1,412) | | $ | 11,843 |
| | | | | | | | | |
121
| Years Ended December 31, | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 32,937 | $ | 25,993 | $ | 14,933 | ||||||
| Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||||||
| Equity in undistributed income of subsidiaries | (13,333 | ) | (15,687 | ) | (10,380 | ) | ||||||
| Other, net | (1,457 | ) | (1,364 | ) | 1,336 | |||||||
| Net cash provided by operating activities | 18,147 | 8,942 | 5,889 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Acquisitions, net of cash paid | — | 1,939 | — | |||||||||
| Purchase of securities | (7 | ) | — | — | ||||||||
| Other, net | — | — | (1 | ) | ||||||||
| Net cash provided by/(used in) investing activities | (7 | ) | 1,939 | (1 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Net proceeds from common stock | 951 | 1,052 | 1,570 | |||||||||
| Net proceeds from reissuance of treasury stock | 686 | 686 | (497 | ) | ||||||||
| Common stock cash dividends paid | (12,184 | ) | (11,505 | ) | (6,577 | ) | ||||||
| Other, net | — | (16 | ) | — | ||||||||
| Net cash used in financing activities | (10,547 | ) | (9,783 | ) | (5,504 | ) | ||||||
| Net change in cash and cash equivalents | 7,593 | 1,098 | 384 | |||||||||
| Cash and cash equivalents at beginning of year | 2,400 | 1,302 | 918 | |||||||||
| Cash and cash equivalents at end of year | $ | 9,993 | $ | 2,400 | $ | 1,302 | ||||||
| 2018 | ||||||||||||||||
| (in thousands, except per share data) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||
| Interest and dividend income | $ | 32,772 | $ | 32,184 | $ | 31,718 | $ | 30,777 | ||||||||
| Interest expense | 10,508 | 9,715 | 8,726 | 7,619 | ||||||||||||
| Net interest income | 22,264 | 22,469 | 22,992 | 23,158 | ||||||||||||
| Non-interest income | 7,450 | 7,126 | 7,121 | 6,238 | ||||||||||||
| Provision for loan losses | 572 | 643 | 770 | 795 | ||||||||||||
| Non-interest expense | 20,096 | 17,906 | 18,685 | 18,852 | ||||||||||||
| Income before income taxes | 9,046 | 11,046 | 10,658 | 9,749 | ||||||||||||
| Income tax expense | 1,426 | 2,076 | 2,123 | 1,937 | ||||||||||||
| Net income | $ | 7,620 | $ | 8,970 | $ | 8,535 | $ | 7,812 | ||||||||
| Basic earnings per share | $ | 0.49 | $ | 0.58 | $ | 0.55 | $ | 0.51 | ||||||||
| Diluted earnings per share | 0.49 | 0.58 | 0.55 | 0.50 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 15,516 | 15,503 | 15,482 | 15,448 | ||||||||||||
| Diluted | 15,574 | 15,580 | 15,571 | 15,553 | ||||||||||||
| 2017 | ||||||||||||||||
| (in thousands, except per share data) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||
| Interest and dividend income | $ | 30,156 | $ | 30,063 | $ | 29,665 | $ | 26,185 | ||||||||
| Interest expense | 6,660 | 6,585 | 5,856 | 4,813 | ||||||||||||
| Net interest income | 23,496 | 23,478 | 23,809 | 21,372 | ||||||||||||
| Non-interest income | 6,518 | 6,960 | 6,558 | 5,946 | ||||||||||||
| Provision for loan losses | 597 | 660 | 736 | 795 | ||||||||||||
| Non-interest expense | 14,263 | 17,586 | 20,046 | 20,831 | ||||||||||||
| Income before income taxes | 15,154 | 12,192 | 9,585 | 5,692 | ||||||||||||
| Income tax expense | 8,545 | 3,575 | 3,029 | 1,481 | ||||||||||||
| Net income | $ | 6,609 | $ | 8,617 | $ | 6,556 | $ | 4,211 | ||||||||
| Basic earnings per share | $ | 0.43 | $ | 0.56 | $ | 0.43 | $ | 0.29 | ||||||||
| Diluted earnings per share | 0.43 | 0.56 | 0.42 | 0.29 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 15,437 | 15,420 | 15,393 | 14,471 | ||||||||||||
| Diluted | 15,537 | 15,511 | 15,506 | 14,591 | ||||||||||||
| | | | | | | | | |
| | As | | | | As | |||
(in thousands) |
| Reported |
| Adjustment |
| Revised | |||
Three Months Ended March 31, 2020 | | | | | | | | | |
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized (loss) on hedging derivatives | | $ | (2,382) | | $ | (6,540) | | $ | (8,922) |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized loss on hedging derivatives | | | 650 | | | 1,535 | | | 2,185 |
Total other comprehensive income | | | 2,279 | | | (5,005) | | | (2,726) |
Total comprehensive income | | $ | 10,000 | | $ | (5,005) | | $ | 4,995 |
| | | | | | | | | |
Three Months Ended June 30, 2020 | | | | | | | | | |
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain (loss) on hedging derivatives | | $ | 626 | | $ | (692) | | $ | (66) |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized (gain) loss on hedging derivatives | | | (147) | | | 162 | | | 15 |
Total other comprehensive income | | | 2,331 | | | (530) | | | 1,801 |
Total comprehensive income | | $ | 10,812 | | $ | (530) | | $ | 10,282 |
| | | | | | | | | |
Three Months Ended September 30, 2020 | | | | | | | | | |
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain on hedging derivatives | | $ | 805 | | $ | 497 | | $ | 1,302 |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized gain on hedging derivatives | | | (190) | | | (118) | | | (308) |
Total other comprehensive income | | | 884 | | | 379 | | | 1,263 |
Total comprehensive income | | $ | 9,286 | | $ | 379 | | $ | 9,665 |
| | | | | | | | | |
Three Months Ended December 31, 2020 | | | | | | | | | |
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain on hedging derivatives | | $ | 4,723 | | $ | 1,312 | | $ | 6,035 |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized gain on hedging derivatives | | | (1,193) | | | (313) | | | (1,506) |
Total other comprehensive income | | | 1,611 | | | 999 | | | 2,610 |
Total comprehensive income | | $ | 10,251 | | $ | 999 | | $ | 11,250 |
NOTE 19. SUBSEQUENT EVENTS
There were no significant subsequent events between December 31, 20182021 and through the date the financial statements are available to be issued.
122
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.Management Report on Internal Control over Financial Reporting:
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Based on its assessment, management believes that as of December 31, 2018,2021, the Company’s internal control over financial reporting is effective, based on the criteria set forth by COSO in
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This audit report appears within Item 8 of this report on Form 10-K.
Changes in Internal Control Over Financial Reporting:
No change in the internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the last fiscal year that has materially affected, or is reasonably likely to materially affect, the
123
To the Shareholders and the Board of Directors of Bar Harbor Bankshares:
Opinion on the Internal Control Over Financial Reporting
We have audited Bar Harbor Bankshares’Bankshares and Subsidiaries' (the Company) internal control over financial reporting as of December 31, 2018,2021, based on criteria established in
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Bar Harbor Bankshares and Subsidiaries (the Company) as of December 31, 20182021 and 2017, and2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes to the consolidated financial statements of the Company and our report dated March 12, 201914, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying “Management Report on Effectiveness of Internal Control Over Financial Reporting and Compliance with Designated Laws and Regulations”Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Boston, Massachusetts
March 14, 2022
124
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required in response to this Item 10 is incorporated herein by reference to the Company'sCompany’s Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is incorporated herein by reference to the Company'sCompany’s Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required in response to this Item 12 is incorporated herein by reference to the Company'sCompany’s Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item 13 is incorporated herein by reference to the Company'sCompany’s Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item 14 is incorporated herein by reference to the Company'sCompany’s Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The consolidated financial statements of the Company and report of the Company’s independent registered public accounting firm incorporated herein are included in Item 8 of this Reportreport as follows:
125
EXHIBIT INDEX
| | |
Exhibit No. | Description | |
3.1 | | |
| | |
3.2 | | |
| | |
4.1 | | |
| | |
4.2 | | |
| | |
4.3 | | |
| | |
4.4 | | |
| | |
4.5 | | |
| | |
4.6* | | |
| | |
4.7 | | |
| | |
10.1† | | |
| | |
10.2† | | |
| | |
10.3† | | |
| | |
10.4† | | |
| | |
10.5† | | |
| | |
10.6† 10.7† | | 2021 through 2023 Long Term Executive Incentive Program Guidelines |
| | |
126
10.8† | | |
| | |
10.9† | | |
| | |
10.10† | | |
| | |
10.11† | | |
| | |
10.12† | | |
| | |
10.13† | | |
| | |
10.14 10.15* 10.16 | | |
| | |
10.17* | | |
4 | | |
Exhibit No. | Description | |
| | |
21.1 | | |
| | |
23.1 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
127
101 | | The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, |
104 | | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document |
*Schedules (or similar attachments) have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules upon request by the Securities and Exchange Commission, provided that the registrant may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934 for any schedules so furnished.
†Indicates management contract or compensatory plan.
128
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Curtis C. Simard |
Date: March 14, 2022 | /s/ Curtis C. Simard |
| |
| Name: Curtis C. Simard |
| Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons have signed this report in the capacities indicated on behalf of the Registrant.
| | |
/s/ David B. Woodside | /s/ Curtis C. Simard | |
David B. Woodside, Chairman, Board of Directors | | Curtis C. Simard, Director |
| | President & Chief Executive Officer |
| | |
| | |
/s/ Daina H. Belair | | /s/ Josephine Iannelli |
Daina H. Belair, Director | | Josephine Iannelli |
| | Executive Vice President and Chief Financial Officer |
| | |
| | |
/s/ Matthew L. Caras | | /s/ Brendan O’Halloran |
Matthew Caras, Director | | Brendan O’Halloran, Director |
| | |
| | |
/s/ David M. Colter | | /s/ Kenneth E. Smith |
David M. Colter, Director | | Kenneth E. Smith, Director |
| | |
| | |
/s/ Steven H. Dimick | | /s/ Stephen R. Theroux |
Steven H. Dimick, Director | | Stephen R. Theroux, Director |
| | |
| | |
/s/ Martha Tod Dudman | | /s/ Scott G. Toothaker |
Martha Tod Dudman, Director | | Scott G. Toothaker, Director |
| | |
| | |
/s/ Lauri E. Fernald | | |
Lauri E. Fernald, Director | ||
| ||
|
129