UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 20212022
| |
☐ | 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: (207) 288-3314
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $2.00 per share | | BHB | | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of "large accelerated filer," "accelerated filer", "smaller reporting company", orand "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ◻ Accelerated Filer ⌧ Non-Accelerated Filer Smaller Reporting Company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ⌧
The Registrant had 14,986,78615,065,620 shares of common stock, par value $2.00 per share, outstanding as of November 5, 2021.2, 2022.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
FORM 10-Q
INDEX
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| Consolidated Balance Sheets as of September 30, |
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| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, |
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| Notes to Unaudited Consolidated Interim Financial Statements | | |||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Bar Harbor Bankshares conducts business operations principally through Bar Harbor Bank & Trust, which may be referred to as the “Bank” and which is a subsidiary of Bar Harbor Bankshares. Unless the context requires otherwise, references in this report to “the Company” "our company, "our," "us," and similar terms refer to Bar Harbor Bankshares and its subsidiaries, including the Bank, collectively.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this documentQuarterly Report on Form 10-Q (the “Form 10-Q”) that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target"“believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” and “potential,” and other similar words and expressions of the future, are intended to identify such forward-looking statements, but these termsother statements not based on historical information may also be considered forward-looking, including statements about the Company’s future financial and operating results and the Company’s plans, objectives, and intentions. All forward-looking statements are notsubject to risks, uncertainties, and other factors that may cause the exclusive meansactual results, performance, or achievements of identifyingthe Company to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are subject to significantknown and unknown 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 disclosedfactors that could cause the actual results to differ materially from time to time in documents that the Company files with the Securities and Exchange Commission,statements, including, but not limited to:
● | deterioration in the financial condition of borrowers of the Bank, including as a result of the negative impact of inflationary pressures on our customers and their businesses resulting in significant increases in loan losses and provisions for those losses; |
● | the possibility that our asset quality could decline or that we experience greater loan losses than anticipated, |
● | increased levels of other real estate, primarily as a result of foreclosures; |
● | the impact of liquidity needs on our results of operations and financial condition; |
● | competition from financial institutions and other financial service providers; |
● | the effect of interest rate increases on the cost of deposits; |
● | unanticipated weakness in loan demand or loan pricing; |
● | adverse conditions in the national or local economies including in our markets throughout Northern New England; |
● | the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on the Company’s and our customers' business, results of operations, asset quality and financial condition; |
● | the efficacy of vaccines against the COVID-19 virus, including new variants; |
● | the effects of civil unrest, international hostilities or other geopolitical events, including the war in Ukraine; |
● | inflation, interest rate, market, and monetary fluctuations; |
● | lack of strategic growth opportunities or our failure to execute on available opportunities; |
● | the ability to grow and retain low-cost core deposits and retain large, uninsured deposits; |
● | our ability to effectively manage problem credits; |
● | our ability to successfully implement efficiency initiatives on time and with the results projected; |
● | our ability to successfully develop and market new products and technology; |
● | the impact of negative developments in the financial industry and United States and global capital and credit markets; |
● | our ability to retain executive officers and key employees and their customer and community relationships; |
● | our ability to adapt to technological changes; |
● | risks associated with litigation, including reputational and financial risks and the applicability of insurance coverage; |
● | the vulnerability of the Bank’s computer and information technology systems and networks, and the systems and networks of third parties with whom the Company or the Bank contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches and interruptions; |
● | ongoing competition in the labor markets and increased employee turnover; |
3
● | our ability to comply with various governmental and regulatory requirements applicable to financial institutions; |
● | changes in state and federal laws, rules, regulations, or policies applicable to banks or bank or financial holding companies, including regulatory or legislative developments; |
● | governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”); |
● | adverse impacts (including costs, fines, reputational harm, or other negative effects) from current or future litigation, regulatory examinations, or other legal and/or regulatory actions; and |
● | general competitive, economic, political, and market conditions, including economic conditions in the local markets where we operate. |
Other factors not identified above, including those discusseddescribed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the section titled "Risk Factors" in the Company'sour Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Because2021, our quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website at http://www.sec.gov, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and other uncertainties, the Company’s actual results, performance or achievements, or industry results,are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be materially different from the results indicatedmade by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate future results. You should not place undue reliance onus. We undertake no obligation to release publicly any of therevisions to any forward-looking statements, which speak only asto report events or to report the occurrence of the dates on which they were made. The Company is not undertaking an obligationunanticipated events unless we are required 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 statementsdo so by these cautionary statements.law.
34
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | | | | | | | | | | |
(in thousands, except share data) |
| September 30, 2021 |
| December 31, 2020 |
| September 30, 2022 |
| December 31, 2021 | ||||
Assets |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents: | | | | | | | | | | | | |
Cash and due from banks | | $ | 39,081 | | $ | 27,566 | | $ | 50,760 | | $ | 33,508 |
Interest-bearing deposits with other banks | |
| 302,118 | |
| 198,441 | ||||||
Interest-earning deposits with other banks | |
| 31,305 | |
| 216,881 | ||||||
Total cash and cash equivalents | |
| 341,199 | |
| 226,007 | |
| 82,065 | |
| 250,389 |
| | | | | | | | | | | | |
Securities: | | | | | | | | | | | | |
Securities available for sale | |
| 545,327 | |
| 585,046 | |
| 556,752 | |
| 618,276 |
Federal Home Loan Bank stock | |
| 10,192 | |
| 14,036 | |
| 9,035 | |
| 7,384 |
Total securities | |
| 555,519 | |
| 599,082 | |
| 565,787 | |
| 625,660 |
| | | | | | | | | | | | |
Loans held for sale | | | 7,505 | | | 23,988 | | | 982 | | | 5,523 |
| | | | | | | | | | | | |
Total loans | |
| 2,534,154 | |
| 2,562,885 | |
| 2,850,364 | |
| 2,531,910 |
Less: Allowance for credit losses | |
| (22,448) | |
| (19,082) | |
| (25,018) | |
| (22,718) |
Net loans | |
| 2,511,706 | |
| 2,543,803 | |
| 2,825,346 | |
| 2,509,192 |
| | | | | | | | | | | | |
Premises and equipment, net | |
| 50,070 | |
| 52,458 | |
| 48,010 | |
| 49,382 |
Goodwill | |
| 119,477 | |
| 119,477 | |
| 119,477 | |
| 119,477 |
Other intangible assets | |
| 6,966 | |
| 7,670 | |
| 6,034 | |
| 6,733 |
Cash surrender value of bank-owned life insurance | |
| 79,380 | |
| 77,870 | |
| 80,758 | |
| 79,020 |
Deferred tax assets, net | |
| 5,811 | |
| 3,047 | |
| 25,288 | |
| 5,547 |
Other assets | |
| 60,712 | |
| 70,873 | |
| 86,499 | |
| 58,310 |
Total assets | | $ | 3,738,345 | | $ | 3,724,275 | | $ | 3,840,246 | | $ | 3,709,233 |
| | | | | | | | | | | | |
Liabilities | |
|
| |
|
| |
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|
|
Deposits: | |
|
| |
|
| |
|
| |
|
|
Demand | | $ | 664,395 | | $ | 544,636 | | $ | 700,218 | | $ | 664,420 |
NOW | |
| 888,021 | |
| 738,849 | |
| 918,822 | |
| 940,631 |
Savings | |
| 605,977 | |
| 521,638 | |
| 669,317 | |
| 628,670 |
Money market | |
| 379,651 | |
| 402,731 | |
| 513,075 | |
| 389,291 |
Time | |
| 469,221 | |
| 698,361 | |
| 334,248 | |
| 425,532 |
Total deposits | |
| 3,007,265 | |
| 2,906,215 | |
| 3,135,680 | |
| 3,048,544 |
| | | | | | | | | | | | |
Borrowings: | |
|
| |
|
| |
|
| |
|
|
Senior | |
| 190,267 | |
| 276,062 | |
| 188,757 | |
| 118,400 |
Subordinated | |
| 60,083 | |
| 59,961 | |
| 60,248 | |
| 60,124 |
Total borrowings | |
| 250,350 | |
| 336,023 | |
| 249,005 | |
| 178,524 |
| | | | | | | | | | | | |
Other liabilities | |
| 62,295 | |
| 74,972 | |
| 75,596 | |
| 58,018 |
Total liabilities | |
| 3,319,910 | |
| 3,317,210 | |
| 3,460,281 | |
| 3,285,086 |
| | | | | | | | | | | | |
(continued)
45
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)
| | | | | | |
(in thousands, except share data) |
| September 30, 2021 |
| December 31, 2020 | ||
Shareholders’ equity |
| | |
| | |
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2021 and December 31, 2020 |
| | 32,857 |
| | 32,857 |
Additional paid-in capital |
| | 190,892 |
| | 190,084 |
Retained earnings |
| | 209,426 |
| | 195,607 |
Accumulated other comprehensive income(1) |
| | 2,888 |
| | 6,740 |
Less: 1,441,763 and 1,512,465 shares of treasury stock at September 30, 2021 and December 31, 2020, respectively |
| | (17,628) |
| | (18,223) |
Total shareholders’ equity(1) |
| | 418,435 |
| | 407,065 |
Total liabilities and shareholders’ equity(1) | | $ | 3,738,345 | | $ | 3,724,275 |
| | | | | | |
(in thousands, except share data) |
| September 30, 2022 |
| December 31, 2021 | ||
Shareholders’ equity |
| | |
| | |
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2022 and December 31, 2021 |
| | 32,857 |
| | 32,857 |
Additional paid-in capital |
| | 191,438 |
| | 190,876 |
Retained earnings |
| | 235,218 |
| | 215,592 |
Accumulated other comprehensive (loss) income |
| | (62,589) |
| | 2,303 |
Less: 1,362,768 and 1,427,059 shares of treasury stock at September 30, 2022 and December 31, 2021, respectively |
| | (16,959) |
| | (17,481) |
Total shareholders’ equity |
| | 379,965 |
| | 424,147 |
Total liabilities and shareholders’ equity | | $ | 3,840,246 | | $ | 3,709,233 |
The accompanying notes are an integral part of these consolidated financial statements.
56
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(in thousands, except earnings per share data) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Interest and dividend income | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 25,094 | | $ | 25,918 | | $ | 72,490 | | $ | 80,398 | | $ | 27,940 | | $ | 25,094 | | $ | 75,192 | | $ | 72,490 |
Securities and other | |
| 3,821 | |
| 4,557 | |
| 11,792 | |
| 15,006 | |
| 5,145 | |
| 3,821 | |
| 13,178 | |
| 11,792 |
Total interest and dividend income | |
| 28,915 | |
| 30,475 | |
| 84,282 | |
| 95,404 | |
| 33,085 | |
| 28,915 | |
| 88,370 | |
| 84,282 |
Interest expense | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Deposits | |
| 1,555 | |
| 3,869 | |
| 7,109 | |
| 14,437 | |
| 1,801 | |
| 1,555 | |
| 4,185 | |
| 7,109 |
Borrowings | |
| 1,778 | |
| 1,941 | |
| 5,415 | |
| 7,149 | |
| 1,374 | |
| 1,778 | |
| 3,458 | |
| 5,415 |
Total interest expense | |
| 3,333 | |
| 5,810 | |
| 12,524 | |
| 21,586 | |
| 3,175 | |
| 3,333 | |
| 7,643 | |
| 12,524 |
Net interest income | |
| 25,582 | |
| 24,665 | |
| 71,758 | |
| 73,818 | |
| 29,910 | |
| 25,582 | |
| 80,727 | |
| 71,758 |
Provision for credit losses | |
| (174) | |
| 1,800 | |
| (1,428) | |
| 4,265 | |
| 1,306 | |
| (174) | |
| 2,217 | |
| (1,428) |
Net interest income after provision for loan losses | |
| 25,756 | |
| 22,865 | |
| 73,186 | |
| 69,553 | ||||||||||||
Net interest income after provision for credit losses | |
| 28,604 | |
| 25,756 | |
| 78,510 | |
| 73,186 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest income | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Trust and investment management fee income | |
| 3,868 | |
| 3,532 | |
| 11,335 | |
| 10,060 | |
| 3,548 | |
| 3,868 | |
| 11,131 | |
| 11,335 |
Customer service fees | |
| 3,515 | |
| 2,886 | |
| 9,742 | |
| 8,437 | |
| 3,836 | |
| 3,515 | |
| 11,108 | |
| 9,742 |
Gain on sales of securities, net | |
| 1,930 | |
| — | |
| 1,980 | |
| 1,486 | |
| 44 | |
| 1,930 | |
| 53 | |
| 1,980 |
Mortgage banking income | | | 850 | | | 2,649 | | | 4,973 | | | 4,230 | | | 315 | | | 850 | | | 1,427 | | | 4,973 |
Bank-owned life insurance income | |
| 494 | |
| 492 | |
| 1,510 | |
| 1,525 | |
| 496 | |
| 494 | |
| 1,501 | |
| 1,510 |
Customer derivative income | |
| 341 | |
| 316 | |
| 837 | |
| 1,417 | |
| 58 | |
| 341 | |
| 213 | |
| 837 |
Other income | |
| 352 | |
| 227 | |
| 726 | |
| 1,078 | |
| 526 | |
| 352 | |
| 1,660 | |
| 726 |
Total non-interest income | |
| 11,350 | |
| 10,102 | |
| 31,103 | |
| 28,233 | |
| 8,823 | |
| 11,350 | |
| 27,093 | |
| 31,103 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest expense | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Salaries and employee benefits | |
| 11,743 | |
| 11,809 | |
| 35,275 | |
| 35,602 | |
| 12,242 | |
| 11,743 | |
| 35,757 | |
| 35,275 |
Occupancy and equipment | |
| 4,029 | |
| 4,279 | |
| 12,251 | |
| 12,559 | |
| 4,458 | |
| 4,029 | |
| 13,254 | |
| 12,251 |
Loss (gain) on sales of premises and equipment, net | |
| (146) | |
| — | |
| (137) | |
| 90 | ||||||||||||
Gain on sales of premises and equipment, net | |
| — | |
| (146) | |
| (65) | |
| (137) | ||||||||||||
Outside services | |
| 547 | |
| 438 | |
| 1,512 | |
| 1,414 | |
| 393 | |
| 547 | |
| 1,143 | |
| 1,512 |
Professional services | |
| 491 | |
| 479 | |
| 1,200 | |
| 1,488 | |
| 421 | |
| 491 | |
| 1,122 | |
| 1,200 |
Communication | |
| 188 | |
| 215 | |
| 707 | |
| 698 | |
| 204 | |
| 188 | |
| 617 | |
| 707 |
Marketing | |
| 339 | |
| 300 | |
| 1,163 | |
| 970 | |
| 518 | |
| 339 | |
| 1,150 | |
| 1,163 |
Amortization of intangible assets | |
| 233 | |
| 256 | |
| 707 | |
| 768 | |
| 233 | |
| 233 | |
| 699 | |
| 707 |
Loss on debt extinguishment | | | 1,768 | | | — | | | 1,768 | | | 1,351 | | | — | | | 1,768 | | | — | | | 1,768 |
Acquisition, conversion and other expenses | |
| 318 | |
| 691 | |
| 1,759 | |
| 952 | |
| 31 | |
| 318 | |
| 356 | |
| 1,759 |
Other expenses | |
| 3,862 | |
| 3,952 | |
| 11,382 | |
| 11,152 | |
| 4,532 | |
| 3,862 | |
| 12,585 | |
| 11,382 |
Total non-interest expense | |
| 23,372 | |
| 22,419 | |
| 67,587 | |
| 67,044 | |
| 23,032 | |
| 23,372 | |
| 66,618 | |
| 67,587 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | |
| 13,734 | |
| 10,548 | |
| 36,702 | |
| 30,742 | |
| 14,395 | |
| 13,734 | |
| 38,985 | |
| 36,702 |
Income tax expense | |
| 2,706 | |
| 2,146 | |
| 7,169 | |
| 6,138 | |
| 2,965 | |
| 2,706 | |
| 7,940 | |
| 7,169 |
Net income | | $ | 11,028 | | $ | 8,402 | | $ | 29,533 | | $ | 24,604 | | $ | 11,430 | | $ | 11,028 | | $ | 31,045 | | $ | 29,533 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Basic | | $ | 0.74 | | $ | 0.56 | | $ | 1.97 | | $ | 1.60 | | $ | 0.76 | | $ | 0.74 | | $ | 2.07 | | $ | 1.97 |
Diluted | | $ | 0.73 | | $ | 0.56 | | $ | 1.96 | | $ | 1.60 | | $ | 0.76 | | $ | 0.73 | | $ | 2.06 | | $ | 1.96 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Basic | |
| 14,983 | |
| 15,079 | |
| 14,961 | |
| 15,359 | |
| 15,058 | |
| 14,983 | |
| 15,029 | |
| 14,961 |
Diluted | |
| 15,051 | |
| 15,103 | |
| 15,035 | |
| 15,382 | |
| 15,113 | |
| 15,051 | |
| 15,100 | |
| 15,035 |
The accompanying notes are an integral part of these consolidated financial statements.
67
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net income | | $ | 11,028 | | $ | 8,402 | | $ | 29,533 | | $ | 24,604 | | $ | 11,430 | | $ | 11,028 | | $ | 31,045 | | $ | 29,533 |
Other comprehensive income, before tax: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Changes in unrealized (loss) gain on securities available for sale | |
| (3,700) | |
| 351 | |
| (7,328) | |
| 7,922 | ||||||||||||
Other comprehensive (loss) income, before tax: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Changes in unrealized loss on securities available for sale | |
| (26,933) | |
| (3,700) | |
| (79,186) | |
| (7,328) | ||||||||||||
Changes in unrealized (loss) gain on hedging derivatives | |
| (203) | |
| 1,302 | |
| 2,311 | |
| (7,568) | |
| (1,568) | |
| (203) | |
| (5,446) | |
| 2,311 |
Changes in unrealized loss on pension | |
| 0 | |
| 0 | |
| 0 | |
| 0 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Income taxes related to other comprehensive income: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Changes in unrealized loss (gain) on securities available for sale | |
| 861 | |
| (82) | |
| 1,703 | |
| (1,791) | ||||||||||||
Changes in unrealized loss (gain) on hedging derivatives(1) | |
| 48 | |
| (308) | |
| (538) | |
| 1,776 | ||||||||||||
Changes in unrealized loss on pension | |
| 0 | |
| 0 | |
| 0 | |
| 0 | ||||||||||||
Total other comprehensive (loss) income(1) | |
| (2,994) | |
| 1,263 | |
| (3,852) | |
| 339 | ||||||||||||
Total comprehensive income(1) | | $ | 8,034 | | $ | 9,665 | | $ | 25,681 | | $ | 24,943 | ||||||||||||
Changes in unrealized loss on securities available for sale | |
| 6,522 | |
| 861 | |
| 18,486 | |
| 1,703 | ||||||||||||
Changes in unrealized loss (gain) on hedging derivatives | |
| 361 | |
| 48 | |
| 1,254 | |
| (538) | ||||||||||||
Total other comprehensive loss | |
| (21,618) | |
| (2,994) | |
| (64,892) | |
| (3,852) | ||||||||||||
Total comprehensive (loss) income | | $ | (10,188) | | $ | 8,034 | | $ | (33,847) | | $ | 25,681 |
The accompanying notes are an integral part of these consolidated financial statements.
78
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | |
|
| |
| | | |
| | | | 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, 2019 |
| $ | 32,857 | | $ | 188,536 | | $ | 175,780 | | $ | 3,792 | | $ | (4,677) | | $ | 396,288 |
Net income | |
| 0 | |
| 0 | |
| 16,202 | |
| 0 | |
| 0 | |
| 16,202 |
Other comprehensive income | |
| 0 | |
| 0 | |
| 0 | |
| (924) | |
| 0 | |
| (924) |
Cash dividends declared ($0.44 per share) | |
| 0 | |
| 0 | |
| (6,819) | |
| 0 | |
| 0 | |
| (6,819) |
Treasury stock purchased (405,208 shares) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (7,467) | |
| (7,467) |
Net issuance (61,025 shares) to employee stock plans, including related tax effects | |
| 0 | |
| 406 | |
| 0 | |
| 0 | |
| 251 | |
| 657 |
Recognition of stock based compensation | |
| 0 | |
| 584 | |
| 0 | |
| 0 | |
| 0 | |
| 584 |
Balance at June 30, 2020 | | $ | 32,857 | | $ | 189,526 | | $ | 185,163 | | $ | 2,868 | | $ | (11,893) | | $ | 398,521 |
Net income | |
| 0 | |
| 0 | |
| 8,402 | |
| 0 | |
| 0 | |
| 8,402 |
Other comprehensive income | |
| 0 | |
| 0 | |
| 0 | |
| 1,263 | |
| 0 | |
| 1,263 |
Cash dividends declared ($0.22 per share) | |
| 0 | |
| 0 | |
| (3,316) | |
| 0 | |
| 0 | |
| (3,316) |
Common stock purchased (297,658 shares) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (6,003) | |
| (6,003) |
Net issuance (12,275 shares) to employee stock plans, including related tax effects | |
| 0 | |
| (199) | |
| 0 | |
| 0 | |
| 224 | |
| 25 |
Recognition of stock based compensation | |
| 0 | |
| 279 | |
| 0 | |
| 0 | |
| 0 | |
| 279 |
Balance at September 30, 2020 | | $ | 32,857 | | $ | 189,606 | | $ | 190,249 | | $ | 4,131 | | $ | (17,672) | | $ | 399,171 |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | $ | 32,857 | | $ | 190,084 | | $ | 195,607 | | $ | 6,740 | | $ | (18,223) | | $ | 407,065 |
Allowance for credit losses cumulative-effect adjustment - ASU 2016-13 (Note 1) | | | 0 | | | 0 | | | (5,242) | | | 0 | | | 0 | | | (5,242) |
Net income | |
| 0 | |
| 0 | |
| 18,505 | |
| 0 | |
| 0 | |
| 18,505 |
Other comprehensive loss | |
| 0 | |
| 0 | |
| 0 | |
| (858) | |
| 0 | |
| (858) |
Cash dividends declared ($0.46 per share) | |
| 0 | |
| 0 | |
| (6,876) | |
| 0 | |
| 0 | |
| (6,876) |
Net issuance (56,290 shares) to employee stock plans, including related tax effects | |
| 0 | |
| (280) | |
| 0 | |
| 0 | |
| 449 | |
| 169 |
Recognition of stock based compensation | |
| 0 | |
| 997 | |
| 0 | |
| 0 | |
| 0 | |
| 997 |
Balance at June 30, 2021 | | $ | 32,857 | | $ | 190,801 | | $ | 201,994 | | $ | 5,882 | | $ | (17,774) | | $ | 413,760 |
Net income | |
| 0 | |
| 0 | |
| 11,028 | |
| 0 | |
| 0 | |
| 11,028 |
Other comprehensive income | |
| 0 | |
| 0 | |
| 0 | |
| (2,994) | |
| 0 | |
| (2,994) |
Cash dividends declared ($0.24 per share) | |
| 0 | |
| 0 | |
| (3,596) | |
| 0 | |
| 0 | |
| (3,596) |
Net issuance (14,412 shares) to employee stock plans, including related tax effects | |
| 0 | |
| (276) | |
| 0 | |
| 0 | |
| 146 | |
| (130) |
Recognition of stock based compensation | |
| 0 | |
| 367 | |
| 0 | |
| 0 | |
| 0 | |
| 367 |
Balance at September 30, 2021 | | $ | 32,857 | | $ | 190,892 | | $ | 209,426 | | $ | 2,888 | | $ | (17,628) | | $ | 418,435 |
| | | | | | | | | | | | | | | | | | |
|
| |
| | | |
| | | | Accumulated |
| | |
| | | |
| | Common | | Additional | | | | | other | | | | | | | |||
| | stock | | paid-in | | Retained | | comprehensive | | Treasury | | | | |||||
(in thousands, except per share data) |
| amount |
| capital |
| earnings |
| income (loss) |
| stock |
| Total | ||||||
Balance at December 31, 2020 |
| $ | 32,857 | | $ | 190,084 | | $ | 195,607 | | $ | 6,740 | | $ | (18,223) | | $ | 407,065 |
Allowance for credit losses cumulative-effect adjustment - ASU 2016-13 | | | — | | | — | | | (5,242) | | | — | | | — | | | (5,242) |
Net income | |
| — | |
| — | |
| 18,505 | |
| — | |
| — | |
| 18,505 |
Other comprehensive loss | |
| — | |
| — | |
| — | |
| (858) | |
| — | |
| (858) |
Cash dividends declared ($0.46 per share) | |
| — | |
| — | |
| (6,876) | |
| — | |
| — | |
| (6,876) |
Net issuance (56,290 shares) to employee stock plans, including related tax effects | |
| — | |
| (280) | |
| — | |
| — | |
| 449 | |
| 169 |
Recognition of stock based compensation | |
| — | |
| 997 | |
| — | |
| — | |
| — | |
| 997 |
Balance at June 30, 2021 | | $ | 32,857 | | $ | 190,801 | | $ | 201,994 | | $ | 5,882 | | $ | (17,774) | | $ | 413,760 |
| |
| | | | | | | | | | | | | | | | |
Net income | |
| — | |
| — | |
| 11,028 | |
| — | |
| — | |
| 11,028 |
Other comprehensive income | |
| — | |
| — | |
| — | |
| (2,994) | |
| — | |
| (2,994) |
Cash dividends declared ($0.24 per share) | |
| — | |
| — | |
| (3,596) | |
| — | |
| — | |
| (3,596) |
Net issuance (14,412 shares) to employee stock plans, including related tax effects | |
| — | |
| (276) | |
| — | |
| — | |
| 146 | |
| (130) |
Recognition of stock based compensation | |
| — | |
| 367 | |
| — | |
| — | |
| — | |
| 367 |
Balance at September 30, 2021 | | $ | 32,857 | | $ | 190,892 | | $ | 209,426 | | $ | 2,888 | | $ | (17,628) | | $ | 418,435 |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2021 | | $ | 32,857 | | $ | 190,876 | | $ | 215,592 | | $ | 2,303 | | $ | (17,481) | | $ | 424,147 |
Net income | |
| — | |
| — | |
| 19,615 | |
| — | |
| — | |
| 19,615 |
Other comprehensive loss | |
| — | |
| — | |
| — | |
| (43,274) | |
| — | |
| (43,274) |
Cash dividends declared ($0.50 per share) | |
| — | |
| — | |
| (7,509) | |
| — | |
| — | |
| (7,509) |
Net issuance (24,768 shares) to employee stock plans, including related tax effects | |
| — | |
| 376 | |
| — | |
| — | |
| 148 | |
| 524 |
Recognition of stock based compensation | |
| — | |
| 94 | |
| — | |
| — | |
| — | |
| 94 |
Balance at June 30, 2022 | | $ | 32,857 | | $ | 191,346 | | $ | 227,698 | | $ | (40,971) | | $ | (17,333) | | $ | 393,597 |
| | | | | | | | | | | | | | | | | | |
Net income | |
| — | |
| — | |
| 11,430 | |
| — | |
| — | |
| 11,430 |
Other comprehensive loss | |
| — | |
| — | |
| — | |
| (21,618) | |
| — | |
| (21,618) |
Cash dividends declared ($0.26 per share) | |
| — | |
| — | |
| (3,910) | |
| — | |
| — | |
| (3,910) |
Net issuance (39,523 shares) to employee stock plans, including related tax effects | |
| — | |
| (530) | |
| — | |
| — | |
| 374 | |
| (156) |
Recognition of stock based compensation | |
| — | |
| 622 | |
| — | |
| — | |
| — | |
| 622 |
Balance at September 30, 2022 | | $ | 32,857 | | $ | 191,438 | | $ | 235,218 | | $ | (62,589) | | $ | (16,959) | | $ | 379,965 |
| | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
89
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | |
| | Nine Months Ended September 30, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Cash flows from operating activities: |
|
|
| | |
|
Net income |
| $ | 29,533 | | $ | 24,604 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
|
Provision for credit losses | |
| (1,428) | |
| 4,265 |
Net amortization of securities | |
| 3,788 | |
| 2,472 |
Change in unamortized net loan costs and premiums | |
| (2,739) | |
| 1,923 |
Premises and equipment depreciation | |
| 3,466 | |
| 3,571 |
Stock-based compensation expense | |
| 1,364 | |
| 863 |
Accretion of purchase accounting entries, net | |
| 10 | |
| 7 |
Amortization of other intangibles | |
| 704 | |
| 768 |
Income from cash surrender value of bank-owned life insurance policies | |
| (1,510) | |
| (1,525) |
Gain on sales of securities, net | |
| (1,980) | |
| (1,486) |
Decrease (increase) in right-of-use lease assets | | | 851 | | | (578) |
(Decrease) increase in lease liabilities | | | (786) | | | 625 |
Loss on other real estate owned | |
| — | |
| 366 |
(Gain) loss on premises and equipment, net | |
| (137) | |
| 90 |
Net change in other assets and liabilities | |
| (373) | |
| (3,978) |
Net cash provided by operating activities | |
| 30,763 | |
| 31,987 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Proceeds from sales of securities available for sale | |
| 54,388 | |
| 87,521 |
Proceeds from maturities, calls and prepayments of securities available for sale | |
| 99,580 | |
| 109,314 |
Purchases of securities available for sale | |
| (123,335) | |
| (131,107) |
Net change in loans | |
| 47,519 | |
| (71,233) |
Purchase of FHLB stock | |
| (790) | |
| (4,044) |
Proceeds from sale of FHLB stock | |
| 4,634 | |
| 10,748 |
Purchase of premises and equipment, net | |
| (1,216) | |
| (4,449) |
Net investment in community limited partnerships | | | (1,112) | | | — |
Acquisitions, net of cash acquired | | | — | | | (340) |
Proceeds from sale of other real estate owned | | | — | | | (113) |
Net cash provided by (used in) investing activities | |
| 79,668 | |
| (3,703) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Net change in deposits | |
| 101,050 | |
| 239,164 |
Net change in short-term senior borrowings | | | 9,324 | | | (273,268) |
Proceeds from long-term senior borrowings | | | — | | | 273,342 |
Repayments of long-term senior borrowings | | | (89,018) | | | (71,187) |
Net change in short-term other borrowings | |
| (6,112) | |
| (14,784) |
Net change subordinated debt issuance costs | | | — | | | 119 |
Exercise of stock options | | | 39 | | | 682 |
Purchase of treasury and common stock | | | — | | | (13,470) |
Cash dividends paid on common stock | |
| (10,472) | |
| (10,135) |
Net cash provided by financing activities | |
| 4,811 | |
| 130,463 |
(continued) |
| | | | | | |
| | Nine Months Ended September 30, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Cash flows from operating activities: |
|
|
| | |
|
Net income |
| $ | 31,045 | | $ | 29,533 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Originations of loans held for sale | | | (33,919) | | | (149,948) |
Proceeds from loan sales | | | 38,184 | | | 153,832 |
Loss on sale of loans | | | 281 | | | 3,621 |
Provision for credit losses | |
| 2,217 | |
| (1,428) |
Net amortization of securities | |
| 2,287 | |
| 3,788 |
Change in unamortized net loan costs and premiums | |
| 353 | |
| (2,739) |
Premises and equipment depreciation | |
| 3,186 | |
| 3,466 |
Stock-based compensation expense | |
| 716 | |
| 1,364 |
Accretion of purchase accounting entries, net | |
| — | |
| 10 |
Amortization of other intangibles | |
| 699 | |
| 704 |
Income from cash surrender value of bank-owned life insurance policies | |
| (1,501) | |
| (1,510) |
Gain on sales of securities, net | |
| (53) | |
| (1,980) |
Amortization of right-of-use lease assets | | | 893 | | | 851 |
Decrease in lease liabilities | | | (851) | | | (786) |
Gain on premises and equipment, net | |
| (65) | |
| (137) |
Net change in other assets and liabilities | |
| (2,954) | |
| (7,878) |
Net cash provided by operating activities | |
| 40,518 | |
| 30,763 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Proceeds from sales of securities available for sale | |
| 19,591 | |
| 54,388 |
Proceeds from maturities, calls and prepayments of securities available for sale | |
| 48,073 | |
| 99,580 |
Purchases of securities available for sale | |
| (99,294) | |
| (123,335) |
Net change in loans | |
| (319,036) | |
| 47,360 |
Recoveries of previously charged off loans | | | 312 | | | 159 |
Purchase of FHLB stock | |
| (2,924) | |
| (790) |
Proceeds from sale of FHLB stock | |
| 1,273 | |
| 4,634 |
Purchase of premises and equipment, net | |
| (1,842) | |
| (1,216) |
Net investment in community limited partnerships | | | (1,430) | | | (1,112) |
Net cash (used in) provided by investing activities | |
| (355,277) | |
| 79,668 |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Net change in deposits | |
| 87,136 | |
| 101,050 |
Net change in short-term senior borrowings | | | 92,250 | | | 9,324 |
Repayments of long-term senior borrowings | | | (21,014) | | | — |
Net change in short-term other borrowings | |
| (886) | |
| (89,018) |
Net issuance to employee stock plans | | | 368 | | | (6,073) |
Cash dividends paid on common stock | |
| (11,419) | |
| (10,472) |
Net cash provided by financing activities | |
| 146,435 | |
| 4,811 |
| | | | | | |
Net change in cash and cash equivalents | |
| (168,324) | |
| 115,242 |
Cash and cash equivalents at beginning of year | |
| 250,389 | |
| 226,007 |
Cash and cash equivalents at end of period | | $ | 82,065 | | $ | 341,249 |
| | | | | | |
Supplemental cash flow information: | |
|
| |
|
|
Interest paid | | $ | 7,028 | | $ | 13,052 |
Income taxes paid, net | |
| 6,781 | |
| 7,755 |
9
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
| | | | | | |
| | Nine Months Ended September 30, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Net change in cash and cash equivalents | |
| 115,242 | |
| 158,747 |
Cash and cash equivalents at beginning of year | |
| 226,007 | |
| 56,910 |
Cash and cash equivalents at end of period | | $ | 341,249 | | $ | 215,657 |
| | | | | | |
Supplemental cash flow information: | |
|
| |
|
|
Interest paid | | $ | 13,052 | | $ | 22,085 |
Income taxes paid, net | |
| 7,755 | |
| 4,806 |
| | | | | | |
Acquisition of non-cash assets and liabilities: | | | | | | |
Assets acquired | | | — | | | 1,171 |
Liabilities acquired | | | — | | | (343) |
The accompanying notes are an integral part of these consolidated financial statements.
10
BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements (unaudited) (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company”“Company,” “we,” “our” or “Bar Harbor”)“us” or similar terms) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Bar Harbor BanksharesThe Company is a Maine Financial Institution Holding Company for the purposes of the laws of the stateState of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include our accounts, the accounts of the Company, itsour wholly owned subsidiary Bar Harbor Bank & Trust (the "Bank"“Bank”) and the Bank’s consolidated subsidiaries. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly owned and majority owned subsidiaries are consolidated unless GAAP requires otherwise.
In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.
The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures forin the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 previously filed with the Securities and Exchange Commission (the "SEC"). In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.
Reclassifications: Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation. The reclassifications had no impact on net income in the Company’s consolidated income statement.
Summary of Significant Accounting Policies
The disclosures below supplement updates the accounting policies previously disclosed in NOTE 1 – Summary of Significant Accounting Policies of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The updates reflect the adoption of the Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments”, referred to as ASC 326 or, more commonly, referred to as Current Expected Credit Losses (CECL).
Allowance for Credit Loss on AFS Debt Securities: Upon adoption of CECL, effective January 1, 2021, the Company monitors the credit quality of available for sale (AFS) debt securities through credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a security and are utilized by the Company to make informed decisions. Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, the Company utilizes 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 collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on AFS debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. When assessing an AFS debt security for credit loss, securities with identical CUSIPs are pooled together to assess for impairment using the average cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income.
A change in the allowance on AFS debt securities may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an AFS debt security is confirmed based on the above described analysis. As
11
of September 30, 2021 and January 1, 2021 (i.e. ASU 2016-13 adoption), there was 0 allowance carried on the Company's AFS debt securities. Refer to Note 2 of the consolidated financial statements for further discussion.
Loans: Loans held for investment by the Company are reported at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased or acquired through mergers.
For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.
For acquired loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. 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 include some loans that have experienced more than insignificant credit deterioration since origination. The initial allowance for credit losses is determined on a collective basis and allocated to the individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost. The difference between the initial amortized cost and the par value of the loan is a discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
The Company 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 date 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 estimated lives of the related loans. The converted PCD assets of $12.5 million were then pooled by call report coding and an additional allowance was calculated on the pooled assets separately from other loan pools totaling $524 thousand.
Non-performing loans: Residential real estate and consumer 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. 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 contractually delinquent, if the Company could reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans and any change in performance would have impacted accretable yield. After adoption of ASC 326 on January 1, 2021 the Company now treats these non-performing acquired loans that meet the criteria for non-accrual consistent with originated loans.
Allowance for Credit Losses: The allowance for credit 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
12
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 on January 1, 2021, the Company replaced the incurred loss impairment model that recognizes 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 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 TDRs.
The Company uses the discounted cash flow (DCF) method to estimate expected credit losses for 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 based 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 the 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 effective yield to produce an instrument-level Net Present Value (NPV). An allowance is established for the difference 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 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.
Arriving at an appropriate level of allowance 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. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.
Individually Evaluated Loans: Prior to the adoption of CECL on January 1, 2021, a loan was individually evaluated when the loan was considered impaired. Impaired loans were based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.
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
13
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 measurement date exceeds the amortized cost basis of the financial asset.
Accrued Interest. Upon adoption of CECL, effective as of 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 write-off accrued interest receivable by reversing interest income. The Company has a policy in place to write-off accrued interest when a loan is placed on non-accrual. Historically, the Company has not experienced uncollectible accrued interest receivable on investment debt securities.
Allowance for off-balance sheet credit exposures: The exposure is a component of other liabilities on the Company’s Consolidated Balance Sheet and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit and standby and commercial letters of credit. The process used to determine the allowance for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to provision for credit losses on the consolidated statements of income is made to account for the change in the allowance on off-balance sheet exposures between reporting periods.
14
Impact of Adoption
The following table illustrates the adoption of CECL on 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 |
15
Revision of Previously Issued Financial Statements
The Company has revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q 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 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 (Unaudited) | |||||||||
| | | | | | | | | |
Three months ended September 30, 2020 | | As Reported | | Adjustment | | As Revised | |||
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain (loss) on hedging derivatives | | $ | 805 | | $ | 497 | | $ | 1,302 |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized (gain) loss on hedging derivatives | | | (190) | | | (118) | | | (308) |
Total other comphrensive income | | | 884 | | | 379 | | | 1,263 |
Total comphrensive income | | $ | 9,286 | | $ | 379 | | $ | 9,665 |
| | | | | | | | | |
Nine months ended September 30, 2020 | | As Reported | | Adjustment | | As Revised | |||
Other comprehensive income, before tax: | | | | | | | | | |
Changes in unrealized gain (loss) on hedging derivatives | | $ | (833) | | $ | (6,735) | | $ | (7,568) |
| | | | | | | | | |
Income taxes related to other comprehensive income: | | | | | | | | | |
Changes in unrealized (gain) loss on hedging derivatives | | | 195 | | | 1,580 | | | 1,776 |
Total other comphrensive income | | | 5,494 | | | (5,155) | | | 339 |
Total comphrensive income | | $ | 30,098 | | $ | (5,155) | | $ | 24,943 |
16
| | | | | | | | | |
Consolidated Statements of Changes in Shareholder's Equity (Unaudited) | |||||||||
| | | | | | | | | |
| | 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 | | | 4,610 | | | (5,534) | | | (924) |
Ending accumulated other comprehensive income | | | 8,521 | | | (5,653) | | | 2,868 |
| | | | | | | | | |
Balance at June 30, 2020 | | $ | 404,174 | | $ | (5,653) | | $ | 398,521 |
Beginning accumulated other comprehensive income | | | 8,521 | | | (5,653) | | | 2,868 |
Other comprehensive income | | | 884 | | | 379 | | | 1,263 |
Ending accumulated other comprehensive income | | | 9,405 | | | (5,274) | | | 4,131 |
| | | | | | | | | |
Balance at September 30, 2020 | | $ | 404,445 | | $ | (5,274) | | $ | 399,171 |
| | | | | | | | | |
Balance at December 31, 2020 | | $ | 411,341 | | $ | (4,276) | | $ | 407,065 |
Beginning accumulated other comprehensive income | | | 11,016 | | | (4,276) | | | 6,740 |
Other comprehensive income | | | (3,322) | | | 2,464 | | | (858) |
Ending accumulated other comprehensive income | | | 7,694 | | | (1,812) | | | 5,882 |
| | | | | | | | | |
Balance at June 30, 2021 | | $ | 415,572 | | $ | (1,812) | | $ | 413,760 |
17
Recent Accounting Pronouncements
The following table provides a brief description of recent accounting standards updates (ASU)(“ASU”) that could have a material impact to the Company’s consolidated financial statements upon adoption:
| | | | | | | | | |
| | | | | | | | | |
Standard |
|
| Description |
|
| Required Date |
| ||
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect on financial statements | ||||
Standards Not Yet Adopted | | | | ||||||
ASU | | |
| | |
| | |
|
19
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:
Cash flow hedges
The Company amends the hedge documentation, without dedesignating and redesignating, for all outstanding cash flow hedging relationships for the following elections:
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 the March 31, 2021 will be documented in accordance with the elections being made here.
2011
NOTE 2. SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale:sale (“AFS”):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||
| | | | | Unrealized | | Unrealized | | | | | | | | Unrealized | | Unrealized | | | | ||||
(in thousands) |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
September 30, 2021 |
| |
|
| |
|
| |
|
| |
| ||||||||||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
| ||||||||||||
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 181,821 | | $ | 3,386 | | $ | (1,939) | | $ | 183,268 | | $ | 252,369 | | $ | 4 | | $ | (36,349) | | $ | 216,024 |
US Government agency | |
| 53,475 | |
| 1,470 | |
| (239) | |
| 54,706 | |
| 93,643 | |
| 11 | |
| (10,128) | |
| 83,526 |
Private label | |
| 62,843 | |
| 185 | |
| (114) | |
| 62,914 | |
| 72,484 | |
| 34 | |
| (5,749) | |
| 66,769 |
Obligations of states and political subdivisions thereof | |
| 158,914 | |
| 2,090 | |
| (827) | |
| 160,177 | |
| 123,350 | |
| 9,205 | |
| (27,903) | |
| 104,652 |
Corporate bonds | |
| 82,533 | |
| 2,376 | |
| (647) | |
| 84,262 | |
| 91,512 | |
| 26 | |
| (5,757) | |
| 85,781 |
Total securities available for sale | | $ | 539,586 | | $ | 9,507 | | $ | (3,766) | | $ | 545,327 | | $ | 633,358 | | $ | 9,280 | | $ | (85,886) | | $ | 556,752 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||
| | | | | Unrealized | | Unrealized | | | | | | | | Unrealized | | Unrealized | | | | ||||
(in thousands) |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
December 31, 2020 | |
|
| |
|
| |
|
| |
|
| ||||||||||||
December 31, 2021 | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Mortgage-backed securities: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
US Government-sponsored enterprises | | $ | 206,834 | | $ | 6,018 | | $ | (462) | | $ | 212,390 | | $ | 237,283 | | $ | 2,289 | | $ | (3,455) | | $ | 236,117 |
US Government agency | |
| 82,878 | |
| 2,870 | |
| (116) | |
| 85,632 | |
| 79,143 | |
| 1,016 | |
| (522) | |
| 79,637 |
Private label | |
| 19,810 | |
| 40 | |
| (141) | |
| 19,709 | |
| 68,691 | |
| 142 | |
| (138) | |
| 68,695 |
Obligations of states and political subdivisions thereof | |
| 164,766 | |
| 4,244 | |
| (6) | |
| 169,004 | |
| 140,585 | |
| 1,489 | |
| (298) | |
| 141,776 |
Corporate bonds | |
| 97,689 | |
| 1,465 | |
| (843) | |
| 98,311 | |
| 89,994 | |
| 2,479 | |
| (422) | |
| 92,051 |
Total securities available for sale | | $ | 571,977 | | $ | 14,637 | | $ | (1,568) | | $ | 585,046 | | $ | 615,696 | | $ | 7,415 | | $ | (4,835) | | $ | 618,276 |
Credit Quality Information
The Company monitorsWe monitor the credit quality of available for sale debt securities through credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a security and are utilized by the Companyus to make informed decisions. Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, the Company utilizeswe utilize other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security.
As of September 30, 2022 and December 31, 2021, the Companywe carried 0no allowance on available for sale debt securities in accordance with ASU 2016-13.2016-13, Measurement of Credit Losses on Financial Instruments.
The amortized cost and estimated fair value of available for sale securities segregated by contractual maturity at September 30, 20212022 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 | | Available for sale | ||||||||
(in thousands) |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value | ||||
Within 1 year |
| $ | 11,755 | | $ | 11,664 |
| $ | 195 | | $ | 196 |
Over 1 year to 5 years | |
| 23,313 | |
| 23,863 | |
| 30,292 | |
| 28,426 |
Over 5 years to 10 years | |
| 48,500 | |
| 47,493 | |
| 49,666 | |
| 55,025 |
Over 10 years | |
| 157,879 | |
| 161,419 | |
| 134,709 | |
| 106,786 |
Total bonds and obligations | |
| 241,447 | |
| 244,439 | |
| 214,862 | |
| 190,433 |
Mortgage-backed securities | |
| 298,139 | |
| 300,888 | |
| 418,496 | |
| 366,319 |
Total securities available for sale | | $ | 539,586 | | $ | 545,327 | | $ | 633,358 | | $ | 556,752 |
2112
The following table presents the gains and losses from the sale of AFS securities for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Gross gains on sales of available for sale securities | | $ | 1,980 | | $ | — | | $ | 2,030 | | $ | 1,508 | | $ | 142 | | $ | 1,980 | | $ | 151 | | $ | 2,030 |
Gross losses on sales of available for sale securities | |
| (50) | |
| — | |
| (50) | |
| (22) | |
| (98) | |
| (50) | |
| (98) | |
| (50) |
Net gains on sale of available for sale securities | | $ | 1,930 | | $ | — | | $ | 1,980 | | $ | 1,486 | | $ | 44 | | $ | 1,930 | | $ | 53 | | $ | 1,980 |
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 | | Less Than Twelve Months | | Over Twelve Months | | Total | ||||||||||||||||||||||||
| | Gross |
| | |
| Gross |
| | |
| Gross |
| | | | Gross |
| | |
| Gross |
| | |
| Gross |
| | | ||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||||||||
(in thousands) |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||||||||
September 30, 2021 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| ||||||||||||||||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| ||||||||||||||||||
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 1,408 | | $ | 77,412 | | $ | 531 | | $ | 16,618 | | $ | 1,939 | | $ | 94,030 | | $ | 18,262 | | $ | 139,219 | | $ | 18,087 | | $ | 76,291 | | $ | 36,349 | | $ | 215,510 |
US Government agency | |
| 130 | |
| 10,488 | |
| 109 | |
| 4,729 | |
| 239 | |
| 15,217 | |
| 6,591 | |
| 64,575 | |
| 3,537 | |
| 17,021 | |
| 10,128 | |
| 81,596 |
Private label | |
| 109 | |
| 42,852 | |
| 5 | |
| 17 | |
| 114 | |
| 42,869 | |
| 3,466 | |
| 35,740 | |
| 2,283 | |
| 30,994 | |
| 5,749 | |
| 66,734 |
Obligations of states and political subdivisions thereof | |
| 827 | |
| 48,355 | |
| — | |
| — | |
| 827 | |
| 48,355 | |
| 20,425 | |
| 78,085 | |
| 7,478 | |
| 21,373 | |
| 27,903 | |
| 99,458 |
Corporate bonds | |
| 14 | |
| 2,486 | |
| 633 | |
| 11,617 | |
| 647 | |
| 14,103 | |
| 3,770 | |
| 65,251 | |
| 1,987 | |
| 16,763 | |
| 5,757 | |
| 82,014 |
Total securities available for sale | | $ | 2,488 | | $ | 181,593 | | $ | 1,278 | | $ | 32,981 | | $ | 3,766 | | $ | 214,574 | | $ | 52,514 | | $ | 382,870 | | $ | 33,372 | | $ | 162,442 | | $ | 85,886 | | $ | 545,312 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Over Twelve Months | | Total | | Less Than Twelve Months | | Over Twelve Months | | Total | ||||||||||||||||||||||||
|
| Gross |
| | |
| Gross |
| | |
| Gross |
| | |
| Gross |
| | |
| Gross |
| | |
| Gross |
| | | ||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||||||||
(in thousands) | | Losses | | Value | | Losses | | Value | | Losses | | Value | | Losses | | Value | | Losses | | Value | | Losses | | Value | ||||||||||||
December 31, 2020 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| ||||||||||||||||||
December 31, 2021 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| ||||||||||||||||||
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 209 | | $ | 40,285 | | $ | 253 | | $ | 4,323 | | $ | 462 | | $ | 44,608 | | $ | 1,589 | | $ | 127,780 | | $ | 1,866 | | $ | 39,717 | | $ | 3,455 | | $ | 167,497 |
US Government agency | |
| 45 | |
| 6,776 | |
| 71 | |
| 3,297 | |
| 116 | |
| 10,073 | |
| 381 | |
| 32,628 | |
| 141 | |
| 4,548 | |
| 522 | |
| 37,176 |
Private label | |
| — | |
| — | |
| 141 | |
| 19,514 | |
| 141 | |
| 19,514 | |
| 133 | |
| 44,372 | |
| 5 | |
| 16 | |
| 138 | |
| 44,388 |
Obligations of states and political subdivisions thereof | |
| 6 | |
| 5,577 | |
| — | |
| — | |
| 6 | |
| 5,577 | |
| 187 | |
| 36,878 | |
| 111 | |
| 6,129 | |
| 298 | |
| 43,007 |
Corporate bonds | |
| 555 | |
| 21,774 | |
| 288 | |
| 11,712 | |
| 843 | |
| 33,486 | |
| 94 | |
| 21,358 | |
| 328 | |
| 11,922 | |
| 422 | |
| 33,280 |
Total securities available for sale | | $ | 815 | | $ | 74,412 | | $ | 753 | | $ | 38,846 | | $ | 1,568 | | $ | 113,258 | | $ | 2,384 | | $ | 263,016 | | $ | 2,451 | | $ | 62,332 | | $ | 4,835 | | $ | 325,348 |
2213
The Company expectsWe expect to recover itsthe amortized cost basis on all securities in itsour AFS portfolio. Furthermore, the Company doeswe do not intend to sell nor does itdo we anticipate that itwe will be required to sell any of its securities in an unrealized loss position as of September 30, 2021,2022, prior to this recovery. The Company’sOur ability and intent to hold these securities until recovery is supported by the Company’s strongour capital and liquidity positions as well as its historically low portfolio turnover.
The following summarizes, by investment security type, the impact of securities in an unrealized loss position for greater than 12 months at September 30, 2021:2022:
US Government-sponsored enterprises
49489 out of the total 528521 securities in the Company’sour portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.07%14.55% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of the Company’sour US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.
US Government agency
11139 out of the total 150161 securities in the Company’sour portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 0.45%11.04% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of the Company’sour US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.
Private label
1433 of the total 3135 securities in the Company’sour portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.18%7.93% of the amortized cost of securities in unrealized loss positions. Based upon the expectation that the Company willWe expect to 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
1268 of the total 11983 securities in the Company’sour portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.52%22.06% of the amortized cost of securities in unrealized loss positions. The CompanyWe continually monitorsmonitor the municipal bond sector of the market carefully and periodically evaluatesevaluate the appropriate level of exposure to the market. At this time, the Company feelswe feel the bonds in this portfolio carry minimal risk of default, and the Company iswe are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.
Corporate bonds
426 out of the total 2731 securities in the Company’sour portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 0.78%7.07% of the amortized cost of bonds in unrealized loss positions. The Company reviewsWe review the financial strength of all of these bonds, and haswe have concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.
2314
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Upon adoption of ASC 326 or CECL, at January 1, 2021, the Company evaluates itsWe evaluate risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. 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 loans.
The following is a summary of total loans by regulatory call report code segmentation based on underlying collateral for certain loan types:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
(in thousands) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Commercial construction | | $ | 152,700 | | $ | 117,882 | | $ | 97,156 | | $ | 56,263 |
Commercial real estate owner occupied | |
| 253,792 | |
| 219,217 | |
| 256,475 | |
| 257,122 |
Commercial real estate non-owner occupied | |
| 733,353 | |
| 716,776 | |
| 1,081,924 | |
| 887,092 |
Tax exempt | |
| 42,448 | |
| 47,862 | |
| 41,622 | |
| 41,280 |
Commercial and industrial | |
| 336,989 | |
| 355,684 | |
| 319,645 | |
| 307,112 |
Residential real estate | |
| 917,301 | |
| 995,216 | |
| 953,113 | |
| 888,263 |
Home equity | |
| 88,002 | |
| 100,096 | |
| 92,296 | |
| 86,657 |
Consumer other | |
| 9,569 | |
| 10,152 | |
| 8,133 | |
| 8,121 |
Total loans | |
| 2,534,154 | |
| 2,562,885 | |
| 2,850,364 | |
| 2,531,910 |
Allowance for credit losses | |
| 22,448 | |
| 19,082 | |
| 25,018 | |
| 22,718 |
Net loans | | $ | 2,511,706 | | $ | 2,543,803 | | $ | 2,825,346 | | $ | 2,509,192 |
Total unamortized net costs and premiums included in loan totals were as follows:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
(in thousands) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Unamortized net loan origination costs | | $ | 4,015 | | $ | 5,157 | ||||||
Unamortized net premium on purchased loans | |
| (65) | |
| (85) | ||||||
Total unamortized net costs and premiums | | $ | 3,950 | | $ | 5,072 | ||||||
Net unamortized loan origination costs | | $ | 3,367 | | $ | 3,014 | ||||||
Net unamortized fair value discount on acquired loans | |
| (3,898) | |
| (4,758) | ||||||
Total | | $ | (531) | | $ | (1,744) |
The Company elected toWe exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 20212022 and December 31, 2020,2021, accrued interest receivable for loans totaled $8.7$8.8 million and $11.4$6.3 million, respectively, and is included in the “other assets” line item on the Company’s consolidated balance sheets.
The CARESCoronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent legislation established the Payroll Protection Program (PPP),(“PPP”) are administered directly by the Small Business Administration (SBA)(“SBA”). The Company has participated in both 2020 and 2021 rounds of funding. As of September 30, 20212022, we had no remaining PPP loans and as of December 31, 2020, the Company2021, we had 404 and 74661 PPP loans outstanding, with an outstanding principal balance of $24.2 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.$6.7 million. PPP loans are included in the commercial and industrial portfolio segment.
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.on stabilized commercial real estate transactions. 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.
24
Commercial real estate owner occupied and non-owner occupied - Loans in these segments are primarily owner-occupied or income-producing properties. Loans to Real Estate Investment Trusts (REITs) and unsecured loans to developers that closely correlate to the inherent risk in commercial real estate markets are also included. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
15
Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made in these borrowers may provide the Companyus 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 loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.
Home equity - All loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.
Consumer 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 established policy guidelines, as applicable.
Allowance for Credit Losses
The Allowance for Credit Losses (ACL)(“ACL”) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the ACL represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.
Upon adoption of CECL on January 1, 2021, the Company replaced 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 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 ACL 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 TDRs.
2516
The Company’s activity in the allowance for credit losses for the periods ended are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | At or for the Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| | Balance at | | | | | | | | | | | | | | Balance at | | | | | | | | | | | | | ||
| | Beginning of | | | | | | | | | | | Balance at | | Beginning of | | | | | | | | | | | Balance at | ||||
(in thousands) |
| Period |
| Charge Offs |
| Recoveries |
| Provision |
| End of Period |
| Period | | Charge Offs |
| Recoveries |
| Provision |
| End of Period | ||||||||||
Commercial construction | | $ | 2,372 | | $ | — | | $ | — | | $ | (286) | | $ | 2,086 | | $ | 1,010 | | $ | — | | $ | — | | $ | 213 | | $ | 1,223 |
Commercial real estate owner occupied | |
| 2,552 | |
| (142) | |
| 72 | |
| 237 | |
| 2,719 | |
| 2,722 | |
| — | |
| 7 | |
| 132 | |
| 2,861 |
Commercial real estate non-owner occupied | |
| 5,604 | |
| — | |
| — | |
| (22) | |
| 5,582 | |
| 7,361 | |
| — | |
| — | |
| 610 | |
| 7,971 |
Tax exempt | |
| 91 | |
| — | |
| — | |
| (6) | |
| 85 | |
| 105 | |
| — | |
| — | |
| (11) | |
| 94 |
Commercial and industrial | |
| 5,225 | |
| (24) | |
| — | |
| 105 | |
| 5,306 | |
| 4,820 | |
| (8) | |
| 20 | |
| 290 | |
| 5,122 |
Residential real estate | |
| 6,069 | |
| (6) | |
| 19 | |
| (290) | |
| 5,792 | |
| 6,806 | |
| (11) | |
| 6 | |
| 85 | |
| 6,886 |
Home equity | |
| 822 | |
| (49) | |
| 1 | |
| 30 | |
| 804 | |
| 865 | |
| — | |
| 2 | |
| (76) | |
| 791 |
Consumer other | |
| 80 | |
| (65) | |
| 1 | |
| 58 | |
| 74 | |
| 67 | |
| (66) | |
| 6 | |
| 63 | |
| 70 |
Total | | $ | 22,815 | | $ | (286) | | $ | 93 | | $ | (174) | | $ | 22,448 | | $ | 23,756 | | $ | (85) | | $ | 41 | | $ | 1,306 | | $ | 25,018 |
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 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 | | $ | 48 | | $ | 2,086 |
Commercial real estate owner occupied | |
| 1,783 | |
| 708 | |
| (403) | |
| 72 | |
| 559 | |
| 2,719 |
Commercial real estate non-owner occupied | |
| 7,864 | |
| (2,008) | |
| — | |
| 4 | |
| (278) | |
| 5,582 |
Tax exempt | |
| 58 | |
| 40 | |
| — | |
| — | |
| (13) | |
| 85 |
Commercial and industrial | |
| 3,137 | |
| 2,996 | |
| (44) | |
| 14 | |
| (797) | |
| 5,306 |
Residential real estate | |
| 5,010 | |
| 1,732 | |
| (67) | |
| 141 | |
| (1,024) | |
| 5,792 |
Home equity | |
| 285 | |
| 603 | |
| (108) | |
| 48 | |
| (24) | |
| 804 |
Consumer other | |
| 121 | |
| (39) | |
| (119) | |
| 10 | |
| 101 | |
| 74 |
Total | | $ | 19,082 | | $ | 5,228 | | $ | (741) | | $ | 307 | | $ | (1,428) | | $ | 22,448 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | | At or for the Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| | Balance at | | | | | | | | | | | | | | Balance at | | | | | | | | | | | | | ||
| | Beginning of | | | | | | | | | | | Balance at | | Beginning of | | | | | | | | | | Balance at | |||||
(in thousands) |
| Period |
| Charge Offs |
| Recoveries |
| Provision |
| End of Period |
| Period | | Charge Offs |
| Recoveries |
| Provision |
| End of Period | ||||||||||
Commercial construction | | $ | 532 | | $ | — | | $ | — | | $ | 185 | | $ | 717 | | $ | 2,111 | | $ | — | | $ | — | | $ | (888) | | $ | 1,223 |
Commercial real estate owner occupied | |
| 1,524 | |
| — | |
| — | |
| 370 | |
| 1,894 | |
| 2,751 | |
| — | |
| 120 | |
| (10) | |
| 2,861 |
Commercial real estate non-owner occupied | |
| 5,926 | |
| (266) | |
| 14 | |
| 783 | |
| 6,457 | |
| 5,650 | |
| — | |
| — | |
| 2,321 | |
| 7,971 |
Tax exempt | |
| 64 | |
| — | |
| — | |
| 4 | |
| 68 | |
| 86 | |
| — | |
| — | |
| 8 | |
| 94 |
Commercial and industrial | |
| 3,056 | |
| (24) | |
| 14 | |
| 236 | |
| 3,282 | |
| 5,369 | |
| (14) | |
| 56 | |
| (289) | |
| 5,122 |
Residential real estate | |
| 4,991 | |
| — | |
| 1 | |
| 86 | |
| 5,078 | |
| 5,862 | |
| (26) | |
| 103 | |
| 947 | |
| 6,886 |
Home equity | |
| 318 | |
| — | |
| — | |
| (4) | |
| 314 | |
| 814 | |
| (6) | |
| 22 | |
| (39) | |
| 791 |
Consumer other | |
| 98 | |
| (149) | |
| 8 | |
| 140 | |
| 97 | |
| 75 | |
| (181) | |
| 9 | |
| 167 | |
| 70 |
Total | | $ | 16,509 | | $ | (439) | | $ | 37 | | $ | 1,800 | | $ | 17,907 | | $ | 22,718 | | $ | (227) | | $ | 310 | | $ | 2,217 | | $ | 25,018 |
2617
| | | | | | | | | | | | | | | |
| | | |||||||||||||
| | Nine Months Ended September 30, 2020 | |||||||||||||
| | Balance at | | | | | | | | | | | | | |
| | Beginning of | | | | | | | | | | | Balance at | ||
(in thousands) |
| Period |
| Charge Offs |
| Recoveries |
| Provision |
| End of Period | |||||
Commercial construction | | $ | 317 | | $ | — | | $ | — | | $ | 400 | | $ | 717 |
Commercial real estate owner occupied | |
| 2,368 | |
| — | |
| — | |
| (474) | |
| 1,894 |
Commercial real estate non-owner occupied | |
| 4,695 | |
| (1,137) | |
| 109 | |
| 2,790 | |
| 6,457 |
Tax exempt | |
| 67 | |
| — | |
| — | |
| 1 | |
| 68 |
Commercial and industrial | |
| 3,262 | |
| (360) | | | 25 | |
| 355 | |
| 3,282 |
Residential real estate | |
| 4,213 | |
| (32) | |
| 12 | |
| 885 | |
| 5,078 |
Home equity | |
| 320 | |
| — | |
| — | |
| (6) | |
| 314 |
Consumer other | |
| 111 | |
| (341) | |
| 13 | |
| 314 | |
| 97 |
Total | | $ | 15,353 | | $ | (1,870) | | $ | 159 | | $ | 4,265 | | $ | 17,907 |
| | | | | | | | | | | | | | | |
| | At or for the Three Months Ended September 30, 2021 | |||||||||||||
| | Balance at | | | | | | | | | | | | | |
| | Beginning of | | | | | | | | | | Balance at | |||
(in thousands) |
| Period | | Charge Offs |
| Recoveries |
| Provision |
| End of Period | |||||
Commercial construction | | $ | 2,372 | | $ | — | | $ | — | | $ | (286) | | $ | 2,086 |
Commercial real estate owner occupied | |
| 2,552 | |
| (142) | |
| 72 | |
| 237 | |
| 2,719 |
Commercial real estate non-owner occupied | |
| 5,604 | |
| — | |
| — | |
| (22) | |
| 5,582 |
Tax exempt | |
| 91 | |
| — | |
| — | |
| (6) | |
| 85 |
Commercial and industrial | |
| 5,225 | |
| (24) | |
| — | |
| 105 | |
| 5,306 |
Residential real estate | |
| 6,069 | |
| (6) | |
| 19 | |
| (290) | |
| 5,792 |
Home equity | |
| 822 | |
| (49) | |
| 1 | |
| 30 | |
| 804 |
Consumer other | |
| 80 | |
| (65) | |
| 1 | |
| 58 | |
| 74 |
Total | | $ | 22,815 | | $ | (286) | | $ | 93 | | $ | (174) | | $ | 22,448 |
| | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||
| | At or for the Nine Months Ended September 30, 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 | | $ | 48 | | $ | 2,086 |
Commercial real estate owner occupied | |
| 1,783 | |
| 708 | |
| (403) | |
| 72 | |
| 559 | |
| 2,719 |
Commercial real estate non-owner occupied | |
| 7,864 | |
| (2,008) | |
| — | |
| 4 | |
| (278) | |
| 5,582 |
Tax exempt | |
| 58 | |
| 40 | |
| — | |
| — | |
| (13) | |
| 85 |
Commercial and industrial | |
| 3,137 | |
| 2,996 | |
| (44) | | | 14 | |
| (797) | |
| 5,306 |
Residential real estate | |
| 5,010 | |
| 1,732 | |
| (67) | |
| 141 | |
| (1,024) | |
| 5,792 |
Home equity | |
| 285 | |
| 603 | |
| (108) | |
| 48 | |
| (24) | |
| 804 |
Consumer other | |
| 121 | |
| (39) | |
| (119) | |
| 10 | |
| 101 | |
| 74 |
Total | | $ | 19,082 | | $ | 5,228 | | $ | (741) | | $ | 307 | | $ | (1,428) | | $ | 22,448 |
18
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 was as follows:
| | | | | | |||||||
| | | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, 2021 |
| Nine Months Ended September 30, 2021 | | Three Months Ended September 30, 2022 |
| Nine Months Ended September 30, 2022 | ||||
Begininng Balance | | $ | 1,921 | | $ | 359 | ||||||
Impact of CECL adoption | | | — | | | 1,616 | ||||||
Beginning Balance | | $ | 2,523 | | $ | 2,152 | ||||||
Provision for credit losses | |
| 280 | |
| 226 | |
| (26) | |
| 345 |
Ending Balance | | $ | 2,201 | | $ | 2,201 | | $ | 2,497 | | $ | 2,497 |
| | | | | �� | | | | | | | |
(in thousands) | | Three Months Ended September 30, 2020 |
| Nine Months Ended September 30, 2020 | | Three Months Ended September 30, 2021 |
| Nine Months Ended September 30, 2021 | ||||
Begininng Balance | | $ | 319 | | $ | 314 | ||||||
Beginning Balance | | $ | 1,921 | | $ | 359 | ||||||
Impact of ASC 326 | | | — | | 1,616 | |||||||
Provision for credit losses | |
| 2 | |
| 7 | |
| 280 | |
| 226 |
Ending Balance | | $ | 321 | | $ | 321 | | $ | 2,201 | | $ | 2,201 |
Loan Origination/Risk Management: The Company hasWe have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. The Company’sOur Board of Directors reviewsreview and approvesapprove 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, and concentration of credit, loan delinquencies, non-performing loans and potential problem loans. The Company seeksWe seek to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.
Credit Quality Indicators: In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. Consistent with regulatory guidelines, the Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).
The following are the definitions of the Company’sour credit quality indicators:
Pass: Loans the Company considerswe consider in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.
27
Special Mention: Loans the Company considersconsidered 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 Companyus to sufficient risks to warrant classification.
Substandard: Loans the Company considerswe consider 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
19
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 considerswe consider as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).
Loss: Loans the Company considerswe consider 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.
20
The following table presents our loans by year of origination, loan segmentation and risk indicator as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
(in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total | |||||||
Commercial construction |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Risk rating: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Pass | | $ | 34,032 | | $ | 32,179 | | $ | 5,928 | | $ | 1,011 | | $ | 973 | | $ | — | | $ | 74,123 |
Special mention | |
| — | |
| — | |
| 23,033 | |
| — | |
| — | |
| — | |
| 23,033 |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | 34,032 | | $ | 32,179 | | $ | 28,961 | | $ | 1,011 | | $ | 973 | | $ | — | | $ | 97,156 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial real estate owner occupied | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 20,248 | | $ | 12,973 | | $ | 23,785 | | $ | 31,795 | | $ | 47,090 | | $ | 110,306 | | $ | 246,197 |
Special mention | |
| — | |
| — | |
| 245 | |
| 672 | |
| 1,145 | |
| 1,711 | |
| 3,773 |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| 931 | |
| 5,276 | |
| 6,207 |
Doubtful | | | — | | | — | | | — | | | — | | | 151 | | | 147 | | | 298 |
Total | | $ | 20,248 | | $ | 12,973 | | $ | 24,030 | | $ | 32,467 | | $ | 49,317 | | $ | 117,440 | | $ | 256,475 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial real estate non-owner occupied | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 283,316 | | $ | 249,574 | | $ | 146,764 | | $ | 89,252 | | $ | 35,671 | | $ | 259,250 | | $ | 1,063,827 |
Special mention | |
| — | |
| — | |
| — | |
| 139 | |
| 918 | |
| 14,665 | |
| 15,722 |
Substandard | |
| — | |
| — | |
| — | |
| 173 | |
| — | |
| 2,048 | |
| 2,221 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | 154 | | | 154 |
Total | | $ | 283,316 | | $ | 249,574 | | $ | 146,764 | | $ | 89,564 | | $ | 36,589 | | $ | 276,117 | | $ | 1,081,924 |
| | | | | | | | | | | | | | | | | | | | | |
Tax exempt | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 6,944 | | $ | 1,044 | | $ | 256 | | $ | 778 | | $ | 13,276 | | $ | 19,324 | | $ | 41,622 |
Special mention | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | 6,944 | | $ | 1,044 | | $ | 256 | | $ | 778 | | $ | 13,276 | | $ | 19,324 | | $ | 41,622 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 56,222 | | $ | 70,975 | | $ | 60,338 | | $ | 29,867 | | $ | 11,053 | | $ | 84,792 | | $ | 313,247 |
Special mention | |
| 1,497 | |
| — | |
| 155 | |
| 1,083 | |
| 516 | |
| 2,432 | |
| 5,683 |
Substandard | |
| — | |
| 55 | |
| 12 | |
| 70 | |
| — | |
| 514 | |
| 651 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | 64 | | | 64 |
Total | | $ | 57,719 | | $ | 71,030 | | $ | 60,505 | | $ | 31,020 | | $ | 11,569 | | $ | 87,802 | | $ | 319,645 |
| | | | | | | | | | | | | | | | | | | | | |
Residential real estate |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 170,291 | | $ | 178,875 | | $ | 113,573 | | $ | 71,869 | | $ | 51,588 | | $ | 361,823 | | $ | 948,019 |
Nonperforming | |
| — | |
| 48 | |
| — | |
| 50 | |
| 643 | |
| 4,353 | |
| 5,094 |
Total | | $ | 170,291 | | $ | 178,923 | | $ | 113,573 | | $ | 71,919 | | $ | 52,231 | | $ | 366,176 | | $ | 953,113 |
| | | | | | | | | | | | | | | | | | | | | |
Home equity | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 11,839 | | $ | 12,152 | | $ | 8,965 | | $ | 7,796 | | $ | 7,326 | | $ | 43,173 | | $ | 91,251 |
Nonperforming | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 1,045 | |
| 1,045 |
Total | | $ | 11,839 | | $ | 12,152 | | $ | 8,965 | | $ | 7,796 | | $ | 7,326 | | $ | 44,218 | | $ | 92,296 |
| | | | | | | | | | | | | | | | | | | | | |
Consumer other | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 3,833 | | $ | 1,596 | | $ | 1,029 | | $ | 362 | | $ | 328 | | $ | 980 | | $ | 8,128 |
Nonperforming | |
| — | |
| — | |
| 5 | |
| — | |
| — | |
| — | |
| 5 |
Total | | $ | 3,833 | | $ | 1,596 | | $ | 1,034 | | $ | 362 | | $ | 328 | | $ | 980 | | $ | 8,133 |
| | | | | | | | | | | | | | | | | | | | | |
Total Loans | | $ | 588,222 | | $ | 559,471 | | $ | 384,088 | | $ | 234,917 | | $ | 171,609 | | $ | 912,057 | | $ | 2,850,364 |
21
The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
(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 |
| | | | | | | | | | | | | | | | | | | | | |
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 |
22
Past Dues
The following is a summary of past due loans for the periods ended:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | ||||||||||||||||
(in thousands) |
| 30-59 |
| 60-89 |
| 90+ |
| Total Past Due |
| Current |
| Total Loans | ||||||
Commercial construction | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 97,156 | | $ | 97,156 |
Commercial real estate owner occupied | |
| 84 | |
| — | |
| — | |
| 84 | |
| 256,391 | |
| 256,475 |
Commercial real estate non-owner occupied | |
| 298 | |
| — | |
| 173 | |
| 471 | |
| 1,081,453 | |
| 1,081,924 |
Tax exempt | |
| — | |
| — | |
| — | |
| — | |
| 41,622 | |
| 41,622 |
Commercial and industrial | |
| 200 | |
| 100 | |
| 12 | |
| 312 | |
| 319,333 | |
| 319,645 |
Residential real estate | |
| 565 | |
| 928 | |
| 1,882 | |
| 3,375 | |
| 949,738 | |
| 953,113 |
Home equity | |
| 269 | |
| 236 | |
| 204 | |
| 709 | |
| 91,587 | |
| 92,296 |
Consumer other | |
| 11 | |
| 4 | |
| — | |
| 15 | |
| 8,118 | |
| 8,133 |
Total | | $ | 1,427 | | $ | 1,268 | | $ | 2,271 | | $ | 4,966 | | $ | 2,845,398 | | $ | 2,850,364 |
| | | | | | | | | | | | | | | | | | |
| | 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 |
Non-Accrual Loans
The following is a summary of non-accrual loans for the periods ended:
| | | | | | | | | |
| | September 30, 2022 | |||||||
| | | | | Nonaccrual With No | | 90+ Days Past | ||
(in thousands) |
| Nonaccrual |
| Related Allowance |
| Due and Accruing | |||
Commercial construction | | $ | — | | $ | — | | $ | — |
Commercial real estate owner occupied | |
| 604 | |
| 371 | |
| — |
Commercial real estate non-owner occupied | |
| 747 | |
| 430 | |
| — |
Tax exempt | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 279 | |
| 187 | |
| 2 |
Residential real estate | |
| 5,094 | |
| 1,539 | |
| 242 |
Home equity | |
| 1,044 | |
| 70 | |
| 15 |
Consumer other | |
| 5 | |
| — | |
| — |
Total | | $ | 7,773 | | $ | 2,597 | | $ | 259 |
23
| | | | | | | | | |
| | 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 |
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 we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect 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.
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended.
| | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | ||||||||
(in thousands) |
| Real Estate |
| Other |
| Real Estate |
| Other | ||||
Commercial construction | | $ | — | | $ | — | | $ | — | | $ | — |
Commercial real estate owner occupied | |
| 604 | |
| — | |
| 783 | |
| — |
Commercial real estate non-owner occupied | |
| 747 | |
| — | |
| 622 | |
| — |
Tax exempt | |
| — | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 122 | |
| 157 | |
| 385 | |
| 292 |
Residential real estate | |
| 5,094 | |
| — | |
| 6,835 | |
| — |
Home equity | |
| 1,044 | |
| — | |
| 1,269 | |
| — |
Consumer other | |
| 5 | |
| — | |
| 5 | |
| — |
Total | | $ | 7,616 | | $ | 157 | | $ | 9,899 | | $ | 292 |
Troubled Debt Restructuring Loans
The loan portfolio also includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan. There were no modifications qualifying as TDR’s for the three and nine months ended September 30, 2022 and 2021.
Foreclosure
Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2022 and December 31, 2021 totaled $249 thousand and $574 thousand, respectively.
Mortgage Banking
Loans held for sale had at September 30, 2022 and December 31, 2021 had an unpaid principal balance of $987 thousand and $5.4 million, respectively. The interest rate exposure on loans held for sale are mitigated through forward delivery commitments with certain approved secondary market investors. Forward delivery commitments had a notional amount
24
of $200 thousand, and $14.8 million at September 30, 2022 and December 31, 2021, respectively. Refer to Note 8 for further discussion of forward delivery commitments.
For the three months ended September 30, 2022 and 2021, we sold $5.2 million and $28.5 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net loss on sale of loans (net of costs, including direct and indirect origination costs) of $52 thousand and a gain of $682 thousand, respectively. For the nine months ended September 30, 2022 and 2021, we sold $38.2 million and $153.8 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 $281 thousand and $3.6 million, respectively.
We sell residential loans on the secondary market while primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and earn fees over the servicing period. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates. We obtain third-party valuations of our servicing assets portfolio quarterly, and the assumptions are reflected in Fair Value disclosures.
25
NOTE 4. BORROWED FUNDS
Borrowed funds at September 30, 2022 and December 31, 2021 are summarized, as follows:
| | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| |||||||
| | | | | Weighted | | | | | Weighted | | |
(dollars in thousands) |
| Carrying Value |
| Average Rate | | Carrying Value |
| Average Rate |
| |||
Short-term borrowings | |
| | |
| | |
| | |
|
|
Advances from the FHLB | | $ | 167,250 |
| 2.95 | % | | $ | 75,000 |
| 0.30 | % |
Other borrowings | |
| 18,916 |
| 0.14 | | |
| 19,802 |
| 0.17 | |
Total short-term borrowings | |
| 186,166 |
| 1.27 | | |
| 94,802 |
| 0.21 | |
Long-term borrowings | |
|
|
|
| | |
|
|
|
| |
Advances from the FHLB | |
| 2,591 |
| 0.39 | | |
| 23,598 |
| 1.08 | |
Subordinated borrowings | |
| 60,248 |
| 5.05 | | |
| 60,124 |
| 4.34 | |
Total long-term borrowings | |
| 62,839 |
| 4.86 | | |
| 83,722 |
| 3.42 | |
Total | | $ | 249,005 |
| 1.74 | % | | $ | 178,524 |
| 0.91 | % |
Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a remaining maturity of less than one year. We also maintain a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended September 30, 2022 and December 31, 2021.
We have the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2022, our available secured line of credit at the FRB was $84.1 million. We have pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended December 31, 2021.
We maintain, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of September 30, 2022 and December 31, 2021. There was no outstanding balance on the line of credit as of September 30, 2022 and December 31, 2021.
Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at September 30, 2022 include no callable advances and amortizing advances of $291 thousand. The advances outstanding at December 31, 2021 included $20.0 million of callable advances and $298 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 September 30, 2022 is, as follows:
| | | | | | |
|
| | |
| Weighted Average |
|
(in thousands, except rates) | | Amount | | Rate |
| |
2022 | | $ | 166,250 |
| 2.97 | % |
2023 | |
| 1,000 |
| — | |
2024 | |
| 2,300 |
| — | |
2025 | |
| — |
| — | |
2026 | |
| — |
| — | |
2027 and thereafter | |
| 291 |
| 3.45 | |
Total FHLB advances | | $ | 169,841 |
| 2.92 | % |
On November 26, 2019, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors pursuant to which we sold and issued $40.0 million in aggregate principal amount of subordinated notes due 2029 (the “Notes”). The Notes have a maturity date of December 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 thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight
26
Financing Rate (SOFR) plus 3.27%. We have the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. The transaction included debt issuance costs of $372 thousand as of September 30, 2022 and $496 thousand net of amortization as of December 31, 2021, that are netted against the subordinated debt.
We also have $20.6 million in floating Junior Subordinated Deferrable Interest Debentures (“Debentures”) issued by NHTB Capital Trust II (“Trust II”) and NHTB Capital Trust III (“Trust III”), which are both Connecticut statutory trusts. The Debentures were issued on March 30, 2004, carry a variable interest rate of three-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by us at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which we are not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into our financial statements.
Repurchase Agreements
We can raise additional liquidity by entering into repurchase agreements at our discretion. In a security repurchase agreement transaction, we 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, we are 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, we either deal 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 our safekeeping agents.
| | | | | | |
(in thousands) | | September 30, 2022 | | December 31, 2021 | ||
Customer Repurchase Agreements |
| |
| |
|
|
US Government-sponsored enterprises | | $ | 18,916 | | $ | 19,802 |
Total | | $ | 18,916 | | $ | 19,802 |
27
NOTE 5. DEPOSITS
A summary of time deposits is, as follows:
| | | | | | |
(in thousands) |
| September 30, 2022 |
| December 31, 2021 | ||
Time less than $100,000 | | $ | 167,056 | | $ | 181,586 |
Time $100,000 through $250,000 | |
| 113,168 | |
| 169,645 |
Time $250,000 or more | |
| 54,024 | |
| 74,301 |
Total | | $ | 334,248 | | $ | 425,532 |
At September 30, 2022 and December 31, 2021, the scheduled maturities by year for time deposits are, as follows:
| | | | | | |
(in thousands) |
| September 30, 2022 | | December 31, 2021 | ||
Within 1 year | | $ | 262,787 | | $ | 318,692 |
Over 1 year to 2 years | |
| 46,867 | |
| 71,247 |
Over 2 years to 3 years | |
| 12,626 | |
| 18,201 |
Over 3 years to 4 years | |
| 5,971 | |
| 8,498 |
Over 4 years to 5 years | |
| 5,302 | |
| 6,751 |
Over 5 years | |
| 695 | |
| 2,143 |
Total | | $ | 334,248 | | $ | 425,532 |
Included in time deposits are brokered deposits of $15.1 million and $16.1 million at September 30, 2022 and December 31, 2021, respectively. Also included in time deposits are reciprocal deposits of $12.7 million and $17.3 million at September 30, 2022 and December 31, 2021, respectively.
28
The following tables present the Company’s loans by year of origination, loan segmentation and risk indicator as of September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
(in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | |||||||
Commercial construction |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Risk rating: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Pass | | $ | 22,192 | | $ | 76,226 | | $ | 44,453 | | $ | 9,829 | | $ | — | | $ | — | | $ | 152,700 |
Special mention | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | 22,192 | | $ | 76,226 | | $ | 44,453 | | $ | 9,829 | | $ | — | | $ | — | | $ | 152,700 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial real estate owner occupied | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 9,937 | | $ | 16,003 | | $ | 35,366 | | $ | 47,026 | | $ | 20,038 | | $ | 110,663 | | $ | 239,033 |
Special mention | |
| — | |
| — | |
| 767 | |
| — | |
| — | |
| 3,125 | |
| 3,892 |
Substandard | |
| — | |
| — | |
| — | |
| 248 | |
| 248 | |
| 10,030 | |
| 10,526 |
Doubtful | | | — | | | — | | | — | | | 172 | | | — | | | 169 | | | 341 |
Total | | $ | 9,937 | | $ | 16,003 | | $ | 36,133 | | $ | 47,446 | | $ | 20,286 | | $ | 123,987 | | $ | 253,792 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial real estate non-owner occupied | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 101,706 | | $ | 147,754 | | $ | 90,963 | | $ | 40,545 | | $ | 147,197 | | $ | 186,056 | | $ | 714,221 |
Special mention | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 15,612 | |
| 15,612 |
Substandard | |
| — | |
| — | |
| — | |
| 131 | |
| 131 | |
| 3,086 | |
| 3,348 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | 172 | | | 172 |
Total | | $ | 101,706 | | $ | 147,754 | | $ | 90,963 | | $ | 40,676 | | $ | 147,328 | | $ | 204,926 | | $ | 733,353 |
| | | | | | | | | | | | | | | | | | | | | |
Tax exempt | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 1,511 | | $ | 604 | | $ | 975 | | $ | 14,453 | | $ | 5,387 | | $ | 19,518 | | $ | 42,448 |
Special mention | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Substandard | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | 1,511 | | $ | 604 | | $ | 975 | | $ | 14,453 | | $ | 5,387 | | $ | 19,518 | | $ | 42,448 |
| | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risk rating: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Pass | | $ | 104,179 | | $ | 64,303 | | $ | 36,010 | | $ | 17,635 | | $ | 35,407 | | $ | 73,972 | | $ | 331,506 |
Special mention | |
| 619 | |
| 222 | |
| 717 | |
| 596 | |
| 202 | |
| 1,429 | |
| 3,785 |
Substandard | |
| 98 | |
| — | |
| 549 | |
| 14 | |
| 50 | |
| 677 | |
| 1,388 |
Doubtful | | | — | | | — | | | — | | | — | | | 122 | | | 188 | | | 310 |
Total | | $ | 104,896 | | $ | 64,525 | | $ | 37,276 | | $ | 18,245 | | $ | 35,781 | | $ | 76,266 | | $ | 336,989 |
| | | | | | | | | | | | | | | | | | | | | |
(continued) |
29
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | |||||||
Residential real estate |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 143,071 | | $ | 126,171 | | $ | 95,942 | | $ | 70,062 | | $ | 69,486 | | $ | 404,395 | | $ | 909,127 |
Nonperforming | |
| — | |
| — | |
| — | |
| 576 | |
| 183 | |
| 7,415 | |
| 8,174 |
Total | | $ | 143,071 | | $ | 126,171 | | $ | 95,942 | | $ | 70,638 | | $ | 69,669 | | $ | 411,810 | | $ | 917,301 |
| | | | | | | | | | | | | | | | | | | | | |
Home equity | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 8,227 | | $ | 10,946 | | $ | 9,775 | | $ | 7,647 | | $ | 6,975 | | $ | 43,133 | | $ | 86,703 |
Nonperforming | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 1,299 | |
| 1,299 |
Total | | $ | 8,227 | | $ | 10,946 | | $ | 9,775 | | $ | 7,647 | | $ | 6,975 | | $ | 44,432 | | $ | 88,002 |
| | | | | | | | | | | | | | | | | | | | | |
Consumer other | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 3,037 | | $ | 1,942 | | $ | 1,023 | | $ | 803 | | $ | 329 | | $ | 2,429 | | $ | 9,563 |
Nonperforming | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 6 | |
| 6 |
Total | | $ | 3,037 | | $ | 1,942 | | $ | 1,023 | | $ | 803 | | $ | 329 | | $ | 2,435 | | $ | 9,569 |
| | | | | | | | | | | | | | | | | | | | | |
Total Loans | | $ | 394,577 | | $ | 444,171 | | $ | 316,540 | | $ | 209,737 | | $ | 285,755 | | $ | 883,374 | | $ | 2,534,154 |
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 | |
| | |
| | |||
| | 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:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||||||||
(in thousands) |
| 30-59 |
| 60-89 |
| 90+ |
| Total Past Due |
| Current |
| Total Loans | ||||||
Commercial construction | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 152,700 | | $ | 152,700 |
Commercial real estate owner occupied | |
| — | |
| 10 | |
| 627 | |
| 637 | |
| 253,155 | |
| 253,792 |
Commercial real estate non-owner occupied | |
| 314 | |
| — | |
| 117 | |
| 431 | |
| 732,922 | |
| 733,353 |
Tax exempt | |
| — | |
| — | |
| — | |
| — | |
| 42,448 | |
| 42,448 |
Commercial and industrial | |
| 44 | |
| 35 | |
| 313 | |
| 392 | |
| 336,597 | |
| 336,989 |
Residential real estate | |
| 414 | |
| 1,007 | |
| 2,796 | |
| 4,217 | |
| 913,084 | |
| 917,301 |
Home equity | |
| 344 | |
| 95 | |
| 62 | |
| 501 | |
| 87,501 | |
| 88,002 |
Consumer other | |
| 32 | |
| 2 | |
| — | |
| 34 | |
| 9,535 | |
| 9,569 |
Total | | $ | 1,148 | | $ | 1,149 | | $ | 3,915 | | $ | 6,212 | | $ | 2,527,942 | | $ | 2,534,154 |
30
| | | | | | | | | | | | | | | | | | |
| | 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:
| | | | | | | | | |
| | September 30, 2021 | |||||||
| | | | | Nonaccrual With No | | 90+ Days Past | ||
(in thousands) |
| Nonaccrual |
| Related Allowance |
| Due and Accruing | |||
Commercial construction | | $ | — | | $ | — | | $ | — |
Commercial real estate owner occupied | |
| 1,184 | |
| 808 | |
| 366 |
Commercial real estate non-owner occupied | |
| 770 | |
| 314 | |
| — |
Tax exempt | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 775 | |
| 629 | |
| 149 |
Residential real estate | |
| 8,174 | |
| 3,217 | |
| 105 |
Home equity | |
| 1,298 | |
| 316 | |
| — |
Consumer other | |
| 6 | |
| — | |
| — |
Total | | $ | 12,207 | | $ | 5,284 | | $ | 620 |
| | | | | | | | | |
| | 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 |
31
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.
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended.
| | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | ||||||||
(in thousands) |
| Real Estate |
| Other |
| Real Estate |
| Other | ||||
Commercial construction | | $ | — | | $ | — | | $ | 259 | | $ | — |
Commercial real estate owner occupied | |
| 1,184 | |
| — | |
| 3,441 | |
| — |
Commercial real estate non-owner occupied | |
| 770 | |
| — | |
| 383 | |
| — |
Tax exempt | |
| — | |
| — | |
| — | |
| — |
Commercial and industrial | |
| 436 | |
| 339 | |
| 625 | |
| 607 |
Residential real estate | |
| 8,174 | |
| — | |
| 7,432 | |
| — |
Home equity | |
| 1,298 | |
| — | |
| 1,493 | |
| — |
Consumer other | |
| 6 | |
| — | |
| 60 | |
| — |
Total | | $ | 11,868 | | $ | 339 | | $ | 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 and 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.
32
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 |
33
Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.
The following tables include the recorded investment and number of modifications identified during the 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 three and nine months ended September 30, 2021.
| | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | |||||||||
| | | | Pre-Modification | | Post-Modification | | | | ||
| | Number of | | Outstanding | | Outstanding | | | | ||
(in thousands) |
| Modifications |
| Balance |
| Balance |
| Reserve | |||
Commercial and industrial |
| 1 | |
| 86 | |
| 86 | |
| — |
Total |
| 1 | | $ | 86 | | $ | 86 | | $ | — |
| | | | | | | | | | | |
| | Nine Months Ended September 30, 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 | |
| 247 | |
| — |
Tax exempt |
| — | |
| — | |
| — | |
| — |
Commercial and industrial |
| 4 | |
| 127 | |
| 248 | |
| — |
Residential real estate |
| — | |
| — | |
| — | |
| — |
Home equity |
| 1 | |
| 26 | |
| 24 | |
| — |
Consumer other |
| 1 | |
| 9 | |
| 9 | |
| — |
Total |
| 7 | | $ | 216 | | $ | 528 | | $ | — |
The following tables summarize the types of loan concessions made for the periods presented:
| | | | | | | | | | |
| | September 30, 2021 | | September 30, 2020 | ||||||
|
| |
| Post-Modification |
| |
| Post-Modification | ||
| | Number of | | Outstanding | | Number of | | Outstanding | ||
(in thousands) | | Modifications | | Balance | | Modifications | | Balance | ||
Interest rate, forbearance and maturity concession |
| — | | $ | — |
| 4 | | $ | 409 |
Forbearance and interest only payments |
| — | |
| — |
| 1 | |
| 24 |
Maturity concession |
| — | |
| — |
| 2 | |
| 95 |
Total |
| — | | $ | — |
| 7 | | $ | 528 |
For the three months ended September 30, 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
34
made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 - Basis of Presentation in December 31, 2020 10-K for more information.
Foreclosure
Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2021 and December 31, 2020 totaled $734 thousand and $917 thousand, respectively.
Mortgage Banking
The Company had identified and designated loans with an unpaid principal balance of $7.5 million and $24.0 million as residential loans held for sale at September 30, 2021 and December 31, 2020, respectively. 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 $14.5 million, and $50.6 million, respectively. Refer to Note 8 for further discussion of the Company's forward delivery commitments.
For the three months ended September 30, 2021 and 2020, the Company sold $28.5 million and $86.2 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 $682 thousand and $2.2 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company sold $153.9 million and $156.0 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 $3.6 million and $3.1 million, respectively.
The Company sells residential loans on the secondary market with the Company primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and the Company earns fees over the servicing period. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates. The Company obtains third party valuations of its servicing assets portfolio quarterly, which assumptions are reflected in Fair Value disclosures.
35
NOTE 4. BORROWED FUNDS
Borrowed funds at September 30, 2021 and December 31, 2020 are summarized, as follows:
| | | | | | | | | | | | |
| | September 30, 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 | |
| 21,667 |
| 0.13 | | |
| 27,779 |
| 0.15 | |
Total short-term borrowings | |
| 96,667 |
| 0.18 | | |
| 93,455 |
| 0.44 | |
Long-term borrowings | |
|
|
|
| | |
|
|
|
| |
Advances from the FHLB | |
| 93,600 |
| 1.57 | | |
| 182,607 |
| 1.73 | |
Subordinated borrowings | |
| 60,083 |
| 4.34 | | |
| 59,961 |
| 4.34 | |
Total long-term borrowings | |
| 153,683 |
| 2.65 | | |
| 242,568 |
| 2.37 | |
Total | | $ | 250,350 |
| 1.06 | % | | $ | 336,023 |
| 1.41 | % |
Short-term debt includes Federal Home Loan Bank of Boston (FHLB) advances with a maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was 0 outstanding balance on the FHLB line of credit for the periods ended September 30, 2021 and December 31, 2020.
The Company has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2021, the Company’s available secured line of credit at the FRB was $72.0 million. The Company has pledged certain loans and securities to the FRB to support this arrangement. There were 0 outstanding advances with the FRB for the periods ended September 30, 2021 and December 31, 2020.
The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of September 30, 2021 and December 31, 2020. There was 0 outstanding balance on the line of credit as of September 30, 2021 and December 31, 2020.
Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at September 30, 2021 include callable advances of $20.0 million and amortizing advances of $300 thousand. The advances outstanding at December 31, 2020 included $20.0 million of callable advances and $307 million 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 September 30, 2021 is, as follows:
| | | | | | |
|
| | |
| Weighted Average |
|
(in thousands, except rates) | | Amount | | Rate |
| |
2021 | | $ | 75,000 |
| 0.30 | % |
2022 | |
| 15,000 |
| 1.76 | |
2023 | |
| 51,000 |
| 1.71 | |
2024 | |
| 7,300 |
| 1.16 | |
2025 | |
| 20,000 |
| 1.21 | |
2026 and thereafter | |
| 300 |
| 3.39 | |
Total FHLB advances | | $ | 168,600 |
| 1.01 | % |
On November 26, 2019, the Company executed a Subordinated Note Purchase Agreement with an aggregate of $40.0 million of subordinated notes (the "Notes") to accredited investors. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.625% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-
36
month SOFR plus 3.27%. The Company has the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of $537 thousand as of September 30, 2021 and issuance costs of $659 thousand net of amortization as of December 31, 2020.
The Company also has $20.6 million in floating Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II ("Trust II") and NHTB Capital Trust III ("Trust III"), which are both Connecticut statutory trusts. The Debentures were issued on March 30, 2004, carry a variable interest rate of 3-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.
37
NOTE 5. DEPOSITS
A summary of time deposits is, as follows:
| | | | | | |
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Time less than $100,000 | | $ | 199,312 | | $ | 325,646 |
Time $100,000 through $250,000 | |
| 192,497 | |
| 278,940 |
Time $250,000 or more | |
| 77,412 | |
| 93,775 |
Total | | $ | 469,221 | | $ | 698,361 |
At September 30, 2021 and December 31, 2020, the scheduled maturities by year for time deposits are, as follows:
| | | | | | |
(in thousands) |
| September 30, 2021 | | December 31, 2020 | ||
Within 1 year | | $ | 362,774 | | $ | 574,007 |
Over 1 year to 2 years | |
| 56,926 | |
| 61,584 |
Over 2 years to 3 years | |
| 31,888 | |
| 41,145 |
Over 3 years to 4 years | |
| 9,182 | |
| 12,875 |
Over 4 years to 5 years | |
| 6,272 | |
| 8,728 |
Over 5 years | |
| 2,179 | |
| 22 |
Total | | $ | 469,221 | | $ | 698,361 |
Included in time deposits are brokered deposits of $31.4 million and $193.7 million at September 30, 2021 and December 31, 2020, respectively. Also included in time deposits are reciprocal deposits of $238.5 million and $125.0 million at September 30, 2021 and December 31, 2020, respectively.
38
NOTE 6. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY
The actual and required capital ratios are, as follows:
| | | | | | | | | | | | |
| | September 30, 2022 | | |||||||||
| | | | | | | | Minimum Regulatory | | |||
| | Actual | | Capital Requirements | | |||||||
(in thousands, except ratios) |
| Amount |
| Ratio | | Amount |
| Ratio | | |||
Company (consolidated) | | | | | | | | | | |
| |
Total capital to risk-weighted assets | | $ | 404,804 | | 13.42 | % | | $ | 241,314 | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 317,043 | | 10.51 | | |
| 135,740 | | 4.50 | |
Tier 1 capital to risk-weighted assets | |
| 337,663 | | 11.19 | | |
| 180,986 | | 6.00 | |
Tier 1 capital to average assets (leverage ratio) | |
| 337,663 | | 9.13 | | |
| 147,908 | | 4.00 | |
| | | | | | | | | | | | |
Bank | | | | | | | | | | | | |
Total capital to risk-weighted assets | | $ | 398,292 | | 13.22 | % | | $ | 241,079 | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 371,151 | | 12.32 | | |
| 135,606 | | 4.50 | |
Tier 1 capital to risk-weighted assets | |
| 371,151 | | 12.32 | | |
| 180,808 | | 6.00 | |
Tier 1 capital to average assets (leverage ratio) | |
| 371,151 | | 10.05 | | |
| 147,791 | | 4.00 | |
| | | | | | | | | |
|
| |
| Regulatory |
| |
| Regulatory |
|
| | September 30, | | Minimum to be | | December 31, | | Minimum to be |
|
| | 2021 | | "Well-Capitalized" | | 2020 | | "Well-Capitalized" |
|
Company (consolidated) |
|
|
|
|
|
|
|
| |
Total capital to risk-weighted assets(1) |
| 14.12 | % | 10.50 | % | 13.57 | % | 10.50 | % |
Common equity tier 1 capital to risk-weighted assets(1) |
| 10.92 |
| 7.00 |
| 10.49 |
| 7.00 | |
Tier 1 capital to risk-weighted assets(1) |
| 11.70 |
| 8.50 |
| 11.29 |
| 8.50 | |
Tier 1 capital to average assets |
| 8.54 |
| 5.00 |
| 8.12 |
| 5.00 | |
| | | | | | | | | |
Bank |
|
|
|
|
|
|
|
| |
Total capital to risk-weighted assets(1) |
| 13.92 | % | 10.50 | % | 13.27 | % | 10.50 | % |
Common equity tier 1 capital to risk-weighted assets(1) |
| 13.02 |
| 7.00 |
| 12.53 |
| 7.00 | |
Tier 1 capital to risk-weighted assets(1) |
| 13.02 |
| 8.50 |
| 12.52 |
| 8.50 | |
Tier 1 capital to average assets |
| 9.50 |
| 5.00 |
| 9.02 |
| 5.00 | |
| | | | | | | | | | | | |
| | December 31, 2021 | | |||||||||
| | | | | | | | Minimum Regulatory | | |||
| | Actual | | Capital Requirements | | |||||||
(in thousands, except ratios) |
| Amount |
| Ratio | | Amount |
| Ratio | | |||
Company (consolidated) | | | | | | | | | | |
| |
Total capital to risk-weighted assets | | $ | 380,690 | | 14.31 | % | | $ | 212,798 | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 295,635 | | 11.11 | | |
| 119,699 | | 4.50 | |
Tier 1 capital to risk-weighted assets | |
| 316,255 | | 11.89 | | |
| 159,598 | | 6.00 | |
Tier 1 capital to average assets (leverage ratio) | |
| 316,255 | | 8.66 | | |
| 146,029 | | 4.00 | |
| | | | | | | | | | | | |
Bank | | | | | | | | | | | | |
Total capital to risk-weighted assets | | $ | 375,435 | | 14.13 | % | | $ | 220,425 | | 8.00 | % |
Common equity tier 1 capital to risk-weighted assets | |
| 351,000 | | 13.21 | | |
| 123,812 | | 4.50 | |
Tier 1 capital to risk-weighted assets | |
| 351,000 | | 13.21 | | |
| 165,082 | | 6.00 | |
Tier 1 capital to average assets (leverage ratio) | |
| 351,000 | | 9.62 | | |
| 151,082 | | 4.00 | |
In order to be classified as “well-capitalized” under the relevant regulatory framework, the Company must, on a consolidated basis, maintain a total risk-based capital ratio of 10.00% or greater and a Tier 1 risk-based capital ratio of 6.00% or greater; and the Bank must maintain a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a common equity Tier 1 capital ratio of 6.50% or greater, and a leverage ratio of 5.00% or greater. At each date shown in the tables above, the Company and the Bank met the conditions to be classified as “well-capitalized” under the relevant regulatory framework. To be categorized as "well-capitalized," an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.
The Company and the Bank are subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk-weighted assets and the Company and the Bank each exceed the minimum to be "well-capitalized." Effective January 1, 2019 all banking organizations must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%.
Accumulated other comprehensive income (loss)
Components of accumulated other comprehensive income is, as follows:
| | | | | | |
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Accumulated other comprehensive income, before tax: |
| |
|
| |
|
Net unrealized gain on AFS securities | | $ | 5,741 | | $ | 13,069 |
Net unrealized gain on hedging derivatives(1) | |
| (121) | |
| (2,432) |
Net unrealized loss on post-retirement plans | |
| (1,850) | |
| (1,850) |
| | | | | | |
Income taxes related to items of accumulated other comprehensive income: | |
|
| |
|
|
Net unrealized gain on AFS securities | |
| (1,343) | |
| (3,046) |
Net unrealized gain on hedging derivatives(1) | |
| 29 | |
| 567 |
Net unrealized loss on post-retirement plans | |
| 432 | |
| 432 |
Accumulated other comprehensive income(1) | | $ | 2,888 | | $ | 6,740 |
3929
Accumulated other comprehensive (loss) income
Components of accumulated other comprehensive income is, as follows:
| | | | | | |
(in thousands) |
| September 30, 2022 |
| December 31, 2021 | ||
Accumulated other comprehensive income, before tax: |
| |
|
| |
|
Net unrealized (loss) gain on AFS securities | | $ | (76,606) | | $ | 2,580 |
Net unrealized (loss) gain on hedging derivatives | |
| (4,316) | |
| 1,130 |
Net unrealized loss on post-retirement plans | |
| (718) | |
| (718) |
| | | | | | |
Income taxes related to items of accumulated other comprehensive income: | |
|
| |
|
|
Net unrealized loss (gain) on AFS securities | |
| 17,891 | |
| (595) |
Net unrealized loss (gain) on hedging derivatives | |
| 994 | |
| (260) |
Net unrealized loss on post-retirement plans | |
| 166 | |
| 166 |
Accumulated other comprehensive (loss) income | | $ | (62,589) | | $ | 2,303 |
The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 20212022 and 2020:2021:
| | | | | | | | | |
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Three Months Ended September 30, 2021 |
| |
|
| |
|
| |
|
Net unrealized gain on AFS securities: |
| |
|
| |
|
| |
|
Net unrealized gain arising during the period | | $ | (1,770) | | $ | 403 | | $ | (1,367) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 1,930 | |
| (458) | |
| 1,472 |
Net unrealized gain on AFS securities | |
| (3,700) | |
| 861 | |
| (2,839) |
| | | | | | | | | |
Net unrealized gain on hedging derivatives: | |
|
| |
|
| |
| |
Net unrealized gain arising during the period | |
| (203) | |
| 48 | |
| (155) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on cash flow hedging derivatives | |
| (203) | |
| 48 | |
| (155) |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
| |
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive loss | | $ | (3,903) | | $ | 909 | | $ | (2,994) |
| | | | | | | | | |
Three Months Ended September 30, 2020 | |
|
| |
|
| |
|
|
Net unrealized gain on AFS securities: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | | $ | 351 | | $ | (82) | | $ | 269 |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on AFS securities | |
| 351 | |
| (82) | |
| 269 |
| | | | | | | | | |
Net unrealized gain on derivative hedgess: | |
|
| |
|
| |
| |
Net unrealized gain arising during the period(1) | |
| 1,302 | |
| (308) | |
| 994 |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on cash flow derivative hedges(1) | |
| 1,302 | |
| (308) | �� |
| 994 |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
| |
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive income(1) | | $ | 1,653 | | $ | (390) | | $ | 1,263 |
| | | | | | | | | |
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Three Months Ended September 30, 2022 |
| |
|
| |
|
| |
|
Net unrealized loss on AFS securities: |
| |
|
| |
|
| |
|
Net unrealized loss arising during the period | | $ | (26,889) | | $ | 6,512 | | $ | (20,377) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 44 | |
| (10) | |
| 34 |
Net unrealized loss on AFS securities | |
| (26,933) | |
| 6,522 | |
| (20,411) |
| | | | | | | | | |
Net unrealized loss on hedging derivatives: | |
|
| |
|
| |
| |
Net unrealized loss arising during the period | |
| (1,568) | |
| 361 | |
| (1,207) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on cash flow hedging derivatives | |
| (1,568) | |
| 361 | |
| (1,207) |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
| |
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive loss | | $ | (28,501) | | $ | 6,883 | | $ | (21,618) |
| | | | | | | | | |
Three Months Ended September 30, 2021 | |
|
| |
|
| |
|
|
Net unrealized gain on AFS securities: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | | $ | (1,770) | | $ | 403 | | $ | (1,367) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 1,930 | |
| (458) | |
| 1,472 |
Net unrealized gain on AFS securities | |
| (3,700) | |
| 861 | |
| (2,839) |
| | | | | | | | | |
Net unrealized gain on derivative hedgess: | |
|
| |
|
| |
| |
Net unrealized gain arising during the period | |
| (203) | |
| 48 | |
| (155) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on cash flow derivative hedges | |
| (203) | |
| 48 | |
| (155) |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
| |
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive (loss) income | | $ | (3,903) | | $ | 909 | | $ | (2,994) |
4030
| | | | | | | | | |
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Nine Months Ended September 30, 2021 |
| |
|
| |
|
| |
|
Net unrealized loss on AFS securities: |
| |
|
| |
|
| |
|
Net unrealized loss arising during the period | | $ | (5,348) | | $ | 1,234 | | $ | (4,114) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 1,980 | |
| (469) | |
| 1,511 |
Net unrealized loss on AFS securities | |
| (7,328) | |
| 1,703 | |
| (5,625) |
| | | | | | | | | |
Net unrealized loss on derivative hedges: | |
| | |
|
| |
|
|
Net unrealized loss arising during the period | |
| 2,311 | |
| (538) | |
| 1,773 |
Less: reclassification adjustment for (losses) gains realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on derivative hedges | |
| 2,311 | |
| (538) | |
| 1,773 |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive loss | | $ | (5,017) | | $ | 1,165 | | $ | (3,852) |
| | | | | | | | | |
Nine Months Ended September 30, 2020 | |
|
| |
|
| |
|
|
Net unrealized gain on AFS securities: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | | $ | 9,408 | | $ | (2,143) | | $ | 7,265 |
Less: reclassification adjustment for gains realized in net income | |
| 1,486 | |
| (352) | |
| 1,134 |
Net unrealized gain on AFS securities | |
| 7,922 | |
| (1,791) | |
| 6,131 |
| | | | | | | | | |
Net unrealized loss on cash flow hedging derivatives: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period(1) | |
| (7,568) | |
| 1,776 | |
| (5,792) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on cash flow hedging derivatives(1) | |
| (7,568) | |
| 1,776 | |
| (5,792) |
| | | | | | | | | |
Net unrealized gain on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive income(1) | | $ | 354 | | $ | (15) | | $ | 339 |
| | | | | | | | | |
(in thousands) |
| Before Tax |
| Tax Effect |
| Net of Tax | |||
Nine Months Ended September 30, 2022 |
| |
|
| |
|
| |
|
Net unrealized loss on AFS securities: |
| |
|
| |
|
| |
|
Net unrealized loss arising during the period | | $ | (79,133) | | $ | 18,474 | | $ | (60,659) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| 53 | |
| (12) | |
| 41 |
Net unrealized loss on AFS securities | |
| (79,186) | |
| 18,486 | |
| (60,700) |
| | | | | | | | | |
Net unrealized loss on hedging derivatives: | |
| | |
|
| |
|
|
Net unrealized loss arising during the period | |
| (5,446) | |
| 1,254 | |
| (4,192) |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on hedging derivatives | |
| (5,446) | |
| 1,254 | |
| (4,192) |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive loss | | $ | (84,632) | | $ | 19,740 | | $ | (64,892) |
| | | | | | | | | |
Nine Months Ended September 30, 2021 | |
|
| |
|
| |
|
|
Net unrealized loss on AFS securities: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period | | $ | (5,348) | | $ | 1,234 | | $ | (4,114) |
Less: reclassification adjustment for gains realized in net income | |
| 1,980 | |
| (469) | |
| 1,511 |
Net unrealized loss on AFS securities | |
| (7,328) | |
| 1,703 | |
| (5,625) |
| | | | | | | | | |
Net unrealized gain on hedging derivatives: | |
|
| |
|
| |
|
|
Net unrealized gain arising during the period | |
| 2,311 | |
| (538) | |
| 1,773 |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized gain on cash flow hedging derivatives | |
| 2,311 | |
| (538) | |
| 1,773 |
| | | | | | | | | |
Net unrealized loss on post-retirement plans: | |
|
| |
|
| |
|
|
Net unrealized loss arising during the period | |
| — | |
| — | |
| — |
Less: reclassification adjustment for gains (losses) realized in net income | |
| — | |
| — | |
| — |
Net unrealized loss on post-retirement plans | |
| — | |
| — | |
| — |
Other comprehensive (loss) income | | $ | (5,017) | | $ | 1,165 | | $ | (3,852) |
4131
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three and nine months ended September 30, 20212022 and 2020:2021:
| | | | | | | | | | | | |
|
| Net unrealized |
| Net loss on |
| Net unrealized |
| | | |||
| | gain | | effective cash | | loss | | | | |||
| | on AFS | | flow hedging | | on pension | | | | |||
(in thousands) | | Securities | | derivatives(1) | | plans | | Total(1) | ||||
Three Months Ended September 30, 2021 | |
| | |
| | |
| | |
| |
Balance at beginning of period | | $ | 7,237 | | $ | 63 | | $ | (1,418) | | $ | 5,882 |
Other comprehensive gain before reclassifications | |
| (1,367) | |
| (155) | |
| 0 | |
| (1,522) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 1,472 | |
| 0 | |
| 0 | |
| 1,472 |
Total other comprehensive income | |
| (2,839) | |
| (155) | |
| 0 | |
| (2,994) |
Balance at end of period | | $ | 4,398 | | $ | (92) | | $ | (1,418) | | $ | 2,888 |
| | | | | | | | | | | | |
Three Months Ended September 30, 2020 | |
|
| |
|
| |
|
| |
| |
Balance at beginning of period | | $ | 11,412 | | $ | (7,387) | | $ | (1,157) | | $ | 2,868 |
Other comprehensive gain before reclassifications | |
| 269 | |
| 994 | |
| 0 | |
| 1,263 |
Less: amounts reclassified from accumulated other comprehensive income | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Total other comprehensive income | |
| 269 | |
| 994 | |
| 0 | |
| 1,263 |
Balance at end of period | | $ | 11,681 | | $ | (6,393) | | $ | (1,157) | | $ | 4,131 |
| | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | |
|
| |
|
| |
|
| |
| |
Balance at beginning of period | | $ | 10,023 | | $ | (1,865) | | $ | (1,418) | | $ | 6,740 |
Other comprehensive loss before reclassifications | |
| (4,114) | |
| 1,773 | |
| 0 | |
| (2,341) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 1,511 | |
| 0 | |
| 0 | |
| 1,511 |
Total other comprehensive loss | |
| (5,625) | |
| 1,773 | |
| 0 | |
| (3,852) |
Balance at end of period | | $ | 4,398 | | $ | (92) | | $ | (1,418) | | $ | 2,888 |
| | | | | | | | | | | | |
Nine Months Ended September 30, 2020 | | | | | | | | | | | | |
Balance at beginning of period | | $ | 5,550 | | $ | (601) | | $ | (1,157) | | $ | 3,792 |
Other comprehensive gain (loss) before reclassifications | |
| 7,265 | |
| (5,792) | |
| 0 | |
| 1,473 |
Less: amounts reclassified from accumulated other comprehensive income | |
| 1,134 | |
| 0 | |
| 0 | |
| 1,134 |
Total other comprehensive income (loss) | |
| 6,131 | |
| (5,792) | |
| 0 | |
| 339 |
Balance at end of period | | $ | 11,681 | | $ | (6,393) | | $ | (1,157) | | $ | 4,131 |
| | | | | | | | | | | | |
|
| Net unrealized |
| Net gain (loss) on |
| Net unrealized |
| | | |||
| | gain (loss) | | effective cash | | loss | | | | |||
| | on AFS | | flow hedging | | on pension | | | | |||
(in thousands) | | Securities | | derivatives | | plans | | Total | ||||
Three Months Ended September 30, 2022 | |
| | |
| | |
| | |
| |
Balance at beginning of period | | $ | (38,304) | | $ | (2,115) | | $ | (552) | | $ | (40,971) |
Other comprehensive loss before reclassifications | |
| (20,377) | |
| (1,207) | |
| — | |
| (21,584) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 34 | |
| — | |
| — | |
| 34 |
Total other comprehensive income | |
| (20,411) | |
| (1,207) | |
| — | |
| (21,618) |
Balance at end of period | | $ | (58,715) | | $ | (3,322) | | $ | (552) | | $ | (62,589) |
| | | | | | | | | | | | |
Three Months Ended September 30, 2021 | |
|
| |
|
| |
|
| |
| |
Balance at beginning of period | | $ | 7,237 | | $ | 63 | | $ | (1,418) | | $ | 5,882 |
Other comprehensive gain before reclassifications | |
| (1,367) | |
| (155) | |
| — | |
| (1,522) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 1,472 | |
| — | |
| — | |
| 1,472 |
Total other comprehensive income | |
| (2,839) | |
| (155) | |
| — | |
| (2,994) |
Balance at end of period | | $ | 4,398 | | $ | (92) | | $ | (1,418) | | $ | 2,888 |
| | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | |
|
| |
|
| |
|
| |
| |
Balance at beginning of period | | $ | 1,985 | | $ | 870 | | $ | (552) | | $ | 2,303 |
Other comprehensive loss before reclassifications | |
| (60,659) | |
| (4,192) | |
| — | |
| (64,851) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 41 | |
| — | |
| — | |
| 41 |
Total other comprehensive loss | |
| (60,700) | |
| (4,192) | |
| — | |
| (64,892) |
Balance at end of period | | $ | (58,715) | | $ | (3,322) | | $ | (552) | | $ | (62,589) |
| | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | | | | | | | | | | | |
Balance at beginning of period | | $ | 10,023 | | $ | (1,865) | | $ | (1,418) | | $ | 6,740 |
Other comprehensive (loss) gain before reclassifications | |
| (4,114) | |
| 1,773 | |
| — | |
| (2,341) |
Less: amounts reclassified from accumulated other comprehensive income | |
| 1,511 | |
| — | |
| — | |
| 1,511 |
Total other comprehensive (loss) gain | |
| (5,625) | |
| 1,773 | |
| — | |
| (3,852) |
Balance at end of period | | $ | 4,398 | | $ | (92) | | $ | (1,418) | | $ | 2,888 |
4232
The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three and nine months ended September 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Affected Line Item where | | Three Months Ended September 30, | | Nine Months Ended September 30, | Affected Line Item where | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Net Income is Presented |
| 2022 |
| 2021 |
| 2022 |
| 2021 | Net Income is Presented | ||||||||
Net realized gains on AFS securities: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
|
Before tax (1) | | $ | 1,930 | | $ | — | | $ | 1,980 | | $ | 1,486 |
| Non-interest income | | $ | 44 | | $ | 1,930 | | $ | 53 | | $ | 1,980 | Non-interest income |
Tax effect | |
| (458) | |
| — | |
| (469) | |
| (352) |
| Tax expense | |
| (10) | |
| (458) | |
| (12) | |
| (469) | Tax expense |
Total reclassifications for the period | | $ | 1,472 | | $ | — | | $ | 1,511 | | $ | 1,134 | | | | $ | 34 | | $ | 1,472 | | $ | 41 | | $ | 1,511 | |
Net realized gains before tax include |
4333
NOTE 7. EARNINGS PER SHARE
The following table presents the calculation of earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(in thousands, except per share and share data) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net income | | $ | 11,028 | | $ | 8,402 | | $ | 29,533 | | $ | 24,604 | | $ | 11,430 | | $ | 11,028 | | $ | 31,045 | | $ | 29,533 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Average number of basic common shares outstanding | |
| 14,982,766 | |
| 15,079,413 | |
| 14,960,753 | |
| 15,358,803 | |
| 15,057,598 | |
| 14,982,766 | |
| 15,028,963 | |
| 14,960,753 |
Plus: dilutive effect of stock options and awards outstanding | |
| 67,990 | |
| 23,421 | |
| 73,829 | |
| 23,063 | |
| 55,757 | |
| 67,990 | |
| 71,317 | |
| 73,829 |
Average number of diluted common shares outstanding(1) | |
| 15,050,756 | |
| 15,102,834 | |
| 15,034,582 | |
| 15,381,866 | |
| 15,113,355 | |
| 15,050,756 | |
| 15,100,280 | |
| 15,034,582 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Basic | | $ | 0.74 | | $ | 0.56 | | $ | 1.97 | | $ | 1.60 | | $ | 0.76 | | $ | 0.74 | | $ | 2.07 | | $ | 1.97 |
Diluted | | $ | 0.73 | | $ | 0.56 | | $ | 1.96 | | $ | 1.60 | | $ | 0.76 | | $ | 0.73 | | $ | 2.06 | | $ | 1.96 |
(1) | Average diluted shares outstanding are computed using the treasury stock method. |
4434
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company usesWe use derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. The Company’sOur interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the changes in interest rates do not have a significant effect on net interest income. Thus, all of the Company'sour derivative contracts are considered to be interest rate contracts.
The Company recognizes itsWe recognize our derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designateswe designate whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The CompanyWe formally documentsdocument relationships between hedging instruments and hedged items, as well as itsour risk management objective and strategy for undertaking hedge transactions. The CompanyWe also assesses,assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss.
The Company offersWe offer 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)(“MNA”) with financial institution counterparties or Risk Participation Agreements (RPA)(“RPA”) with commercial bank counterparties, for which the Companywe assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.
The following tables present information about derivative assets and liabilities at September 30, 20212022 and December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | September 30, 2022 | ||||||||||||||||||
| | | | Weighted | | |
| | | | | Weighted | | |
| | ||||||
| | Notional | | Average | | Fair Value | | Location Fair | | Notional | | Average | | Fair Value | | Location Fair | ||||||
| | Amount | | Maturity | | Asset (Liability) |
| Value Asset | | Amount | | Maturity | | Asset (Liability) |
| Value Asset | ||||||
|
| (in thousands) |
| (in years) |
| (in thousands) |
| (Liability) |
| (in thousands) |
| (in years) |
| (in thousands) |
| (Liability) | ||||||
Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap on wholesale fundings | | $ | 75,000 |
| | 3.3 | | $ | (1,168) | | Other liabilities | | $ | 75,000 |
| | 2.3 | | $ | 5,153 | | Other assets |
Interest rate swap on variable rate loans | | | 50,000 | | | 4.5 | | | (121) | | Other liabilities | | | 50,000 | | | 3.5 | | | (5,289) | | Other liabilities |
Total cash flow hedges | |
| 125,000 |
| | | | | (1,289) | | | |
| 125,000 |
| | | | | (136) | | |
| | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap on securities | |
| 37,190 |
| | 7.8 | |
| (841) | | Other liabilities | |
| 37,190 |
| | 6.8 | |
| 5,017 | | Other assets |
Total fair value hedges | |
| 37,190 |
| | | | | (841) | | | |
| 37,190 |
| | | | | 5,017 | | |
| | | | | | | | | | | | | | | | | | | | | | |
Economic hedges: | | | | | | | | | | | | | | | | | | | | | | |
Forward sale commitments | |
| 14,533 |
| | 0.1 | |
| (140) | | Other liabilities | |
| 200 |
| | — | |
| 8 | | Other assets |
Customer Loan Swaps-MNA Counterparty | | | 250,852 | | | 6.4 | | | (10,258) | | Other liabilities | | | 193,743 | | | 6.0 | | | (21,795) | | Other liabilities |
Customer Loan Swaps-RPA Counterparty | | | 119,285 | | | 7.1 | | | (5,892) | | Other liabilities | | | 110,317 | | | 6.3 | | | — | | Other liabilities |
Customer Loan Swaps-Customer | | | 370,137 | | | 6.6 | | | 16,150 | | Other assets | | | 304,060 | | | 6.1 | | | 21,795 | | Other assets |
Total economic hedges | |
| 754,807 |
| | | | | (140) | | | |
| 608,320 |
| | | | | 8 | | |
| | | | | | | | | | | | | | | | | | | | | | |
Non-hedging derivatives: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate lock commitments | |
| 12,885 |
| | 0.1 | |
| 47 | | Other assets | |
| — |
| | — | |
| — | | Other assets |
Total non-hedging derivatives | |
| 12,885 |
| | | | | 47 | | | |
| — |
| | | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 929,882 | | | | | $ | (2,223) | | | | $ | 770,510 | | | | | $ | 4,889 | | |
4535
| | | | | | | | | | | |
| | 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, 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) | | |
As of September 30, 20212022 and December 31, 2020,2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | | | | | | | | | | |
|
| |
| | |
| Cumulative Amount of Fair |
| |
| | |
| Cumulative Amount of Fair | ||
| | Location of Hedged Item on | | Carrying Amount of Hedged | | Value Hedging Adjustment in | | Location of Hedged Item on | | Carrying Amount of Hedged | | Value Hedging Adjustment in | ||||
|
| Balance Sheet |
| Assets |
| Carrying Amount |
| Balance Sheet |
| Assets |
| Carrying Amount | ||||
September 30, 2021 |
|
|
| |
|
| |
| ||||||||
September 30, 2022 |
|
|
| |
|
| |
| ||||||||
Interest rate swap on securities |
| Securities Available for Sale | | $ | 39,200 | | $ | 2,010 |
| Securities Available for Sale | | $ | 27,993 | | $ | (9,197) |
| | | | | | | | | | | | | | | | |
December 31, 2020 |
|
| |
|
| |
|
| ||||||||
December 31, 2021 |
|
| |
|
| |
|
| ||||||||
Interest rate swap on securities |
| Securities Available for Sale | | $ | 40,209 | | $ | 3,019 |
| Securities Available for Sale | | $ | 39,726 | | $ | 2,536 |
4636
Information about derivative assets and liabilities for the three and nine months endedeneded September 30, 20212022 and December 31, 2020,2021, follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
|
| Amount of |
| |
| Amount of |
| |
| |
| Amount of |
| |
| Amount of |
| |
| | ||||||
| | Gain (Loss) | | | | Gain (Loss) | | | | | | Gain (Loss) | | | | Gain (Loss) | | | | | ||||||
| | Recognized in | | | | Reclassified | | Location of | | Amount of | | Recognized in | | | | Reclassified | | Location of | | Amount of | ||||||
| | Other | | Location of Gain (Loss) | | from Other | | Gain (Loss) | | Gain (Loss) | | Other | | Location of Gain (Loss) | | from Other | | Gain (Loss) | | Gain (Loss) | ||||||
| | Comprehensive | | Reclassified from Other | | Comprehensive | | Recognized in | | Recognized | | Comprehensive | | Reclassified from Other | | Comprehensive | | Recognized in | | Recognized | ||||||
(in thousands) |
| Income |
| Comprehensive Income |
| Income |
| Income |
| in Income |
| Income |
| Comprehensive Income |
| Income |
| Income |
| in Income | ||||||
Cash flow hedges: |
| |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
Interest rate swap on wholesale funding | | $ | 167 | | Interest expense | | $ | — |
| Interest expense | | $ | (205) | | $ | 1,262 | | Interest expense | | $ | — |
| Interest expense | | $ | 140 |
Interest rate swap on variable rate loans | | | (101) | | Interest income | | | — | | Interest income | | | 92 | | | (1,181) | | Interest income | | | — | | Interest income | | | (238) |
Total cash flow hedges | |
| 66 |
| | |
| — |
|
| |
| (113) | |
| 81 |
| | |
| — |
|
| |
| (98) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges: | |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| (221) |
| Interest income | |
| — |
| Interest income | |
| (144) | |
| (1,287) |
| Interest income | |
| — |
| Interest income | |
| 155 |
Total fair value hedges | |
| (221) |
| | |
| — |
|
| |
| (144) | |
| (1,287) |
| | |
| — |
|
| |
| 155 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Economic hedges: | |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Other income | |
| (96) | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| 19 |
Total economic hedges | |
| — |
| | |
| — |
|
| |
| (96) | |
| — |
| | |
| — |
|
| |
| 19 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Other income | |
| 22 | |
| — |
| Other expense | |
| — |
| Mortgage banking income | |
| (50) |
Total non-hedging derivatives | |
| — |
| | |
| — |
|
| |
| 22 | |
| — |
| | |
| — |
|
| |
| (50) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | (155) | | | | $ | — |
|
| | $ | (331) | | $ | (1,206) | | | | $ | — |
|
| | $ | 26 |
4737
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||
|
| Amount of |
| |
| Amount of |
| |
| |
| Amount of |
| |
| Amount of |
| |
| | ||||||
| | Gain (Loss) | | | | Gain (Loss) | | | | | | Gain (Loss) | | | | Gain (Loss) | | | | | ||||||
| | Recognized in | | | | Reclassified | | Location of | | Amount of | | Recognized in | | | | Reclassified | | Location of | | Amount of | ||||||
| | Other | | Location of Gain (Loss) | | from Other | | Gain (Loss) | | Gain (Loss) | | Other | | Location of Gain (Loss) | | from Other | | Gain (Loss) | | Gain (Loss) | ||||||
| | Comprehensive | | Reclassified from Other | | Comprehensive | | Recognized in | | Recognized | | Comprehensive | | Reclassified from Other | | Comprehensive | | Recognized in | | Recognized | ||||||
(in thousands) |
| Income |
| Comprehensive Income |
| Income |
| Income |
| in Income |
| Income |
| Comprehensive Income |
| Income |
| Income |
| in Income | ||||||
Cash flow hedges: |
| |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
Interest rate swap on wholesale funding | | $ | 1,148 | | Interest expense | | $ | — |
| Interest expense | | $ | (589) | | $ | 4,058 | | Interest expense | | $ | — |
| Interest expense | | $ | (1) |
Interest rate swap on variable rate loans | | | (93) | | Interest income | | | — | | Interest income | | | 189 | | | (3,489) | | Interest income | | | — | | Interest income | | | (239) |
Total cash flow hedges | |
| 1,055 |
| | |
| — |
|
| |
| (400) | |
| 569 |
| | |
| — |
|
| |
| (240) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges: | |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| 720 |
| Interest income | |
| — |
| Interest income | |
| (421) | |
| (4,761) |
| Interest income | |
| — |
| Interest income | |
| (48) |
Total fair value hedges | |
| 720 |
| | |
| — |
|
| |
| (421) | |
| (4,761) |
| | |
| — |
|
| |
| (48) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Economic hedges: | |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Other income | |
| (45) | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| (7) |
Total economic hedges | |
| — |
| | |
| — |
|
| |
| (45) | |
| — |
| | |
| — |
|
| |
| (7) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Other income | |
| 26 | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| (283) |
Total non-hedging derivatives | |
| — |
| | |
| — |
|
| |
| 26 | |
| — |
| | |
| — |
|
| |
| (283) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,775 | | | | $ | — |
|
| | $ | (840) | | $ | (4,192) | | | | $ | — |
|
| | $ | (578) |
The Company expects approximately $1.0 million of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of September 30, 2021.
4838
| | | | | | | | | | | | | |
| | Three Months Ended September 30, 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 | | $ | 167 |
| Interest expense | | $ | — |
| Interest expense | | $ | (205) |
Interest rate swap on variable rate loans | | | (101) | | Interest income | | | | | Interest income | | | 92 |
Total cash flow hedges | | | 66 | | | |
| — |
| | |
| (113) |
| | | | | | | | | | | | | |
Fair value hedges: | | |
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| (221) |
| Interest income | |
| — |
| Interest income | |
| (144) |
Total economic hedges | | | (221) | | | |
| — |
|
| |
| (144) |
| | | | | | | | | | | | | |
Economic hedges: | | |
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| (96) |
Total economic hedges | | | — | | | |
| — |
|
| |
| (96) |
| | | | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| 22 |
Total non-hedging derivatives | | | — | | | |
| — |
|
| |
| 22 |
| | | | | | | | | | | | | |
Total | | $ | (155) |
|
| | $ | — |
|
| | $ | (331) |
39
| | | | | | | | | | | | | |
| | Three Months Ended September 30, 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 | | $ | 362 |
| Interest expense | | $ | — |
| Interest expense | | $ | (427) |
Total cash flow hedges | | | 362 | | | |
| — |
| | |
| (427) |
| |
| | | | | | | | | | | |
Fair value hedges: | | |
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| 635 |
| Interest income | |
| — |
| Interest income | |
| (204) |
Total economic hedges | | | 635 | | | |
| — |
|
| |
| (204) |
| | | | | | | | | | | | | |
Economic hedges: | | |
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Other income | |
| 40 |
Total economic hedges | | | — | | | |
| — |
|
| |
| 40 |
| |
| | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Other Income | |
| (39) |
Total non-hedging derivatives | | | — | | | |
| — |
|
| |
| (39) |
| | | | | | | | | | | | | |
Total | | $ | 997 |
|
| | $ | — |
|
| | $ | (630) |
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, 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 | | $ | (4,247) |
| Interest expense | | $ | — |
| Interest expense | | $ | (642) |
Total cash flow hedges | | | (4,247) | | | |
| — |
| | |
| (642) |
| |
| | | | | | | | | | | |
Fair value hedges: | | |
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| (1,545) |
| Interest income | |
| — |
| Interest income | |
| (145) |
Total economic hedges | | | (1,545) | | | |
| — |
|
| |
| (145) |
| | | | | | | | | | | | | |
Economic hedges: | | |
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Other income | |
| (3) |
Total economic hedges | | | — | | | |
| — |
|
| |
| (3) |
| |
| | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Other Income | |
| (35) |
Total non-hedging derivatives | | | — | | | |
| — |
|
| |
| (35) |
| | | | | | | | | | | | | |
Total | | $ | (5,792) |
|
| | $ | — |
|
| | $ | (825) |
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, 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(1) | | Comprehensive Income | | Income | | Income | | in Income | |||
Cash flow hedges: |
| |
|
|
| |
|
|
|
|
| |
|
Interest rate swap on wholesale funding | | $ | 1,148 |
| Interest expense | | $ | — |
| Interest expense | | $ | (589) |
Interest rate swap on variable rate loans | | | (93) | | Interest income | | | | | Interest income | | | 189 |
Total cash flow hedges | | | 1,055 | | | |
| — |
| | |
| (400) |
| | | | | | | | | | | | | |
Fair value hedges: | | |
|
|
| |
|
|
|
| |
|
|
Interest rate swap on securities | |
| 720 |
| Interest income | |
| — |
| Interest income | |
| (421) |
Total economic hedges | | | 720 | | | |
| — |
|
| |
| (421) |
| | | | | | | | | | | | | |
Economic hedges: | | |
|
|
| |
|
|
|
| |
|
|
Forward commitments | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| (45) |
Total economic hedges | | | — | | | |
| — |
|
| |
| (45) |
| | | | | | | | | | | | | |
Non-hedging derivatives: | |
|
|
|
| |
|
|
|
| |
|
|
Interest rate lock commitments | |
| — |
| Other income | |
| — |
| Mortgage banking income | |
| 26 |
Total non-hedging derivatives | | | — | | | |
| — |
|
| |
| 26 |
| | | | | | | | | | | | | |
Total | | $ | 1,775 |
|
| | $ | — |
|
| | $ | (840) |
4940
The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and nine months ended September 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | |||||||||||||
| | Interest and Dividend Income | | Interest Expense | | | | ||||||||
(in thousands) |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income | |||||
Income and exepense line items presented in the consolidated statements of income |
| $ | 25,094 | | $ | 3,821 | | $ | 1,555 | | $ | 1,778 | | $ | 11,350 |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | — | | | (205) | | | — |
Interest rate swap on variable rate loans | |
| 92 | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (144) | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | |||||||||||||
| | Interest and Dividend Income | | Interest Expense | | | | ||||||||
(in thousands) |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income | |||||
Income and exepense line items presented in the consolidated statements of income |
| $ | 25,918 | | $ | 4,557 | | $ | 3,869 | | $ | 1,941 | | $ | 10,102 |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | (365) | | | (62) | | | — |
Interest rate swap on variable rate loans | |
| — | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (204) | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | |||||||||||||
| | 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 |
| $ | 27,940 | | $ | 5,145 | | $ | 1,801 | | $ | 1,374 | | $ | 8,823 |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | — | | | 140 | | | — |
Interest rate swap on variable rate loans | |
| (238) | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | 155 | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 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 |
| $ | 25,094 | | $ | 3,821 | | $ | 1,555 | | $ | 1,778 | | $ | 11,350 |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | — | | | (205) | | | — |
Interest rate swap on variable rate loans | |
| 92 | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (144) | | | — | | | — | | | — |
5041
The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| | Interest and Dividend Income | | Interest Expense | | | | | Interest and Dividend Income | | Interest Expense | | | | ||||||||||||||||
(in thousands) |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income | ||||||||||
Income and exepense line items presented in the consolidated statements of income |
| $ | 72,490 | | | 11,792 | | $ | 7,109 | | | 5,415 | | $ | 31,103 | |||||||||||||||
Income and expense line items presented in the consolidated statements of income |
| $ | 75,192 | | $ | 13,178 | | $ | 4,185 | | $ | 3,458 | | $ | 27,093 | |||||||||||||||
|
| |
| | | |
| |
| | | |
| |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | — | | | (589) | | | — | | | — | | | — | | | — | | | (1) | | | — |
Interest rate swap on variable rate loans | |
| 189 | | | — | |
| — | | | — | |
| — | |
| (239) | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
| |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (421) | | | — | | | — | | | — | | | — | | | (48) | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| | Interest and Dividend Income | | Interest Expense | | | | | Interest and Dividend Income | | Interest Expense | | | | ||||||||||||||||
(in thousands) |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income |
| Loans | | Securities and other |
| Deposits | | Borrowings |
| Non-interest Income | ||||||||||
Income and exepense line items presented in the consolidated statements of income |
| $ | 80,398 | | | 15,006 | | $ | 14,437 | | | 7,149 | | $ | 28,233 | |||||||||||||||
Income and expense line items presented in the consolidated statements of income |
| $ | 72,490 | | | 11,792 | | $ | 7,109 | | | 5,415 | | $ | 31,103 | |||||||||||||||
|
| |
| | | |
| |
| | | |
| |
|
| |
| | | |
| |
| | | |
| |
|
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
|
| | | | |
|
| | | | |
|
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap on wholesale funding | | | — | | | — | | | (580) | | | (62) | | | — | | | — | | | — | | | — | | | (589) | | | — |
Interest rate swap on variable rate loans | |
| — | | | — | |
| — | | | — | |
| — | |
| 189 | | | — | |
| — | | | — | |
| — |
| |
|
| | | | |
|
| | | | |
|
| |
|
| | | | |
|
| | | | |
|
|
Gain (loss) on fair value hedges: | |
| | | | | |
|
| | | | |
|
| |
| | | | | |
|
| | | | |
|
|
Interest rate swap on securities | | | — | | | (145) | | | — | | | — | | | — | | | — | | | (421) | | | — | | | — | | | — |
42
Cash flow hedges
Interest rate swaps on wholesale funding
As of September 30, 2021 the Company has 22022, we have two interest rate swaps on wholesale borrowings (the "SWAPS") to limit itsour exposure to rising interest rates over a five yearfive-year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. The first of the 2two agreements werewas entered into in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered oninto in April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Companyus interest on the three-month LIBOR rate. The CompanyWe designated the swaps as a cash flow hedge.hedges.
Interest rate swap on variable rate loans
In March 2021, the Company 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 changes in its cash flows from interest receipts attributable to changes in a contractually specified interest rate, onWe have an amount of the Company’s variable rate loan assets equal to $50 million. The interest rate swap willthat effectively fix the Company’sfixes our interest rate on $50 million of 1 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 Companyinstrument is specifically designed to hedge the risk of changes in its cash flows from interest receipts attributable to changes in a contractually specified interest rate, on an amount of our variable rate loan assets equal to $50 million. We designated the swap as a cash flow hedge.
51
Fair value hedges
Interest rate swap on securities
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 utilizesWe utilize interest rate swaps designated as fair 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 rates to LIBOR-based variable interest rates. These derivatives are designated 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 Companywe entered into 8eight 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 fair values of fixed rate securities. The fixed rates on the transactions have a weighted average of 1.696%.
Economic hedges
Forward sale commitments
The Company utilizesWe utilize forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives. The CompanyWe typically usesuse a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where the Company commitswe commit 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 maywe enter into contracts just prior to the loan closing with a customer.
Customer loan derivatives
The Company entersWe enter into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigatesWe mitigate 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'sour consolidated balance sheet. The Company isWe are party to master netting arrangements with itsour financial institutional counterparties; however, the Company doeswe do not offset assets and liabilities under these arrangements for financial statement presentation purposes.
43
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 $17.0 million with counterparties.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts Offset in the Consolidated Balance Sheet | | Gross Amounts Offset in the Consolidated Balance Sheet | ||||||||||||||||||||
| | Derivative | | | | Cash Collateral | | | | | Derivative | | | | Cash Collateral | | | | ||||||
(in thousands) |
| Liabilities |
| Derivative Assets |
| Pledged |
| Net Amount |
| Liabilities |
| Derivative Assets |
| Pledged |
| Net Amount | ||||||||
As of September 30, 2021 | |
| | |
| | |
| | |
| | ||||||||||||
As of September 30, 2022 | |
| | |
| | |
| | |
| | ||||||||||||
Customer Loan Derivatives: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
MNA counterparty | | $ | (10,258) | | $ | 10,258 | | $ | 17,000 | | $ | 17,000 | | $ | (21,795) | | $ | 21,795 | | $ | — | | $ | — |
RPA counterparty | |
| (5,892) | |
| 5,892 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Total | | $ | (16,150) | | $ | 16,150 | | $ | 17,000 | | $ | 17,000 | | $ | (21,795) | | $ | 21,795 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts Offset in the Consolidated Balance Sheet | | Gross Amounts Offset in the Consolidated Balance Sheet | ||||||||||||||||||||
| | Derivative | | | | Cash Collateral | | | | | Derivative | | | | Cash Collateral | | | | ||||||
(in thousands) |
| Liabilities |
| Derivative Assets |
| Pledged |
| Net Amount |
| Liabilities |
| Derivative Assets |
| Pledged |
| Net Amount | ||||||||
As of December 31, 2020 | |
| | |
| | |
| | |
| | ||||||||||||
As of December 31, 2021 | |
| | |
| | |
| | |
| | ||||||||||||
Customer Loan Derivatives: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
MNA counterparty | | $ | (15,938) | | $ | 15,938 | | $ | 23,450 | | $ | 23,450 | | $ | (9,429) | | $ | 9,429 | | $ | 12,000 | | $ | 12,000 |
RPA counterparty | |
| (9,957) | |
| 9,957 | |
| — | |
| — | |
| (4,421) | |
| 4,421 | |
| — | |
| — |
Total | | $ | (25,895) | | $ | 25,895 | | $ | 23,450 | | $ | 23,450 | | $ | (13,850) | | $ | 13,850 | | $ | 12,000 | | $ | 12,000 |
52
Non-hedging derivatives
Interest rate lock commitments
The Company entersWe enter into interest rate lock commitments (IRLCs)(“IRLCs”) for residential mortgage loans, which commit the Companyus to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are held for sale and are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Companyus 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’sour Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on;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.
5344
NOTE 9. 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 September 30, 20212022 and December 31, 2020,2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | September 30, 2022 | ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
(in thousands) | | Inputs | | Inputs | | Inputs | | Fair Value | | Inputs | | Inputs | | Inputs | | Fair Value | ||||||||
Available for sale securities: | | | | |
| | |
| | |
| | | | | |
| | |
| | |
| |
Mortgage-backed securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
US Government-sponsored enterprises | | $ | 0 | | $ | 183,268 | | $ | 0 | | $ | 183,268 | | $ | — | | $ | 216,024 | | $ | — | | $ | 216,024 |
US Government agency | |
| 0 | |
| 54,706 | |
| 0 | |
| 54,706 | |
| — | |
| 83,526 | |
| — | |
| 83,526 |
Private label | |
| 0 | |
| 62,914 | |
| 0 | |
| 62,914 | |
| — | |
| 66,769 | |
| — | |
| 66,769 |
Obligations of states and political subdivisions thereof | |
| 0 | |
| 160,177 | |
| 0 | |
| 160,177 | |
| — | |
| 104,652 | |
| — | |
| 104,652 |
Corporate bonds | |
| 0 | |
| 84,262 | |
| 0 | |
| 84,262 | |
| — | |
| 85,781 | |
| — | |
| 85,781 |
Loans held for sale | | | — | | | 982 | | | — | | | 982 | ||||||||||||
Derivative assets | |
| 0 | |
| 16,149 | |
| 47 | |
| 16,196 | |
| — | |
| 31,964 | |
| 8 | |
| 31,972 |
Derivative liabilities | |
| 0 | |
| (18,159) | |
| (140) | |
| (18,299) | |
| — | |
| (27,084) | |
| — | |
| (27,084) |
| | | | | | | | | | | | |
| | 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) | |
| — | |
| 28,895 | |
| 22 | |
| 28,917 |
Derivative liabilities(1) | |
| — | |
| (31,348) | |
| (95) | |
| (31,443) |
| | | | | | | | | | | | |
| | 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 | | $ | — | | $ | 236,117 | | $ | — | | $ | 236,117 |
US Government agency | |
| — | |
| 79,637 | |
| — | |
| 79,637 |
Private label | |
| — | |
| 68,695 | |
| — | |
| 68,695 |
Obligations of states and political subdivisions thereof | |
| — | |
| 141,776 | |
| — | |
| 141,776 |
Corporate bonds | |
| — | |
| 92,051 | |
| — | |
| 92,051 |
Loans held for sale | | | — | | | 5,523 | | | — | | | 5,523 |
Derivative assets | |
| — | |
| 13,850 | |
| 298 | |
| 14,148 |
Derivative liabilities | |
| — | |
| (15,257) | |
| — | |
| (15,257) |
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 obtainswe obtain 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.US 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.
Derivative Assets and Liabilities
Cash Flow and Fair Value Hedges. The valuation of the Company'sour 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.
5445
Interest Rate Lock Commitments. The Company entersWe enter into IRLCs for residential mortgage loans, which commit the Companyus to lend funds to a potential borrowerborrowers 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 likelihood of a loan in a lock position will ultimately close. The closing ratio is derived from the Company’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.
Forward Sale Commitments. The Company utilizesWe utilize forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are not considered observable factors. As such, mandatory delivery forward commitments are classified as Level 3 measurements.
Customer Loan Derivatives. The valuation of the Company’sour 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 incorporatesWe incorporate credit valuation adjustments to appropriately reflect both its ownour nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of itsthe derivative contracts for the effect of nonperformance risk, the Company haswe have considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.
Although the Company haswe have 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 September 30, 2021, the Company2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of itsour derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of itsour derivatives. As a result, the Companywe determined that itsthe derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
5546
The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | |
| | Assets (Liabilities) | | Assets (Liabilities) | ||||||||
| | Interest Rate Lock | | Forward | | Interest Rate Lock | | Forward | ||||
(in thousands) |
| Commitments |
| Commitments |
| Commitments |
| Commitments | ||||
Three Months Ended September 30, 2022 | |
| | |
| | ||||||
Balance at beginning of period | | $ | 50 | | $ | (11) | ||||||
Realized gain (loss) recognized in non-interest income | |
| (50) | |
| 19 | ||||||
Balance at end of period | | $ | — | | $ | 8 | ||||||
| | | | | | | ||||||
Three Months Ended September 30, 2021 | |
| | |
| | |
| | |
| |
Balance at beginning of period | | $ | 25 | | $ | (45) | | $ | 25 | | $ | (45) |
Realized gain recognized in non-interest income | |
| 22 | |
| (95) | ||||||
Realized (loss) gain recognized in non-interest income | |
| 22 | |
| (95) | ||||||
Balance at end of period | | $ | 47 | | $ | (140) | | $ | 47 | | $ | (140) |
| | | | | | | | | | | | |
Three Months Ended September 30, 2020 | |
| | |
| | ||||||
Nine Months Ended September 30, 2022 | |
|
| |
|
| ||||||
Balance at beginning of period | | $ | 63 | | $ | (126) | | $ | 283 | | $ | 15 |
Realized gain recognized in non-interest income | |
| (39) | |
| 39 | ||||||
Realized loss recognized in non-interest income | |
| (283) | |
| (7) | ||||||
Balance at end of period | | $ | 24 | | $ | (87) | | $ | — | | $ | 8 |
| | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | |
|
| |
|
| |
|
| |
|
|
Balance at beginning of period | | $ | 22 | | $ | (95) | | $ | 22 | | $ | (95) |
Realized loss recognized in non-interest income | |
| 25 | |
| (45) | ||||||
Realized gain recognized in non-interest income | |
| 25 | |
| (45) | ||||||
Balance at end of period | | $ | 47 | | $ | (140) | | $ | 47 | | $ | (140) |
| | | | | | | ||||||
Nine Months Ended September 30, 2020 | |
|
| |
|
| ||||||
Balance at beginning of period | | $ | 59 | | $ | (84) | ||||||
Realized loss recognized in non-interest income | |
| (35) | |
| (3) | ||||||
Balance at end of period | | $ | 24 | | $ | (87) |
Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | |
| |
| Significant |
|
| Fair Value | | |
| |
| Significant |
| |||
| | Fair Value | | Fair Value | | | | | | Unobservable | | | September 30, | | Valuation | | Unobservable | | Unobservable | | |||||
(in thousands, except ratios) |
| September 30, 2021 |
| December 31, 2020 | | Valuation Techniques |
| Unobservable Inputs |
| Input Value | |
| 2022 | | Techniques |
| Inputs |
| Input Value | | |||||
Assets (Liabilities) | |
| | |
| | |
| |
| |
| |
| |
| | |
| |
| |
| |
|
Interest Rate Lock Commitment |
| $ | 47 | | $ | 22 | | Historical trend |
| Closing Ratio |
| | 85 | % |
| $ | — | | Pull-through Rate Analysis |
| Closing Ratio |
| | — | % |
| |
| | |
| | | Pricing Model | | Origination Costs, per loan | | $ | 1.7 | | |
| | | Pricing Model | | Origination Costs, per loan | | $ | — | |
| | | | | | | | |
| | | | | | | | | | Discount Cash Flows | | Mortgage Servicing Asset | | | — | % |
| | | | | |
| | | | | | ||||||||||||||
Forward Commitments | |
| (140) | |
| (95) | | Quoted prices for similar loans in active markets |
| Freddie Mac pricing system | |
| Pair-off contract price | | |
| 8 | | Quoted prices for similar loans in active markets |
| Freddie Mac pricing system | |
| $97.2 to $101.4 | |
Total | | $ | (93) | | $ | (73) | |
|
|
| |
|
| | | $ | 8 | | | | | | | | |
| | | | | | | | | | | | ||||||||||||||
|
| Fair Value | | |
| |
| Significant |
| ||||||||||||||||
| | December 31, | | Valuation | | Unobservable | | Unobservable | | ||||||||||||||||
(in thousands, except ratios) |
| 2021 | | Techniques |
| Inputs |
| Input Value | | ||||||||||||||||
Assets (Liabilities) | |
| | |
| |
| |
| |
| ||||||||||||||
Interest Rate Lock Commitment |
| $ | 283 | | 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 | | Quoted prices for similar loans in active markets |
| Freddie Mac pricing system | |
| $99.8 to $103.2 | | ||||||||||||||
Total | | $ | 298 | | | | | | | | |
5647
Non-Recurring Fair Value Measurements
The Company isWe are required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | Fair Value Measurement Date as of September 30, 2021 | | September 30, 2022 | | December 31, 2021 | | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 | | Fair Value Measurement Date as of September 30, 2022 | ||||||||
| | Level 3 | | Level 3 | | Total | | Total | | Level 3 | | Level 3 | | Level 3 | | Total | | Total | | Level 3 | ||||||||
(in thousands) |
| Inputs |
| Inputs |
| Gains (Losses) |
| Gains (Losses) |
| Inputs |
| Inputs |
| Inputs |
| Gains (Losses) |
| Gains (Losses) |
| Inputs | ||||||||
Assets | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
Individually evaluated loans | | $ | 9,247 | | $ | 8,746 | | $ | 707 | | $ | (501) | | September 2021 | | $ | 15,388 | | $ | 17,932 | | $ | 1,778 | | $ | (2,544) | | September 2022 |
Capitalized servicing rights | |
| 4,867 | | | 3,605 |
| | (136) |
| | (1,262) |
| September 2021 | |
| 7,127 | | | 5,263 |
| | 84 |
| | 1,864 |
| September 2022 |
Premises held for sale | |
| 822 | | | 962 |
| | 149 |
| | 140 |
| December 2020 | |
| 327 | | | 226 |
| | — |
| | 101 |
| February 2022 |
Total | | $ | 14,936 | | $ | 13,313 | | $ | 720 | | $ | (1,623) |
|
| | $ | 22,842 | | $ | 23,421 | | $ | 1,862 | | $ | (579) |
|
|
There are 0no liabilities measured at fair value on a non-recurring basis in 20212022 and 2020.2021.
5748
Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is, as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| ||||
(in thousands, except ratios) |
| Fair Value September 30, 2021 |
| Valuation Techniques |
| Unobservable Inputs |
| Range (Weighted Average)(a) |
|
| Fair Value September 30, 2022 |
| Valuation Techniques |
| Unobservable Inputs |
| Range (Weighted Average)(a) |
| ||||
Assets |
| |
|
|
|
|
| | |
| |
| |
|
|
|
|
| | |
| |
Individually evaluated loans | | $ | 6,226 |
| Fair value of collateral-appraised value |
| Loss severity | | | 10% to 70% | | | $ | 10,903 |
| Fair value of collateral-appraised value |
| Loss severity | | | 10% to 70% | |
| | | | | |
| Appraised value | | | $71 to $1,792 | | | | | | |
| Appraised value | | | $80 to $1,175 | |
| | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated loans | |
| 3,021 |
| Discount cash flow |
| Discount rate |
| | 2.88% to 9.50% | | |
| 4,485 |
| Discount cash flow |
| Discount rate |
| | 2.88% to 6.45% | |
| | | | | |
| Cash flows | | | $6 to $939 | | | | | | |
| Cash flows | | | $4 to $925 | |
| | | | | | | | | | | | | | | | | | | | | | |
Capitalized servicing rights | |
| 4,867 |
| Discounted cash flow |
| Constant prepayment rate (CPR) |
| | 13.66% | | |
| 7,127 |
| Discounted cash flow |
| Constant prepayment rate (CPR) |
| | 7.10% | |
| |
|
|
|
|
| Discount rate |
| | 9.53% | | |
|
|
|
|
| Discount rate |
| | 9.54% | |
| | | | | | | | | | | | | | | | | | | | | | |
Premises held for sale | |
| 822 |
| Fair value of asset less selling costs |
| Appraised value | | | $220 to $386 | | |
| 327 |
| Fair value of asset less selling costs |
| Appraised value | | | $347 | |
| |
| |
|
|
| Selling Costs |
| | 6% | | |
| |
|
|
| Selling Costs |
| | 6% | |
Total | | $ | 14,936 |
|
|
|
|
| |
| | | $ | 22,842 |
|
|
|
|
| |
| |
Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties. |
| | | | | | | | | | | |
| | | | | | | | | | ||
(in thousands, except ratios) |
| Fair Value Dec 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 $1730 | |
| | | | | | | | | | | |
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 | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | ||
(in thousands, except ratios) |
| Fair Value December 31, 2021 |
| Valuation Techniques |
| Unobservable Inputs |
| Range (Weighted Average)(a) | | ||
Assets | | | | | | | | | | | |
Individually evaluated loans | | $ | 12,127 | | Fair value of collateral-appraised value | | Loss severity | | | 10% to 70% | |
| | | | | | | Appraised value | | | $71 to $1,792 | |
| | | | | | | | | | | |
Individually evaluated loans | |
| 5,805 | | 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 | | $ | 23,421 | | | | | | | | |
(a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties. |
There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended September 30, 20212022 and December 31, 2020.2021.
5849
Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company recordswe record non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, non-recurring fair value measurement adjustments relating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral supporting commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.
Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of loan servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.
Other real estate owned (OREO).or OREO. OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, the Company recordswe record 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. Assets held for sale, identified as part of the Company’sour 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.
5950
Summary of Estimated Fair Values of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company’sour financial instruments are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | September 30, 2022 | ||||||||||||||||||||||||||
| | Carrying | | Fair | | | | | | | | | | | Carrying | | Fair | | | | | | | | | | ||||
(in thousands) |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||
Financial Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 341,199 | | $ | 341,199 | | $ | 341,199 | | $ | 0 | | $ | 0 | | $ | 82,065 | | $ | 82,065 | | $ | 82,065 | | $ | — | | $ | — |
Securities available for sale | |
| 545,327 | |
| 545,327 | |
| 0 | |
| 545,327 | |
| 0 | |
| 556,752 | |
| 556,752 | |
| — | |
| 556,752 | |
| — |
FHLB stock | |
| 10,192 | |
| 10,192 | |
| 0 | |
| 10,192 | |
| 0 | |
| 9,035 | |
| 9,035 | |
| — | |
| 9,035 | |
| — |
Loans held for sale | | | 7,505 | | | 7,505 | | | 0 | | | 0 | | | 7,505 | | | 987 | | | 982 | | | — | | | 982 | | | — |
Net loans | |
| 2,511,706 | |
| 2,472,108 | |
| 0 | |
| 0 | |
| 2,472,108 | |
| 2,850,364 | |
| 2,783,612 | |
| — | |
| — | |
| 2,783,612 |
Accrued interest receivable | |
| 3,272 | |
| 3,272 | |
| 0 | |
| 3,272 | |
| 0 | |
| 4,053 | |
| 4,053 | |
| — | |
| 4,053 | |
| — |
Cash surrender value of bank-owned life insurance policies | |
| 79,380 | |
| 79,380 | |
| 0 | |
| 79,380 | |
| 0 | |
| 80,758 | |
| 80,758 | |
| — | |
| 80,758 | |
| — |
Derivative assets | |
| 17,019 | |
| 17,019 | |
| 0 | |
| 16,972 | |
| 47 | |
| 31,973 | |
| 31,973 | |
| — | |
| 31,973 | |
| 8 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Non-maturity deposits | | $ | 2,538,044 | | $ | 2,452,990 | | $ | 0 | | $ | 2,452,990 | | $ | 0 | | $ | 2,801,432 | | $ | 2,616,000 | | $ | — | | $ | 2,616,000 | | $ | — |
Time deposits | | | 469,221 | | | 470,000 | | | 0 | | | 470,000 | | | 0 | | | 334,248 | | | 330,059 | | | — | | | 330,059 | | | — |
Securities sold under agreements to repurchase | | | 21,667 | | | 21,667 | | | 0 | | | 21,667 | | | 0 | | | 18,916 | | | 18,916 | | | — | | | 18,916 | | | — |
FHLB advances | |
| 168,600 | |
| 169,815 | |
| 0 | |
| 169,815 | |
| 0 | |
| 169,841 | |
| 169,459 | |
| — | |
| 169,459 | |
| — |
Subordinated borrowings | |
| 60,083 | |
| 63,660 | |
| 0 | |
| 63,660 | |
| 0 | |
| 60,248 | |
| 57,744 | |
| — | |
| 57,744 | |
| — |
Derivative liabilities | |
| 18,299 | |
| 18,299 | |
| 0 | |
| 18,159 | |
| 140 | |
| 27,084 | |
| 27,084 | |
| — | |
| 27,084 | |
| — |
| | | | | | | | | | | | | | | |
| | 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) | |
| 28,895 | |
| 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 |
| | | | | | | | | | | | | | | |
| | 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 | | $ | — | | $ | — |
Securities available for sale | |
| 618,276 | |
| 618,276 | |
| — | |
| 618,276 | |
| — |
FHLB stock | |
| 7,384 | |
| 7,384 | |
| — | |
| 7,384 | |
| — |
Loans held for sale | | | 5,523 | | | 5,523 | | | — | | | 5,523 | | | — |
Net loans | |
| 2,509,192 | |
| 2,442,741 | |
| — | |
| — | |
| 2,442,741 |
Accrued interest receivable | |
| 2,712 | |
| 2,712 | |
| — | |
| 2,712 | |
| — |
Cash surrender value of bank-owned life insurance policies | |
| 79,020 | |
| 79,020 | |
| — | |
| 79,020 | |
| — |
Derivative assets | |
| 14,148 | |
| 14,148 | |
| — | |
| 13,850 | |
| 298 |
| | | | | | | | | | | | | | | |
Financial Liabilities | |
|
| |
|
| |
|
| |
|
| |
|
|
Non-maturity deposits | | $ | 2,623,012 | | $ | 2,853,000 | | $ | — | | $ | 2,853,000 | | $ | — |
Time deposits | | | 425,532 | | | 424,000 | | | — | | | 424,000 | | | — |
Securities sold under agreements to repurchase | | | 19,802 | | | 19,802 | | | — | | | 19,802 | | | — |
FHLB advances | |
| 98,598 | |
| 98,439 | |
| — | |
| 98,439 | |
| — |
Subordinated borrowings | |
| 60,124 | |
| 61,884 | |
| — | |
| 61,884 | |
| — |
Derivative liabilities | |
| 15,257 | |
| 15,257 | |
| — | |
| 15,257 | |
| — |
6051
NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERCUSTOMERS
The Company has accountedWe account for theour various non-interest revenue streams and related contracts under ASC 606. Revenue from contracts with customers is based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. Revenue is recognized when we satisfy our performance obligation, which is generally when services are rendered and can be either satisfied at a point in time or over time. We recognize revenue at a point in time that is transactional in nature. We recognize revenue over time that is earned as services are performed and performance obligations are satisfied over time.
A substantial portion of our revenue is specifically excluded from the scope of ASC 606. This exclusion is associated with financial instruments, including interst income on loans and investment securities, in addition to loan derivative income and gains on loan and investment sales.
Disaggregation of Revenue
The following tables present disaggregation of the Company’sour non-interest revenue by major business line and timing of revenue recognition for the transfer of products or services:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Major Products/Service Lines |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Trust management fees | | $ | 3,403 | | $ | 3,256 | | $ | 10,052 | | $ | 9,193 | | $ | 3,077 | | $ | 3,403 | | $ | 9,941 | | $ | 10,052 |
Financial services fees | |
| 465 | |
| 276 | |
| 1,283 | |
| 867 | |
| 471 | |
| 465 | |
| 1,190 | |
| 1,283 |
Interchange fees | |
| 1,882 | |
| 1,709 | |
| 5,509 | |
| 4,910 | |
| 1,953 | |
| 1,882 | |
| 5,849 | |
| 5,509 |
Customer deposit fees | |
| 1,363 | |
| 937 | |
| 3,542 | |
| 2,836 | |
| 1,578 | |
| 1,363 | |
| 4,418 | |
| 3,542 |
Other customer service fees | |
| 270 | |
| 240 | |
| 691 | |
| 691 | |
| 305 | |
| 270 | |
| 841 | |
| 691 |
Total | | $ | 7,383 | | $ | 6,418 | | $ | 21,077 | | $ | 18,497 | | $ | 7,384 | | $ | 7,383 | | $ | 22,239 | | $ | 21,077 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Timing of Revenue Recognition |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Products and services transferred at a point in time | | $ | 3,737 | | $ | 3,133 | | $ | 10,593 | | $ | 9,026 | | $ | 4,020 | | $ | 3,737 | | $ | 11,755 | | $ | 10,593 |
Products and services transferred over time | |
| 3,646 | |
| 3,285 | |
| 10,484 | |
| 9,471 | |
| 3,364 | |
| 3,646 | |
| 10,484 | |
| 10,484 |
Total | | $ | 7,383 | | $ | 6,418 | | $ | 21,077 | | $ | 18,497 | | $ | 7,384 | | $ | 7,383 | | $ | 22,239 | | $ | 21,077 |
Trust Management Fees
The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory,financial advice, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. These fees are primarily earned over time as the Company charges itswe charge our customers on a monthly or quarterly basis in accordance with its investment advisory agreements. Fees are generally assessed based on a tiered scale of 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 hasWe have a revenue sharing agreement with Infinex for any financial service fee income generated. Financial services fees are recognized at a point in time upon the completion of service requirements.
Interchange Fees
The Company earnsWe earn interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction.
52
Customer Deposit Fees
The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to 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.
61
Other Customer Service Fees
The Company hasWe have 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 CompanyWe also earnsearn a percentage of the fees generated from third-party credit card plans promoted through the Bank. Revenue from these incentive and referral fee arrangements are recognized over time using the right to invoice measure of progress.
Contract Balances from Contracts with Customers
The following table provides information about contract assets or receivables and contract liabilities or deferred revenues from contracts with customers:
| | | | | | | | | | | | |
|
| |
| |
| |
| | ||||
(in thousands) | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 | ||||
Balances from contracts with customers only: |
| |
|
| |
|
| |
|
| |
|
Other Assets | | $ | 1,277 | | $ | 1,121 | | $ | 1,325 | | $ | 1,184 |
Other Liabilities | |
| 2,467 | |
| 2,785 | |
| 2,535 | |
| 2,324 |
The timing of revenue recognition, billings and cash collections results in contract assets or receivables and contract liabilities or deferred revenue on the consolidated balance sheets. For most customer contracts, fees are deducted directly from customer accounts and, therefore, there is no associated impact on the accounts receivable balance. For certain types of service contracts, the Company haswe have 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 CompanyWe currently expensesexpense contract costs for processing and administrative fees for debit card transactions. The CompanyWe also expensesexpense custody fees and transactional costs associated with securities transactions as well as third party tax preparation fees. The Company hasWe have elected the practical expedient in ASC 340-40-25-4, whereby the Company recognizeswe recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets the Companywe otherwise would have recognized is one year or less.
6253
NOTE 11. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” and all subsequent ASUs modifying ASC 842. Substantially allMost of theour leases pursuant to which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space withand have terms extending through 2040. All leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (ROU)right- of-use (“ROU”) asset with a corresponding lease liability using the modified retrospective approach.
The Company elected the following practical expedients in conjunction with implementation of ASC 842 as follows:
liability.
The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities:
| | | | | | | | | | | | | | | | |
(in thousands) |
| Classification |
| September 30, 2021 |
| December 31, 2020 |
| Classification |
| September 30, 2022 |
| December 31, 2021 | ||||
Lease Right-of-Use Assets |
| | | |
| | |
|
| | | |
| | |
|
Operating lease right-of-use assets |
| Other assets | | $ | 9,488 | | $ | 10,338 |
| Other assets | | $ | 8,381 | | $ | 9,274 |
| | | | | | | | | | | | | | | | |
Lease Liabilities |
|
| |
|
| |
|
|
|
| |
|
| |
|
|
Operating lease liabilities |
| Other liabilities | |
| 9,841 | |
| 10,627 |
| Other liabilities | |
| 8,791 | |
| 9,643 |
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used for the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’sour discretion. If at lease inception, the Company considerswe consider the exercising of a renewal option to be reasonably certain, the Companywe will include the extended term in the calculation of the ROU asset and lease liability. If there are multiple renewals typically only the next lease renewal is considered. Regarding the discount rate, ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.
The following table presents the weighted average lease term and discount rate of the Company’s leases:
| | | | | | | | | | | | |
|
| September 30, 2021 |
| December 31, 2020 |
| September 30, 2022 |
| December 31, 2021 | ||||
Weighted-average remaining lease term (in years) | |
| | |
| | |
| | |
| |
Operating leases | | 8.57 | | | 9.26 | | | 7.42 | | | 8.03 | |
| | | | | | | | | | | | |
Weighted-average discount rate | |
| | |
| | |
| | |
| |
Operating leases | | 3.15 | % | | 3.15 | % | | 3.09 | % | | 3.07 | % |
63
The following table represents lease costs which includes prepaids and expenses and other lease information. As the Companywe have elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as real estate taxes, common area maintenance and utilities.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
(in thousands) | | September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | | September 30, 2022 |
| September 30, 2021 |
| September 30, 2022 |
| September 30, 2021 | ||||||||
Lease Costs | | |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
Operating lease cost | | $ | 324 | | $ | 344 | | $ | 966 | | $ | 988 | | $ | 338 | | $ | 324 | | $ | 994 | | $ | 966 |
Variable lease cost | |
| 43 | |
| 59 | |
| 179 | |
| 177 | |
| 71 | |
| 43 | |
| 345 | |
| 179 |
Total lease cost | | $ | 367 | | $ | 403 | | $ | 1,145 | | $ | 1,165 | | $ | 409 | | $ | 367 | | $ | 1,339 | | $ | 1,145 |
54
Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 20212022 are, as follows:
| | | | | | |
(in thousands) |
| Payments |
| Payments | ||
Twelve Months Ended: |
| |
|
| |
|
September 30, 2022 | | $ | 1,314 | |||
September 30, 2023 | |
| 1,318 | | $ | 1,343 |
September 30, 2024 | |
| 1,319 | |
| 1,344 |
September 30, 2025 | |
| 1,125 | |
| 1,129 |
September 30, 2026 | |
| 1,032 | |
| 1,032 |
September 30, 2027 | |
| 889 | |||
Thereafter | |
| 4,301 | |
| 3,411 |
Total future minimum lease payments | |
| 10,409 | |
| 9,148 |
Amounts representing interest | |
| (568) | |
| (357) |
Present value of net future minimum lease payments | | $ | 9,841 | | $ | 8,791 |
6455
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management’sThe following is management’s discussion and analysis is intended to assist in understandingof the financial condition andmajor factors that influenced our results of operations and financial condition as of and for the Company. The following discussionthree and analysisnine months ended September 30, 2022 and should be read in conjunction with the Company’sour unaudited consolidated financial statements and thecondensed notes thereto appearingincluded elsewhere in Part I, Item 1 of this document and with the Company’sForm 10-Q as well as our audited consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company'sour Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate.
Bar Harbor Bankshares (the "Company")“Company,” “we,” “our” or “us” or similar terms) is the parent company of Bar Harbor Bank & Trust (the "Bank”), which is the only community bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a regional community bank that thinks differently about banking. The Bank provides the technology offerings and capabilities of larger banks, accompanied by access to local decision makers who are acutely focused on their local markets. AsHaving recently celebrated the Company approaches the 135th135th anniversary of itsthe Bank’s founding, they have not forgotten thatwe remain focused on helping our customers achieve their goals isas the key to the Bank’s success. The Company delivers banking, lendingWith over 500 dedicated professionals and wealth management services from more than 50 locations. The Company’slocations, we are committed to servicing and building enduring relationships by providing a higher standard of banking. We offer a variety of financial products and services designed around our customers in order to serve their banking and financial needs. Through these efforts, we continue to be a relationship-focused community bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals within our footprint. Our corporate goal is to be amongone of the most profitabletop performing banks in New England, and itsour business model is centered on the following:
● | Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders |
● | Geography, heritage, and performance are key while remaining true to a community-focused culture |
● |
● | Service and sales driven culture with a focus on core business growth |
● | Fee income is fundamental to |
● | Investment in processes, products, technology, training, leadership, and infrastructure |
● | Expansion of |
● | Opportunity and growth for existing employees while adding catalyst recruits across all levels |
56
SELECTED FINANCIAL DATA
The following summary data is based in part on the unaudited consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Forms 10-Q.Form 10-Q filings.
| | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended |
| ||||||||
| | September 30, | | | September 30, |
| ||||||||
|
| 2021 |
| 2020 |
| | 2021 |
| 2020 |
| ||||
PER SHARE DATA | | | | | | | | | | | | | | |
Net earnings, diluted | | $ | 0.73 | | $ | 0.56 | | | $ | 1.97 | | $ | 1.60 | |
Adjusted earnings, diluted(1) | |
| 0.73 | |
| 0.61 | | |
| 2.04 | |
| 1.66 | |
Total book value(5) | |
| 27.92 | |
| 26.74 | | |
| 27.92 | |
| 26.74 | |
Tangible book value(1) (5) | |
| 19.48 | |
| 18.21 | | |
| 19.48 | |
| 18.21 | |
Market price at period end | |
| 28.05 | |
| 20.55 | | |
| 28.05 | |
| 20.55 | |
Dividends | |
| 0.24 | |
| 0.22 | | |
| 0.70 | |
| 0.66 | |
| | | | | | | | | | | | | | |
PERFORMANCE RATIOS(2) | | | | | | | | | | | | | | |
Return on assets | |
| 1.16 | % |
| 0.88 | % | |
| 1.05 | % |
| 0.87 | % |
Adjusted return on assets(1) | |
| 1.16 | |
| 0.96 | | |
| 1.09 | |
| 0.91 | |
Pre-tax, pre-provision return on assets | | | 1.43 | |
| 1.29 | | |
| 1.26 | |
| 1.24 | |
Adjusted pre-tax, pre-provision return on assets (1) (2) | | | 1.43 | |
| 1.39 | | |
| 1.31 | |
| 1.29 | |
Return on equity(5) | |
| 10.38 | |
| 8.25 | | |
| 9.54 | |
| 8.10 | |
Adjusted return on equity(1) (5) | |
| 10.39 | |
| 9.02 | | |
| 9.98 | |
| 8.42 | |
Return on tangible equity(5) | | | 15.08 | | | 12.32 | | | | 14.01 | | | 12.10 | |
Adjusted return on tangible equity(1) (5) | |
| 15.09 | |
| 13.44 | | |
| 14.50 | |
| 12.57 | |
Net interest margin, fully taxable equivalent (FTE)(1) (3) | |
| 3.02 | |
| 2.90 | | |
| 2.88 | |
| 2.95 | |
Adjusted net interest margin(1) (5) | |
| 2.75 | |
| 2.89 | | |
| 2.73 | |
| 2.94 | |
Efficiency ratio(1) | |
| 59.18 | |
| 59.47 | | |
| 61.48 | |
| 61.62 | |
| | | | | | | | | | | | | | |
FINANCIAL DATA (In millions) | | | | | | | | | | | | | | |
Total assets | | $ | 3,738 | | $ | 3,861 | | | $ | 3,738 | | $ | 3,861 | |
Total earning assets(4) | |
| 3,394 | |
| 3,505 | | |
| 3,394 | |
| 3,505 | |
Total investments | |
| 556 | |
| 619 | | |
| 556 | |
| 619 | |
Total loans | |
| 2,534 | |
| 2,685 | | |
| 2,534 | |
| 2,685 | |
Allowance for loan losses | |
| 22 | |
| 18 | | |
| 22 | |
| 18 | |
Total goodwill and intangible assets | |
| 126 | |
| 127 | | |
| 126 | |
| 127 | |
Total deposits | |
| 3,007 | |
| 2,935 | | |
| 3,007 | |
| 2,935 | |
Total shareholders' equity(5) | |
| 418 | |
| 399 | | |
| 418 | |
| 399 | |
Net income | |
| 11 | |
| 8 | | |
| 30 | |
| 25 | |
Adjusted income(1) | |
| 11 | |
| 9 | | |
| 31 | |
| 26 | |
| | | | | | | | | | | | | | |
ASSET QUALITY AND CONDITION RATIOS | | | | | | | | | | | | | | |
Net charge-offs (annualized)/average loans | |
| 0.03 | % |
| 0.06 | % | |
| (0.02) | % |
| 0.07 | % |
Allowance for credit losses/total loans | |
| 0.89 | |
| 0.67 | | |
| 0.89 | |
| 0.67 | |
Loans/deposits | |
| 84 | |
| 91 | | |
| 84 | |
| 91 | |
Shareholders' equity to total assets(5) | |
| 11.19 | |
| 10.34 | | |
| 11.19 | |
| 10.34 | |
Tangible shareholders' equity to tangible assets(1) (5) | |
| 8.08 | |
| 7.27 | | |
| 8.08 | |
| 7.27 | |
| | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended |
| ||||||||
| | September 30, | | | September 30, |
| ||||||||
|
| 2022 |
| 2021 |
| | 2022 |
| 2021 |
| ||||
PER SHARE DATA | | | | | | | | | | | | | | |
Net earnings, diluted | | $ | 0.76 | | $ | 0.73 | | | $ | 2.07 | | $ | 1.97 | |
Adjusted earnings, diluted(1) | |
| 0.76 | |
| 0.73 | | |
| 2.07 | |
| 2.04 | |
Total book value | |
| 25.22 | |
| 27.92 | | |
| 25.22 | |
| 27.92 | |
Tangible book value per share(1) | |
| 16.89 | |
| 19.48 | | |
| 16.89 | |
| 19.48 | |
Market price at period end | |
| 26.52 | |
| 28.05 | | |
| 26.52 | |
| 28.05 | |
Dividends | |
| 0.26 | |
| 0.24 | | |
| 0.76 | |
| 0.70 | |
| | | | | | | | | | | | | | |
PERFORMANCE RATIOS(2) | | | | | | | | | | | | | | |
Return on assets | |
| 1.20 | % |
| 1.16 | % | |
| 1.11 | % |
| 1.05 | % |
Adjusted return on assets(1) | |
| 1.20 | |
| 1.16 | | |
| 1.12 | |
| 1.09 | |
Pre-tax, pre-provision return on assets | | | 1.65 | |
| 1.43 | | |
| 1.48 | |
| 1.26 | |
Adjusted pre-tax, pre-provision return on assets (1) | | | 1.65 | |
| 1.43 | | |
| 1.49 | |
| 1.31 | |
Return on equity | |
| 11.55 | |
| 10.38 | | |
| 10.32 | |
| 9.54 | |
Adjusted return on equity(1) | |
| 11.54 | |
| 10.39 | | |
| 10.38 | |
| 9.98 | |
Return on tangible equity | | | 17.25 | | | 15.08 | | | | 15.28 | | | 14.01 | |
Adjusted return on tangible equity(1) | |
| 17.24 | |
| 15.09 | | |
| 15.37 | |
| 14.50 | |
Net interest margin, fully taxable equivalent (FTE)(1) (3) | |
| 3.47 | |
| 3.02 | | |
| 3.21 | |
| 2.88 | |
Adjusted net interest margin(1) | |
| 3.47 | |
| 2.75 | | |
| 3.21 | |
| 2.73 | |
Efficiency ratio(1) | |
| 57.67 | |
| 59.18 | | |
| 59.66 | |
| 61.48 | |
| | | | | | | | | | | | | | |
FINANCIAL DATA (In millions) | | | | | | | | | | | | | | |
Total assets | | $ | 3,840 | | $ | 3,738 | | | $ | 3,840 | | $ | 3,738 | |
Total earning assets(4) | |
| 3,525 | |
| 3,394 | | |
| 3,525 | |
| 3,394 | |
Total investments | |
| 566 | |
| 556 | | |
| 566 | |
| 556 | |
Total loans | |
| 2,850 | |
| 2,534 | | |
| 2,850 | |
| 2,534 | |
Allowance for credit losses | |
| 25 | |
| 22 | | |
| 25 | |
| 22 | |
Total goodwill and intangible assets | |
| 126 | |
| 126 | | |
| 126 | |
| 126 | |
Total deposits | |
| 3,136 | |
| 3,007 | | |
| 3,136 | |
| 3,007 | |
Total shareholders' equity | |
| 380 | |
| 418 | | |
| 380 | |
| 418 | |
Net income | |
| 11 | |
| 11 | | |
| 31 | |
| 30 | |
Adjusted income(1) | |
| 11 | |
| 11 | | |
| 31 | |
| 31 | |
| | | | | | | | | | | | | | |
ASSET QUALITY AND CONDITION RATIOS | | | | | | | | | | | | | | |
Net charge-offs (recoveries) (annualized)/average loans | |
| 0.01 | % |
| 0.03 | % | |
| — | % |
| (0.02) | % |
Allowance for credit losses/total loans | |
| 0.88 | |
| 0.89 | | |
| 0.88 | |
| 0.89 | |
Loans/deposits | |
| 91 | |
| 84 | | |
| 91 | |
| 84 | |
Shareholders' equity to total assets | |
| 9.89 | |
| 11.19 | | |
| 9.89 | |
| 11.19 | |
Tangible shareholders' equity to total tangible assets(1) | |
| 6.85 | |
| 8.08 | | |
| 6.85 | |
| 8.08 | |
(1) | Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of |
(2) | All performance ratios are annualized and are based on average balance sheet amounts, where applicable. |
(3) | Fully taxable equivalent considers the impact of tax-advantaged investment securities and loans. |
(4) | Earning assets includes non-accruing loans and securities are valued at amortized cost. |
6658
CONSOLIDATED LOAN AND DEPOSIT ANALYSIS
The following tables present the quarterly trend in loan and deposit data and accompanying quarterly growth rates as of September 30, 20212022 on an annualized basis:
LOAN ANALYSIS
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Annualized Growth % | ||||
(in thousands, except ratios) |
| Sep 30, 2021 |
| Jun 30, 2021 |
| Mar 31, 2021 |
| Dec 31, 2020 |
| Sep 30, 2020 |
| Quarter To Date | | Year To Date | |||||||
Commercial real estate | | $ | 1,170,372 | | $ | 1,135,857 | | $ | 1,118,669 | | $ | 1,084,381 | | $ | 1,045,635 |
| 12 | % | | 11 | % |
Commercial and industrial | |
| 331,091 | |
| 327,729 | |
| 317,500 | |
| 323,864 | |
| 324,647 |
| 4 |
| | 3 | |
Paycheck Protection Program (PPP) | | | 24,227 | | | 65,918 | | | 77,878 | | | 53,774 | | | 131,537 | | * | | | (74) | |
Total commercial loans | |
| 1,525,690 | |
| 1,529,504 | |
| 1,514,047 | |
| 1,462,019 | |
| 1,501,819 |
| (1) | | | 6 | |
Total commercial loans, excluding PPP | | | 1,501,463 | | | 1,463,586 | | | 1,436,169 | | | 1,408,245 | | | 1,370,282 | | 10 | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | |
Residential real estate | |
| 849,692 | |
| 822,774 | |
| 868,084 | |
| 923,891 | |
| 997,485 |
| 13 |
| | (11) | |
Consumer | |
| 100,933 | |
| 103,589 | |
| 106,835 | |
| 113,544 | |
| 119,340 |
| (10) |
| | (15) | |
Tax exempt and other | |
| 57,839 | |
| 59,693 | |
| 62,098 | |
| 63,431 | |
| 66,326 |
| (12) |
| | (12) | |
Total loans | | $ | 2,534,154 | | $ | 2,515,560 | | $ | 2,551,064 | | $ | 2,562,885 | | $ | 2,684,970 |
| 3 | % | | (1) | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Annualized | ||||
| | | | | | | | | | | | | | | | | Growth % | ||||
| | | | | | | | | | | | | | | | | Quarter | | | Year | |
(in thousands, except ratios) |
| Sep 30, 2022 |
| Jun 30, 2022 |
| Mar 31, 2022 |
| Dec 31, 2021 |
| Sep 30, 2021 |
| to Date | | to Date | |||||||
Commercial real estate | | $ | 1,421,962 | | $ | 1,331,860 | | $ | 1,289,968 | | $ | 1,210,580 | | $ | 1,170,372 |
| 27 | % | | 23 | % |
Commercial and industrial | |
| 376,624 | |
| 360,304 | |
| 346,394 | |
| 340,129 | |
| 331,091 |
| 18 |
| | 14 | |
Paycheck Protection Program (PPP) | | | — | | | 170 | | | 1,126 | | | 6,669 | | | 24,227 | | * | | | * | |
Total commercial loans | |
| 1,798,586 | |
| 1,692,334 | |
| 1,637,488 | |
| 1,557,378 | |
| 1,525,690 |
| 25 | | | 21 | |
Total commercial loans, excluding PPP | | | 1,798,586 | | | 1,692,164 | | | 1,636,362 | | | 1,550,709 | | | 1,501,463 | | 25 | | | 21 | |
| | | | | | | | | | | | | | | | | | | | | |
Residential real estate | |
| 896,618 | |
| 876,644 | |
| 868,382 | |
| 821,004 | |
| 849,692 |
| 9 |
| | 12 | |
Consumer | |
| 100,822 | |
| 100,816 | |
| 96,876 | |
| 98,949 | |
| 100,933 |
| — |
| | 3 | |
Tax exempt and other | |
| 54,338 | |
| 57,480 | |
| 51,816 | |
| 54,579 | |
| 57,839 |
| (22) |
| | (1) | |
Total loans | | $ | 2,850,364 | | $ | 2,727,274 | | $ | 2,654,562 | | $ | 2,531,910 | | $ | 2,534,154 |
| 18 | % | | 17 | % |
*Indicates ratios of 100% or greater.
DEPOSIT ANALYSIS
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Annualized Growth % | ||||
(in thousands, except ratios) |
| Sep 30, 2021 |
| Jun 30, 2021 |
| Mar 31, 2021 |
| Dec 31, 2020 |
| Sep 30, 2020 |
| Quarter To Date | | Year To Date | |||||||
Demand | | $ | 664,395 | | $ | 599,598 | | $ | 586,487 | | $ | 544,636 | | $ | 515,064 |
| 43 | % | | 29 | % |
NOW | |
| 888,021 | |
| 802,681 | |
| 761,817 | |
| 738,849 | |
| 706,048 |
| 43 |
| | 27 | |
Savings | |
| 605,977 | |
| 578,361 | |
| 560,095 | |
| 521,638 | |
| 511,938 |
| 19 |
| | 22 | |
Money market | |
| 379,651 | |
| 371,075 | |
| 365,507 | |
| 402,731 | |
| 388,356 |
| 9 |
| | (8) | |
Total non-maturity deposits | |
| 2,538,044 | |
| 2,351,715 | |
| 2,273,906 | |
| 2,207,854 | |
| 2,121,406 |
| 32 |
| | 20 | |
Total time deposits | |
| 469,221 | |
| 470,758 | |
| 638,436 | |
| 698,361 | |
| 813,509 |
| (1) |
| | (44) | |
Total deposits | | $ | 3,007,265 | | $ | 2,822,473 | | $ | 2,912,342 | | $ | 2,906,215 | | $ | 2,934,915 |
| 26 | % | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Annualized | ||||
| | | | | | | | | | | | | | | | | Growth % | ||||
| | | | | | | | | | | | | | | | | Quarter | | | Year | |
(in thousands, except ratios) |
| Sep 30, 2022 |
| Jun 30, 2022 |
| Mar 31, 2022 |
| Dec 31, 2021 |
| Sep 30, 2021 |
| to Date | | to Date | |||||||
Demand | | $ | 700,218 | | $ | 670,268 | | $ | 653,471 | | $ | 664,420 | | $ | 664,395 |
| 18 | % | | 7 | % |
NOW | |
| 918,822 | |
| 883,239 | |
| 918,768 | |
| 940,631 | |
| 888,021 |
| 16 |
| | (3) | |
Savings | |
| 669,317 | |
| 663,676 | |
| 658,834 | |
| 628,670 | |
| 605,977 |
| 3 |
| | 9 | |
Money market | |
| 513,075 | |
| 499,456 | |
| 424,750 | |
| 389,291 | |
| 379,651 |
| 11 |
| | 42 | |
Total non-maturity deposits | |
| 2,801,432 | |
| 2,716,639 | |
| 2,655,823 | |
| 2,623,012 | |
| 2,538,044 |
| 12 |
| | 9 | |
Total time deposits | |
| 334,248 | |
| 361,906 | |
| 391,940 | |
| 425,532 | |
| 469,221 |
| (31) |
| | (29) | |
Total deposits | | $ | 3,135,680 | | $ | 3,078,545 | | $ | 3,047,763 | | $ | 3,048,544 | | $ | 3,007,265 |
| 7 | % | | 4 | % |
6759
AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following tables present average balances and average yields and rates on an annualized fully taxable equivalent basis for the periods included:
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| |||||||||||||||
| | 2021 | | | 2020 |
| ||||||||||||
| | Average | | | | | | | | Average | | | | | |
| ||
(in thousands, except ratios) |
| Balance |
| Interest(3) |
| Yield/Rate(3) |
| | Balance |
| Interest(3) |
| Yield/Rate(3) |
| ||||
Assets |
| |
|
| |
|
|
|
| | |
|
| |
|
|
| |
Interest-bearing deposits with other banks(4) | | $ | 284,429 | | $ | 110 | | 0.15 | % | | $ | 92,066 | | $ | 21 | | 0.09 | % |
Securities available for sale and FHLB stock(2)(3) | | | 610,381 | | | 3,986 | | 2.59 | | | | 627,162 | | | 4,787 | | 3.04 | |
Loans: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 1,153,813 | | | 10,269 |
| 3.53 | | | | 1,012,194 | | | 9,691 |
| 3.81 | |
Commercial and industrial | |
| 391,191 | |
| 3,739 |
| 3.79 | | |
| 399,734 | |
| 4,411 |
| 4.39 | |
Paycheck protection program | | | 45,835 | | | 2,690 | | 23.28 | | | | 131,605 | | | 1,052 | | 3.18 | |
Residential | |
| 824,686 | |
| 7,574 |
| 3.64 | | |
| 1,060,084 | |
| 9,886 |
| 3.71 | |
Consumer | |
| 101,545 | |
| 968 |
| 3.78 | | |
| 121,248 | |
| 1,042 |
| 3.42 | |
Total loans (1) | |
| 2,517,070 | |
| 25,240 |
| 3.98 | | |
| 2,724,865 | |
| 26,082 |
| 3.81 | |
Total earning assets | |
| 3,411,880 | |
| 29,336 |
| 3.41 | % | |
| 3,444,093 | |
| 30,890 |
| 3.57 | % |
Other assets(6) | |
| 352,208 | | | |
|
| | |
| 370,335 | |
|
|
| | |
Total assets(6) | | $ | 3,764,088 | | | |
|
| | | $ | 3,814,428 | |
|
|
| | |
| | | | | | | | | | | | | | | | | | |
Liabilities | |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
NOW | | $ | 860,206 | | $ | 272 |
| 0.13 | % | | $ | 677,706 | | $ | 243 |
| 0.14 | % |
Savings | |
| 591,440 | |
| 124 |
| 0.08 | | |
| 488,508 | |
| 157 |
| 0.13 | |
Money market | |
| 381,755 | |
| 115 |
| 0.12 | | |
| 396,351 | |
| 163 |
| 0.16 | |
Time deposits | |
| 471,934 | |
| 1,044 |
| 0.88 | | |
| 777,424 | |
| 3,307 |
| 1.69 | |
Total interest bearing deposits | |
| 2,305,335 | |
| 1,555 |
| 0.27 | | |
| 2,339,989 | |
| 3,870 |
| 0.66 | |
Borrowings | |
| 334,097 | |
| 1,778 |
| 2.11 | | |
| 481,687 | |
| 1,941 |
| 1.60 | |
Total interest bearing liabilities | |
| 2,639,432 | |
| 3,333 |
| 0.50 | % | |
| 2,821,676 | |
| 5,811 |
| 0.82 | % |
Non-interest bearing demand deposits | |
| 641,769 | |
|
|
|
| | |
| 507,844 | |
|
|
| | |
Other liabilities(6) | |
| 61,436 | |
|
|
|
| | |
| 79,848 | |
|
|
| | |
Total liabilities(6) | |
| 3,342,637 | |
|
|
|
| | |
| 3,409,368 | |
|
|
| | |
| | | | | | | | | | | | | | | | | | |
Total shareholders' equity(6) | |
| 421,451 | |
|
|
|
| | |
| 405,060 | |
|
|
| | |
| | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity(6) | | $ | 3,764,088 | |
|
|
|
| | | $ | 3,814,428 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Net interest spread | |
|
| |
|
|
| 2.91 | % | |
|
| |
|
|
| 2.75 | % |
Net interest margin (1) | | | | | | | | 3.02 | | |
|
| |
|
|
| 2.90 | |
Adjusted net interest margin(5) | |
|
| |
|
|
| 2.75 | | | | | | | | | 2.89 | |
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| |||||||||||||||
| | 2022 | | | 2021 |
| ||||||||||||
| | Average | | | | | | | | Average | | | | | |
| ||
(in thousands, except ratios) |
| Balance |
| Interest(3) |
| Yield/Rate(3) |
| | Balance |
| Interest(3) |
| Yield/Rate(3) |
| ||||
Assets |
| |
|
| |
|
|
|
| | |
|
| |
|
|
| |
Interest-earning deposits with other banks | | $ | 59,556 | | $ | 320 | | 2.13 | % | | $ | 284,429 | | $ | 110 | | 0.15 | % |
Securities available for sale and FHLB stock(2)(3) | | | 642,475 | | | 5,058 | | 3.12 | | | | 610,381 | | | 3,986 | | 2.59 | |
Loans: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 1,351,599 | | | 14,510 |
| 4.26 | | | | 1,153,813 | | | 10,269 |
| 3.53 | |
Commercial and industrial | |
| 421,963 | |
| 4,739 |
| 4.46 | | |
| 391,191 | |
| 3,739 |
| 3.79 | |
Paycheck protection program | | | 94 | | | — | | — | | | | 45,835 | | | 2,690 | | 23.28 | |
Residential | |
| 882,158 | |
| 7,676 |
| 3.45 | | |
| 824,686 | |
| 7,574 |
| 3.64 | |
Consumer | |
| 101,175 | |
| 1,161 |
| 4.55 | | |
| 101,545 | |
| 968 |
| 3.78 | |
Total loans (1) | |
| 2,756,989 | |
| 28,086 |
| 4.04 | | |
| 2,517,070 | |
| 25,240 |
| 3.98 | |
Total earning assets | |
| 3,459,020 | |
| 33,464 |
| 3.84 | % | |
| 3,411,880 | |
| 29,336 |
| 3.41 | % |
Other assets | |
| 313,289 | | | |
|
| | |
| 352,208 | |
|
|
| | |
Total assets | | $ | 3,772,309 | | | |
|
| | | $ | 3,764,088 | |
|
|
| | |
| | | | | | | | | | | | | | | | | | |
Liabilities | |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
NOW | | $ | 905,668 | | $ | 366 |
| 0.16 | % | | $ | 860,206 | | $ | 272 |
| 0.13 | % |
Savings | |
| 668,255 | |
| 143 |
| 0.08 | | |
| 591,440 | |
| 124 |
| 0.08 | |
Money market | |
| 491,683 | |
| 808 |
| 0.65 | | |
| 381,755 | |
| 115 |
| 0.12 | |
Time deposits | |
| 349,787 | |
| 485 |
| 0.55 | | |
| 471,934 | |
| 1,044 |
| 0.88 | |
Total interest bearing deposits | |
| 2,415,393 | |
| 1,802 |
| 0.30 | | |
| 2,305,335 | |
| 1,555 |
| 0.27 | |
Borrowings | |
| 202,296 | |
| 1,374 |
| 2.69 | | |
| 334,097 | |
| 1,778 |
| 2.11 | |
Total interest bearing liabilities | |
| 2,617,689 | |
| 3,176 |
| 0.48 | % | |
| 2,639,432 | |
| 3,333 |
| 0.50 | % |
Non-interest bearing demand deposits | |
| 690,134 | |
|
|
|
| | |
| 641,769 | |
|
|
| | |
Other liabilities | |
| 71,934 | |
|
|
|
| | |
| 61,436 | |
|
|
| | |
Total liabilities | |
| 3,379,757 | |
|
|
|
| | |
| 3,342,637 | |
|
|
| | |
| | | | | | | | | | | | | | | | | | |
Total shareholders' equity | |
| 392,552 | |
|
|
|
| | |
| 421,451 | |
|
|
| | |
| | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 3,772,309 | |
|
|
|
| | | $ | 3,764,088 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Net interest spread | |
|
| |
|
|
| 3.36 | % | |
|
| |
|
|
| 2.91 | % |
Net interest margin | | | | | | | | 3.47 | | |
|
| |
|
|
| 3.02 | |
Adjusted net interest margin(4) | |
|
| |
|
|
| 3.47 | | | | | | | | | 2.75 | |
(1) | The average balances of loans include non-accrual loans and unamortized deferred fees and costs. |
(2) | The average balance for securities available for sale is based on amortized cost. |
(3) | Fully taxable equivalent considers the impact of tax-advantaged securities and loans. |
(4) | Adjusted net interest margin excludes PPP loans. |
60
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | ||||||||||||||||
| | 2022 | | 2021 |
| |||||||||||||
| | Average | | Interest | | Yield/ | | Average | | Interest | | Yield/ | ||||||
(in millions, except ratios) |
| Balance |
| (3) |
| Rate(3) | | Balance |
| (3) |
| Rate(3) | ||||||
Assets | | | | | | | | | | | | | | | | | | |
Interest-earning deposits with other banks | | $ | 86,390 | | $ | 503 | | 0.78 | % | | $ | 229,235 | | $ | 203 | | 0.12 | % |
Securities available for sale and FHLB stock(2)(3) | | | 630,679 | | | 13,297 | | 2.82 | | | | 617,373 | | | 12,424 | | 2.69 | |
Loans: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 1,306,664 | | | 37,765 |
| 3.86 | | | | 1,128,134 | | | 30,177 |
| 3.58 | |
Commercial and industrial(3) | |
| 408,620 | |
| 11,871 |
| 3.88 | | |
| 381,753 | |
| 10,727 |
| 3.76 | |
Paycheck protection program | | | 4,676 | | | 223 | | 6.39 | | | | 62,562 | | | 5,058 | | 10.81 | |
Residential | |
| 865,259 | |
| 22,801 |
| 3.52 | | |
| 861,629 | |
| 24,145 |
| 3.75 | |
Consumer | |
| 99,673 | |
| 2,943 |
| 3.95 | | |
| 105,371 | |
| 2,833 |
| 3.59 | |
Total loans (1) | |
| 2,684,892 | |
| 75,603 |
| 3.76 | | |
| 2,539,449 | |
| 72,940 |
| 3.84 | |
Total earning assets | |
| 3,401,961 | |
| 89,403 |
| 3.51 | % | |
| 3,386,057 | |
| 85,567 |
| 3.38 | % |
Other assets | |
| 323,253 | | | |
|
| | |
| 357,334 | | | |
|
| |
Total assets | | $ | 3,725,214 | | | |
|
| | | $ | 3,743,391 | | | |
|
| |
| | | | | | | | | | | | | | | | | | |
Liabilities | |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
NOW | | $ | 909,793 | | $ | 984 |
| 0.14 | % | | $ | 801,292 | | $ | 760 |
| 0.13 | % |
Savings | |
| 655,727 | |
| 418 |
| 0.09 | | |
| 568,726 | |
| 431 |
| 0.10 | |
Money market | |
| 455,645 | |
| 1,139 |
| 0.33 | | |
| 376,775 | |
| 354 |
| 0.13 | |
Time deposits | |
| 376,496 | |
| 1,645 |
| 0.58 | | |
| 583,529 | |
| 5,565 |
| 1.28 | |
Total interest bearing deposits | |
| 2,397,661 | |
| 4,186 |
| 0.23 | | |
| 2,330,322 | |
| 7,110 |
| 0.41 | |
Borrowings | |
| 187,629 | |
| 3,458 |
| 2.46 | | |
| 336,432 | |
| 5,415 |
| 2.15 | |
Total interest bearing liabilities | |
| 2,585,290 | |
| 7,644 |
| 0.40 | % | |
| 2,666,754 | |
| 12,525 |
| 0.63 | % |
Non-interest bearing demand deposits | |
| 671,490 | |
|
|
|
| | |
| 598,434 | |
|
|
|
| |
Other liabilities | |
| 66,298 | |
|
|
|
| | |
| 64,360 | |
|
|
|
| |
Total liabilities | |
| 3,323,078 | |
|
|
|
| | |
| 3,329,548 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Total shareholders' equity | |
| 402,136 | |
|
|
|
| | |
| 413,843 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 3,725,214 | |
|
|
|
| | | $ | 3,743,391 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Net interest spread | | | | | | | | 3.12 | % | | | | | | | | 2.75 | % |
Net interest margin | |
|
| |
|
|
| 3.21 | | |
|
| |
|
|
| 2.88 | |
Adjusted net interest margin(4) | | | | | | | | 3.21 | | | | | | | | | 2.73 | |
(1) | The average balances of loans include non-accrual loans and unamortized deferred fees and costs. |
(2) | The average balance for securities available for sale is based on amortized cost. |
(3) | Fully taxable equivalent considers the impact of tax-advantaged securities and loans. |
(4) |
Adjusted net interest margin excludes |
68
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | ||||||||||||||||
| | 2021 | | 2020 |
| |||||||||||||
| | Average | | | | | Yield/ | | Average | | | | | Yield/ | ||||
(in thousands, except ratios) |
| Balance |
| Interest(3) |
| Rate(3) | | Balance |
| Interest(3) |
| Rate(3) | ||||||
Assets | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits with other banks(4) | | $ | 229,235 | | $ | 203 | | 0.12 | % | | $ | 52,326 | | $ | 84 | | 0.21 | % |
Securities available for sale and FHLB stock(2)(3) | | | 617,373 | | | 12,424 | | 2.69 | | | | 643,978 | | | 15,798 | | 3.28 | |
Loans: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 1,128,134 | | | 30,177 |
| 3.58 | | | | 972,330 | | | 29,895 |
| 4.11 | |
Commercial and industrial(3) | |
| 381,753 | |
| 10,727 |
| 3.76 | | |
| 414,532 | |
| 13,847 |
| 4.46 | |
Paycheck protection program | | | 62,562 | | | 5,058 | | 10.81 | | | | 78,782 | | | 1,921 | | 3.26 | |
Residential | |
| 861,629 | |
| 24,145 |
| 3.75 | | |
| 1,103,442 | |
| 31,386 |
| 3.80 | |
Consumer | |
| 105,371 | |
| 2,833 |
| 3.59 | | |
| 126,189 | |
| 3,929 |
| 4.16 | |
Total loans (1) | |
| 2,539,449 | |
| 72,940 |
| 3.84 | | |
| 2,695,275 | |
| 80,978 |
| 4.01 | |
Total earning assets | |
| 3,386,057 | |
| 85,567 |
| 3.38 | % | |
| 3,391,579 | |
| 96,860 |
| 3.81 | % |
Other assets(6) | |
| 357,334 | | | |
|
| | |
| 371,792 | | | |
|
| |
Total assets(6) | | $ | 3,743,391 | | | |
|
| | | $ | 3,763,371 | | | |
|
| |
| | | | | | | | | | | | | | | | | | |
Liabilities | |
|
| |
|
|
|
| | |
|
| |
|
|
|
| |
NOW | | $ | 801,292 | | $ | 760 |
| 0.13 | % | | $ | 622,702 | | $ | 1,021 |
| 0.22 | % |
Savings | |
| 568,726 | |
| 431 |
| 0.10 | | |
| 451,952 | |
| 587 |
| 0.17 | |
Money market | |
| 376,775 | |
| 354 |
| 0.13 | | |
| 393,702 | |
| 1,511 |
| 0.51 | |
Time deposits | |
| 583,529 | |
| 5,565 |
| 1.28 | | |
| 813,442 | |
| 11,320 |
| 1.86 | |
Total interest bearing deposits | |
| 2,330,322 | |
| 7,110 |
| 0.41 | | |
| 2,281,798 | |
| 14,439 |
| 0.85 | |
Borrowings | |
| 336,432 | |
| 5,415 |
| 2.15 | | |
| 547,557 | |
| 7,149 |
| 1.74 | |
Total interest bearing liabilities | |
| 2,666,754 | |
| 12,525 |
| 0.63 | % | |
| 2,829,355 | |
| 21,588 |
| 1.02 | % |
Non-interest bearing demand deposits | |
| 598,434 | |
|
|
|
| | |
| 464,476 | |
|
|
|
| |
Other liabilities(6) | |
| 64,360 | |
|
|
|
| | |
| 63,812 | |
|
|
|
| |
Total liabilities(6) | |
| 3,329,548 | |
|
|
|
| | |
| 3,357,643 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Total shareholders' equity(6) | |
| 413,843 | |
|
|
|
| | |
| 405,728 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity(6) | | $ | 3,743,391 | |
|
|
|
| | | $ | 3,763,371 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | | |
Net interest spread | | | | | | | | 2.75 | % | | | | | | | | 2.79 | % |
Net interest margin | |
|
| |
|
|
| 2.88 | | |
|
| |
|
|
| 2.95 | |
Adjusted net interest margin(5) | | | | | | | | 2.73 | | | | | | | | | 2.94 | |
6961
NON-GAAP FINANCIAL MEASURES
This document contains certain non-GAAP financial measures in addition to results presented in accordance with accounting principles generally accepted in the United States of America, ("GAAP").or 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'sour GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company'sour results for any particular quarter or year. The Company'sOur 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 Companyus in this report as supplemental financial data should be considered in conjunction with the Company'sour GAAP financial information. In addition, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies because such measures may include or exclude other specified items.
The Company utilizesWe use the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts that the Company viewswe view 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 CompanyWe also calculatescalculate adjusted earnings per share based on itsour measure of adjusted earnings. The Company viewsWe view these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company'sour performance. Management also believesWe believe that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Companyus to other companies in the financial services industry. The CompanyWe also adjustsadjust certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.
7062
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items for the time periods presented:
| | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
(in thousands) |
| Calculations |
| 2021 |
| 2020 | | 2021 |
| 2020 | ||||
Net income |
|
| | $ | 11,028 | | $ | 8,402 | | $ | 29,533 | | $ | 24,604 |
Non-recurring items: | | | | | | | | | | | | | | |
Gain on sale of securities, net |
|
| |
| (1,930) | |
| — | |
| (1,980) | |
| (1,486) |
Loss (gain) on sale of premises and equipment, net |
|
| |
| (146) | |
| — | |
| (137) | |
| 90 |
Loss on other real estate owned |
|
| |
| — | |
| 335 | |
| (11) | |
| 366 |
Loss on debt extinguishment | | | | | 1,768 | | | — | | | 1,768 | | | 1,351 |
Acquisition, conversion and other expenses |
|
| |
| 318 | |
| 691 | |
| 1,759 | |
| 952 |
Income tax expense (1) |
|
| |
| (2) | |
| (245) | |
| (332) | |
| (304) |
Total non-recurring items | | | | | 8 | | | 781 | | | 1,067 | | | 969 |
Total adjusted income(2) |
| (A) | | $ | 11,036 | | $ | 9,183 | | $ | 30,600 | | $ | 25,573 |
| | | | | | | | | | | | | | |
Net interest income |
| (B) | | $ | 25,582 | | $ | 24,665 | | $ | 71,758 | | $ | 73,818 |
Plus: Non-interest income |
|
| |
| 11,350 | |
| 10,102 | |
| 31,103 | |
| 28,233 |
Total Revenue |
|
| |
| 36,932 | |
| 34,767 | |
| 102,861 | |
| 102,051 |
Gain on sale of securities, net |
|
| |
| (1,930) | |
| ��� | |
| (1,980) | |
| (1,486) |
Total adjusted revenue(2) |
| (C) | | $ | 35,002 | | $ | 34,767 | | $ | 100,881 | | $ | 100,565 |
| | | | | | | | | | | | | | |
Total non-interest expense |
|
| | $ | 23,372 | | $ | 22,419 | | $ | 67,587 | | $ | 67,044 |
Non-recurring expenses: | | | | | | | | | | | | | | |
(Loss) gain on sale of premises and equipment, net |
|
| |
| 146 | |
| — | |
| 137 | |
| (90) |
Loss on other real estate owned |
|
| |
| — | |
| (335) | |
| 11 | |
| (366) |
Loss on debt extinguishment | | | | | (1,768) | | | — | | | (1,768) | | | (1,351) |
Acquisition, conversion and other expenses |
|
| |
| (318) | |
| (691) | |
| (1,759) | |
| (952) |
Total non-recurring expenses | | | | | (1,940) | | | (1,026) | | | (3,379) | | | (2,759) |
Adjusted non-interest expense(2) |
| (D) | | $ | 21,432 | | $ | 21,393 | | $ | 64,208 | | $ | 64,285 |
| | | | | | | | | | | | | | |
Total revenue | | | | | 36,932 | | | 34,767 | | | 102,861 | | | 102,051 |
Total non-interest expense | | | | | 23,372 | | | 22,419 | | | 67,587 | | | 67,044 |
Pre-tax, pre-provision net revenue | | | | $ | 13,560 | | $ | 12,348 | | $ | 35,274 | | $ | 35,007 |
| | | | | | | | | | | | | | |
Adjusted revenue(2) | | | | | 35,002 | | | 34,767 | | | 100,881 | | | 100,565 |
Adjusted non-interest expense(2) | | | | | 21,432 | | | 21,393 | | | 64,208 | | | 64,285 |
Adjusted pre-tax, pre-provision net revenue(2) | | | | $ | 13,570 | | $ | 13,374 | | $ | 36,673 | | $ | 36,280 |
| | | | | | | | | | | | | | |
(in millions) |
|
| |
|
| |
|
| |
|
| |
|
|
Average earning assets |
| (E) | | $ | 3,412 | | $ | 3,444 | | $ | 3,386 | | $ | 3,392 |
Average paycheck protection program (PPP) loans | | (R) | | | 46 | | | 132 | | | 63 | | | 79 |
Average earning assets, excluding PPP loans | | (S) | | | 3,366 | | | 3,312 | | | 3,323 | | | 3,313 |
Average assets |
| (F) | |
| 3,764 | |
| 3,814 | |
| 3,743 | |
| 3,763 |
Average shareholders' equity(8) |
| (G) | |
| 421 | |
| 405 | |
| 414 | |
| 406 |
Average tangible shareholders' equity(2)(3)(8) |
| (H) | |
| 295 | |
| 278 | |
| 287 | |
| 278 |
Tangible shareholders' equity, period-end(2)(3)(8) |
| (I) | |
| 292 | |
| 272 | |
| 292 | |
| 272 |
Tangible assets, period-end(2)(3)(8) |
| (J) | |
| 3,612 | |
| 3,734 | |
| 3,612 | |
| 3,734 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
(in thousands) |
| Calculations |
| 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Net income |
|
| | $ | 11,430 | | $ | 11,028 | | $ | 31,045 | | $ | 29,533 |
Non-recurring items: | | | | | | | | | | | | | | |
Gain on sale of securities, net |
|
| |
| (44) | |
| (1,930) | |
| (53) | |
| (1,980) |
Gain on sale of premises and equipment, net |
|
| |
| — | |
| (146) | |
| (65) | |
| (137) |
Gain on other real estate owned |
|
| |
| — | |
| — | |
| — | |
| (11) |
Loss on debt extinguishment | | | | | — | | | 1,768 | | | — | | | 1,768 |
Acquisition, conversion and other expenses |
|
| |
| 31 | |
| 318 | |
| 356 | |
| 1,759 |
Income tax expense (1) |
|
| |
| 3 | |
| (2) | |
| (55) | |
| (332) |
Total non-recurring items | | | | | (10) | | | 8 | | | 183 | | | 1,067 |
Total adjusted income(2) |
| (A) | | $ | 11,420 | | $ | 11,036 | | $ | 31,228 | | $ | 30,600 |
| | | | | | | | | | | | | | |
Net interest income |
| (B) | | $ | 29,910 | | $ | 25,582 | | $ | 80,727 | | $ | 71,758 |
Plus: Non-interest income |
|
| |
| 8,823 | |
| 11,350 | |
| 27,093 | |
| 31,103 |
Total Revenue |
|
| |
| 38,733 | |
| 36,932 | |
| 107,820 | |
| 102,861 |
Gain on sale of securities, net |
|
| |
| (44) | |
| (1,930) | |
| (53) | |
| (1,980) |
Total adjusted revenue(2) |
| (C) | | $ | 38,689 | | $ | 35,002 | | $ | 107,767 | | $ | 100,881 |
| | | | | | | | | | | | | | |
Total non-interest expense |
|
| | $ | 23,032 | | $ | 23,372 | | $ | 66,618 | | $ | 67,587 |
Non-recurring expenses: | | | | | | | | | | | | | | |
Gain on sale of premises and equipment, net |
|
| |
| — | |
| 146 | |
| 65 | |
| 137 |
Gain on other real estate owned |
|
| |
| — | |
| — | |
| — | |
| 11 |
Loss on debt extinguishment | | | | | — | | | (1,768) | | | — | | | (1,768) |
Acquisition, conversion and other expenses |
|
| |
| (31) | |
| (318) | |
| (356) | |
| (1,759) |
Total non-recurring expenses | | | | | (31) | | | (1,940) | | | (291) | | | (3,379) |
Adjusted non-interest expense(2) |
| (D) | | $ | 23,001 | | $ | 21,432 | | $ | 66,327 | | $ | 64,208 |
| | | | | | | | | | | | | | |
Total revenue | | | | | 38,733 | | | 36,932 | | | 107,820 | | | 102,861 |
Total non-interest expense | | | | | 23,032 | | | 23,372 | | | 66,618 | | | 67,587 |
Pre-tax, pre-provision net revenue | | | | $ | 15,701 | | $ | 13,560 | | $ | 41,202 | | $ | 35,274 |
| | | | | | | | | | | | | | |
Adjusted revenue(2) | | | | | 38,689 | | | 35,002 | | | 107,767 | | | 100,881 |
Adjusted non-interest expense(2) | | | | | 23,001 | | | 21,432 | | | 66,327 | | | 64,208 |
Adjusted pre-tax, pre-provision net revenue(2) | | | | $ | 15,688 | | $ | 13,570 | | $ | 41,440 | | $ | 36,673 |
| | | | | | | | | | | | | | |
(in millions) |
|
| |
|
| |
|
| |
|
| |
|
|
Average earning assets |
| (E) | | $ | 3,459 | | $ | 3,412 | | $ | 3,402 | | $ | 3,386 |
Average paycheck protection program (PPP) loans | | (R) | | | — | | | 46 | | | 5 | | | 63 |
Average earning assets, excluding PPP loans | | (S) | | | 3,459 | | | 3,366 | | | 3,397 | | | 3,323 |
Average assets |
| (F) | |
| 3,772 | |
| 3,764 | |
| 3,725 | |
| 3,743 |
Average shareholders' equity |
| (G) | |
| 393 | |
| 421 | |
| 402 | |
| 414 |
Average tangible shareholders' equity(2)(3) |
| (H) | |
| 267 | |
| 295 | |
| 276 | |
| 287 |
Tangible shareholders' equity, period-end(2)(3) |
| (I) | |
| 254 | |
| 292 | |
| 254 | |
| 292 |
Tangible assets, period-end(2)(3) |
| (J) | |
| 3,715 | |
| 3,612 | |
| 3,715 | |
| 3,612 |
| | | | | | | | | | | | | | |
7163
| | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| Nine Months Ended September 30, | | ||||||||
| | Calculations | | 2021 | | 2020 | | 2021 | | 2020 | | ||||
(in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
Common shares outstanding, period-end |
| (K) | |
| 14,987 | |
| 14,929 | |
| 14,987 | |
| 14,929 | |
Average diluted shares outstanding |
| (L) | |
| 15,051 | |
| 15,103 | |
| 15,035 | |
| 15,382 | |
| | | | | | | | | | | | | | | |
Adjusted earnings per share, diluted(2) |
| (A/L) | | $ | 0.73 | | $ | 0.61 | | $ | 2.04 | | $ | 1.66 | |
Tangible book value per share, period-end(2)(8) |
| (I/K) | |
| 19.48 | |
| 18.21 | |
| 19.48 | |
| 18.21 | |
Securities adjustment, net of tax(1)(4) |
| (M) | |
| 4,398 | |
| 11,681 | |
| 4,398 | |
| 11,681 | |
Tangible book value per share, excluding securities adjustment(2)(4)(8) |
| (I+M)/K | |
| 19.19 | |
| 17.42 | |
| 19.19 | |
| 17.42 | |
Total tangible shareholders' equity/total tangible assets(2)(8) |
| (I/J) | |
| 8.08 | |
| 7.28 | |
| 8.08 | |
| 7.28 | |
| | | | | | | | | | | | | | | |
Performance ratios(5) | | | | | | | | | | | | | | | |
Return on assets | |
| | | 1.16 | % | | 0.88 | | | 1.05 | % | | 0.87 | % |
Adjusted return on assets(2) | | (A/F) | | | 1.16 | | | 0.96 | | | 1.09 | | | 0.91 | |
Pre-tax, pre-provision return on assets | | | | | 1.43 | | | 1.29 | | | 1.26 | | | 1.24 | |
Adjusted pre-tax, pre-provision return on assets (2) | | (U/F) | | | 1.43 | | | 1.39 | | | 1.31 | | | 1.29 | |
Return on equity(8) | |
| | | 10.38 | | | 8.25 | | | 9.54 | | | 8.10 | |
Adjusted return on equity(2)(8) | | (A/G) | | | 10.39 | | | 9.02 | | | 9.98 | | | 8.42 | |
Return on tangible equity(8) | | | | | 15.08 | | | 12.32 | | | 14.01 | | | 12.10 | |
Adjusted return on tangible equity(1)(2)(8) | | (A+Q)/H | | | 15.09 | | | 13.44 | | | 14.50 | | | 12.57 | |
Efficiency ratio(2)(6) | | (D-O-Q)/(C+N) | | | 59.18 | | | 59.47 | | | 61.48 | | | 61.62 | |
Net interest margin | | (B+P)/E | | | 3.02 | | | 2.90 | | | 2.88 | | | 2.95 | |
Adjusted net interest margin(2)(7) | | (B+P-T)/S | | | 2.75 | | | 2.89 | | | 2.73 | | | 2.94 | |
| | | | | | | | | | | | | | | |
Supplementary data (in thousands) | |
| | |
| | |
| | |
| | |
| |
Taxable equivalent adjustment for efficiency ratio | | (N) | | $ | 576 | | $ | 570 | | $ | 1,757 | | $ | 1,395 | |
Franchise taxes included in non-interest expense | | (O) | | | 143 | | | 121 | | | 396 | | | 360 | |
Tax equivalent adjustment for net interest margin | | (P) | | | 421 | | | 416 | | | 1,284 | | | 1,041 | |
Intangible amortization | | (Q) | | | 233 | | | 256 | | | 707 | | | 768 | |
Interest and fees on PPP loans | | (T) | | | 2,690 | | | 1,052 | | | 5,058 | | | 1,921 | |
| | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| | Calculations | | 2022 | | 2021 | | 2022 | | 2021 | ||||
(in thousands) |
|
| |
|
| |
|
| |
|
| |
|
|
Common shares outstanding, period-end |
| (K) | |
| 15,066 | |
| 14,987 | |
| 15,066 | |
| 14,987 |
Average diluted shares outstanding |
| (L) | |
| 15,113 | |
| 15,051 | |
| 15,100 | |
| 15,035 |
| | | | | | | | | | | | | | |
Adjusted earnings per share, diluted(2) |
| (A/L) | | $ | 0.76 | | $ | 0.73 | | $ | 2.07 | | $ | 2.04 |
Tangible book value per share, period-end(2) |
| (I/K) | |
| 16.89 | |
| 19.48 | |
| 16.89 | |
| 19.48 |
Securities adjustment, net of tax(1)(4) |
| (M) | |
| (58,715) | |
| 4,398 | |
| (58,715) | |
| 4,398 |
Tangible book value per share, excluding securities adjustment(2)(4) |
| (I+M)/K | |
| 20.79 | |
| 19.19 | |
| 20.79 | |
| 19.19 |
Total tangible shareholders' equity/total tangible assets(2) |
| (I/J) | |
| 6.85 | |
| 8.08 | |
| 6.85 | |
| 8.08 |
| | | | | | | | | | | | | | |
Performance ratios(5) | | | | | | | | | | | | | | |
Return on assets | |
| | | 1.20 | % | | 1.16 | | | 1.11 | % | | 1.05 |
Adjusted return on assets(2) | | (A/F) | | | 1.20 | | | 1.16 | | | 1.12 | | | 1.09 |
Pre-tax, pre-provision return on assets | | | | | 1.65 | | | 1.43 | | | 1.48 | | | 1.26 |
Adjusted pre-tax, pre-provision return on assets (2) | | (U/F) | | | 1.65 | | | 1.43 | | | 1.49 | | | 1.31 |
Return on equity | |
| | | 11.55 | | | 10.38 | | | 10.32 | | | 9.54 |
Adjusted return on equity(2) | | (A/G) | | | 11.54 | | | 10.39 | | | 10.38 | | | 9.98 |
Return on tangible equity | | | | | 17.25 | | | 15.08 | | | 15.28 | | | 14.01 |
Adjusted return on tangible equity(1)(2) | | (A+Q)/H | | | 17.24 | | | 15.09 | | | 15.37 | | | 14.50 |
Efficiency ratio(2)(6) | | (D-O-Q)/(C+N) | | | 57.67 | | | 59.18 | | | 59.66 | | | 61.48 |
Net interest margin | | (B+P)/E | | | 3.47 | | | 3.02 | | | 3.21 | | | 2.88 |
Adjusted net interest margin(2)(7) | | (B+P-T)/S | | | 3.47 | | | 2.75 | | | 3.21 | | | 2.73 |
| | | | | | | | | | | | | | |
Supplementary data (in thousands) | |
| | |
| | |
| | |
| | |
|
Taxable equivalent adjustment for efficiency ratio | | (N) | | $ | 533 | | $ | 576 | | $ | 1,500 | | $ | 1,757 |
Franchise taxes included in non-interest expense | | (O) | | | 149 | | | 143 | | | 434 | | | 396 |
Tax equivalent adjustment for net interest margin | | (P) | | | 379 | | | 421 | | | 1,033 | | | 1,284 |
Intangible amortization | | (Q) | | | 233 | | | 233 | | | 699 | | | 707 |
Interest and fees on PPP loans | | (T) | | | — | | | 2,690 | | | 223 | | | 5,058 |
(1) | Assumes a marginal tax rate of 23.41% for 2022 and 23.71% for |
(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 |
(5) | All performance ratios are based on average balance sheet amounts, where applicable. |
(6) | Efficiency ratio is computed by dividing core non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis. |
(7) | Adjusted net interest margin excludes Paycheck Protection Program loans. |
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FINANCIALQUARTERLY PERFORMANCE SUMMARY
The Company reported Earnings (third quarter 2021 net income of $11.0 million or $0.73 per diluted share, up from $8.4 million or $0.56 per diluted share in2022 compared to the same quarter of 2020. Adjusted2021)
THIRD QUARTER HIGHLIGHTS (ratios compared to the third quarter 2020)
Adjusted earnings per share (non-GAAP) in the third quarter 2021 grew 20% over the same quarter
While fee income and efficiency improvements contributed to increased profitability, the quarterly results also benefited from a 13 basis point expansion in the margin to 2.99% compared with 2.86% in the second quarter 2021 on a normalized basis (excluding PPP and excess cash effects). This improvement is a direct result of increased core deposit funding as the Company gained market share and reduced reliance on wholesale borrowings. Financial Position(As of September 30, 2021, the Company’s wholesale borrowings as a percentage of funding was 9%, down from 23% in the prior year.2022, compared to June 30, 2022)
The Company executed another delever and security remix strategy
The Company continues to build long term shareholder value while providing a favorable dividend rate relative to other community banks. The Company’s return on equity for the third quarter rose to 10.38% from 8.25%gain in the same quarter of 2020. The Company remains committed to underwriting standards as evidenced by further improvement in past-due accounts, non-accruals and a near zero net-charge-off ratio.
The Company was named by Newsweek Magazine as one of "America's Best Banks." Best Bank winners were selected from over 2,500 financial institutions and assessed on more than 30 separate factors including the overall health of the bank, customer service performance and features, digital and branch presence, account and loan options, interest rate offerings, and fees.
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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 20212022 AND DECEMBER 31, 20202021
Total assets were $3.7 billion at the end of the third quarter 2021 as well as at year-end 2020. In the third quarter the Company executed a balance sheet delever and security remix strategy, prepaying $89.0 million of Federal Home Loan Bank advances and selling $43.5 million of securities. The replenishment of those securities is expected to be fulfilled in the fourth quarter 2021. Total loans decreased $28.7 million from year-end 2020 primarily due to PPP loan forgiveness outpacing 2021 originations by $29.5 million from year-end 2020. Non-maturity deposits (core deposits) increased $330.2 million from the end of 2020 as over 800 new accounts were opened during the quarter, continuing a trend of almost 1,000 new accounts per quarter. The loan to deposit ratio was 84% at the end of the third quarter compared to 88% at year-end 2020. Asset quality metrics remain strong with an allowance for credit losses to total loans ratio of 0.89% and a coverage ratio to non-accruing loans of 184%, up from 157% as of year-end 2020. Tangible book value per share (non-GAAP) increased to $19.48 from $18.77 at year-end on strong earnings offset by the impact of the CECL adoption in the first quarter 2021.
Cash
Total cash and cash equivalents at September 30, 2021 were $341.2 million, compared to $226.0 million at December 31, 2020. Interest bearing deposits held with other banks totaled $302.1 million at quarter end and $198.4 million at year-end 2020 carrying a yield of 0.15% and 0.11% respectively. The increase in cash balances reflects the growth in core deposits.
Securities
Securities totaled $555.5Total securities decreased to $565.8 million in the third quarter 2021 and $599.1from $625.6 million at year-end 2020 representing 15% and 16% of2021. The $59.8 million decrease in total assets, respectively. The decrease is primarily due to the security sale of $43.5 million as a part of the balance sheet delever and security remix strategy. In the first nine months of 2021 purchases totaled $123.3 million and were offset by $52.4securities included $99.3 million of purchases, $19.5 million in sales, $103.4an $11.7 million cost reduction to municipal securities that are hedged, and $50.4 million of maturities, calls and pay-downs of amortizing securities and a $3.8 million reduction in FHLB stock.amortization. Fair value adjustments increasedreduced the security portfolio by $7.3$76.6 million at the end of the thirdSeptember 30, 2022 quarter, 2021 and $13.1compared to an increase of $2.6 million at year-end 2020. Unrealized gains decreased for2021. Net unrealized losses in the nine months ended September 30, 2021 dueof 2022 resulted from the Federal Reserve increasing the federal funds target interest rate 300 basis points in that period. All securities remain classified as available for sale to salesprovide flexibility in loan funding and changes in the long-term treasury yield curve.management of our cost of funds. The weighted average yield of the Company'sour securities portfolio was 2.82% as of September 30, 2021 compared to 2.96%3.43% at year-end 2020. At the end of the third quarter 2021 securitiesquarter-end and 2.63% at year-end. Securities held by the Companyat quarter-end had an average life of 5.19.5 years and an effective duration of 4.45.1 years compared to 4.85.3 years and 4.34.2 years at the end of 2020,year-end 2021, respectively.
Loans Held For Sale
Held for sale loans decreased to $7.5 million at September 30, 2021 from $24.0 million at December 31, 2020. The Company sold $28.5 million of residential loan originations in the third quarter 2021 compared with $86.2 million in the same quarter of 2020. Sales in the nine month period of 2021 totaled $153.9 million and $156.0 million in the comparable period of 2020. The decrease in sales reflects the Company strategically directing residential loan production to the balance sheet when rates were higher in the quarter.
Loans
Loan balances in the third quarterTotal loans increased by $318.5 million from year-end 2021, were $2.5 billion compared $2.6or 17% annualized, to $2.9 billion at year-end 2020.September 30, 2022. Commercial loans grew 9% on a year-to-date annualized basis, excludingincreased by $241.2 million with growth from existing customers and 491 new lending relationships. PPP loans and included 2 new relationships totaling $21.2 million duringloan balances were zero at the third quarter. Commercial real estate and commercial and industrial loans, excluding PPP, increased 11% and 3% on a year-to-date annualized basis, respectively. PPP loans totaled $24.2end of the quarter, compared to $6.7 million at quarter-end, consisting of $24.1year-end. Total residential loans increased by $75.6 million from 2021, and $145 thousand from 2020, and were $53.8 million at year-end 2020. COVID loan modifications totaled $4.7 million, down from $68.6 million at year-end, as the majority of modified loans have resumed normal payment schedules. Total residential loans decreased $74.2 million from year-end 2020, which includes $156.3 million ofwe placed more originations recorded on the balance sheet instead of selling into the secondary market. Residential loan origination volume in 2022 is significantly down as compared to respective periods 2021 on lower refinancing activity and $230.5 million of prepayments/amortization.increasing market rates.
Allowance for Credit Losses
The allowance for credit losses (ACL) totaled $22.4ACL increased to $25.0 million at the end of the third quarter 2021 and $19.0quarter-end as compared to $22.7 million at year-end 2020. The increase is primarily2021 principally due to loan growth. The ratio of the Company’s adoption of CECL as of January 1, 2021, which increasedallowance to loans decreased to 0.88% from 0.90% at year-end reflecting an improvement in economic forecasts used the ACL by $5.2 million and unfunded commitment reserves by $1.6 million. Since adoption the ACL has decreased due to improved economic forecasts and lower reserves on specific loans offset by changes in loan mix.
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Net charge offs totaled $434 thousand in the first nine months of 2021, or 0.02% of total average loans, compared to $1.9 million, or 0.07% of total average loans, for the same period of 2020.calculation. Non-accruing loans were $12.2continue to trend downwards on a quarterly basis to $7.8 million or 0.48% of total loans, at the end of the third quarter 2021 and were $12.2 million or 0.48% of total loans at year-end 2020.from $10.2 million. The ratio of accruing past due loans to total loans improved to 0.12%0.10% of total loans decreasing from 0.58%0.32%. Total delinquent and non-accruing loans as percentage of December 31, 2020.total improved to 0.37% from 0.72%. Net recoveries on previously charged-off loans for the first nine months of 2022 totaled $83 thousand compared to net charge-offs of $434 thousand for the same period of 2021.
Other Assets
Total otherOther assets were $322.4$366.1 million compared to $318.5 million at the endyear-end 2021. The increase includes $18.5 million of the third quarter 2021 compared to $331.4deferred tax assets recorded in connection with unrealized losses on securities, $6.5 million as of December 31, 2020. The decrease is primarily frominvestments made in tax credits and community developments, a $9.7$7.9 million decreaseincrease in the fair value inof customer loan derivatives offset by $2.9swaps, and a $10.2 million increase in community limited partnership investments. Additionally,the fair value of derivative balances and deferred taxes have been restated for prior periods as described in Note 1 Revision of Previously Issued Financial Statements.instruments.
Deposits and Borrowings
Total deposits increased by $87.1 million from year-end 2021 to $3.1 billion. In the first nine months of 2022 over 2,300 net new deposit accounts opened and over 2,900 were $3.0 billionopened in the same period of 2021. The loan to deposit ratio increased to 91% from 83% at the end of 2021 due to loan growth offset in part by 4% annualized growth in total deposits. Core deposits grew by $178.4 million, or 9% annualized, while time deposits decreased by $27.7 million, which includes $36.0 million of wholesale deposits that matured. Borrowings increased by $70.5 million from year-end 2021 to supplement excess cash and deposit funding. FHLB borrowings totaled $169.8 million and $98.6 million with weighted average rates of 2.91% and 0.49% at the end of the third quarter of 2022 and year-end 2021, compared to $2.9 billion at year-end 2020. Non-maturity deposits increased $330.2 million over the first nine months of 2021, or 20% on an annualized basis due to growth in new accounts with over 2,900 new customer relationships added. Growth in core deposits during 2021 and the prepayment of $89.0 million in FHLBrespectively. Wholesale borrowings resulted in a reduction of wholesale funding as a percentage of total fundingdebt decreased to 9% from 18% at year-end 2020. Time deposits decreased $229.1 million to $469.2 million at quarter-end as $162.3 million of brokered deposits matured in the first nine months of 2021 and were not replaced due to excess liquidity. Retail time deposits decreased $66.9 million as customers moved funds to transactional accounts upon contractual maturity. Total borrowings decreased by $85.7 million primarily from the aforementioned delever strategy. The average cost of deposits was 0.27%5.8% in the third quarter of 2021 compared to 0.61% in the fourth quarter 2020 and borrowing costs were 2.11% compared to 1.83% for the same periods. The change in cost of funds reflects the attrition of balances on prepaid or matured borrowings and time deposits.from 6.0% at year-end 2021.
66
Derivative Financial Instruments and Other Liabilities
The notional balance of derivative financial instruments increasedOther liabilities were $75.6 million compared to $929.9 million at the end of the third quarter 2021 from $876.6$58.0 million at year-end 2020.2021. The $17.6 million increase is principally dueincludes $7.0 million in remaining tax credit investment commitments, a $7.9 million increase related to a $50.0 million new hedge on variable rate loans tied to one-month LIBOR. The net fair value of all derivatives was a liability of $2.2 million at the end of the third quarter 2021 compared to liability of $5.5 million at year-end 2020. The reduction in net derivative fair values reflects the rise in long-term interest rates. Additionally, derivative balances have been restated for prior periods as described in Note 1 Revision of Previously Issued Financial Statements.
Other liabilities totaled $62.3 million at the end of the third quarter 2021 compared to $75.0 million as of December 31, 2020. The decrease primarily reflects the $9.7 million reduction in the fair value of customer loan derivativesswaps, and a $3.3$4.5 million decrease in cash flow andincrease related to the fair value hedges.of derivative instruments.
Equity
Total equity was $418.4 million, compared with $407.1 million at year-end 2020. The Company’s book value per share was $27.92 as of September 30, 2021 compared with $27.29 at December 31, 2020. Equity included net unrealized securities totaling $4.4 million at the end of the third quarter 2021 and $10.0of 2022 was $380.0 million compared to $424.1 million at year-end 2020. Equity was reduced by $5.22021. The $44.1 million due to the Company’s CECL adoptiondecrease in the first quarter 2021. Additionally, accumulatednine months of 2022 included net income totaling $31.0 million, $11.4 million of dividends to shareholders and $64.9 million of other comprehensive income has been restated for prior periods as described in Note 1 Revisionlosses. Other comprehensive losses were primarily due to unrealized losses on securities, net of Previously Issued Financial Statements.tax, totaling $60.7 million.
In June 2022, our Board of Directors authorized a stock repurchase plan for up to 5% of outstanding shares of common stock, which represents approximately 751,000 shares. As of September 30, 2022, no repurchases have been made, but we will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20212022 AND 20202021
SummaryNet Income
Net income in the third quarter 2021of 2022 was $11.4 million, or $0.76 per diluted share, compared to $11.0 million, or $0.73 per diluted share, compared to $8.4 million, or $0.56 per share, in the same quarter of 2020. Net income improved on higher fee income and fees from PPP loans in the quarter. PPP loan fees contributed $0.13 to earnings per share in the third quarter of 2021 and $0.06 in the same period of 2020. Adjusted earnings totaled $11.0 million or $0.73 per share, compared to $9.1 million, or $0.61 per share, in the same
75
quarter of 2020. Non-recurring items (non-GAAP) reduced net income by $8 thousand and $781 thousand in third quarters of 2021 and 2020, respectively. The Company's return on assets ratio was 1.16% in the third quarter of 2021 and 0.88% in the same quarter of 2020. Adjusted return on assets (non-GAAP) was 1.16% and 0.96% for the third quarters of 2021 and 2020, respectively evidencing continued execution of strategic initiatives that balance growth and earnings2021.
The Company reported year-to-date 2021During the first nine months of 2022, net income of $29.5was $31.0 million, or $1.96$2.06 per diluted share, compared with $24.6to $29.5 million, or $1.60$1.96 per diluted share, in the same period of 2020. Adjusted earnings increased to $30.6 million, or $2.04 per diluted share comparedwith$25.6million,or$1.66per diluted share,fortherespectiveperiods.2021. Non-recurring items (non-GAAP) in the first nine months reduced net income by $1.1 million, and $969 thousandor $0.07 per diluted share, in 2021 and 2020, respectively. The return on assets ratio year-to-date2021.
2021was1.05%comparedto0.87%intheprioryear and adjusted return on assets was 1.09% during the first nine months of 2021 and 0.91% in the same period of 2020. Thesechangeslargelyreflectthesame factors and trends discussed above that drove third quarter net income and average assets.
Net Interest Income
Net interest income was $29.9 million in the third quarter of 2022 compared with $25.6 million in the third quarter 2021of 2021. NIM was 3.47% compared with $24.7 million into 3.02% for the same quarterperiods, and was 3.50%% and 2.94%, respectively, on a non-GAAP basis when excluding the impact of 2020. NetPPP loan fees and interest-bearing excess cash. The increase in net interest income and net interest margin was 3.02% compared to 2.90% in third quarter of 2020. Acceleration of PPP loan fee amortization due to forgiveness contributed 28 basis pointshigher interest on earning assets due to NIM in the third quarter 2021 and 1 basis point in the same period of 2020. Interest-bearing cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 26 basis points in the quarter and 8 basis points in the third quarter 2020.increasing their federal funds target rate. The yield on earning assets totaled 3.41%3.84% compared to 3.57%3.41% in the third quarter 2020. Excluding the impact of PPP and excess cash, the yield on earning assets totaled 3.42% and 3.67% for the same periods.2021. The yield on loans was 4.04% in the third quarter of 2022, and 3.98% in the third quarter 2021and 3.81%of 2021. The non-GAAP the yield on loans was 4.04% and 3.62% for the same periods when excluding PPP loan fees. Total cost of deposits was 0.30% in the third quarter of 2020. Excluding PPP loans the yield on loans was 3.62%2022 compared to 0.27% in the third quarter of 2021 and 3.83% inreflecting a lower correlation to federal fund rate movements. Borrowing costs were 2.69% compared to 2.11% for the third quarter of 2020. Costs of funds decreased to 0.50% from 0.82% in the third quarter 2020same periods due to increased core deposit levels, lower deposit rates and reduced wholesale borrowings.the repricing of rolling short-term FHLB borrowings to market rates.
For the first nine months of 2021,2022, net interest income was $71.8$80.7 million compared with $73.9$71.8 million in the same period of 2020. Net interest margin2021. The comparison of NIM and earning asset yields were 3.21% and 2.88%, and 3.51% and 3.38% in 2022 and 2021, respectively. The explanations for improvement in those ratios are consistent with the nine months ended was 2.88% in the third quarter 2021 compared to 2.95% in the third quarter of 2020. The decrease in net interest income and NIM was driven by rate compression triggered by the pandemic, combined with growth in the Company’s interest-bearing cash balances. PPP loan accretion in 2021 helped to offset interest rate compression on yields. Costs of funds for the nine months ended September 30, 2021 decreased to 0.63% from 1.02% due to increased core deposit levels, lower deposit rates and reduced wholesale borrowings.three month comparison above.
Provision for Credit Losses
The provision for credit losses (the “provision”) for the quarter was $1.3 million, compared to a benefitrecapture of $174 thousand compared to an expense of $1.8 million in the third quarter of 2020. For2021.
During the first nine months of 2021,2022, the provision for credit losses was $2.2 million compared to a benefit of $1.4 million compared to an expense of $4.3 million in the same period of 2020.2021. The benefits experiencedchange in the periods of 2021provisions for credit losses and benefit are mostly attributable to continued strong credit qualityloan growth in 2022, and improvingimproved economic forecasts. forecasts in 2021 as compared to 2020, respectively.
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Non-Interest Income
Non-interest income in the third quarter 2021of 2022 was $11.4$8.8 million, compared to $10.1$11.4 million in the same quarter of 2020. The increase was due to higher customer service fees, wealth management income, and a gain on securities sales.2021. Customer service fees were $3.5$3.8 million in the third quarter of 2022, compared to $2.9$3.5 million in the same period of 2020.2021. The increase is due to over 800reflects the net new accounts that were opened during the quarter and a higher volume of customer activity and transactions. Wealth management income increased 10% overwas $3.5 million in the third quarter of 2022, down from $3.9 million in the same quarter of 2020 to $3.9 million with assets2021. Assets under management of $2.4 billion(“AUM”) declined approximately 16.1% year to date, as compared to $2.1 billionthe blended decline of the S&P 500 of 24.1%. The smaller decline in AUM is a direct function of effective portfolio management and new business successes. Mortgage banking income was $315 thousand in the third quarter of 2022, compared to $850 thousand in the same period of 2020. The Company sold securities resulting in a $1.9 million gain as part of its delever and security remix strategy. Mortgage banking activities contributed $850 thousand, compared to $2.6 million in the same period of 2020. The Company took advantage of volatility in the yield curve in the third quarter and put residential mortgages2021 reflecting higher on the balance sheet when rates were higheractivity and sold loans in the secondary market when rates were low.lower residential loan originations.
Non-interest income for the first nine months of 20212022 was $31.1$27.1 million compared to $28.2$31.1 million in the same period in 2020. The increase reflects a 13% increase in wealth management income, 15% increase in customer2021. Customer service fees 18% increase inincreased $1.4 million while mortgage banking income decreased $3.5 million and gainsin 2021 included a $2.0 million net gain on securities; all of which were driven bysecurity sales. The reasons for these changes are the same reasons as the quarterly period. comparison above.
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Non-Interest Expense
Non-interest expense was $23.4$23.0 million in the third quarter 2021 from $22.4of 2022, compared to $23.4 million in the same quarter of 2020. Salaries2021. The decrease is primarily the net result of a $499 thousand increase in salary and benefitsbenefit expense, decreased to $11.7 million compared to $11.8a $429 thousand increase in occupancy and equipment expense, and non-recurring expenses totaling $2.1 million in the same quarter2021. Salary and benefit expense increased due to annual cost of 2020, reflecting full-time equivalents of 428 compared to 457living adjustments in the thirdsecond quarter of 2020. Non-core2022 along with higher pay-for-performance incentives. Occupancy and equipment expense increased on higher utility costs and software amortization in 2022. Non-recurring expenses (non-GAAP) in the third quarter 2021, totaled $1.9 million and were mostly made up of theincluded a $1.8 million prepayment penaltyloss on debt extinguishment. In the same quarterextinguishment and $318 thousand of 2020 non-core expenses (non-GAAP) totaled $1.0 million and included costsfees related to consolidate the Company’s wealth management systems. The efficiency ratio for the third quarter was 59.18% compared to 59.47% in the same period of 2020. Excluding the effects of PPP the efficiency ratio was 63.35% and 61.30% for the same respective periods.consolidating our Wealth Management businesses.
For the first nine months of 2021,2022, non-interest expense was $67.6$66.6 million and $67.0compared to $67.6 million in the same period of 2020.2021. The Company’s year-to-datereasons for the decrease in the nine month period is similar to the quarterly explanation above with higher salary and benefits expense and occupancy costs, and lower non-recurring expenses. Non-recurring expenses in 2022 totaled $291 thousand consisting of mostly contract renegotiation fees. In 2021, non-recurring expenses were $3.4 million consisting of $1.8 million of reduction in workforce costs and a $1.8 million loss on extinguishment of debt. The efficiency ratio was 59.66% in the first nine months of 2022 compared to 61.48% in same period 2021, compared to 61.62% in 2020 which reflects managements disciplined approach to expense management as revenue grows and the above noted expense initiatives. Non-recurring expenses (non-GAAP) in the first nine months of 2021 totaled $3.3 million and $2.8 million in the same period of 2020. In the first nine months of 2021 these expenses mostly consisted of workforce reduction charges and loss on debt extinguishment and in 2020 primarily consisted of a loss on debt extinguishment and costscontinues to consolidate wealth management systems.
Income Tax Expense
The third quarter effective tax rate decreased to 19.7% in 2021 compared with 20.3% in the same quarter of 2020, reflecting higher pre-tax income being offset by the proportional amounts of tax-advantaged revenue.grow.
Liquidity and Cash Flows
Liquidity is measured by the Company'sour ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeksWe seek 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'sour ability to meet liquidity needs, including variations in the markets served by itsour 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'sBank’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'sBank’s liquidity position tightens.
The Company’s liquidity position remains strong. During the third quarter 2022 we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on sold loans. At September 30, 2021,2022, available same-day liquidity totaled approximately $1.3$1.0 billion, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company'sour amortizing securities and loan portfolios. The CompanyWe had unused borrowing capacity at the FHLB of $467.2$385 million, unused borrowing capacity at the Federal
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Reserve of $72.0$84 million and unused lines of credit totaling $51.0 million, in addition to over $200.0$82.1 million in unencumbered, liquid investment portfolio assets.
The Bank maintains a liquidity contingency plan approved by the Bank'sBank’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. Companyus. Our management believes the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company'sour liquidity position.
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Capital Resources
Please see the “Equity” section of the Comparisontitled “Comparison of Financial Condition at September 30, 2022 and December 31, 2021--Equity” for a discussion of shareholders’ equity together with the Note 6 Capital“Capital Ratios and Shareholders’ EquityEquity” in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in the Company'sour most recent Annual Report on Form 10-K.
The Company’sOur principal cash requirement is the payment of dividends on our common stock, as and when declared by the Company'sour Board of Directors. Dividends to shareholders in the aggregate amount of $10.5$11.4 million and $10.1$10.5 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. All dividends declared and distributed by the Companyus will be in compliance with applicable state corporate law and regulatory requirements.
Off-Balance Sheet Arrangements
The Company is,We are, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company'sour financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors.
The Company’sOur off-balance sheet arrangements are limited to standby letters of credit whereby the Bank guarantees the obligations or performance of certain customers. These letters of credit are sometimes issued in support of third-party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.
The Company’sOur off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND RECENT ACCOUNTING PRONOUNCEMENTS
Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The Company’smost significant accounting policies we follow are describedpresented in Note 1 to our Annual Report on Form 10-K for the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accountingfiscal year ended December 31, 2021. Application of these principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires managementus to make estimates, assumptions, and assumptionsjudgments that affect the amounts reported in the financial statementsConsolidated Financial Statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemedMost accounting policies are not considered by management to be relevant, actual results could differ from those estimates.critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management 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 using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accouting Policies and Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes in our application of critical accounting policies since December 31, 2021.
Management has identifiedRefer to “Note 1 Basis of Presentation--Recent Accounting Pronouncements” of the Company's most criticalconsolidated financial statements for discussion of accounting policies as related to:
pronouncements issued but yet to be adopted and implemented.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Interest rate risk is theThe most significant market risk affecting the Company.that affects us is interest rate risk. Other types of market risk do not arise in the normal course of the Company’sour business activities.
The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee, (“ALCO”),or ALCO, chaired by the Bank’s Chief Financial Officer and composed of various members of the Bank’s 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'sManagement’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank'sBank’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'sBank’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’sBank’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 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.
A flatThe 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 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, and re-pricing volumes consistent with this flat rate assumption;
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A 200 basis point rise or decline in interest rates (or as appropriate given the absolute level of market rates) applied againstgrowth and a parallel shift in interest rates. All rate changes were “ramped” over the yield curvefirst 12-month period and then maintained at those levels over a twelve-month horizon together with a dynamic balance sheet anticipated to be consistent with such interest rate changes;
Various non-parallel shifts in the yield curve, including changes in either short-term or long-term rates over a twelve-month horizon, together with a dynamic balance sheet anticipated to be consistent with such interest rate changes; and
An extensionremainder of the foregoing simulations to each of two, three, four and five year horizons to determine the interest rate risk with the level of interest rates stabilizing in years two through five. Even though rates remain stable during this two to five year time period, re-pricing opportunities driven by maturities, cash flow, and adjustable rate products will continue to change the balance sheet profile for each of the interest rate conditions.
simulation horizon. Changes in net interest income based upon the foregoingthese simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.scenario.
As of September 30, 20212022, interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 was asset sensitive.sensitive over the one- and two-year horizons.
The following table presents the changes in sensitivities on net interest income for the periods ended September 30, 2022 and 2021:
| | | | | | | | | | | |
Change in Interest Rates-Basis Points (Rate Ramp) | | 1 - 12 Months | | 13 - 24 Months |
| ||||||
(in thousands, except ratios) | | $ Change | | % Change | | $ Change | | % Change |
| ||
At September 30, 2022 |
| |
|
|
|
| |
|
|
| |
-100 | | $ | (3,414) | | (2.4) | % | $ | (10,292) | | (6.9) | % |
+100 | | | 1,956 | | 1.4 | | | 6,544 | | 4.4 | |
+200 | |
| 3,721 | | 2.6 | | | 12,622 | | 8.5 | |
At September 30, 2021 | |
|
|
|
| |
| |
|
| |
-100 | |
| (2,226) |
| (2.4) | | | (6,019) |
| (6.7) | |
+100 | | | 4,715 | | 5.1 | | | 11,583 | | 13.0 | |
+200 | |
| 9,548 |
| 10.3 | |
| 21,878 |
| 24.5 | |
Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will deteriorate over the one year horizon (-2.4% versus the base case) while deteriorating further from that level over the two-year horizon (-9.8% versus the base case).horizon.
Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will improve over both the one and two-year horizons (10.6% and 21.8%, respectively).horizons.
As compared to December 31, 2020, the year-oneSeptember 30, 2021, sensitivity in theto both a down 100 basis points scenario was up slightly for the nine months ended September 30, 2021 (-2.6% prior, versus -2.4% current). The year-two sensitivities in the down 100 basis points scenario were mostly unchanged going from -9.5% to -9.8%. In the year-onepoint rate movement and an up 200 basis points scenario, results were up slightly going from 7.7% to 10.6%. Year-two, up 200 basis points was up (18.4% prior, versus 21.8% current).point rate movement has decreased.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Companywe cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.
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ITEM 4. CONTROLS AND PROCEDURES
(a) | Disclosure controls and procedures. |
Under the supervision and with the participation of our senior management, consisting of the Company’sour principal executive officer and our principal financial officer, the Companywe conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’sour management, including itsour principal executive officer and principal financial officer, concluded that as of September 30, 2021 the Company’s2022, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it fileswe file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’sOur disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in itsusing our Exchange Act reports is accumulated and communicated to the Company’sour management, including itsour principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(b) | Changes in internal control over financial reporting. |
There were no changes in the Company’sour internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The CompanyWe and itsour subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, whichbusinesses. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, our management believes that based on the information currently available the outcome of such actions, individually or in the opinion of management based upon currently available informationaggregate, will not have noa material adverse effect on the Company'sCompany’s consolidated financial statements.position as a whole.
ITEM 1A. RISK FACTORS
There were no material changes to the risk factors discussed in Part I, Item 1A. of the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021. In addition to the other information set forth in this report,Form 10-Q, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our company.Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c)On April 20, 2021, Company'sJune 23, 2022, our Board of Directors approved a twelve-month plan to repurchase up to 5% of itsour outstanding shares of common stock, representing 747,000751,000 shares.
The following table indicates that no shares were repurchased by the Companyus in the third quarter of 2021:
2022:
| | | | | | | | | |
|
| | | | | | 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 | |
July 1-31, |
| — | | $ | — |
| — |
|
|
August 1-31, |
| — | |
| — |
| — |
|
|
September 1-30, |
| — | |
| — |
| — |
|
|
Total |
| — | | $ | — |
| — |
|
|
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ITEM 6. EXHIBITS
| | |
| Certification of Chief Executive Officer under Rule 13a-14(a)/15d-14(a) |
|
| | |
| Certification of Chief Financial Officer under Rule 13a-14(a)/15d-14(a) |
|
| | |
| Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350 |
|
| | |
| Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350 |
|
| | |
| The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, | |
| | |
104 | Cover Page Interactive Data File |
*Filed herewith
**Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| BAR HARBOR BANKSHARES | |
| | |
| | |
Dated: November | By: | /s/ Curtis C. Simard |
| | Curtis C. Simard |
| | President & Chief Executive Officer (Principal Executive Officer) |
| | |
| | |
Dated: November |
| /s/ Josephine Iannelli |
| | Josephine Iannelli |
| | Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) |
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