Loans and Allowance for Loan Losses | LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated: December 31, (In thousands) 2019 2018 Residential real estate $ 1,070,374 $ 992,866 Commercial real estate 1,243,397 1,269,533 Commercial 421,108 381,780 Home equity 312,779 327,763 Consumer 25,772 20,624 HPFC 21,593 33,656 Total loans $ 3,095,023 $ 3,026,222 The loan balances for each portfolio segment presented above are net of their respective net unamortized fair value mark discount on acquired loans and net unamortized loan origination costs for the dates indicated: December 31, (In thousands) 2019 2018 Net unamortized fair value mark discount on acquired loans $ 2,593 $ 3,936 Net unamortized loan origination costs (3,111 ) (1,865 ) Total $ (518 ) $ 2,071 The Company's lending activities are primarily conducted in Maine, but also include loan production offices in Massachusetts and New Hampshire. The Company originates single- and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy. The HPFC loan portfolio is an acquired loan portfolio. It consists of niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. In 2016, the Company closed HPFC's operations and is no longer originating HPFC loans. In the normal course of business, the Company makes loans to certain officers, directors and their associated companies, under terms that are consistent with the Company’s lending policies and regulatory requirements and do not involve more than the normal risk of collectability or present other unfavorable features. At December 31, 2019 and 2018, outstanding loans to certain officers, directors and their associated companies was less than 5% of the Company's shareholders' equity. The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs. The Company completed its annual ALL policy review in the fourth quarter of 2019, and no significant changes to its ALL methodology were made. The Board of Directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors external loan reviews, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the Board of Directors. The Company's practice is to manage the portfolio proactively such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, consumer and HPFC. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include the following: Residential Real Estate . Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residences, including for investment purposes. Commercial Real Estate. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower. Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured. Home Equity. Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Consumer. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. HPFC. Prior to the Company's closing of HPFC's operations in 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral consists of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower and the original terms ranged from seven to ten years. The following table presents the activity in the ALL and select loan information by portfolio segment for the periods indicated: (In thousands) Residential Real Estate Commercial Real Estate Commercial Home Equity Consumer HPFC Total At or For the Year Ended December 31, 2019: ALL: Beginning balance $ 6,071 $ 11,654 $ 3,620 $ 2,796 $ 234 $ 337 $ 24,712 Loans charged off (462 ) (300 ) (1,167 ) (412 ) (301 ) (71 ) (2,713 ) Recoveries 16 49 225 1 19 — 310 Provision (credit) (1) 217 1,011 1,091 38 555 (50 ) 2,862 Ending balance $ 5,842 $ 12,414 $ 3,769 $ 2,423 $ 507 $ 216 $ 25,171 ALL balance attributable loans: Individually evaluated for impairment $ 364 $ 30 $ — $ 69 $ — $ — $ 463 Collectively evaluated for impairment 5,478 12,384 3,769 2,354 507 216 24,708 Total ending ALL $ 5,842 $ 12,414 $ 3,769 $ 2,423 $ 507 $ 216 $ 25,171 Loans: Individually evaluated for impairment $ 3,384 $ 402 $ 319 $ 373 $ — $ — $ 4,478 Collectively evaluated for impairment 1,066,990 1,242,995 420,789 312,406 25,772 21,593 3,090,545 Total loan balances $ 1,070,374 $ 1,243,397 $ 421,108 $ 312,779 $ 25,772 $ 21,593 $ 3,095,023 At or For the Year Ended December 31, 2018: ALL: Beginning balance $ 5,086 $ 11,863 $ 4,171 $ 2,367 $ 233 $ 451 $ 24,171 Loans charged off (173 ) (512 ) (736 ) (476 ) (96 ) (255 ) (2,248 ) Recoveries 90 28 1,770 44 11 1 1,944 Provision (credit) (1) 1,068 275 (1,585 ) 861 86 140 845 Ending balance $ 6,071 $ 11,654 $ 3,620 $ 2,796 $ 234 $ 337 $ 24,712 ALL balance attributable loans: Individually evaluated for impairment $ 586 $ 23 $ 53 $ 162 $ — $ — $ 824 Collectively evaluated for impairment 5,485 11,631 3,567 2,634 234 337 23,888 Total ending ALL $ 6,071 $ 11,654 $ 3,620 $ 2,796 $ 234 $ 337 $ 24,712 Loans: Individually evaluated for impairment $ 4,762 $ 930 $ 786 $ 442 $ 6 $ — $ 6,926 Collectively evaluated for impairment 988,104 1,268,603 380,994 327,321 20,618 33,656 3,019,296 Total loan balances $ 992,866 $ 1,269,533 $ 381,780 $ 327,763 $ 20,624 $ 33,656 $ 3,026,222 (In thousands) Residential Real Estate Commercial Real Estate Commercial Home Equity Consumer HPFC Total At or For the Year Ended December 31, 2017: ALL: Beginning balance $ 4,160 $ 12,154 $ 3,755 $ 2,194 $ 181 $ 672 $ 23,116 Loans charged off (482 ) (124 ) (1,014 ) (434 ) (124 ) (290 ) (2,468 ) Recoveries 30 141 301 2 17 6 497 Provision (credit) (1) 1,378 (308 ) 1,129 605 159 63 3,026 Ending balance $ 5,086 $ 11,863 $ 4,171 $ 2,367 $ 233 $ 451 $ 24,171 ALL balance attributable loans: Individually evaluated for impairment $ 568 $ 1,441 $ — $ — $ — $ — $ 2,009 Collectively evaluated for impairment 4,518 10,422 4,171 2,367 233 451 22,162 Total ending ALL $ 5,086 $ 11,863 $ 4,171 $ 2,367 $ 233 $ 451 $ 24,171 Loans: Individually evaluated for impairment $ 5,171 $ 6,199 $ 1,791 $ 429 $ — $ — $ 13,590 Collectively evaluated for impairment 853,198 1,157,824 371,609 322,949 18,149 45,120 2,768,849 Total loan balances $ 858,369 $ 1,164,023 $ 373,400 $ 323,378 $ 18,149 $ 45,120 $ 2,782,439 (1) The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments was presented within accrued interest and other liabilities on the consolidated statements of condition. At December 31, 2019 , 2018 , and 2017 , the reserve for unfunded commitments was $21,000 , $22,000 and $20,000 , respectively. The following table reconciles the provision for loan losses to the provision for credit losses as presented on the consolidated statement of income for the periods indicated: For the Year Ended December 31, (In thousands) 2019 2018 2017 Provision for loan losses $ 2,862 $ 845 $ 3,026 Change in reserve for unfunded commitments (1 ) 2 9 Provision for credit losses $ 2,861 $ 847 $ 3,035 The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored. As of December 31, 2019 , the Company's total exposure to the lessors of nonresidential buildings' industry was 12% of total loans and 31% of total commercial real estate loans. There were no other industry concentrations exceeding 10% of the Company's total loan portfolio as of December 31, 2019 . To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate, residential real estate, and HPFC loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL: • Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties. • Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification. • Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral. • Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. • Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted. Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing. The following table summarizes credit risk exposure indicators by portfolio segment as of the following dates: (In thousands) Residential Real Estate Commercial Real Estate Commercial Home Equity Consumer HPFC Total December 31, 2019: Pass (Grades 1 – 6) $ 1,062,825 $ 1,196,683 $ 415,870 $ — $ — $ 20,667 $ 2,696,045 Performing — — — 310,653 25,748 — 336,401 Special Mention (Grade 7) 473 31,753 2,544 — — 89 34,859 Substandard (Grade 8) 7,076 14,961 2,694 — — 837 25,568 Non-performing — — — 2,126 24 — 2,150 Total $ 1,070,374 $ 1,243,397 $ 421,108 $ 312,779 $ 25,772 $ 21,593 $ 3,095,023 December 31, 2018: Pass (Grades 1 – 6) $ 983,086 $ 1,247,190 $ 374,429 $ — $ — $ 32,261 $ 2,636,966 Performing — — — 325,917 20,595 — 346,512 Special Mention (Grade 7) 887 7,921 3,688 — — 123 12,619 Substandard (Grade 8) 8,893 14,422 3,663 — — 1,272 28,250 Non-performing — — — 1,846 29 — 1,875 Total $ 992,866 $ 1,269,533 $ 381,780 $ 327,763 $ 20,624 $ 33,656 $ 3,026,222 The Company closely monitors the performance of its loan portfolio. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan will return to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt. The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates: (In thousands) 30 – 59 Days Past Due 60 – 89 Days Past Due Greater Than 90 Days Total Past Due Current Total Loans Outstanding Loans > 90 Days Past Due and Accruing Non-Accrual Loans December 31, 2019: Residential real estate $ 2,297 $ 627 $ 2,598 $ 5,522 $ 1,064,852 $ 1,070,374 $ — $ 4,096 Commercial real estate 267 1,720 544 2,531 1,240,866 1,243,397 — 1,122 Commercial 548 — 417 965 420,143 421,108 — 420 Home equity 681 238 1,459 2,378 310,401 312,779 — 2,130 Consumer 108 31 23 162 25,610 25,772 — 24 HPFC — 243 288 531 21,062 21,593 — 364 Total $ 3,901 $ 2,859 $ 5,329 $ 12,089 $ 3,082,934 $ 3,095,023 $ — $ 8,156 December 31, 2018: Residential real estate $ 3,300 $ 2,046 $ 4,520 $ 9,866 $ 983,000 $ 992,866 $ — $ 5,492 Commercial real estate 1,794 369 1,108 3,271 1,266,262 1,269,533 — 1,380 Commercial 150 19 799 968 380,812 381,780 — 1,279 Home equity 907 607 1,476 2,990 324,773 327,763 — 1,846 Consumer 67 15 29 111 20,513 20,624 14 15 HPFC — 183 423 606 33,050 33,656 — 518 Total $ 6,218 $ 3,239 $ 8,355 $ 17,812 $ 3,008,410 $ 3,026,222 $ 14 $ 10,530 Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms for the year ended December 31, 2019 , 2018 , and 2017 is estimated to have been $420,000 , $600,000 , and $843,000 , respectively. TDRs The Company takes a conservative approach with credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs, typically, involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will remain a TDR until paid in full, or until the loan is again restructured at current market rates and no concessions are granted. The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate or, if the loan is currently collateral-dependent, using net realizable value, which was obtained through independent appraisals and internal evaluations. The following is a summary of TDRs, by portfolio segment, and the associated specific reserve included within the ALL for the dates indicated: Number of Contracts Recorded Investment Specific Reserve (In thousands, except number of contracts) December 31, December 31, December 31, 2019 2018 2019 2018 2019 2018 Residential real estate 22 25 $ 2,869 $ 3,614 $ 364 $ 443 Commercial real estate 2 2 338 347 30 23 Commercial 2 2 123 141 — — Consumer and home equity 1 2 299 304 69 162 Total 27 31 $ 3,629 $ 4,406 $ 463 $ 628 At December 31, 2019 , the Company had performing and non-performing TDRs with a recorded investment balance of $3.0 million and $636,000 , respectively. At December 31, 2018 , the Company had performing and non-performing TDRs with a recorded investment balance of $3.9 million and $513,000 , respectively. The following represents loan modifications that qualify as TDRs that occurred during the periods indicated: Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve (In thousands, except number of contracts) For the Year Ended December 31, For the Year Ended December 31, For the Year Ended December 31, For the Year Ended December 31, 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 Residential real estate: Maturity concession — — 2 $ — $ — $ 298 $ — $ — $ 298 $ — $ — $ 15 Interest rate concession — — 1 — — 134 — — 145 — — — Interest rate and maturity concession 2 2 1 64 231 148 69 254 156 15 50 30 Payment deferral — 1 — — 166 — — 166 — — 45 — Home equity: Interest rate and maturity concession — — 1 — — 315 — — 315 — — — Total 2 3 5 $ 64 $ 397 $ 895 $ 69 $ 420 $ 914 $ 15 $ 95 $ 45 As of December 31, 2019, the Company did no t have any other commitments to lend additional funds to borrowers with loans classified as TDRs. For the year ended December 31, 2019 and 2017, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted. For the year ended December 31, 2018, one home equity loan with a recorded investment of $299,000 at December 31, 2018 was modified as a TDR within the previous 12 months for which the borrower subsequently defaulted. At December 31, 2018, the Company carried a specific reserve on this redefaulted TDR of $162,000 . Impaired Loans Impaired loans consist of non-accrual loans and TDRs that are individually evaluated for impairment in accordance with the Company's policy. The following is a summary of impaired loan balances and the associated allowance by portfolio segment as of and for the periods indicated: For the Year Ended (In thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2019: With related allowance recorded: Residential real estate $ 2,395 $ 2,395 $ 364 $ 2,989 $ 110 Commercial real estate 128 128 30 130 11 Commercial — — — 292 — Home equity 318 318 69 522 — Consumer — — — — — HPFC — — — — — Ending balance 2,841 2,841 463 3,933 121 Without related allowance recorded: Residential real estate 989 1,116 — 1,258 21 Commercial real estate 274 433 — 381 13 Commercial 319 685 — 238 7 Home equity 55 192 — 115 — Consumer — — — 1 — HPFC — — — — — Ending balance 1,637 2,426 — 1,993 41 Total impaired loans $ 4,478 $ 5,267 $ 463 $ 5,926 $ 162 December 31, 2018: With related allowance recorded: Residential real estate $ 3,471 $ 3,471 $ 586 $ 3,591 $ 127 Commercial real estate 131 131 23 1,969 11 Commercial 556 556 53 111 — Home equity 318 318 162 250 — Consumer — — — — — HPFC — — — — — Ending balance 4,476 4,476 824 5,921 138 Without related allowance recorded: Residential real estate 1,291 1,415 — 1,524 34 Commercial real estate 799 975 — 2,269 13 Commercial 230 293 — 1,379 8 Home equity 124 305 — 195 — Consumer 6 13 — 1 — HPFC — — — — — Ending balance 2,450 3,001 — 5,368 55 Total impaired loans $ 6,926 $ 7,477 $ 824 $ 11,289 $ 193 For the Year Ended (In thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2017: With related allowance recorded: Residential real estate $ 3,858 $ 3,858 $ 568 $ 3,177 $ 131 Commercial real estate 5,422 5,422 1,441 8,900 22 Commercial — — — 31 — Home equity — — — 125 — Consumer — — — — — HPFC — — — 24 — Ending balance 9,280 9,280 2,009 12,257 153 Without related allowance recorded: Residential real estate 1,313 1,673 — 1,345 15 Commercial real estate 777 1,084 — 1,132 29 Commercial 1,791 2,964 — 1,920 10 Home equity 429 495 — 310 8 Consumer — — — 2 — HPFC — — — — — Ending balance 4,310 6,216 — 4,709 62 Total impaired loans $ 13,590 $ 15,496 $ 2,009 $ 16,966 $ 215 In-Process Foreclosure Proceedings At December 31, 2019 and 2018 , the Company had $1.3 million and $2.3 million , respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process. The Company continues to work these consumer mortgage loans through the foreclosure process to resolution; however, the foreclosure process typically will take 18 to 24 months due to the state of Maine foreclosure laws. |