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ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Maine | 01-0393663 | |||
(State or other jurisdiction of incorporation or |
(I.R.S. Employer Identification No.) | |||
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82 Main Street, Bar Harbor, ME | 04609-0400 | |||
(Address of principal executive |
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Registrant’s telephone number, including area code: (207) 288-3314
Title of each class | Name of each exchange on which registered | |
Common stock, par value $2.00 per share | NYSE American |
Title of className of exchange on which registered
Common Stock, $2.00 par value per share
NYSE MKT, LLC
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Indicate by checkmarkcheck mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESYes þýNO¨ No
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES Yes ¨o NOþ No
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Number of
4, 2018.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Certain statements, as well as certain other discussions contained in this Annual Report on Form 10-K, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operations, financial condition, and the business of Bar Harbor Bankshares (the “Company”) which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:
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Readers should carefully review all of these factors as well as the risk factors set forth in Item 1A, Risk Factors of this Annual Report on Form 10-K. There may be other risk factors that could cause differences from those anticipated by management.
When we say “we,” “us,” “our,” or the “Company,” we mean the Company on a consolidated basis with the Bank and Trust Services.
The forward-looking statements contained herein represent the Company's judgment as of the date of this Annual Report on Form 10-K, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the succeeding discussion, or elsewhere in this Annual Report on Form 10-K, except to the extent required by federal securities laws.
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5
Organization
undue reliance should not be placed on such statements. Bar Harbor Bankshares does not intend or assume any obligation to update or revise any forward-looking statements except as may be required by law.
The Company is a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company is also a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such is subject to the jurisdiction of the Superintendent (the “Superintendent”) of the Maine Bureau of Financial Institutions (“BFI”).
Recent Acquisition
On January 13, 2017, the Company completed the previously announced acquisition of Lake Sunapee Bank Group (“LSBG”). In connection with the acquisition, Lake Sunapee Bank, a wholly owned subsidiary of LSBG, merged with and into the Bank, with the Bank continuing as the surviving entity.
Bar Harbor Bank & Trust
The Bank, originally founded in 1887, is a Maine financial institution, and its deposits are insured by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum extent permitted by law.Vermont. The Bank is subjecta true community bank providing exceptional commercial, retail and wealth management banking services through a network of 47 full-service branches.
Company
As
The Bank is a retail bank serving individual and business customers, retail establishments and restaurants, seasonal lodging, biological research laboratories, andalso supported by a large contingent of retirees. With significant operations in coastal Maine, it serves the tourism, hospitality, lobstering, fishing, boat building and marine services industries. It also serves Maine’s wild blueberry industry through its Hancock and Washington County offices.
The Bank has a broad deposit basecounties of Rutland, Windsor and lossOrange. These markets are home to many attractions, including Killington Mountain, Okemo Resort, and the city of any one depositor or closely aligned group of depositors would not have a material adverse effect on its business. Historically,Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.
6
depositsSecurities Exchange Act of 1934 are available free of charge at sec.gov and at bhbt.com under the Investor Relations tab. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K.
The Bank emphasizes personal service to the community, with a concentration on retail banking. Customers are primarily individuals and small businesses to which the Bank offers a wide variety of products and services.
Retail Products and Services: The Bank offers a variety of consumer financialproviding products and services designed to satisfyaddress the specific needs of customers; however, no assurance can be given that the Company will continue to be able to compete effectively with other financial institutions in the future.
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
(in thousands, except percentages) | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||||||||||||||
Commercial real estate | $ | 826,746 | 34 | % | $ | 418,119 | 37 | % | $ | 396,032 | 40 | % | $ | 351,354 | 38 | % | $ | 354,398 | 41 | % | |||||||||||||||
Commercial and industrial | 379,423 | 15 | 151,240 | 13 | 126,158 | 13 | 121,057 | 13 | 117,256 | 14 | |||||||||||||||||||||||||
Total commercial | 1,206,169 | 49 | 569,359 | 50 | 522,190 | 53 | 472,411 | 51 | 471,654 | 55 | |||||||||||||||||||||||||
Residential | 1,155,682 | 46 | 506,612 | 45 | 408,401 | 41 | 382,678 | 42 | 317,115 | 37 | |||||||||||||||||||||||||
Consumer | 123,762 | 5 | 53,093 | 5 | 59,479 | 6 | 63,935 | 7 | 64,088 | 8 | |||||||||||||||||||||||||
Total loans | 2,485,613 | 100 | % | 1,129,064 | 100 | % | 990,070 | 100 | % | 919,024 | 100 | % | 852,857 | 100 | % | ||||||||||||||||||||
Allowance for loan losses | (12,325 | ) | (10,419 | ) | (9,439 | ) | (8,969 | ) | (8,475 | ) | |||||||||||||||||||||||||
Net loans | $ | 2,473,288 | $ | 1,118,645 | $ | 980,631 | $ | 910,055 | $ | 844,382 |
(in thousands) | 1 Year or Less | 1 to 5 Years | More than 5 Years | Total | ||||||||||||
Commercial real estate | $ | 16,404 | $ | 100,097 | $ | 710,245 | $ | 826,746 | ||||||||
Commercial and industrial | 24,842 | 120,961 | 233,620 | 379,423 | ||||||||||||
Total Commercial | 41,246 | 221,058 | 943,865 | 1,206,169 | ||||||||||||
Residential | 376 | 23,501 | 1,131,805 | 1,155,682 | ||||||||||||
Consumer | 9,591 | 31,925 | 82,246 | 123,762 | ||||||||||||
Total | $ | 51,213 | $ | 276,484 | $ | 2,157,916 | $ | 2,485,613 |
(in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Non-accruing loans: | ||||||||||||||||||||
Commercial real estate | $ | 8,343 | $ | 2,564 | $ | 2,390 | $ | 4,484 | $ | 3,959 | ||||||||||
Commercial and industrial | 1,209 | 315 | 308 | 708 | 849 | |||||||||||||||
Residential | 4,266 | 3,419 | 3,452 | 6,051 | 3,227 | |||||||||||||||
Consumer | 500 | 198 | 830 | 1,045 | 805 | |||||||||||||||
Total non-performing loans | 14,318 | 6,496 | 6,980 | 12,288 | 8,840 | |||||||||||||||
Real estate owned | 122 | 90 | 256 | 523 | 1,625 | |||||||||||||||
Total non-performing assets | $ | 14,440 | $ | 6,586 | $ | 7,236 | $ | 12,811 | $ | 10,465 | ||||||||||
Troubled debt restructurings (accruing) | $ | 1,046 | $ | 2,713 | $ | 2,336 | $ | 1,092 | $ | 1,038 | ||||||||||
Accruing loans 90+ days past due | 510 | — | 28 | — | — | |||||||||||||||
Total non-performing loans/total loans | 0.58 | % | 0.58 | % | 0.71 | % | 1.34 | % | 1.04 | % | ||||||||||
Total non-performing assets/total assets | 0.41 | 0.38 | 0.46 | 0.88 | 0.76 |
(in thousands, except ratios) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Balance at beginning of year | $ | 10,419 | $ | 9,439 | $ | 8,969 | $ | 8,475 | $ | 8,097 | ||||||||||
Charged-off loans: | ||||||||||||||||||||
Commercial real estate | 275 | 133 | 667 | 238 | 214 | |||||||||||||||
Commercial and industrial | 207 | 90 | 395 | 489 | 486 | |||||||||||||||
Residential | 255 | 141 | 70 | 650 | 406 | |||||||||||||||
Consumer | 289 | 47 | 487 | 243 | 149 | |||||||||||||||
Total charged-off loans | 1,026 | 411 | 1,619 | 1,620 | 1,255 | |||||||||||||||
Recoveries on charged-off loans: | ||||||||||||||||||||
Commercial real estate | 50 | 40 | 98 | 85 | 105 | |||||||||||||||
Commercial and industrial | 11 | 289 | 54 | 146 | 60 | |||||||||||||||
Residential | 65 | 44 | 129 | 12 | 7 | |||||||||||||||
Consumer | 18 | 39 | 23 | 38 | 43 | |||||||||||||||
Total recoveries on charged-off loans | 144 | 412 | 304 | 281 | 215 | |||||||||||||||
Net charged-off | 882 | (1 | ) | 1,315 | 1,339 | 1,040 | ||||||||||||||
Provision for loan losses | 2,788 | 979 | 1,785 | 1,833 | 1,418 | |||||||||||||||
Balance at end of year | $ | 12,325 | $ | 10,419 | $ | 9,439 | $ | 8,969 | $ | 8,475 | ||||||||||
Ratios: | ||||||||||||||||||||
Net charge-offs/average loans | 0.04 | % | — | % | 0.14 | % | 0.15 | % | 0.12 | % | ||||||||||
Recoveries/charged-off loans | 14.04 | 100.24 | 18.78 | 17.35 | 17.13 | |||||||||||||||
Net loans charged-off/allowance for loan losses | 7.16 | (0.01 | ) | 13.93 | 14.93 | 12.27 | ||||||||||||||
Allowance for loan losses/total loans | 0.50 | 0.92 | 0.95 | 0.98 | 0.99 | |||||||||||||||
Allowance for loan losses/non-accruing loans | 86.08 | 160.39 | 135.23 | 72.99 | 95.87 |
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
(in thousands) | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | Amount Allocated | Percent Allocated to Total Loans In Each Category | |||||||||||||||||||||||||
Commercial real estate | $ | 6,134 | 0.74 | % | $ | 5,145 | 1.23 | % | $ | 4,430 | 1.12 | % | $ | 4,613 | 1.31 | % | $ | 5,139 | 1.45 | % | |||||||||||||||
Commercial and industrial | 2,389 | 0.63 | 1,952 | 1.29 | 1,590 | 1.26 | 1,277 | 1.05 | 1,769 | 1.75 | |||||||||||||||||||||||||
Residential | 3,416 | 0.30 | 2,721 | 0.54 | 2,747 | 0.67 | 2,714 | 0.71 | 1,166 | 0.37 | |||||||||||||||||||||||||
Consumer | 386 | 0.31 | 601 | 1.13 | 672 | 1.13 | 365 | 0.57 | 401 | 0.50 | |||||||||||||||||||||||||
Total | $ | 12,325 | 0.50 | % | $ | 10,419 | 0.92 | % | $ | 9,439 | 0.95 | % | $ | 8,969 | 0.98 | % | $ | 8,475 | 0.99 | % |
2017 | 2016 | 2015 | ||||||||||||||||||||||
(in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
Obligations of US Government sponsored enterprises | $ | 6,967 | $ | 6,972 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
US Government-sponsored enterprises | 447,081 | 443,003 | 330,635 | 328,452 | 304,106 | 306,993 | ||||||||||||||||||
US Government agency | 96,357 | 95,596 | 76,722 | 76,906 | 78,408 | 79,130 | ||||||||||||||||||
Private label | 529 | 674 | 936 | 1,132 | 2,713 | 3,464 | ||||||||||||||||||
Obligations of states and political subdivisions thereof | 138,522 | 140,200 | 123,832 | 122,366 | 110,952 | 115,382 | ||||||||||||||||||
Corporate bonds | 30,527 | 30,797 | — | — | — | — | ||||||||||||||||||
Total | $ | 719,983 | $ | 717,242 | $ | 532,125 | $ | 528,856 | $ | 496,179 | $ | 504,969 |
One Year or Less | One to Five Years | Five to Ten Years | More Than Ten Years | Total | ||||||||||||||||||||||||||||||
(in thousands, except ratios) | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | ||||||||||||||||||||||||
Obligations of US Government sponsored enterprises | $ | 6,967 | 1.85 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 6,967 | 1.85 | % | ||||||||||||||
US Government-sponsored enterprises | 647 | 3.58 | 2,517 | 3.17 | 28,472 | 2.50 | 415,445 | 2.55 | 447,081 | 2.55 | ||||||||||||||||||||||||
US Government agency | 8 | 3.47 | 170 | 3.11 | 1,698 | 3.69 | 94,481 | 2.46 | 96,357 | 2.48 | ||||||||||||||||||||||||
Private label | 8 | 4.92 | 23 | 56.07 | 5 | 489.76 | 493 | 5.75 | 529 | 12.90 | ||||||||||||||||||||||||
Obligations of states and political subdivisions thereof | 30 | 4.60 | 2,903 | 3.93 | 25,231 | 2.31 | 110,358 | 2.98 | 138,522 | 2.88 | ||||||||||||||||||||||||
Corporate bonds | — | — | 8,724 | 3.50 | 21,711 | 4.81 | 92 | 7.14 | 30,527 | 4.44 | ||||||||||||||||||||||||
Total | $ | 7,660 | 2.02 | % | $ | 14,337 | 3.61 | % | $ | 77,117 | 3.15 | % | $ | 620,869 | 2.62 | % | $ | 719,983 | 2.69 | % |
The Bank staffs a call center, providinginstitutional customers with telephonea wide range of interest rates and e-mail responsesterms. The Company's deposits consist of interest-bearing and non-interest-bearing demand accounts, savings accounts, money market deposit accounts, and certificates of deposit. The Company solicits deposits primarily in its market area, excluding brokered deposits. The Company primarily relies on competitive pricing policies, marketing and customer service to their questionsattract and needs. retain deposits.
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||
(in thousands, except ratios) | Average Balance | Percent of Total Average Deposits | Weighted Average Rate | Average Balance | Percent of Total Average Deposits | Weighted Average Rate | Average Balance | Percent of Total Average Deposits | Weighted Average Rate | |||||||||||||||||||||
Demand | $ | 339,303 | 15 | % | — | % | $ | 93,757 | 11 | % | — | % | $ | 82,741 | 9 | % | — | % | ||||||||||||
NOW | 455,064 | 20 | 0.25 | 161,494 | 16 | 0.20 | 149,117 | 16 | 0.20 | |||||||||||||||||||||
Savings | 367,785 | 17 | 0.16 | 72,657 | 7 | 0.09 | 66,736 | 7 | 0.09 | |||||||||||||||||||||
Money market | 300,905 | 14 | 0.49 | 240,325 | 24 | 0.40 | 200,193 | 22 | 0.36 | |||||||||||||||||||||
Time deposits | 760,544 | 34 | 1.07 | 414,347 | 42 | 1.29 | 427,550 | 46 | 1.18 | |||||||||||||||||||||
Total | $ | 2,223,601 | 100 | % | 0.51 | % | $ | 982,580 | 100 | % | 0.68 | % | $ | 926,337 | 100 | % | 0.66 | % |
(in thousands, except ratios) | Amount | Weighted Average Rate | |||||
Three months or less | $ | 72,611 | 0.69 | % | |||
Over 3 months through 6 months | 17,640 | 0.64 | |||||
Over 6 months through 12 months | 51,218 | 1.27 | |||||
Over 12 months | 145,021 | 1.63 | |||||
Total | $ | 286,490 | 1.26 | % |
has the ability to borrow from the Federal Reserve Bank of Boston, as well as through unsecured federal funds lines with correspondent banks. The Company may obtain advances from the FHLB by collateralizing the advances with certain loans and investment securities of the Company. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.
Retail Brokerage Services:
Electronic Banking Services:The Bank continues to offer free Internet banking services, including consumer remote deposit capture, e-statements, free check images, and electronic bill payment, through its dedicated website atwww.bhbt.com. Additionally, the Bank offers telephone banking, an interactive voice response system through which customers can check account balances and activity, as well as initiate money transfers between their accounts. Customers can also monitor their accounts with free mobile banking access via text messaging, browser or “Apps”, and they can receive alerts, view accounts, transfer funds and pay bills. The Bank also offers Popmoney®, an innovative personal payment service that eliminates the need for checks and cash by allowing customers to send and receive money as easily as they send and receive e-mail and text messages.
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Commercial Products and Services:The Bank serves the small business market throughout downeast, midcoast and central Maine. It offers business loans to individuals, partnerships, corporations, and other business entities for capital construction, real estate and equipment financing, working capital, real estate development, and a broad range of other business purposes. Business loans are provided primarily to organizations and sole proprietors in the tourism, hospitality, healthcare, blueberry, boatbuilding, biological research, and fishing industries, as well as to other small and mid-size businesses associated with coastal communities.
The Bank offers a variety of commercial deposit accounts, most notably business checking and tiered money market accounts. These accounts are typically used as operating accounts or short-term savings vehicles. The Bank’s cash management servicestwo wholly-owned subsidiaries that provide business customers with short-term investment opportunities through a cash management sweep program, whereby excess operating funds over established thresholds are swept into overnight securities sold under agreements to repurchase. The Bank also offersBusiness On-Line Direct(“BOLD”) an Internet banking service for businesses. This service allows business clients to view their account histories, print statements, view check images, order stop payments, transfer funds between accounts, and transmit Automated Clearing House (ACH) files. The Bank also offers remote deposit capture, enabling its business customers to deposit checks remotely. Other commercial banking services include merchant credit card processing provided through a third party vendor, night depository, and coin and currency handling.
Bar Harbor Trust Services
Trust Services is a Maine chartered non-depository trust company and a wholly-owned subsidiary of the Bank. Trust Services provides a comprehensive array of trust and investment management services to individuals, businesses, not-for-profit organizations, and municipalities.
Bar Harbor Trust Services serves asis a Maine-chartered trust company, and Charter Trust is a New Hampshire-chartered trust company that was obtained through the Lake Sunapee Bank Group acquisition. As a New Hampshire-chartered trust company, Charter Trust is subject to New Hampshire laws applicable to trust companies and fiduciaries. Trust management services include trustee of both living trusts and trusts under wills, including revocable, irrevocable, charitable remainder and testamentary trusts, and in this capacity holds, accounts for and manages financial assets, real estate and special assets. Trust Services offers custody, estate settlement, and fiduciary tax services.
Market Competition
Maine
New Hampshire and Vermont
With the acquisition of Lake Sunapee Bank Group our market area now extends into certain regions of New Hampshire and Vermont. The New Hampshire market extends from the southern New Hampshire/Massachusetts border-city of Nashua to the north through central and western New Hampshire and central Vermont. It is concentratedthat closed in the counties of Hillsborough, Grafton, Merrimack, Sullivan and Cheshire in south, central and western New Hampshire, and the counties of Rutland, Windsor and Orange in central Vermont.
There are several distinct regions within our market area. The first region is centered in Nashua, New Hampshire, the second largest city in the three northern New England states of New Hampshire, Maine and Vermont. Nashua’s downtown is a regional commercial, entertainment and dining destination. The city, bordering Massachusetts to the south, enjoys a vibrant high-tech industry and a robust retail industry due in part to New Hampshire’s absence of a sales tax. The Upper Valley region is located in the west-central area of New Hampshire, and includes the towns of Lebanon, a commerce and manufacturing center, home to Dartmouth-Hitchcock Medical Center, New Hampshire’s only academic medical center, and Hanover, home of Dartmouth College. The Lake Sunapee region is a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee.
The Monadnock region, in southwestern New Hampshire, is named after Mount Monadnock, the major geographic landmark in the region, and consists of Cheshire, southern Sullivan and western Hillsborough counties. Rutland, Windsor and Orange counties are located in central Vermont. This region is home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.
8
Like most financial institutions in the United States, the Company competes with an ever-increasing array of financial service providers. As the national economy moves further towards a concentration of service companies, competitive pressures will mount.
January 2017. The Company has generally been ablealso augmented the staff with targeted hires to compete effectively with other financial institutionsdeepen the overall employee skill set. The Company’s employees are not represented by emphasizing quality customer service, making decisions ata collective bargaining unit.
No part of the Company’s business is materially dependent upon one, or a few customers, or upon a particular industry segment, the loss of which would have a material adverse impact on the operations of the Company.
consolidated financial statements.
Management and Employees
The Company has two principal executive officers: Curtis C. Simard, President and Chief Executive Officer, and Josephine Iannelli, Executive Vice President, Chief Financial Officer and Treasurer.
For the quarter ended December 31, 2016, the Bank employed 172 full-time equivalent employees, Trust Services employed 11 full-time equivalent employees, and the Company employed 3 full-time equivalent employees, representing a full-time equivalent complement of 186employees of the Company. None of the employees are represented by collective bargaining agreements.
The Company’s management believes employee relations are good.
Supervision and Regulation
General
Banking is a complex, highly regulated industry. Consequently, the performance of the Company and the Bank can be affected not only by management decisions and general and local economic conditions, but also by the statutes enacted by, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are not limited to, the Federal Reserve Board, the Maine Bureau of Financial Institutions ("BFI"), the Internal Revenue Service, the Consumer Financial Protection Bureau (the “CFPB”) and state taxing authorities. The effect of these statutes, regulations and policies and any changes to any of them can be significant and cannot be predicted.
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In furtherance of these goals, the U.S. Congress and the State of Maine have created several largely autonomous regulatory agencies that oversee, and have enacted numerous laws that govern banks, bank holding companies and the banking industry. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for the entities’ respective operations and is intended primarily for the protection of the Bank’s depositors and the public, rather than the stockholders and creditors. The following summarizes some of the materially relevant laws, rules and regulations governing banks and bank holding companies, including the Company and the Bank, but does not purport to be a complete summary of all applicable laws, rules and regulations governing banks and bank holding companies or the Company or the Bank. The descriptions are qualified in their entirety by reference to the specific statutes, regulations and policies discussed. Any change in applicable laws, regulations or regulatory policies may have a material effect on our businesses, operations and prospects. We are unable to predict the nature or extent of the
9
effects that economic controls or new federal or state legislation may have on our business and earnings in the future.
Regulatory Agencies
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Action.
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stockholders. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement.
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stockholders, transactions involving directors, officers or interested stockholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
Pursuant to the Capital Rules, the minimum capital ratios are as follows:
•
•
•
•
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
these rules.
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SAFETY AND SOUNDESS:
BFI.
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jurisdiction of the United States. The U.S. Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of their customers. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, can have serious legal and reputational consequences for the institution.
Availability of Information – Company Website
The Company maintains an Internet website atwww.bhbt.com. At this website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statement on Schedule 14A and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
15
1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC. In addition, the Company makes available, free of charge, its press releases and Code of Ethics through the Company’s Investor Relations page. Information on our website is not incorporated by reference into this document and should not be considered part of this Report.
If any of the following risks actually occurs, our financial condition, results of operations, or cash flow could be materially and adversely affected. If this were to happen, the value of our common stockthe investment could decline significantly,decrease considerably, and youdividends or other distributions concerning the investment could lose allbe reduced or part of your investment.
Changes in the general economy or the financial markets could adverselyaffect our financial performance.
We provide traditional commercial, retail and mortgage banking services, as well as other financial services including wealth management and insurance brokerage services. Downturns in the United States or global economies or financial markets could adversely affect the demand for, or the availability of, loans and other products and services offered by us. The business environment in the U.S. has experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assuranceeliminated. Discussed below are risk factors that economic conditions will not worsen. Difficult economic conditions could adversely affect our business,financial results and condition, as well as the value of, operations and financial condition.
Changesreturn on investment in economic conditions ofthe Company.
Maine
The Company’s success is dependent onfinancial performance.
A number Furthermore, many of our customers in the hospitality and other customersindustry rely upon a high number of visits from tourists to vacation destinations and vacationers to Acadia National Park as a significant part of their businesses. Prolonged interruptions or shutdowns in the operation of tourist destination sitesattraction within our market areas could have a material adverse effect on our business and results of operations.
New Hampshire and Vermont
With the acquisition of Lake Sunapee Bank Group, we are now exposed to the local market conditions and economies of Cheshire, Grafton, Hillsborough, Merrimack and Sullivan counties in central and western New Hampshire and in Rutland, Windsor and Orange counties in central Vermont. Future growth
opportunities dependmarkets. Our success is largely dependent on the economic conditions, including employment levels, population growth, income levels, savings trends and stability of the regional economy and our ability to expand ourgovernment policies in those market area.areas. A downturn in the local economyeconomies may limitadversely affect collateral values, sources of funds, availableand demand for deposit and may negatively affect borrowers’ ability to repay their loans on a timely basis, bothour products, all of which could have ana negative impact on our profitabilityresults of operations, financial condition and business.
business expansion.
Unsuccessful acquisition
The Company recently expanded into the New Hampshireon our results of operations and Vermont markets with the acquisition of Lake Sunapee Bank Group. Successfinancial condition. Deterioration or defaults made by issuers of the acquisition is dependent on the integrationunderlying collateral of the combined company infrastructure, culture, and acceptance of customer within these new markets. Profitability is dependent on management’sour investment securities may cause additional credit-related other-than-temporary impairment charges to our income statement. Our ability to maintain employee and customer relationships, improve operational efficiencies and grow profitsborrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at a rate that exceedsall could be adversely affected by disruptions in the growth of expenses. To the extent that the Company acquirescapital markets or other companies, its business may be negatively impactedevents, including actions by certain risks inherent with such acquisitions.
rating agencies or deteriorating investor expectations.
16
earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. If interest rates decline, the Bank’s higher-rate loans and investments may be subject to prepayment risk, which could negatively impact its net interest margin. Conversely, if interest rates increase, the Bank’s loans and investment securities may be subject to extension risk, which could negatively impact its net interest margin as well.
default.
Regional, national and international competitors have far greater assets and capitalization than we do and have greater access to capital markets and can offer a broader array of financial services than we can. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Further, many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
To compete, the Company focuses on quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect the Company’s growth and profitability.
New regulations
negatively impact earnings if not successful.
operations.
17
The Company is subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
18
The Bank may not be able to meet its cash flow needs on a timely basis at a reasonable cost, and its cost of funds for banking operations may significantly increase as a result of general economic conditions, interest rates, and competitive pressures.
Liquidity is the ability to meet cash flow needs on a timely basis and at a reasonable cost. The liquidity of the Bank is used to make loans and to repay deposit and borrowing liabilities as they become due, or are demanded by customers and creditors. Many factors affect the Bank’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and standing in the marketplace, and general economic conditions.
The Bank’s primary source of funding is retail deposits, gathered throughout its network of banking offices. Wholesale funding sources principally consist of secured borrowing lines from the Federal Home Loan Bank of Boston (the “FHLB”) of which it is a member, secured borrowing lines from the FRB of Boston, and certificates of deposit obtained from the national market. The Bank’s securities and loan portfolios provide a source of contingent liquidity that could be accessed in a reasonable time period through sales.
Significant changes in general economic conditions, market interest rates, competitive pressures or otherwise, could cause the Bank’s deposits to decrease relative to overall banking operations, and it would have to rely more heavily on brokered funds and borrowings in the future, which are typically more expensive than deposits.
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 Bank’s liquidity position, which in turn could materially impact its financial condition, results of operations and cash flows.
If personal, non-public, confidential, or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and financial loss.
19
of its operating systems arising from events that are wholly or partially beyond its control (i.e., computer viruses or electrical or telecommunications outages, natural disaster, disease pandemics, or other damage to property or physical assets), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business (i.e., by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage, and regulatory intervention.
20
technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.
Tax law changes
The Company’s financial performance is impacted by federal and state tax laws. The enactment of proposed U.S. tax reforms could materially adversely affect us, including as a result of a reduction in the value of our DTAs upon a reduction in the U.S. corporate income tax rate. We cannot predict if any such proposals will ultimately become law, or, if enacted, what its provisions or that of the regulations promulgated thereunder will be, but they could materially adversely affect our financial position and our results of operations.
21
22
governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The cost associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
None
The Bank operates 49 full-service banking officesan additional 46 locations throughout Maine, New Hampshire and Vermont. Locations in Maine include: Bar Harbor, Northeast Harbor, Southwest Harbor, Somesville, Deer Isle, Blue Hill, Ellsworth, Rockland, Topsham, South China, Winter Harbor, Milbridge, Machias,Vermont of which 30 are owned and Lubec. Locations16 are leased. The Company also has two stand-alone drive up windows in New Hampshire include: Andover, Bradford, Claremont, Concord, Enfield, Grantham, Guild, Hanover, Hillsboro, Lebanon, Milford, Nashua, Newbury, New London, Newport, Peterborough, Sunapee and West Lebanon. Locationsone in Vermont include: Brandon, Pittsford, Quechee, Randolph, Rochester, Royalton, Rutland, South Royalton, West Rutland, Williamstown and Woodstock. The Bank owns 33 of theseVermont. In addition to banking offices, and leases 16 at prevailing rates.
Anthe Company also has an Operations Center located in Ellsworth, Maine, that houses the Company’s operations and data processing centers. The Bank also leasescenters, as well as leased space in Hampden, Maine which serves as aand Bedford, New Hampshire, where back office support for multiple lines of business and related functions.
functions is located. In the opinion of management, the physical properties of the Company and the Bank are considered adequate to meet the needs of customers in the communities served. Additional information relating to the Company’s properties is provided in Part II, Item 8, Note 17 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K and incorporated herein by reference.
23
applicable.
On April 22, 2014,February 21, 2017, the Company’sCompany's Board of Directors declared a three-for-two stock split of its common stock, payable as a large stock dividend, whichdividend. The stock split was paid on May 19, 2014 (the “payment date”) to all stockholders of record at the close of business on May 5, 2014 (the “2014 Stock Split”). All previously reported share and per share data included in public filings subsequent to the payment date have been adjusted to reflect the retroactive effect of this three-for-two stock split. Refer to Note 2Three-for-two Common Stock Split, of the Consolidated Financial Statements, in this Annual Report on Form 10-K, for further information concerning the 2014 stock split.
On February 21, 2017, the Company announced that its Board of Directors declared a three-for-two split of its common stock payable in the form of a large stock dividend (the “2017 Stock Split”). The 2017 Stock Split is payable March 21, 2017 to the Company’sCompany's common stockholders of record at the close of business on March 7, 2017. Refer to Note 23 Subsequent Events, of the Consolidated Financial Statements in this Annual Report on Form 10-K, for further information concerning the 2017 Stock Split.
Year | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
High | Low | High | Low | High | Low | High | Low | |||||||||
2017 | $33.41 | $26.42 | $33.05 | $27.72 | $31.87 | $25.09 | $32.48 | $26.97 | ||||||||
2016 | 23.13 | 19.69 | 24.07 | 20.53 | 25.13 | 22.7 | 33.25 | 24.13 |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||
| High | Low | High | Low | High | Low | High | Low |
2016 | $34.70 | $29.53 | $36.10 | $30.80 | $37.69 | $34.05 | $49.87 | $36.19 |
2015 | 33.98 | 30.03 | 37.98 | 32.50 | 36.35 | 28.97 | 36.08 | 30.00 |
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as a part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs (1) | |||||||||
October 1-31, 2017 | — | $ | — | — | 404,706 | ||||||||
November 1-30, 2017 | — | — | — | 404,706 | |||||||||
December 1-31, 2017 | — | — | — | 404,706 | |||||||||
Total | — | $ | — | — | 404,706 |
Performance Graph
2017.
Period Ending | ||||||||||||
Index | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | ||||||
Bar Harbor Bankshares | 100.00 | 122.99 | 152.73 | 169.23 | 240.25 | 211.29 | ||||||
NYSE American Composite Index | 100.00 | 126.28 | 134.81 | 129.29 | 144.73 | 171.83 | ||||||
SNL Bank $1B - $5B Index | 100.00 | 145.41 | 152.04 | 170.20 | 244.85 | 261.04 |
24
| 12/11 | 12/12 | 12/13 | 12/14 | 12/15 | 12/16 |
Bar Harbor Bankshares | $100.00 | $116.23 | $142.94 | $177.51 | $196.72 | $279.28 |
NYSE MKT Composite | 100.00 | 106.15 | 115.07 | 118.71 | 106.60 | 117.67 |
S&P 500 | 100.00 | 116.00 | 153.58 | 174.60 | 177.01 | 198.18 |
ABA Nasdaq Community Bank Index | 100.00 | 115.67 | 162.67 | 170.61 | 185.49 | 258.29 |
Dividends
Common stock dividends paid by the CompanyThe following summary data is based in 2016 and 2015 are summarized below:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
2016 | $0.265 | $0.270 | $0.275 | $0.280 | $1.090 |
2015 | 0.245 | 0.250 | 0.255 | 0.260 | 1.010 |
During 2016, the Company declared and distributed regular cash dividendspart on its common stock in the aggregate amount of $6,577 compared with $6,040 in 2015. The Company’s 2016 dividend payout ratio amounted to 44.0% compared with 39.9% in 2015. The total regular cash dividends paid in 2016 amounted to $1.09 per share of common stock, compared with $1.01 in 2015, representing an increase of $0.08 per share, or 7.9%.
In the first quarter of 2017, the Company’s Board of Directors declared a regular cash dividend of $0.28 per share of common stock, representing an increase of $0.015 or 5.7% compared with the first quarter of 2016.
25
The Company has a history of paying quarterly dividends on its common stock. However, the Company’s ability to pay such dividends depends on a number of factors, including the Company’s financial condition, earnings, its need for funds and restrictions on the Company’s ability to pay dividends under federal laws and regulations. Therefore, there can be no assurance that dividends on the Company’s common stock will be paid in the future.
For further information, refer to Item 6, Selected Consolidated Financial Data for dividend related ratios and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, (specifically the “Capital Resources” section).
Recent Sale of Unregistered Securities; Use of Proceeds from Registered Securities
No unregistered securities were sold by the Company during the years ended December 31, 2016, and 2015.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases of shares of the Company’s common stock made by or on behalf of the Company or any “affiliated purchaser” for the quarter ended December 31, 2016.
Information relating to the Company’s stock repurchase program is provided in Part II, Item 7,Stock Repurchase Plan, contained in this Annual Report on Form 10-K and incorporated herein by reference.
Stock Based Compensation Plans
Information regarding stock-based compensation awards both outstanding and available for future grants as of December 31, 2016, represents stock-based compensation plans approved by shareholders and is presented in the table below. There are no compensation plans under which equity securities of the Company may be issued that have not been approved by shareholders. Additional information is presented in Note 15,Stock-Based Compensation Plans,in the Notes to the Consolidated Financial Statements includedand accompanying notes, and other schedules appearing elsewhere in Part II, Item 8,Financial Statements and Supplementary Data,within this Annual Report on Form 10-K.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights, net of forfeits and exercised shares (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for issuance under equity compensation [(excluding securities referenced in column (a)] (c) |
Equity compensation plans approved by security holders | 157,835 | $26.98 | 170,232 |
Equity compensation plans not approved by security holders | --- | N/A | --- |
Total | 157,835 | $26.98 | 170,232 |
Transfer Agent Services
American Stock Transfer & Trust Company provides transfer agent services for the Company. Inquiries may be directed to: American Stock Transfer & Trust Company, 6201 15th Avenue, 3rd Floor, Brooklyn, NY, 11219, telephone: 1-800-937-5449, Internet address: www.amstock.com.
26
27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The supplementary financial Historical data presentedis also based in the following table contains information highlighting certain significant trends in the Company’s financial conditionpart on, and results of operations over the past five years.
The following information should be analyzedread in conjunction with, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, andprior filings with the audited consolidated financial statements included in this Annual Report on Form 10-K. Unless otherwise noted, all dollars are expressed in thousands except share and per share data.SEC.
At or For the Years Ended December 31, | ||||||||||||||||||||
(in millions, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Selected Financial Data: | ||||||||||||||||||||
Total assets | $ | 3,565 | $ | 1,755 | $ | 1,580 | $ | 1,459 | $ | 1,374 | ||||||||||
Total earning assets | 3,241 | 1,683 | 1,517 | 1,411 | 1,321 | |||||||||||||||
Total investments | 755 | 554 | 526 | 492 | 469 | |||||||||||||||
Total loans | 2,486 | 1,129 | 990 | 919 | 853 | |||||||||||||||
Allowance for loan losses | 12 | 10 | 9 | 9 | 8 | |||||||||||||||
Total goodwill and intangible assets | 108 | 5 | 5 | 5 | 6 | |||||||||||||||
Total deposits | 2,352 | 1,050 | 943 | 858 | 836 | |||||||||||||||
Total borrowings | 830 | 537 | 475 | 447 | 409 | |||||||||||||||
Total shareholders' equity | 355 | 157 | 154 | 146 | 121 | |||||||||||||||
Selected Operating Data: | ||||||||||||||||||||
Total interest and dividend income | $ | 116 | $ | 57 | $ | 55 | $ | 54 | $ | 51 | ||||||||||
Total interest expense | 24 | 12 | 10 | 10 | 12 | |||||||||||||||
Net interest income | 92 | 45 | 45 | 44 | 39 | |||||||||||||||
Non-interest income | 26 | 12 | 9 | 8 | 8 | |||||||||||||||
Total revenue | 118 | 58 | 54 | 52 | 47 | |||||||||||||||
Provision for loan losses | 3 | 1 | 2 | 2 | 1 | |||||||||||||||
Total non-interest expense | 73 | 36 | 31 | 29 | 27 | |||||||||||||||
Income tax expense - continuing operations | 17 | 6 | 6 | 6 | 5 | |||||||||||||||
Net income | 26 | 15 | 15 | 15 | 13 | |||||||||||||||
Dividends per common share | $ | 0.75 | $ | 0.73 | $ | 0.67 | $ | 0.60 | $ | 0.56 | ||||||||||
Basic earnings per common share | 1.71 | 1.65 | 1.69 | 1.64 | 1.49 | |||||||||||||||
Diluted earnings per common share | 1.70 | 1.63 | 1.67 | 1.63 | 1.48 | |||||||||||||||
Weighted average common shares outstanding - basic | 15,184 | 9,069 | 8,970 | 8,890 | 8,847 | |||||||||||||||
Weighted average common shares outstanding - diluted | 15,290 | 9,143 | 9,090 | 8,964 | 8,893 |
At or For the Years Ended December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Selected Operating Ratios and Other Data | ||||||||||||||||||||
Per Common Share Data: | ||||||||||||||||||||
Net earnings, diluted | $ | 1.70 | $ | 1.63 | $ | 1.67 | $ | 1.63 | $ | 1.48 | ||||||||||
Total book value | 22.96 | 17.19 | 17.10 | 16.40 | 13.70 | |||||||||||||||
Dividends | 0.75 | 0.73 | 0.67 | 0.60 | 0.56 | |||||||||||||||
Common stock price: | ||||||||||||||||||||
High | 33.41 | 33.25 | 25.32 | 21.91 | 18.43 | |||||||||||||||
Low | 25.09 | 19.69 | 19.31 | 16.01 | 15.06 | |||||||||||||||
Close | 27.01 | 31.55 | 22.95 | 21.33 | 17.77 | |||||||||||||||
Performance Ratios: | ||||||||||||||||||||
Return on assets | 0.75 | % | 0.89 | % | 0.98 | % | 1.03 | % | 0.98 | % | ||||||||||
Return on equity | 7.41 | 9.21 | 10.01 | 10.69 | 10.52 | |||||||||||||||
Interest rate spread | 2.99 | 2.86 | 3.09 | 3.23 | 3.03 | |||||||||||||||
Non-interest income/total net revenue | 21.99 | 21.39 | 16.69 | 15.04 | 16.22 | |||||||||||||||
Non-interest expense/average assets | 2.10 | 2.14 | 2.01 | 2.05 | 2.00 | |||||||||||||||
Dividend payout ratio | 44.26 | 44.04 | 39.86 | 36.69 | 37.28 | |||||||||||||||
Growth Ratios: | ||||||||||||||||||||
Total commercial loans | 23.83 | % | 9.24 | % | 11.21 | % | 0.04 | % | 5.72 | % | ||||||||||
Total loans | 13.14 | 14.04 | 7.73 | 7.76 | 4.64 | |||||||||||||||
Total deposits | 14.39 | 11.40 | 9.88 | 2.68 | 5.11 | |||||||||||||||
Total net revenues, (compared to prior year) | 104.66 | 7.27 | 4.35 | 10.54 | 4.41 | |||||||||||||||
Earnings per share, (compared to prior year) | 4.08 | (2.02 | ) | 2.26 | 9.96 | 4.88 | ||||||||||||||
Asset Quality and Condition Ratios: | ||||||||||||||||||||
Net charge-offs /average loans | 0.04 | % | — | % | 0.14 | % | 0.15 | % | 0.12 | % | ||||||||||
Allowance for loan losses/total loans (1) | 0.50 | 0.92 | 0.95 | 0.98 | 0.99 | |||||||||||||||
Loans/deposits | 105.68 | 107.50 | 105.02 | 107.11 | 102.06 | |||||||||||||||
Capital Ratios: | ||||||||||||||||||||
Tier 1 capital to average assets - Company | 8.10 | % | 8.94 | % | 9.37 | % | 9.30 | % | 9.01 | % | ||||||||||
Tier 1 capital to risk-weighted assets - Company | 12.19 | 15.01 | 15.55 | 15.60 | 14.97 | |||||||||||||||
Tier 1 capital to average assets - Bank | 8.58 | 9.06 | 9.49 | 9.40 | 9.12 | |||||||||||||||
Tier 1 capital to risk-weighted assets - Bank | 12.92 | 15.20 | 15.77 | 15.77 | 15.16 | |||||||||||||||
Shareholders equity to total assets | 9.95 | 8.93 | 9.76 | 10.02 | 8.83 |
(1) | Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combination includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the ratio of the loan loss allowance to total loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions. |
FIVE-YEAR SUMMARY OF FINANCIAL DATA
As of and For the Years Ended December 31,
| 2016 | 2015 | 2014 | 2013 | 2012 |
Balance Sheet Data |
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Total assets | $1,755,349 | $1,580,055 | $1,459,320 | $1,373,893 | $1,302,935 |
Total securities | 528,856 | 504,969 | 470,525 | 450,170 | 418,040 |
Total loans | 1,129,064 | 990,070 | 919,024 | 852,857 | 815,004 |
Allowance for loan losses | (10,419) | (9,439) | (8,969) | (8,475) | (8,097) |
Total deposits | 1,050,300 | 942,787 | 858,049 | 835,651 | 795,012 |
Total borrowings | 536,596 | 474,791 | 447,020 | 409,445 | 371,567 |
Total shareholders' equity | 156,740 | 154,152 | 146,287 | 121,379 | 128,046 |
Average assets | 1,676,941 | 1,541,327 | 1,424,209 | 1,345,353 | 1,252,390 |
Average shareholders' equity | 162,127 | 151,391 | 136,672 | 125,340 | 125,600 |
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Results Of Operations |
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Interest and dividend income | $ 57,487 | $ 55,224 | $ 53,718 | $ 50,749 | $ 50,838 |
Interest expense | 12,113 | 10,390 | 9,905 | 11,663 | 13,867 |
Net interest income | 45,374 | 44,834 | 43,813 | 39,086 | 36,971 |
Provision for loan losses | 979 | 1,785 | 1,833 | 1,418 | 1,652 |
Net interest income after provision for loan losses | 44,395 | 43,049 | 41,980 | 37,668 | 35,319 |
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Non-interest income | 12,349 | 8,979 | 7,758 | 7,566 | 7,709 |
Non-interest expense | 35,935 | 30,908 | 29,211 | 26,860 | 25,618 |
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Income before income taxes | 20,809 | 21,120 | 20,527 | 18,374 | 17,410 |
Income taxes | 5,876 | 5,967 | 5,914 | 5,191 | 4,944 |
Net income | $ 14,933 | $ 15,153 | $ 14,613 | $ 13,183 | $ 12,466 |
Preferred stock dividends and accretion of discount | --- | --- | --- | --- | --- |
Net income available to common shareholders | $ 14,933 | $ 15,153 | $ 14,613 | $ 13,183 | $ 12,466 |
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Per Common Share Data: |
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Basic earnings per share | $ 2.47 | $ 2.53 | $ 2.47 | $ 2.24 | $ 2.13 |
Diluted earnings per share | $ 2.45 | $ 2.50 | $ 2.45 | $ 2.22 | $ 2.12 |
Cash dividends per share | $ 1.090 | $ 1.010 | $ 0.905 | $ 0.833 | $ 0.780 |
Dividend payout ratio | 44.04% | 39.86% | 36.69% | 37.28% | 36.62% |
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Selected Financial Ratios: |
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Return on total average assets | 0.89% | 0.98% | 1.03% | 0.98% | 1.00% |
Return on total average equity | 9.21% | 10.01% | 10.69% | 10.52% | 9.93% |
Tax-equivalent net interest margin | 2.96% | 3.19% | 3.33% | 3.15% | 3.23% |
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Capital Ratios: |
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|
Tier 1 leverage capital ratio | 8.94% | 9.37% | 9.30% | 9.01% | 8.87% |
Tier 1 risk-based capital ratio | 15.01% | 15.55% | 15.60% | 14.97% | 14.15% |
Total risk-based capital ratio | 16.52% | 17.12% | 17.24% | 16.62% | 15.78% |
Common equity tier 1 | 15.01% | 15.55% | n/a | n/a | n/a |
|
|
|
|
|
|
Asset Quality Ratios: |
|
|
|
|
|
Net charge-offs to average loans | 0.00% | 0.14% | 0.15% | 0.12% | 0.23% |
Allowance for loan losses to total loans | 0.92% | 0.95% | 0.98% | 0.99% | 0.99% |
Allowance for loan losses to non-performing loans | 160.4% | 134.7% | 73.0% | 95.9% | 82.1% |
Non-performing loans to total loans | 0.58% | 0.71% | 1.34% | 1.04% | 1.21% |
Use of Non-GAAP Financial Measures:Certain information discussed below is presented on a fully tax-equivalent basis. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The tables below provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.
Average Balances, Interest and Average Yields/Cost:The following tables presenttable presents average balances and an analysis of average rates and yields on aan annualized fully taxable equivalent basis for the years presented. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison.periods included:
2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
(in millions, except ratios) | Average Balance | Interest | Average Yield/Rate (3) | Average Balance | Interest | Average Yield/Rate (3) | Average Balance | Interest | Average Yield/Rate (3) | ||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||
Loans (1) | $ | 2,396.5 | $ | 98.2 | 4.10 | % | $ | 1,054.7 | $ | 41.9 | 3.97 | % | $ | 962.2 | $ | 39.5 | 4.11 | % | |||||||||||||||
Securities and other (2) | 757.4 | 23.5 | 3.10 | 546.7 | 17.7 | 3.24 | 506.8 | 17.6 | 3.48 | ||||||||||||||||||||||||
Total earning assets | 3,153.9 | 121.7 | 3.86 | % | 1,601.4 | 59.6 | 3.72 | % | 1,469.0 | 57.2 | 3.89 | % | |||||||||||||||||||||
Other non-earning assets | 310.1 | 75.5 | 72.3 | ||||||||||||||||||||||||||||||
Total assets | $ | 3,464.0 | $ | 1,676.9 | $ | 1,541.3 | |||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||
Interest bearing deposits | $ | 1,884.3 | $ | 11.3 | 0.60 | % | $ | 888.8 | $ | 6.7 | 0.75 | % | $ | 843.6 | $ | 6.1 | 0.72 | % | |||||||||||||||
Borrowings | 862.5 | 12.6 | 1.46 | 524.9 | 5.4 | 1.03 | 456.7 | 4.3 | 0.94 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 2,746.8 | 23.9 | 0.87 | % | 1,413.7 | 12.1 | 0.86 | % | 1,300.3 | 10.4 | 0.80 | % | |||||||||||||||||||||
Non-interest-bearing demand deposits | 339.3 | 93.8 | 82.7 | ||||||||||||||||||||||||||||||
Other non-earning liabilities | 27.2 | 7.3 | 6.9 | ||||||||||||||||||||||||||||||
Total liabilities | 3,113.3 | 1,514.8 | 1,389.9 | ||||||||||||||||||||||||||||||
Total shareholders' equity | 350.7 | 162.1 | 151.4 | ||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 3,464.0 | $ | 1,676.9 | $ | 1,541.3 | |||||||||||||||||||||||||||
Net interest-earning assets | $ | 407.1 | $ | 187.8 | $ | 168.8 | |||||||||||||||||||||||||||
Net interest income | $ | 97.8 | $ | 47.5 | $ | 46.8 | |||||||||||||||||||||||||||
Net interest spread | 2.99 | % | 2.86 | % | 3.09 | % | |||||||||||||||||||||||||||
Net interest margin | 3.10 | 2.96 | 3.19 | ||||||||||||||||||||||||||||||
Cost of funds | 0.77 | 0.80 | 0.75 | ||||||||||||||||||||||||||||||
Cost of deposits | 0.60 | 0.75 | 0.72 | ||||||||||||||||||||||||||||||
Interest-earning assets/interest bearing liabilities | 114.82 | 113.28 | 112.98 | ||||||||||||||||||||||||||||||
Supplementary Data | |||||||||||||||||||||||||||||||||
Total non-maturity deposits | $ | 1,463.1 | $ | 568.2 | $ | 498.8 | |||||||||||||||||||||||||||
Total deposits | 2,223.6 | 982.6 | 926.3 | ||||||||||||||||||||||||||||||
Fully taxable equivalent adjustments | 5.6 | 2.1 | 2.0 |
(1) | The average balances of loans include nonaccrual loans and deferred fees and costs. |
(2) | The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment. |
(3) | Fully taxable equivalent considers the impact of tax advantaged investment securities and loans. |
For The Year Ended December 31, 2016
|
|
| Weighted |
| Average |
| Average |
| Balance | Interest | Rate |
Interest Earning Assets: |
|
|
|
Loans (1,3) | $1,054,687 | $41,889 | 3.97% |
Securities (2,3) | 521,760 | 16,823 | 3.22% |
Federal Home Loan Bank stock | 24,985 | 868 | 3.47% |
Total Earning Assets | 1,601,432 | 59,580 | 3.72% |
Non-Interest Earning Assets: |
|
|
|
Cash and due from banks | 5,485 |
|
|
Allowance for loan losses | (10,061) |
|
|
Other assets (2) | 80,085 |
|
|
Total Assets | $1,676,941 |
|
|
Interest Bearing Liabilities: |
|
|
|
Deposits | $ 888,823 | $ 6,699 | 0.75% |
Borrowings | 524,859 | 5,414 | 1.03% |
Total Interest Bearing Liabilities | 1,413,682 | 12,113 | 0.86% |
Rate Spread |
|
| 2.86% |
Non-Interest Bearing Liabilities: |
|
|
|
Demand and other non-interest bearing deposits | 93,757 |
|
|
Other liabilities | 7,375 |
|
|
Total Liabilities | 1,514,814 |
|
|
Shareholders' equity | 162,127 |
|
|
Total Liabilities and Shareholders' Equity | $1,676,941 |
|
|
Net interest income and net interest margin (3) |
| 47,467 | 2.96% |
Less: Tax Equivalent adjustment |
| (2,093) |
|
Net Interest Income |
| $45,374 | 2.83% |
29
For The Year Ended December 31, 2015
| Average Balance |
Interest | Weighted Average Rate |
Interest Earning Assets: |
|
|
|
Loans (1,3) | $ 962,240 | $39,545 | 4.11% |
Securities (2,3) | 484,527 | 17,059 | 3.52% |
Federal Home Loan Bank stock | 22,320 | 578 | 2.59% |
Total Earning Assets | 1,469,087 | 57,182 | 3.89% |
Non-Interest Earning Assets: |
|
|
|
Cash and due from banks | 4,899 |
|
|
Allowance for loan losses | (9,239) |
|
|
Other assets (2) | 76,580 |
|
|
Total Assets | $1,541,327 |
|
|
Interest Bearing Liabilities: |
|
|
|
Deposits | $ 843,596 | $ 6,097 | 0.72% |
Borrowings | 456,669 | 4,293 | 0.94% |
Total Interest Bearing Liabilities | 1,300,265 | 10,390 | 0.80% |
Rate Spread |
|
| 3.09% |
Non-Interest Bearing Liabilities: |
|
|
|
Demand and other non-interest bearing deposits | 82,741 |
|
|
Other liabilities | 6,930 |
|
|
Total Liabilities | 1,389,936 |
|
|
Shareholders' equity | 151,391 |
|
|
Total Liabilities and Shareholders' Equity | $1,541,327 |
|
|
Net interest income and net interest margin (3) |
| 46,792 | 3.19% |
Less: Tax Equivalent adjustment |
| (1,958) |
|
Net Interest Income |
| $44,834 | 3.05% |
For The Year Ended December 31, 2014
| Average Balance |
Interest | Weighted Average Rate |
Interest Earning Assets: |
|
|
|
Loans (1,3) | $ 881,389 | $37,982 | 4.31% |
Securities (2,3) | 470,192 | 17,331 | 3.69% |
Federal Home Loan Bank stock | 20,219 | 290 | 1.43% |
|
|
|
|
|
|
|
|
Total Earning Assets | 1,371,800 | 55,603 | 4.05% |
Non-Interest Earning Assets: |
|
|
|
Cash and due from banks | 4,204 |
|
|
Allowance for loan losses | (8,753) |
|
|
Other assets (2) | 56,958 |
|
|
Total Assets | $1,424,209 |
|
|
Interest Bearing Liabilities: |
|
|
|
Deposits | $ 801,224 | $ 5,894 | 0.74% |
Borrowings | 406,744 | 4,011 | 0.99% |
Total Interest Bearing Liabilities | 1,207,968 | 9,905 | 0.82% |
Rate Spread |
|
| 3.23% |
Non-Interest Bearing Liabilities: |
|
|
|
Demand and other non-interest bearing deposits | 72,706 |
|
|
Other liabilities | 6,863 |
|
|
Total Liabilities | 1,287,537 |
|
|
Shareholders' equity | 136,672 |
|
|
Total Liabilities and Shareholders' Equity | $1,424,209 |
|
|
Net interest income and net interest margin (3) |
| 45,698 | 3.33% |
Less: Tax Equivalent adjustment |
| (1,885) |
|
Net Interest Income |
| $43,813 | 3.19% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets.
(3) For purposes of these computations, net interest income and net interest margin are reported on a tax-equivalent basis.
Net Interest Margin Analysis:The following table summarizes the net interest margin components, on a quarterly basis, over the past two years.
WEIGHTED AVERAGE RATES | 2016 |
| 2015 | ||||||
Quarter: | 4 | 3 | 2 | 1 |
| 4 | 3 | 2 | 1 |
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
Loans (1,3) | 3.94% | 3.89% | 4.03% | 4.03% |
| 4.05% | 4.08% | 4.08% | 4.23% |
Securities (2,3) | 3.01 | 3.07 | 3.37 | 3.46 |
| 3.47 | 3.56 | 3.43 | 3.63 |
Federal Home Loan Bank stock | 4.07 | 3.46 | 3.23 | 3.11 |
| 3.85 | 3.21 | 1.63 | 1.74 |
Total Earning Assets | 3.65% | 3.62% | 3.80% | 3.83% |
| 3.86% | 3.89% | 3.83% | 3.99% |
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
Deposits | 0.76 | 0.78 | 0.76 | 0.72 |
| 0.71 | 0.70 | 0.73 | 0.75 |
Borrowings | 1.05 | 1.06 | 0.99 | 1.03 |
| 1.01 | 0.93 | 0.90 | 0.93 |
Total Interest Bearing Liabilities | 0.86% | 0.88% | 0.85% | 0.83% |
| 0.80% | 0.78% | 0.80% | 0.82% |
Rate Spread | 2.79% | 2.74% | 2.95% | 3.00% |
| 3.06% | 3.11% | 3.03% | 3.17% |
Net Interest Margin (3) | 2.89% | 2.84% | 3.04% | 3.09% |
| 3.15% | 3.20% | 3.12% | 3.27% |
Net Interest Margin without Tax Equivalent Adjustments | 2.77% | 2.72% | 2.91% | 2.95% |
| 3.01% | 3.07% | 2.99% | 3.14% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets.
(3) For purposes of these computations, net interest income and net interest margin are reported on a tax-equivalent basis.
30
Rate/Volume Analysis:Analysis
2017 Compared with 2016 | 2016 Compared with 2015 | |||||||||||||||||||||||
Increases (Decreases) due to | Increases (Decreases) due to | |||||||||||||||||||||||
(in thousands) | Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Commercial real estate | $ | 4,099 | $ | 13,489 | $ | 17,588 | $ | (813 | ) | $ | 1,069 | $ | 256 | |||||||||||
Commercial and industrial | 2,379 | 7,979 | 10,358 | 163 | 325 | 488 | ||||||||||||||||||
Residential | (3,062 | ) | 28,729 | 25,667 | (771 | ) | 2,610 | 1,839 | ||||||||||||||||
Consumer | (959 | ) | 3,662 | 2,703 | 12 | (251 | ) | (239 | ) | |||||||||||||||
Total loans | 2,457 | 53,859 | 56,316 | (1,409 | ) | 3,753 | 2,344 | |||||||||||||||||
Securities | (1,027 | ) | 6,815 | 5,788 | (1,334 | ) | 1,388 | 54 | ||||||||||||||||
Total interest income | $ | 1,430 | $ | 60,674 | $ | 62,104 | $ | (2,743 | ) | $ | 5,141 | $ | 2,398 | |||||||||||
Interest expense: | ||||||||||||||||||||||||
NOW | $ | 216 | $ | 600 | $ | 816 | $ | 6 | $ | 25 | $ | 31 | ||||||||||||
Savings | 248 | 260 | 508 | — | 5 | 5 | ||||||||||||||||||
Money market | 276 | 241 | 517 | 104 | 143 | 247 | ||||||||||||||||||
Time deposits | (1,701 | ) | 4,468 | 2,767 | 474 | (155 | ) | 319 | ||||||||||||||||
Total deposits | (961 | ) | 5,569 | 4,608 | 584 | 18 | 602 | |||||||||||||||||
Borrowings | 3,710 | 3,483 | 7,193 | 480 | 641 | 1,121 | ||||||||||||||||||
Total interest expense | $ | 2,749 | $ | 9,052 | $ | 11,801 | $ | 1,064 | $ | 659 | $ | 1,723 | ||||||||||||
Change in net interest income | $ | (1,319 | ) | $ | 51,622 | $ | 50,303 | $ | (3,807 | ) | $ | 4,482 | $ | 675 |
31
FOR THE YEAR ENDED DECEMBER 31, 2016 VERSUS 2015
INCREASES (DECREASES) DUE TO:
| Average Volume | Average Rate | Total Change |
Loans (1,3) | $3,797 | $(1,453) | $2,344 |
Securities (2,3) | 1,322 | (1,558) | (236) |
Federal Home Loan Bank stock | 69 | 221 | 290 |
TOTAL EARNING ASSETS | $5,188 | $(2,790) | $2,398 |
Interest bearing deposits | 327 | 275 | 602 |
Borrowings | 641 | 480 | 1,121 |
TOTAL INTEREST BEARING LIABILITIES | $ 968 | $ 755 | $1,723 |
NET CHANGE IN NET INTEREST INCOME | $4,220 | $(3,545) | $ 675 |
(
FOR THE YEAR ENDED DECEMBER 31, 2015 VERSUS 2014
INCREASES (DECREASES) DUE TO:
| Average Volume | Average Rate | Total Change |
Loans (1,3) | $3,481 | $(1,918) | $1,563 |
Securities (2,3) | 529 | (801) | (272) |
Federal Home Loan Bank stock | 30 | 258 | 288 |
TOTAL EARNING ASSETS | $4,040 | $(2,461) | $1,579 |
Interest bearing deposits | 312 | (109) | 203 |
Borrowings | 492 | (210) | 282 |
TOTAL INTEREST BEARING LIABILITIES | $ 804 | $ (319) | $ 485 |
NET CHANGE IN NET INTEREST INCOME | $3,236 | $(2,142) | $1,094 |
(1) For purposes
(2) For purposesassessing the achievement of short and long term incentive compensation for management. Analysts also rely on these measures in estimating and evaluating the Company’s performance. Management also believes that the computation of non-GAAP earnings and earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company adjusts certain equity related measures to exclude intangible assets due to the importance of these computations, unrealized gains (losses) on available-for-sale securities aremeasures to the investment community and as components of regulatory capital supervision.
(3) For purposes of these computations, net interest incomefor the time periods and net interest margin are reported on a tax-equivalent basis.dates indicated:
At or For The Years Ended | ||||||||||||||
(in thousands, except ratios) | December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 | ||||||||
Adj: Security Gains | (19 | ) | (4,498 | ) | (1,334 | ) | ||||||||
Adj: Loss on sale of fixed assets, net | 94 | 248 | 7 | |||||||||||
Adj: Acquisition expense | 3,302 | 2,650 | 54 | |||||||||||
Adj: Income taxes (1) | (1,269 | ) | 560 | 446 | ||||||||||
Adj: Tax reform charge | 3,988 | — | — | |||||||||||
Total adjusted income (2) | (A) | $ | 32,089 | $ | 13,893 | $ | 14,326 | |||||||
Net-interest income | (B) | $ | 92,155 | $ | 45,374 | $ | 44,834 | |||||||
Plus: Non-interest income | 25,982 | 12,349 | 8,979 | |||||||||||
Total Revenue | 118,137 | 57,723 | 53,813 | |||||||||||
Adj: Net security gains | (19 | ) | (4,498 | ) | (1,334 | ) | ||||||||
Total adjusted revenue (2) | (C) | $ | 118,118 | $ | 53,225 | $ | 52,479 | |||||||
Total non-interest expense | $ | 72,726 | $ | 35,935 | $ | 30,908 | ||||||||
Less: Loss on sale of fixed assets, net | (94 | ) | (248 | ) | (7 | ) | ||||||||
Less: Acquisition expense | (3,302 | ) | (2,650 | ) | (54 | ) | ||||||||
Adjusted non-interest expense (2) | (D) | $ | 69,330 | $ | 33,037 | $ | 30,847 | |||||||
(in millions) | ||||||||||||||
Total average earning assets | (E) | $ | 3,154 | $ | 1,601 | $ | 1,469 | |||||||
Total average assets | (F) | 3,464 | 1,677 | 1,541 | ||||||||||
Total average shareholders' equity | (G) | 351 | 162 | 151 | ||||||||||
Total average tangible shareholders' equity (2) (3) | (H) | 243 | 157 | 146 | ||||||||||
Total tangible shareholders' equity, period-end (2) (3) | (I) | 246 | 151 | 149 | ||||||||||
Total tangible assets, period-end (2) (3) | (J) | 3,457 | 1,750 | 1,575 | ||||||||||
(in thousands) | ||||||||||||||
Total common shares outstanding, period-end | (K) | 15,443 | 9,116 | 9,015 | ||||||||||
Average diluted shares outstanding | (L) | 15,290 | 9,143 | 9,090 | ||||||||||
Adjusted earnings per share, diluted | (A/L) | $ | 2.10 | $ | 1.52 | $ | 1.58 | |||||||
Tangible book value per share, period-end (2) | (I/K) | 15.94 | 16.61 | 16.50 | ||||||||||
Total tangible shareholders' equity/total tangible (2) assets | (H/J) | 7.12 | 8.65 | 9.45 | ||||||||||
Performance ratios | ||||||||||||||
GAAP return on assets | 0.75 | % | 0.89 | % | 0.98 | % | ||||||||
Adjusted return on assets (2) | (A/F) | 0.93 | 0.83 | 0.93 | ||||||||||
GAAP return on equity | 7.41 | 9.21 | 10.01 | |||||||||||
Adjusted return on equity (2) | (A/G) | 9.15 | 8.57 | 9.46 | ||||||||||
Adjusted return on tangible equity (2) (4) | (A/I) | 13.40 | 8.90 | 9.86 | ||||||||||
Efficiency ratio (2)(5) | (D-N-P)/ (C+M) | 55.44 | 58.90 | 55.93 | ||||||||||
Net interest margin | (B+O)/E | 3.10 | 2.96 | 3.19 |
Supplementary data (in thousands) | ||||||||||||||
Taxable equivalent adjustment for efficiency ratio | (M) | $ | 4,391 | $ | 2,470 | $ | 2,284 | |||||||
Franchise taxes included in non-interest expense | (N) | 599 | 140 | 126 | ||||||||||
Tax equivalent adjustment for net interest margin | (O) | 5,615 | 2,093 | 1,958 | ||||||||||
Intangible amortization | (P) | 812 | 92 | 92 |
(1) | Assumes a marginal tax rate of 37.57% in 2017 and 35.00% in 2016 and 2015. |
(2) | Non-GAAP financial measure. |
(3) | Total tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end. |
(4) | Adjusted return on tangible equity is computed by dividing the total core income adjusted for the tax-effected amortization of intangible assets, assuming a marginal rate of 37.57% in 2017 and 35.00% in 2016, by tangible equity. |
(5) | Efficiency ratio is computed by dividing total core tangible non-interest expense by the sum of total net interest income on a fully taxable equivalent basis and total core non-interest income. The Company uses this non-GAAP measure to provide important information about its operating efficiency. |
Amounts Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the prior periodUnited States and to general practices within the financial statements are reclassified whenever necessary to conform to current period presentation. Unless otherwise noted, all dollars are expressed in thousands except share and per share data.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of the Company’s financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles.services industry. The preparation of such financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported amountsin the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
The Company’s significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The reader of the financial statements should review these policies to gain a greater understanding of how the Company’s
32
financial performance is reported. Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements:
Allowance for Loan Losses:The allowance for loan losses, (“allowance”) is a significant accounting estimatefuture additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the preparation of the Company’s consolidated financial statements. The allowance, which is established through a provision for loan loss expense, is based on management’s evaluation of the level of allowance required in relation to the estimated inherent risk of probable lossevaluation. Conditions in the loan portfolio. Management regularly evaluates the allowance for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current general economiclocal economy and real estate market conditions andvalues could require the performance of individual loans in relationCompany to contract terms and estimated fair values of collateral. The use of different estimates or assumptions could produce differentincrease provisions for loan losses. A smaller provision for loan losses, resultswhich would negatively impact earnings.
Other-Than-Temporary Impairments on Securities:The Company evaluates debt and equity securities within the Company’s available for sale portfolio for other-than-temporary impairment (“OTTI”), at least quarterly. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines incredit losses. Determining the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses.
Refer to Part II, Item 7,Impaired Securities,and Part II, Item 8, Notes 1 and 3 of the Consolidated Financial Statementsin this Annual Report on Form 10-K, for further discussion and analysis concerning other-than-temporary impairments.
Income Taxes:The Company estimates its income taxes for each period for which a statement of income is presented. Thisloans involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differingamount and timing of recognitionprincipal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of expenses, incomeinterest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and tax credits, for tax and accounting purposes. These differencesthe amount of cash to be collected. Subsequent decreases in expected cash flows may result in deferred tax assets and liabilities, which are includedchanges in the Company’s consolidated balance sheets. Theamortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company must also assessestimates the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and,fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the extent thatperiod of time and costs associated with the recovery is not likely, a valuation allowance must be established.foreclosure and disposition of the collateral.
time the estimate is made.
The Company evaluates whether the carrying valuea result of its goodwill has become impaired, in which case the value is reduced through a charge to its earnings. Goodwill isbusiness acquisitions and combinations. These assets are evaluated for impairment at least annually, or upon a triggering event using certain fair value techniques. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to the reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Identifiable intangible assets, included in other assets on the consolidated balance sheet, consist of core deposit intangibles amortized over their estimated useful lives on a straight-line method, which approximates the economic benefits to the Company. These assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amountvalue of the asset
33
these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The determinationfair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of which intangible assets have finite livesmarket pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.
debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any changesOTTI on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the estimates used byfinancial statements.
Refernotes to Notes 1 and 8 of the consolidated financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in Part II, Item 8 of this Annual Report on Form 10-K for further details of the Company’s accounting policiesestimation process, the estimates could result in materially different results under different assumptions and estimates covering goodwill.
conditions.
FINANCIAL HIGHLIGHTS
·
Total assets
·
Total loans in 2016 increased 14.0% to $1,129,064 from $990,070 in 2015
·
2016 diluted earnings per share totaled $2.45 and were net of acquisition and system conversion costs totaling $0.28 per share
·
2016 net interest income, on a tax-equivalent basis, was $47,467 compared $46,792 in 2015
·
Total non-interest income for 2016 was up $3,370 or 38% from 2015. Excluding securities gains, non-interest income was up $206 compared to 2015
·
Non-performing assets decreased $512, or 7.3% compared to 2015
Lake Sunapee Bank Group Acquisition
On January 13, 2017, the Company completed the previously announced acquisitionoperations of Lake Sunapee Bank Group (“LSBG”) was completed.. The Company issued 4,163,853 common shares usingacquisition of LSBG closed in early January 2017.
Company to LSBG shareholders.
2016
Securities:
Total Securities: At December 31, 2016,Included in the Company’s total securities amounted to $528,856 compared with $504,969 at December 31, 2015, representing an increase of $23,887, or 4.7%. Securities purchased during 2016 consisted of MBS securities issued and guaranteed by U.S. Government agencies and sponsored enterprises and, to a lesser extent, obligations of state and political subdivisions. All of the Company’s securities were classified as available for sale as of December 31, 2016 and 2015.
The following table summarizes the securities available for sale portfolio as of December 31, 2016, and 2015:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses |
| |
Estimated Fair Value | ||||
December 31, 2016 |
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
US Government-sponsored enterprises | $330,635 | $2,682 | $4,865 | $328,452 |
US Government agency | 76,722 | 797 | 613 | 76,906 |
Private label | 936 | 207 | 11 | 1,132 |
Obligations of states and political subdivisions thereof | 123,832 | 1,941 | 3,407 | 122,366 |
Total | $532,125 | $5,627 | $8,896 | $528,856 |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value |
December 31, 2015 |
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
US Government-sponsored enterprises | $304,106 | $ 5,042 | $2,155 | $306,993 |
US Government agency | 78,408 | 1,269 | 547 | 79,130 |
Private label | 2,713 | 762 | 11 | 3,464 |
Obligations of states and political subdivisions thereof | 110,952 | 4,758 | 328 | 115,382 |
Total | $496,179 | $11,831 | $3,041 | $504,969 |
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Mortgage-backed Securities Issued by U.S. Government-sponsored Enterprises:This category of securities represents MBS issued and guaranteed by U.S. Government-sponsored enterprises, specifically, Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”). These Government-sponsored enterprises were placed under the conservatorship of the U.S. Government on September 7, 2008. In August of 2011, Standard and Poor’s, a major credit rating agency, downgraded all debt issued and guaranteed by the United States from “AAA” to “AA+”. Accordingly, all of these securities were credit rated “AA+” at December 31, 2016 and 2015. At December 31, 2016, the amortized cost of MBS issued by U.S. Government enterprises comprised 62.1% of the securities portfolio, compared with 61.3% at December 31, 2015. At December 31, 2016, the Bank’s weighted average yield on MBS issued by U.S. Government-sponsored enterprises amounted to 2.69% compared with 2.81% at December 31, 2015.
Mortgage-backed Securities Issued by U.S. Government Agencies:This category of securities represents MBS backed by the full faith and credit of the U.S. Government, such as the Government National Mortgage Association (“GNMA”). All of these securities were credit rated “AA+” at December 31, 2016 and 2015. At December 31, 2016, the amortized cost of mortgage-backed securities issued by U.S. Government agencies comprised 14.4% of the Bank’s securities portfolio, compared with 15.8% at December 31, 2015. At December 31, 2016, the weighted average yield on mortgage-backed securities issued by U.S. Government agencies amounted to 2.64%, compared with 2.95% at December 31, 2015.
Mortgage-backed Securities Issued by Private-label Issuers:This category of securities represents MBS issued by banks, investment banks, and thrift institutions. Typically, these securities are largely based on mortgages which exceed the conforming loan sizes required by agency securities. While private-label MBS are not guaranteed by any U.S. Government agency, they are credit rated by the major rating agencies (Moody’s, Standard & Poor’s and FITCH).
Most of the Bank’s MBS issued by private-label issuers carry various amounts of credit enhancement, and none are classified as sub-prime MBS pools. All of these securities were purchased prior to 2008 based on the underlying loan characteristics such as loan to value ratios, borrower credit scores, property type and location, and the level of credit enhancement. At December 31, 2016, the amortized cost of mortgage-backed securities issued by private-label issuers comprised 0.2% of the Bank’s securities portfolio, compared with 0.5% at December 31, 2015. At December 31, 2016, the weighted average yield on the Bank’s private-label MBS portfolio amounted to 20.78%, compared with 11.59% at December 31, 2015. The unusually high yields were largely attributed to interest received on certain other-than-temporarily impaired securities where the book value was significantly lower than the contractual par value.
35
At December 31, 2016, $632 of the total amortized cost of the Bank’s private-label MBS portfolio was rated below investment grade by at least one of the major credit rating agencies, compared with $2,032 at December 31, 2015. All of these below investment grade securities had been rated “AAA” by the credit rating agencies at the date of purchase and continued to be rated “AAA” through December 31, 2007. Beginning in 2008, unprecedented market stresses began affecting all MBS (Government agency and private-label) as the economy, in general, and the housing market, in particular, seriously deteriorated. As a result, the Bank revised its assessments as to the full recoverability of its private-label MBS, which necessitated OTTI write-downs under existing accounting standards each year from 2008 through 2013. Refer to Part II, item 8, Notes to Consolidated Financial Statements, Notes 1 and 4 in this Annual Report on Form 10-K for further information on OTTI.
Obligations of States and Political Subdivisions Thereof:Obligations of states and political subdivisions thereof (“municipal bonds”) are issued by city, county and state governments, as well as by enterprises with a public purpose, such as certain electric utilities, universities and hospitals. One of the primary attractions of municipal bonds is that “Bank Qualified” issues are federally tax exempt. The Bank’s municipal securities primarily consist of general obligation bonds and, to a lesser extent, revenue bonds. General obligation bonds carry less risk, as they are supported by the full faith, credit and taxing authority of the issuing government and in the cases of school districts, are supported with state aid. Revenue bonds are generally backed by municipal revenue streams generated through user fees or lease payments associated with specific municipal projects that have been financed. The Bank’s municipal bond portfolio is generally concentrated in school districts across the U.S.A., which have historically been considered among the safer municipal bond investments.
Municipal bonds are frequently supported with insurance, which guarantees that in the event the issuer experiences financial problems, the insurer will step in and assume payment of both principal and interest. Historically, insurance support has strengthened an issuer’s underlying credit rating to AAA or AA status. Starting in 2008, many of the insurance companies providing municipal bond insurance experienced financial difficulties and, accordingly, were downgraded by at least one of the major credit rating agencies. Consequently, since 2008 a portion of the Bank’s municipal bond portfolio was downgraded by at least one of the major credit rating agencies. Notwithstanding the credit rating downgrades, at December 31, 2016 and 2015, the Bank’s municipal bond portfolio did not contain any below investment grade securities as reported by major credit rating agencies. In addition, at December 31, 2016 and 2015 all municipal bond issuers were current on contractually obligated interest and principal payments.
At December 31, 2016, the amortized cost of municipal bonds comprised 23.3% of the Bank’s securities portfolio, compared with 22.4% at December 31, 2015. At December 31, 2016, the fully tax-equivalent yield on the Bank’s municipal bond portfolio amounted to 5.49%, compared with 5.57% at December 31, 2015.
Securities Maturity Distribution and Weighted Average Yields: The following table summarizes the maturity distribution of the amortized cost of the Bank’s securities portfolio and weighted average yields of such securities on a fully tax-equivalent basis as of December 31, 2016. The maturity distribution is based upon the final maturity date of the securities. Expected maturities may differ from contractual maturities because issuers may have the right to call or pre-pay certain securities. In the case of mortgage-backed securities, actual maturities may also differ from expected maturities due to the amortizing nature of the underlying mortgage collateral, and the fact that borrowers have the right to prepay.
36
| One Year or less | Greater than one year to Five years | Greater than Five to ten years | Greater than ten years | TOTAL | |||||
| Estimated Fair Value | Weighted average yield | Estimated Fair Value | Weighted average yield | Estimated Fair Value | Weighted average yield | Estimated Fair Value | Weighted average yield | Estimated Fair Value | Weighted average yield |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
US Government- sponsored enterprises | $ 21 | 4.60% | $4,968 | 3.12% | $13,003 | 2.99% | $310,460 | 2.67% | $328,452 | 2.69% |
US Government agency | --- | 0.00% | 193 | 2.24% | 2,345 | 2.73% | 74,368 | 2.63% | 76,906 | 2.64% |
Private label | 113 | 5.48% | 45 | 4.74% | 215 | 77.03% | 759 | 8.07% | 1,132 | 20.78% |
Obligations of states and political subdivisions thereof | --- | 0.00% | 1,077 | 5.07% | 2,159 | 5.92% | 119,130 | 5.49% | 122,366 | 5.49% |
Total | $134 |
| $6,283 |
| $17,722 |
| $504,717 |
| $528,856 |
|
Securities Concentrations:At December 31, 2016 and 2015, the Bank did not hold any securities for a single issuer, other than U. S. Government agencies and sponsored enterprises, where the aggregate book value of the securities exceeded 2% of the Company’s shareholders’ equity.
Impaired Securities:The securities portfolio contains certain securities where amortized cost exceeds fair value, which at December 31, 2016, amounted to an excess of $8,896 or 1.7% of the total amortized cost of the securities portfolio. At December 31, 2015, this amount represented an excess of $3,041 or 0.6% of the total amortized cost of the securities portfolio. As of December 31, 2016, unrealized losses on securities in a continuous unrealized loss position more than twelve months amounted to $803, compared with $1,161 at December 31, 2015. The decrease in net unrealized losses was attributed to changes in long-term interest rates and pricing spreads at December 31, 2016, compared with December 31, 2015, which unfavorably impacted the fair value of the Bank’s fixed income portfolio.
Further information regarding impaired securities, other-than-temporarily impaired securities and evaluation of securities for impairment is incorporated by reference to Part II, Item 8, Notes 1 and 4 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Federal Home Loan Bank Stock
The Bank is a member of the FHLB,Boston ("FHLB") stock which is a cooperatively owned wholesale bank for housing and finance in the six New England states. Its mission is to support the residential mortgage and community-development lending activities of its members, which include over 440 financial institutions across New England. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for most of its wholesale funding needs.
At December 31, 2016, the Bank’s investment in FHLB stock totaled $25,331, compared with $21,479 at December 31, 2015, representing an increase of $3,852, or 17.9%. The foregoing increase was attributed to increased FHLB borrowing levels during 2016. Additionally, during 2016 shares held in excess of the minimum required amount were redeemed at par value.
37
FHLB stock is a non-marketable equity security and, therefore, is reported at cost,cost.
2016.
Loans
Total Loans: The loan portfolio is primarily securedacquired balances, total loans increased during 2017 by real estate in the counties of Hancock, Washington, Knox, Kennebec and Sagadahoc, Maine. The following table summarizes the major components of the Bank’s loan portfolio, net of deferred loan fees and costs, as of December 31 over the past five years.
$221.0 million or 13.1%.
| 2016 | 2015 | 2014 | 2013 | 2012 |
Commercial real estate mortgages | $ 403,594 | $371,002 | $325,949 | $336,542 | $324,493 |
Commercial and industrial | 103,586 | 79,911 | 73,893 | 73,972 | 59,373 |
Commercial construction and land development | 14,695 | 24,926 | 25,421 | 18,129 | 22,120 |
Agricultural and other loans to farmers | 31,808 | 31,003 | 30,471 | 26,929 | 24,922 |
Total commercial loans | 553,683 | 506,842 | 455,734 | 455,572 | 430,908 |
|
|
|
|
|
|
Residential real estate mortgages | 506,612 | 408,401 | 382,678 | 317,115 | 297,103 |
Home equity loans | 46,921 | 51,530 | 51,795 | 49,565 | 53,303 |
Other consumer loans | 6,172 | 7,949 | 12,140 | 14,523 | 19,001 |
Total consumer loans | 559,705 | 467,880 | 446,613 | 381,203 | 369,407 |
|
|
|
|
|
|
Tax exempt loans | 15,846 | 15,244 | 16,693 | 16,355 | 15,244 |
|
|
|
|
|
|
Net deferred loan costs and fees | (170) | 104 | (16) | (273) | (555) |
Total loans | 1,129,064 | 990,070 | 919,024 | 852,857 | 815,004 |
Allowance for loan losses | (10,419) | (9,439) | (8,969) | (8,475) | (8,097) |
Total loans net of allowance for loan losses | $1,118,645 | $980,631 | $910,055 | $844,382 | $806,907 |
38
Commercial Loans:The Bank offers a variety of commercial lending products including term loans and lines of credit. The Bank offers a broad range of2016. Total commercial loans primarily collateralized, to businesses for working capital (including inventory and receivables), business expansion (including acquisitions of real estate and improvements) and the purchase of equipment and machinery. The purpose ofhad a particular loan generally determines its structure. Commercial loans are provided primarily to organizations and sole proprietors in the tourism, hospitality, healthcare, blueberry, boatbuilding, biological research, insurance, and fishing industries, as well as to other small and mid-size businesses associated with the coastal communities of Maine.
At December 31, 2016, total commercial loans amounted to $553,683, compared with $506,842 at December 31, 2015, representing an increase of $46,841, or 9.2%.
Commercial loan23.8% organic growth has generally been challengedrate led mostly by continued economic uncertainty, diminished demand, and strong competition for quality loans. Bank management attributes the growth of commercial loans to an effective business banking team, deep local market knowledge, sustained new business development efforts, and a resilient local economy that has been faring better than the nation as a whole.
Reflecting the Bank’s business region, at December 31, 2016, approximately $127,676 or 31.6% of the commercial real estate mortgage portfolio was represented by loans to the lodging industry, compared with $95,330 or 25.7% at December 31, 2015. The Bank underwrites lodging industry loans as operating businesses, lending primarily to seasonal establishments with stabilized cash flows.
The proportion of commercial and industrial loans. Outside of acquired loans, growth for residential mortgage loans remained relatively flat compared to 2016.
acquired from LSBG.
Consumer Loans:At December 31, 2016, total consumer loans stood at $559,705 compared with $467,880 at December 31, 2015, representing an increase of $91,825, or 19.6%. At December 31, 2016, residential real estate mortgage loans represented 90.5% of total consumer loans, compared with 87.3% at December 31, 2015.
Residential real estate mortgage loans totaled $506,612 as of December 31, 2016, compared with $408,401 at December 31, 2015, representing an increase of $98,211, or 24.0%.
Home equity loans totaled $46,921 at December 31, 2016, compared with $51,530 at December 31, 2015, representing a decline of $4,069, or 8.9%. The Bank did not aggressively campaign for home equity loans during 2016.
Loans to individuals for household, family and other personal expenditures (“other consumer loans”)totaled $6,172 at December 31, 2016, compared with $7,949 at December 31, 2015, representing a decline of $1,777, or 22.4%. Given strong competition from the financing affiliates of consumer durable goods manufacturers, among other considerations, the Bank does not campaign aggressively for consumer installment loans.
Tax Exempt Loans:Tax-exempt loans totaled $15,846 at December 31, 2016, compared with $15,244 at December 31, 2015, representing an increase of $602, or 3.9%. Tax-exempt loans include loans to local government municipalities, not-for-profit organizations, and other organizations that qualify for tax-
39
exempt treatment. Government municipality loans typically have short maturities (e.g., tax anticipation notes, etc.). Government municipality loans are normally originated through a bid process among local financial institutions and are typically priced aggressively, thus generating relatively narrow net interest margins.
Loan Concentrations:Because of the Bank’s proximity to Acadia National Park, a large part of the economic activity in the area is generated from the hospitality business associated with tourism. At December 31, 2016, approximately $128,680 or 11.4%credit risk of the Bank’s loan portfolio was represented by loans to the lodging industry, compared with $98,231 or 9.9% at December 31, 2015. Loan concentrationscontinued to principally reflect the Bank’s business region.
Mortgage Loan Servicing:The Bank, from time to time, will sell residential mortgage loans to other institutions and investors such as the FHLMC. In prior years, the Bank has generally sold fixed rate, long term residential mortgage loans, as a means of managing interest rate risk. The sale of loans also allows the Bank to make more funds available to customers in its servicing area, while the retention of servicing rights provides an additional source of income. At December 31, 2016, the unpaid balance of mortgage loans serviced for others totaled $9,501 compared with $11,175 at December 31, 2015, representing a decline of $1,674 or 15.0%.
Loan Portfolio Interest Rate Composition: The following table summarizes the commercial, tax-exempt and consumer components of the loan portfolio by fixed and variable interest rate composition, as of December 31, 2016 and 2015:
| 2016 | 2015 |
Commercial: |
|
|
Fixed | $ 88,428 | $ 87,347 |
Variable | 465,405 | 419,560 |
Total | $ 553,833 | $506,907 |
|
|
|
Tax exempt: |
|
|
Fixed | $ 7,585 | $ 6,939 |
Variable | 8,026 | 8,293 |
Total | $ 15,611 | $ 15,232 |
|
|
|
Consumer: |
|
|
Fixed | $ 453,744 | $352,687 |
Variable | 105,876 | 115,245 |
Total | $ 559,620 | $467,932 |
|
|
|
Total loans: |
|
|
Fixed | $ 549,757 | $446,972 |
Variable | 579,307 | 543,098 |
Total | $1,129,064 | $990,070 |
At December 31, 2016, fixed and variable rate loans comprised 48.7% and 51.3% of the loan portfolio, respectively, compared with 45.1% and 54.9% at December 31, 2015.
40
Loan Maturities and Re-pricing Distribution: The following table summarizes fixed rate loans reported by remaining maturity, and floating rate loans by next re-pricing date, as of December 31, 2016 and 2015. Actual maturity dates may differ from contractual maturity dates due to prepayments, modifications and re-financings.
Maturities | 2016 | 2015 |
One year or less | $ 289,786 | $306,977 |
Over 1 - 5 years | 231,606 | 196,431 |
Over 5 years | 607,672 | 486,662 |
Total loans | $1,129,064 | $990,070 |
Credit Risk:Credit risk is managed through loan officer authorities, loan policies, and oversight from the Bank’s Chief Credit Officer, the Bank's Management Loan Committee, the Directors’ Loan Committee, and the Bank's Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management's review, of individual credits is performed by an independent loan review consulting firm, which reports to the Audit Committee of the Board of Directors.
Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses and maximize earnings. The Bank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the Bank identifies loan delinquency beginning at 10-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Closed-end non-residential mortgage loan losses are recognized no later than the point at which a loan is 120 days past due, and open-end retail loan losses are recognized no later than the point at which a loan is 180 days past due. Residential mortgage loan losses are recognized during the foreclosure process, or sooner, when that loss is quantifiable and reasonably assured. For commercial loans, the Bank applies a risk grading system, which stratifies the portfolio and allows management to focus appropriate efforts on the highest risk components of the portfolio. The risk grades include ratings that correlate with regulatory definitions of “Pass,” “Other Assets Especially Mentioned,” “Substandard,” “Doubtful,” and “Loss.”
As a result of management’s ongoing review The credit risk profile of the Company’s loan portfolio loans are placed on non-accrual status, either due to the delinquent status of principal and/or interest, or a judgment by management that, although payments of principal and/or interest are current, such action is prudent because collectiondescribed in full of all outstanding principal and interest is in doubt. Loans are generally placed on non-accrual status when principal and or interest is 90 days overdue, or sooner if judged appropriate by management. Consumer loans are generally charged-off when principal and or interest payments are 120 days overdue, or sooner if judged appropriate by management.
41
Non-performing Loans:Non-performing loans include loans on non-accrual status and loans past due 90 days or more and still accruing interest. The following table sets forth the details of non-performing loans over the past five years.
| 2016 | 2015 | 2014 | 2013 | 2012 |
Commercial real estate mortgages | $2,564 | $1,279 | $ 3,156 | $2,046 | $1,888 |
Commercial and industrial loans | 284 | 292 | 624 | 793 | 818 |
Commercial construction and land development | --- | 1,111 | 1,328 | 1,913 | 2,359 |
Agricultural and other loans to farmers | 31 | 16 | 84 | 56 | 664 |
Total commercial loans | 2,879 | 2,698 | 5,192 | 4,808 | 5,729 |
|
|
|
|
|
|
Residential real estate mortgages | 3,419 | 3,452 | 6,051 | 3,227 | �� 3,017 |
Home equity loans | 90 | 820 | 1,029 | 745 | 814 |
Other consumer loans | 108 | 10 | 16 | 60 | 72 |
Total consumer loans | 3,617 | 4,282 | 7,096 | 4,032 | 3,903 |
|
|
|
|
|
|
Total non-accrual loans | 6,496 | 6,980 | 12,288 | 8,840 | 9,632 |
Accruing loans contractually past due 90 days or more | --- | 28 | --- | --- | 235 |
Total non-performing loans | $6,496 | $7,008 | $12,288 | $8,840 | $9,867 |
|
|
|
|
|
|
Allowance for loan losses to non-performing loans | 160.4% | 134.7% | 73.0% | 95.9% | 82.1% |
Non-performing loans to total loans | 0.58% | 0.71% | 1.34% | 1.04% | 1.21% |
Allowance to total loans | 0.92% | 0.95% | 0.98% | 0.99% | 0.99% |
At December 31, 2016, total non-performing loans amounted to $6,496, compared with $7,008 at December 31, 2015, representing a decline of $512, or 7.3%.
Non-performing commercial real estate mortgages totaled $2,564 at December 31, 2016, representing an increase of $1,285, or 100.5%, compared with December 31, 2015. The increase was due to the reclassification of a non-performing commercial construction and land development loan that was completed in 2016. At December 31, 2016, non-performing commercial real estate mortgages were represented by 15 business relationships, with outstanding balances ranging from $31 to $637.
Non-performing commercial and industrial loans totaled $284 at December 31, 2016, representing a decline of $8, or 2.7%, compared with December 31, 2015. At December 31, 2016, non-performing commercial and industrial loans were represented by four business relationships, with outstanding balances ranging from $11 to $170.
Non-performing commercial construction and land development loans totaled zero at December 31, 2016, representing a decline of $1,111, or 100%, compared with December 31, 2015. At December 31, 2015, non-performing commercial construction and land development loans were entirely represented by a commercial real estate loan to a local, non-profit affordable housing authority in support of an affordable housing project. This loan is principally secured by the housing units from the project. The project is fully constructed and there is no construction risk associated with the loan. The primary source of repayment is the saleNote 5 - Loan Loss Allowance of the existing housing units. This loan is impaired and was put on non-accrual status in late 2010. This loan was reclassified to non-performing commercial real estate mortgages during 2016.
Consolidated Financial Statements.
Non-performing agricultural and other loans to farmers totaled $31 at December 31, 2016, representing an increase of $15, or 93.8%, compared with December 31, 2015. At December 31, 2016, non-performing agricultural and other loans to farmers were represented by one loan, with an outstanding balance of $31.
Non-performing residential real estate mortgage loans totaled $3,419 at December 31, 2016, representing a decline of $33, or 1.0%, compared with December 31, 2015. At December 31, 2016, non-performing residential real estate mortgage loans were represented by 40 conventional 1-4 family mortgage loans, with outstanding balances ranging from $9 to $472.
42
Non-performing home equity loans totaled $90 at December 31, 2016, representing a decline of $730, or 89.0%, compared with December 31, 2015. At December 31, 2016, non-performing home equity loans were represented by five relationships with outstanding balances ranging from $7 to $44.
Non-performing other consumer loans totaled $108 at December 31, 2016, representing an increase of $98, or 980.0%, compared with December 31, 2015. At December 31, 2016, non-performing other consumer loans were represented by six relationships with outstanding balances ranging from $1 to $83.
While the level and mix of non-performing loans continued to reflect favorably on the overall quality of the loan portfolio as of December 31, 2016, Bank management is cognizant of the still-recovering real estate market and soft economic conditions overall. Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, including debt service levels, collateral values, tourism activity, consumer confidence and other factors existing at the time. Management believes the economic activity and conditions in the local real estate markets will continue to be significant determinants of the quality of the loan portfolio in future periods and, thus, the Company’s results of operations and financial condition.
Delinquencies and Potential Problem Loans:In addition to the non-performing loans discussed above, the Bank also has loans that are 30 to 89 days delinquent. These loans amounted to $6,103 and $1,857 at December 31, 2016, and 2015, or 0.54% and 0.19% of total loans, respectively, net of any loans classified as non-performing that are within these delinquency categories. These loans and delinquency trends in general are considered in the evaluation of the allowance for loan losses and the related determination of the provision for loan losses.
On an ongoing basis, the Bank reviews the commercial loan portfolio for evidence of potential problem loans. Potential problem loans are loans that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the borrower causes doubt about the ability of the borrower to comply with the loan payment terms and may result in disclosure of such loans as non-performing at some time in the future.
In addition the non-performing and delinquent loans discussed above, at December 31, 2016, the Bank identified 34 commercial relationships totaling $20,299, or 1.8% of total loans, as other potential problem loans (i.e. loans classified as sub-standard that were not delinquent or non-performing).At December 31, 2015, the Bank identified 32 commercial relationships totaling $19,774 as potential problem loans, or 2.0% of total loans. Factors such as payment history, value of supporting collateral, and personal or government guarantees led the Bank to conclude that the current risk exposure on these potential problem loans did not warrant accounting for the loans as non-performing. Although in a performing status as of year-end, these loans exhibited certain risk factors, which have the potential to cause them to become non-performing at some point in the future.
Allowance for Loan Losses:At December 31, 2016, the allowance for loan losses (the “allowance”) stood at $10,419, compared with $9,439 at December 31, 2015, representing an increase of $980, or 10.4%. The increase in the allowance from December 31, 2015 was largely attributed to loan growth combined with changes in the overall mix of non-performing and other potential problem loans.
Specific allowances for impaired loans are determined based upon a discounted cash flows analysis, or as appropriate, a collateral shortfall analysis. The amount of collateral dependent impaired loans totaled $3,268 as of December 31, 2016, compared with $1,999 as of December 31, 2015, representing an increase of $1,269 or 63.5%.The related allowances for loan losses on these impaired loans amounted to $369 and $312 as of December 31, 2016 and 2015, respectively.
Management reviews impaired loans to ensure such loans are transferred to interest non-accrual status, and written down when necessary. The amount of interest income not recorded on impaired loans amounted to $286, $117, and $58 for the years ended December 31, 2016, 2015 and 2014, respectively.
General allowances for loan losses account for the risk and estimated loss inherent in certain pools of industry and geographic loan concentrations within the loan portfolio. There were no material changes in loan concentrations during 2016 compared with 2015.
Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management believes the allowance for loan losses at December 31, 2016, is appropriate for the risks inherent in the loan portfolio.
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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.
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The following table details changes in the allowance for loan losses and summarizes loan loss experience by loan type over the past five years.
| 2016 | 2015 | 2014 | 2013 | 2012 |
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|
|
Balance at beginning of period | $ 9,439 | $ 8,969 | $ 8,475 | $ 8,097 | $ 8,221 |
Charge-offs: |
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|
Commercial real estate mortgages | 133 | 667 | 238 | 214 | 474 |
Commercial and industrial | 90 | 323 | 475 | 405 | 102 |
Commercial construction and land development | --- | --- | --- | --- | 344 |
Agricultural and other loans to farmers | --- | 72 | 14 | 81 | 160 |
Residential real estate mortgages | 141 | 70 | 650 | 406 | 568 |
Other consumer loans | 37 | 111 | 191 | 120 | 294 |
Home equity loans | 10 | 376 | 52 | 29 | 92 |
Tax exempt loans | --- | --- | --- | --- | --- |
Total charge-offs | 411 | 1,619 | 1,620 | 1,255 | 2,034 |
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Recoveries: |
|
|
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|
Commercial real estate mortgages | 40 | $ 98 | $ 85 | $ 105 | $ 9 |
Commercial and industrial loans | 242 | 36 | 16 | 23 | 25 |
Commercial construction and land development | --- | --- | --- | --- | --- |
Agricultural and other loans to farmers | 47 | 18 | 130 | 37 | 82 |
Residential real estate mortgages | 44 | 129 | 12 | 7 | 104 |
Other consumer loans | 29 | 22 | 37 | 23 | 38 |
Home equity loans | 10 | 1 | 1 | 20 | --- |
Tax exempt loans | --- | --- | --- | --- | --- |
Total recoveries | 412 | 304 | 281 | 215 | 258 |
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|
|
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Net (recoveries) charge-offs | (1) | 1,315 | 1,339 | 1,040 | 1,776 |
Provision charged to operations | 979 | 1,785 | 1,833 | 1,418 | 1,652 |
Balance at end of period | $ 10,419 | $ 9,439 | $ 8,969 | $ 8,475 | $ 8,097 |
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Average loans outstanding during period | $1,054,687 | $962,240 | $881,389 | $839,010 | $779,800 |
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Annualized net charge-offs to average loans outstanding | 0.00% | 0.14% | 0.15% | 0.12% | 0.23% |
For the year ended December 31, 2016, total net loan recoveries amounted to $1, compared to net charge-offs of $1,315 in 2015, representing a decline of $1,316 or 100.1%. Total net charge-offs to average loans outstanding amounted to 0.00% in 2016, compared with 0.14% in 2015.
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The following table presents the five-year summary of the allowance by loan type at each respective year-end.
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||
|
Amount | Percent of Loans in Each Category to Total loans |
Amount | Percent of Loans in Each Category to Total loans |
Amount | Percent of Loans in Each Category to Total loans |
Amount | Percent of Loans in Each Category to Total loans |
Amount | Percent of Loans in Each Category to Total loans |
Commercial and Industrial, and agricultural | $ 1,900 | 11.99% | $1,543 | 11.20% | $1,206 | �� 11.35% | $1,601 | 11.83% | $1,329 | 10.35% |
Commercial and Consumer real estate mortgages: |
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|
|
|
|
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|
|
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Real estate-construction and development | 79 | 1.30% | 184 | 2.52% | 145 | 2.77% | 314 | 2.13% | 515 | 2.71% |
Real estate-mortgage | 8,289 | 84.76% | 7,554 | 83.76% | 7,453 | 82.74% | 6,255 | 82.42% | 5,905 | 82.74% |
Installments and other loans to individuals | 99 | 0.55% | 111 | 0.98% | 94 | 1.32% | 137 | 1.70% | 207 | 2.33% |
Tax exempt | 52 | 1.40% | 47 | 1.54% | 71 | 1.82% | 168 | 1.92% | 141 | 1.87% |
TOTAL | $10,419 | 100.00% | $9,439 | 100.00% | $8,969 | 100.00% | $8,475 | 100.00% | $8,097 | 100.00% |
Bank Owned Life Insurance
The Company reviews the financial strength of the insurance carrier prior to the purchase of BOLI and quarterly thereafter.
At December 31, 2016,2017, the cash surrender value of BOLI amounted to $24,450,$58.0 million, compared with $23,747$24.4 million at December 31, 2015, representing an increasethe end of $703, or 3.0%.2016. The increase in BOLI was primarily the result of $31.7 million due to the LSBG acquisition and $1.9 million attributed to increases in the cash surrender value of the BOLI policies.
Other Assets
The Company’s other assets are principally comprised of accrued interest receivable, deferred income taxes and other real estate owned. At December 31, 2016, total other assets amounted to $21,274, compared with $13,900 at December 31, 2015, representing an increase of $7,374 or 53.1%. The increase was principally due to an increase in deferred tax assets reflecting lower unrealized security gains in 2016 as compared to 2015.
Funding Sources
The Bank utilizes various traditional sources of funding to support its earning asset portfolios. Funding sources principally consist of retail deposits and, to a lesser extent, certificates of deposit obtained from the national market, borrowings from the FHLB, of which it is a member, Fed funds purchased and borrowing from the Federal Reserve Bank of Boston, subordinated debt and securities sold under agreements to repurchase.
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Total Deposits:At December 31, 2016,acquired balances, total deposits amountedincreased 14.4% to $1,050,300$1.2 billion in 2017 compared with $942,787 at December 31, 2015, representing an increase of $107,513, or 11.4%. Totalto 2016. Core deposits are still the primary funding source for loan growth and the Company took on additional FHLB borrowings in order to fund additional loan growth in the period. Organic growth for demand depositdeposits and other interest bearing deposit,deposits, NOW accounts, and savings and money market accounts increased $87,805 or 16.1%,in total remained close to zero for 2017 compared to 2016, while time deposits increased $19,708, or 5.0%, comparedgrew to $575.0 million with December 31, 2015.
Demand Deposits:The Bank’s demand deposits are principally business accounts. At December 31, 2016, total demand deposits amounted to $98,856, compared with $86,577 at December 31, 2015, representing an increaseorganic growth rate of $12,279, or 14.2%. As discussed above,38% excluding the Bank’s deposits are seasonal in nature and the timing and extentimpact of seasonal swings vary from year to year. This is particularly the case with demand deposits. For the year ended December 31, 2016, total average demand deposits amounted to $93,757 compared with $82,741 in 2015, representing an increase of $11,016, or 13.3%. The increase in average demand deposits was largely attributed to a relatively strong tourist season in the local communities served by the Bank combined with new customer relationships.
acquired balances.
The Bank strives to attract demand deposits in connection with its commercial lending activities, on a total relationship basis. The Bank’s business checking account offerings includeEasy Business Checking, Small Business Checking, Business Checking with Interest, Business Plus Checking,andNon-Profit Business Plus Checking, each designed to help business owners manage the varying financial aspects of their business. The Bank also offersRemote Deposit Capture,enabling its business customers to deposit checks remotely. Business demand deposits are also generated by way of the Bank’sMerchant Credit Card Processing Program.
NOW Accounts:The Bank offersinterest bearing NOW accounts to individuals and not-for-profit organizations. At December 31, 2016, total NOW accounts amounted to $175,150, compared with $160,394 at December 31, 2015, representing an increase of $14,756, or 9.2%. For the year ended December 31, 2016, average NOW accounts amounted to $161,494, compared with $149,117 in 2015, representing an increase of $12,377, or 8.3%.
Savings and Money Market Deposits: At December 31, 2016, total savings and money market accounts amounted to $359,857, compared with $299,087 at December 31, 2015, representing an increase of $60,770, or 20.3%. For the year ended December 31, 2016, average savings and money market accounts amounted to $312,982, compared with $266,929 in 2015, representing an increase of $46,053 or 17.3%. This increase was principally attributed to both new and existing customer relationships.
Time Deposits:At December 31, 2016, total time deposits amounted to $416,437, compared with $396,729 at December 31, 2015, representing an increase of $19,708, or 5.0%. The increase in time deposits was primarily due to an increase in jumbo time deposits, compared with December 31, 2015. A portion of the Bank’s time deposits include certificates of deposit obtained from the national market. This source of funds is generally utilized to help support the Bank’s earning asset growth, while maintaining its strong on-balance-sheet liquidity position via secured borrowing lines of credit with the FHLB and the Federal Reserve Bank of Boston.
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The following table summarizes the changes in the average balances of deposits during the periods indicated, including the weighted average interest rates paid for each category of deposits:
| 2016 | 2015 | ||
| Average Balance | Average Rate | Average Balance | Average Rate |
Demand deposits | $ 93,757 | ---% | $ 82,741 | ---% |
NOW accounts | 161,494 | 0.20 | 149,117 | 0.20 |
Savings and money market deposits | 312,982 | 0.33 | 266,929 | 0.29 |
Time deposits | 414,347 | 1.29 | 427,550 | 1.18 |
Total deposits | $982,580 |
| $926,337 |
|
The following table summarizes the maturity distribution of time deposits of $100 or greater as of December 31 2016:
| |
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Time deposits in denominations of $100 or greater totaled $112,044 at December 31, 2016, compared with $93,481 at December 31, 2015, representing an increase of $18,563, or 19.9%.
Borrowed Funds
Borrowed funds principally consist of advances from the FHLB and, to a lesser extent, securities sold under agreements to repurchase, Fed funds purchased and borrowings from the Federal Reserve Bank of Boston. Advances from the FHLB are secured by stock in the FHLB, investment securities, certain commercial real estate loans, and blanket liens on qualifying mortgage loans and home equity loans.
Refer to Part II, Item 7,Contractual Obligations, and Notes 11 and 12,Short-term BorrowingsandLong-term Debt,
the LSBG acquisition in the first quarter 2017. The LSBG acquisition resulted in a $95.1 million increase in goodwill.
Junior Subordinated Debentures:
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Bank’s historically strong capital position. The subordinated debt securities are due in 2023, but are callable quarterly by the Bank after five years without penalty. The rate of interest on these securities is three month Libor plus 345 basis points. The subordinated debt securities are classified as borrowingsadjustment from time to time, based on the Company’s consolidatedearnings outlook, the strength of its balance sheet.
sheet, its need for funds, and other relevant factors. There can be no assurance that dividends on the Company’s common stock will be paid in the future.
Total Borrowings:At December 31, 2016, total borrowings
Capital Resources
deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.
During
Capital Ratios:The Company and
·
Common Equity Tier 1 of 4.5%
·
Total risk-based capital to risk-weighted assets of 8.0%
·
Tier 1 capital to total risk-weighted assets of 6.0%
·
Tier 1 capital to average assets (“Leverage Ratio”) of 4.0%
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Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements.
As of December 31, 2016, the Company and the Bank were considered well-capitalized under the regulatory framework for prompt corrective action. Under the Basel III capital adequacy guidelines, awell-capitalized institution must maintain the following capital ratios:
·
Common Equity Tier 1 of 6.5%
·
Total risk-based capital to risk-weighted assets of 10.0%
·
Tier 1 capital to total risk-weighted assets of 8.0%
·
Tier 1 capital to average assets (“Leverage Ratio”) of 5.0%
The following table sets forth the Company's regulatory capital at December 31, 2016 and 2015, under the rules applicable at that date.
| 2016 | 2015 | ||
| Amount | Ratio | Amount | Ratio |
Common Equity Tier 1 to Risk Weighted Assets | $155,905 | 15.01% | $145,400 | 15.55% |
Regulatory Requirement | 46,742 | 4.50 | 42,071 | 4.50 |
Excess over "adequately capitalized" | $109,163 | 10.51% | $103,329 | 11.05% |
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Tier 1 Capital to Risk Weighted Assets | $155,905 | 15.01% | $145,400 | 15.55% |
Regulatory Requirement | 62,323 | 6.00 | 56,095 | 6.00 |
Excess over "adequately capitalized" | $ 93,582 | 9.01% | $ 89,305 | 9.55% |
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Tier 1 Capital to Average Assets | $171,558 | 16.52% | $160,042 | 17.12% |
Regulatory Requirement | 83,097 | 8.00 | 74,793 | 8.00 |
Excess over "adequately capitalized" | $ 88,461 | 8.52% | $ 85,249 | 9.12% |
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|
Tier 1 Capital to Average Assets (Leverage) | $155,905 | 8.94% | $145,400 | 9.37% |
Regulatory Requirement | 69,722 | 4.00 | 62,087 | 4.00 |
Excess over "adequately capitalized" | $ 86,183 | 4.94% | $ 83,313 | 5.37% |
As more fully disclosed in Note 14 of the Consolidated Financial Statements in this Annual Report on Form 10-K, the Bank also maintained its standing as a well-capitalizedinstitution as defined by applicable regulatory standards.
Shareholders’ Equity:At December 31, 2016, total shareholders’ equity amounted to $156,740, compared with $154,152 at December 31, 2015, representing an increase of $2,588, or 1.7%. The increase in shareholder’s equity was attributed to an $8,299 increase in retained earnings offset by a $7,955 decline in accumulated other comprehensive income. This decline was principally the result of a reduction in unrealized gains in the Bank’s securities portfolio, which changed from a tax effected unrealized gain of $5,713 at December 31, 2015 to a tax effected unrealized loss of $2,125 at December 31, 2016, largely resulting from interest rate movements between reporting periods.
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Trends, Events or Uncertainties:There are no known trends, events or uncertainties, nor any recommendations by any regulatory authority, that are reasonably likely to have a material effect on the Company’s capital resources, liquidity, or financial condition.
Stock Repurchase Plan:In August 2008, the Company’s Board of Directors approved a 24 month program to repurchase up to 450,000 shares of the Company’s common stock, or approximately 10.2% of the shares then currently outstanding. The Company’s Board of Directors authorized the continuanceItem 6 of this program for additional 24 month periods in August 2010, 2012 and 2014. On August 16, 2016, the Company’s Board of Directors authorized the continuance of this program through August 17, 2018.
report.
Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions.
As of December 31, 2016, the Company had repurchased 173,794 shares of stock under this plan, at a total cost of $3,465 and an average price of $19.94 per share. During 2016, the Company repurchased 15,381 shares under the plan, at a total cost of $497 and an average price of $32.30. The Company records repurchased shares as treasury stock.
Cash Dividends: The Company has historically paid regular quarterly cash dividends on its common stock. Each quarter, the Board of Directors may declare the payment of regular quarterly cash dividends, subject to adjustment from time to time, based on the Company’s earnings outlook, the strength of its balance sheet, its need for funds, and other relevant factors. There can be no assurance that dividends on the Company’s common stock will be paid in the future.
The Company’s principal source of funds to pay cash dividends and support its commitments is derived from Bank operations. During 2016, the Company declared and distributed regular cash dividends on its common stock in the aggregate amount of $6,577 compared with $6,040 in 2015. The Company’s 2016 dividend payout ratio amounted to 44.0%, compared with 39.9% in 2015. The total regular cash dividends paid in 2016 amounted to $1.09 per common share of common stock, compared with $1.01 in 2015, representing an increase of $0.08 per share, or 7.9%.
Inthe first quarter of 2017, the Company declared a regular cash dividend of $0.28 per share of common stock, representing an increase of $0.015 or 5.7%, compared with the first quarter of 2016. Based on the December 31, 2016 price of the Company’s common stock of $47.33 per share, the dividend yield amounted to 2.37%.
Contractual Obligations
The Company is also obligated to make payments on operating leases for its retail branch offices inSomesville and Topsham, Maine, as well as office space in Hampden and Rockland, Maine.
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Borrowings are stated at their contractual maturity due dates and do not reflect call features, or principal amortization features, on certain borrowings. The following table summarizes the Company’s contractual obligations at December 31, 2016.
|
| Payments Due By Period | |||
Description | Total Amount of Obligations | < 1 Year | 1-3 Years | 4-5 Years | > 5 Years |
Borrowings from Federal Home Loan Bank | $509,816 | $372,700 | $115,750 | $21,000 | $ 366 |
Fed Funds Purchased | --- | --- | --- | --- | --- |
Securities sold under agreements to repurchase | 21,780 | 21,780 | --- | --- | --- |
Junior subordinated debentures | 5,000 | --- | --- | --- | 5,000 |
Operating Leases | 1,704 | 271 | 485 | 427 | 521 |
Total | $538,300 | $394,751 | $116,235 | $21,427 | $5,887 |
All FHLB advances are fixed-rate instruments. Advances are payable at their call dates or final maturity dates. At December 31, 2016, the Bank had $17,000 in callable advances.
In the normal course of conducting its banking and financial services business, and in connection with providing products and services to its customers, the Company has entered into a variety of traditional third partythird-party contracts for support services. Examples of such contractual agreements would include, but are not limited to: services providing ATMs, Visa Debit Cardcore banking systems, ATM and debit card processing, trust services accounting support, check printing,software and the leasing of T-1 telecommunication lines and other technology infrastructure supporting the Company’s wide area technology network.
contractual obligations at December 31, 2017:
(in thousands) | Total | Less than One Year | One to Three Years | Three to Five Years | After Five Years | |||||||||||||||
FHLB Borrowings | $ | 745,982 | $ | 608,792 | $ | 134,874 | $ | 1,633 | $ | 683 | ||||||||||
Subordinated Notes | 43,033 | — | — | — | 43,033 | |||||||||||||||
Operating lease obligations | 3,460 | 841 | 1,315 | 727 | 577 | |||||||||||||||
Purchase obligations | 19,998 | 2,222 | 4,444 | 4,444 | 8,888 | |||||||||||||||
Total Contractual Obligations | $ | 812,473 | $ | 611,855 | $ | 140,633 | $ | 6,804 | $ | 53,181 |
Off-Balance Sheet Arrangements
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Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and certain financial derivative instruments.
Commitments to Extend Credit:Commitments to extend credit represent agreements by the Bank to lend to a customer provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis using the same credit policies as it does for its balance sheet instruments, such as loans. The amount of collateral obtained, if deemed necessary by the Bank upon the issuance of commitment, is based on management's credit evaluation of the customer.
The following table summarizes the Bank’s commitments to extend credit as of December 31:
| 2016 | 2015 |
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|
|
Commitments to originate loans | $ 41,731 | $ 41,529 |
Unused lines of credit | 98,823 | 97,283 |
Un-advanced portions of construction loans | 20,330 | 12,719 |
Total | $160,884 | $151,531 |
Financial Derivative Instruments:As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and liabilities so that change in interest rates does not have a significant adverse effect on net interest income. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swap agreements, interest rate floor agreements and interest rate cap agreements.
At December 31, 2016 and 2015, the Bank had four outstanding, off balance sheet, derivative instruments. These derivative instruments were interest rate cap agreements, with notional principal amounts totaling $90,000. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only
Further information covering the Bank’s derivative instruments is incorporated by reference to Part II, Item 8, Notes 1 and 12Significant Accounting Policies of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Statements.
Liquidity
Liquidity is measured by the Company’s ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for
52
maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.
The Bank actively manages its liquidity position through target ratios established under its Asset Liability Management Policy. Continual monitoring of these ratios, both historical and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. A portion of the Bank’s deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.
The Bank uses a basic surplus model to measure its liquidity over 30 and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Bank’s policy is to maintain a liquidity position of at least 4% of total assets. At December 31, 2016, liquidity, as measured by the basic surplus model, was 9.2% over the 30-day horizon and 8.7% over the 90-day horizon.
At December 31, 2016, the Bank had unused lines of credit and net unencumbered qualifying collateral availability to support its credit line with the FHLB approximating $221,440. The Bank also had capacity to borrow funds on a secured basis utilizing the Borrower in Custody (“BIC”) program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At December 31, 2016, the Bank’s available secured line of credit at the FRB stood at $130,979 or 7.5% of the Bank’s total assets. The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.
The Bank maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’s liquidity position.
AVERAGE BALANCES, INTEREST, AVERAGE YIELDS/COST AND RATE/VOLUME ANALYSIS
Tables with the above information are presented in Item 6 of this report.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of the Company’s income stream and represents the difference or spread between interest generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.
Total Net Interest Income:For the year ended December 31, 2016, net interest income on a tax-equivalent basis amounted to $47,467 compared with $46,792 in 2015, representing an increase of $675, or 1.4%. The increase in 2016 tax-equivalent net interest income was attributed to average earning asset growth of $132,345 or 9.0%, as the net interest margin declined 23 basis points compared with 2015.
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For the year ended December 31, 2015, net interest income on a tax-equivalent basis amounted to $46,792 compared with $45,698 in 2015, representing an increase of $1,094, or 2.4%. The increase in 2016 tax-equivalent net interest income was attributed to average earning asset growth of $97,287 or 7.1%, as the net interest margin declined 14 basis points compared with 2014.
For the year ended December 31, 2016, the tax equivalent net interest margin amounted to 2.96%, compared with 3.19% in 2015, representing a decline of 23 basis points. The decline in the net interest margin was principally attributed to a 17 basis point decline in the weighted average earning asset yield, as well as a six basis point increase in the weighted average cost of interest bearing liabilities.
For the year ended December 31, 2015, the tax equivalent net interest margin amounted to 3.19%, compared with 3.33% in 2014, representing a decline of fourteen basis points. The decline in the net interest margin was principally attributed to a 16 basis point decline in the weighted average earning asset yield, partially offset by a two basis point decline in the weighted average cost of interest bearing liabilities.
Interest and Dividend Income:For the year ended December 31, 2016, total interest and dividend income on a tax-equivalent basis amounted to $59,580, compared with $57,182 in 2015, representing an increase of $2,398, or 4.2%. The increase in interest and dividend income was attributed to average interest earning asset growth of $132,345 or 9.0%, partially offset by a decline in the weighted average earning asset yield of 17 basis points to 3.72%.
For the year ended December 31, 2015, total interest and dividend income on a tax-equivalent basis amounted to $57,182, compared with $55,603 in 2014, representing an increase of $1,579, or 2.8%. The increase in interest and dividend income was attributed to average earning growth of $97,287 or 7.1%, as the weighted average earning asset yield remained unchanged at 3.89%.
For the year ended December 31, 2016, tax-equivalent interest income from the securities portfolio amounted to $16,823, compared with $17,059 in 2015, representing a decline of $236, or 1.4%. This decline was principally attributed to a 30 basis point decline in the weighted average securities yield to 3.22%, but was largely offset by a $37,233 or 7.7% increase in total average securities, compared with 2015.
For the year ended December 31, 2015, tax-equivalent interest income from the securities portfolio amounted to $17,059, compared with $17,331 in 2014, representing an increase of $272 or 1.6%. This increase was principally attributed to a 17 basis point increase in the weighted average securities yield to 3.52%, but was largely offset by a $14,335 or 3.0% increase in total average securities, compared with 2014. The decline in the weighted average securities yield was largely attributed to the replacement of MBS cash flows in a still-historically low interest rate environment, combined with management’s 2015 efforts to lower the duration of the securities portfolio.
For the year ended December 31, 2016, tax-equivalent interest income from the loan portfolio amounted to $41,889, compared with $39,545 in 2015, representing an increase of $2,344, or 5.9%. This increase was attributed to average loan portfolio growth of $92.447 or 9.6%, partially offset by a decline in the weighted average loan yield of 14 basis points to 3.97%.
For the year ended December 31, 2015, tax-equivalent interest income from the loan portfolio amounted to $39,545, compared with $37,982 in 2014, representing an increase of $1,563, or 4.1%. This increase was attributed to average loan portfolio growth of $80,851 or 9.2%, partially offset by a decline in the previously discussed weighted average loan yield of 20 basis points to 4.11%.
54
Interest Expense:For the year ended December 31, 2016, total interest expense amounted to $12,113, compared with $10,390 in 2015, representing an increase of $1,723, or 16.6%. This increase was principally attributed to a $113,417 or 8.7% increase in average interest bearing liabilities, and to a lesser extent a six basis point increase in the weighted average cost of interest bearing liabilities to 0.86%, compared with 2015.
The 2016 increase in the average cost of interest bearing liabilities was principally attributed to increases in the weighted average cost borrowings, which increased nine basis points to 1.03%, principally reflecting the maturity of higher cost, long-term borrowings that were replaced in a historically low interest rate environment.
For the year ended December 31, 2015, total interest expense amounted to $10,390, compared with $9,905 in 2014, representing an increase of $485, or 4.9%. This increase was principally attributed to a $92,297 or 7.6% increase in average interest bearing liabilities, partially offset by a two basis point decline in the weighted average cost of interest bearing liabilities to 0.80%, compared with 2014.
The 2015 decline in the average cost of interest bearing liabilities was principally attributed to prevailing, historically low short-term and long-term market interest rates, with maturing time deposits and borrowings being added or replaced at a lower cost and other interest bearing deposits re-pricing into the lower interest rate environment. The weighted average cost of interest bearing deposits declined two basis points in 2015 to 0.72%, while the weighted average cost of borrowings declined five basis points to 0.94%, principally reflecting the maturity of higher cost, long-term borrowings that were replaced in a historically low interest rate environment.
Provision for Loan Losses
The provision for loan losses (the “provision”) reflects the amount necessary to maintain the allowance for loan losses (the “allowance”) at a level that, in management’s judgment, is appropriate for the amount of inherent risk of probable loss in the Bank’s current loan portfolio.
For the year ended December 31, 2016, the Bank recorded a provision of $979, compared with $1,785 in 2015, representing a decline of $806 or 45.2%. The decline in the provision was largely attributed to lower levels of non-performing loans and loan charge-off experience, combined with relatively stable credit quality metrics.
For the year ended December 31, 2015, the Bank recorded a provision of $1,785, compared with $1,833 in 2014, representing a decline of $48, or 2.6%. The moderate decline in the provision was attributed to lower levels of non-performing loans and loan charge-off experience, combined with relatively stable credit quality metrics.
Refer to Part II, Item 7,Non-performing Loans, Potential Problem Loans and the Allowance for Loan Losses,in this Annual Report on Form 10-Kfor further discussion and analysis related to the provision for loan losses.
Non-interest Income
In addition to net interest income, non-interest income is a significant source of revenue for the Company and an important factor in its results of operations. In 2016, non-interest income represented 21.5% of total net interest income and non-interest income, compared with 16.7% and 15.0% in 2015 and 2014, respectively.
For the year ended December 31, 2016, total non-interest income amounted to $12,349, compared with $8,979 in 2015, representing an increase of $3,370, or 37.5%.
For the year ended December 31, 2015, total non-interest income amounted to $8,979, compared with $7,758 in 2014, representing an increase of $1,221, or 15.7%.
Trust and Financial Services Income:Income from trust and financial services represented 31.0% of the Company’s total non-interest income in 2016, compared with 43.3% and 51.3% in 2015 and 2014, respectively. Income from trust and financial services is principally derived from fee income based on a percentage of the fair market value of client assets under management and held in custody and, to a lesser extent, revenue from retail brokerage services conducted through Bar Harbor Financial Services, an independent third-party broker.
For the year ended December 31, 2016, income from trust and other financial services amounted to $3,829, compared with $3,888, in 2015, representing a decline of $59, or 1.5%. This decline was attributed to lower levels of revenue from retail brokerage activities.
For the year ended December 31, 2015, income from trust and other financial services amounted to $3,888, compared with $3,976, in 2014, representing a decline of $88, or 2.2%. This decline was attributed to lower levels of revenue from retail brokerage activities.
At December 31, 2016, total assets under management stood at $402,759, compared with $377,533 at December 31, 2015, representing an increase of $25,226, or 6.7%. The increase in assets under management was principally reflective of the broad increases experienced by the equity markets during 2016, as well as new managed asset accounts.
Service Charges on Deposit Accounts:This income is principally derived from overdraft fees, monthly deposit account maintenance and activity fees, automated teller machine (“ATM”) fees and a variety of other deposit account related fees. Income from service charges on deposit accounts represented 7.0% of total 2016 non-interest income, compared with 9.9% and 12.5% in 2015 and 2014, respectively.
For the year ended December 31, 2016, income generated from service charges on deposit accounts amounted to $866, compared with $892 and $971 in 2015 and 2014, representing declines of $26 and $79, or 2.9% and 8.1%, respectively. The Bank has not been aggressive in selling its fee based overdraft
55
products as a cautionary measure in light of continued regulatory pressure on the banking industry including the Consumer Financial Protection Bureau, which was established by the Wall Street Reform and Consumer Protection Act (the “Dodd – Frank Act”).
Debit Card Service Charges and Fees:This income is principally derived from the Bank’s Visa debit card product and merchant credit and debit card processing fees. Income from debit card service charges and fees represented 14.4% of total 2016 non-interest income, compared with 18.9% and 20.4% in 2015 and 2014, respectively.
For the year ended December 31, 2016, credit and debit card service charges and fees amounted to $1,782, compared with $1,694 in 2015, representing an increase of $88, or 5.2%. This increase was principally attributed to continued growth of the Bank’s retail deposit base and continued success with a program that offers rewards for certain debit card transactions.
For the year ended December 31, 2015, debit card service charges and fees amounted to $1,694, compared with $1,584 in 2014, representing an increase of $110, or 6.9%. This increase was principally attributed to continued growth of the Bank’s retail deposit base and continued success with a program that offers rewards for certain debit card transactions.
Net Securities Gains: For the year ended December 31, 2016, total realized securities gains amounted to $4,498, compared with $1,334 in 2015, representing an increase of $3,164, or 237.2%. The realized securities gains largely reflected Bank management’s strategy of lowering the duration of the securities portfolio and its overall interest rate risk profile, while simultaneously generating income.
For the year ended December 31, 2015, total realized securities gains amounted to $1,334, compared with $403 in 2014, representing an increase of $931, or 231.0%. The realized securities gains largely reflected Bank management’s strategy of lowering the duration of the securities portfolio and its overall interest rate risk profile, while simultaneously generating income.
Further information regarding securities gains and losses is incorporated by reference to Part II, Item 8, Notes 1 and 3 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Other Operating Income:Other operating income principally includes income from bank-owned life insurance, representing increases in the cash surrender value of life insurance policies on the lives of certain retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Other operating income also includes a variety of miscellaneous service charges and fees including fees for non-customer ATM transactions. Other operating income represented 11.1% of total 2016 non-interest income, compared with 13.0% and 10.6% in 2015 and 2014, respectively.
For the year ended December 31, 2016, total other operating income amounted to $1,374, compared with $1,171 in 2015, representing an increase of $203, or 17.3%.
For the year ended December 31, 2015, total other operating income amounted to $1,171, compared with $824 in 2014, representing an increase of $347, or 42.1%. The 2015 increase in other operating income was principally attributed to income relating to the Bank’s purchase of Bank Owned Life Insurance (“BOLI”) during the first quarter of 2015.
Non-interest Expense
For the year ended December 31, 2016, total non-interest expense amounted to $35,935, compared with $30,908 and $29,211 in 2015 and 2014, representing increases of $5,027 and $1,697, or 16.3% and 5.8%, respectively.
Salaries and Employee Benefits:For the year ended December 31, 2016, total salaries and employee benefits expense amounted to $19,775, compared with $17,884 and $16,836 in 2015 and 2014, representing increases of $1,891 and $1,048, or 10.6% and 6.2%, respectively. The increase in 2016 was due to strategic hires at the executive and senior level positions within the risk management and information technology departments, along with normal increases in base salaries and employee health insurance costs. The increase in 2015 was due to normal increases in base salaries and higher levels of employee health insurance costs, higher levels of employee incentive and equity compensation, as well as increases in staffing levels.
Occupancy Expense:For the year ended December 31, 2016, total occupancy expense amounted to $2,334, compared with $2,248 and $2,143 in 2015 and 2014, representing increases of $86 and $105, or 3.8% and 4.9%, respectively. The increases were largely attributed to higher levels of building improvement expenses, as well as higher levels of utilities expense and grounds maintenance.
Furniture and Equipment Expense:For the year ended December 31, 2016, total furniture and equipment expense amounted to $2,276, compared with $2,321 and $2,166 in 2015 and 2014, representing a decrease of $45 or 1.9% and an increase of $155, or 7.2%, respectively.
Debit Card Expenses:These expenses relate to the Bank’s Visa debit card processing activities. For the year ended December 31, 2016, total debit card expense amounted to $495 compared with $452 and
56
$429 in 2015 and 2014, representing increases of $43 and $23, or 9.5% and 5.4%, respectively. These increases were principally attributed to higher transaction volumes and were more than offset with higher revenues from debit card activity.
Other Operating Expense:For the year ended December 31, 2016, total other operating expenses amounted to $10,250, compared with $7,170 in 2015, representing an increase of $3,080, or 43.0%. The increase was principally due to $2,650 of merger related and system conversion costs in 2016 associated with the Lake Sunapee Bank Group acquisition.
For the year ended December 31, 2015, total other operating expenses amounted to $7,170, compared with $6,938 in 2014, representing an increase of $232, or 3.3%.The increase was principally due to higher professional services and shareholder related expenses in 2015.
Income Taxes
The effective tax rate was 28.2%, 28.3%, and 28.8% in 2016, 2015, and 2014, respectively. The effective tax rate remained relative flat in 2016 as compared to 2015, which reflected the impact of 2016 security gains offset by merger-related expenses. The slightly higher effective tax rate in 2014 was reflective of a lower proportion of tax advantaged-income.
Impact of New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for the recently adopted accounting standards and accounting standards pending adoption.
57
·
58
·
·
·
The following table summarizes the Bank's net interest income sensitivity analysis as
| -100 Basis Points Parallel Yield Curve Shift | +200 Basis Points Parallel Yield Curve Shift |
Year 1 |
|
|
Net interest income ($) | $ (86) | $(982) |
Net interest income (%) | -0.18% | -2.06% |
Year 2 |
|
|
Net interest income ($) | $(1,530) | $(3,624) |
Net interest income (%) | -3.22% | -7.63% |
As more fully discussed below, the December 31, 2016,2017 interest rate sensitivity modeling results indicate that the Bank’s balance sheet was moderately liability sensitive over the oneone- and two-year horizons (i.e., moderately exposed to rising interest rates).
Change in Interest Rates-Basis | 1 - 12 Months | 13 - 24 Months | ||||||||||||
Points (Rate Ramp) (In Thousands) | $ Change | % Change | $ Change | % Change | ||||||||||
At December 31, 2017 | ||||||||||||||
-100 | $ | 130 | 0.14 | % | $ | 301 | 0.32 | % | ||||||
+200 | (3,211 | ) | (3.44 | ) | (7,521 | ) | (8.07 | ) | ||||||
At December 31, 2016 | ||||||||||||||
-100 | $ | (86 | ) | (0.18 | )% | $ | (1,530 | ) | (3.22 | )% | ||||
+200 | (982 | ) | (2.07 | ) | (3,624 | ) | (7.63 | ) |
59
parallel with these increases, management believes net interest income will remain relatively stable over the one year horizon and then decline moderately over the two year horizonone and two-year horizons as increased funding costs outpace increases in earning asset yields. The interest rate sensitivity simulation model suggests that as interest rates rise, the Bank’s funding costs will initially re-price disproportionately with earning asset yields to a moderate degree. As funding costs begin to stabilize early in the third year of the simulation, the model suggests that the earning asset portfolios will continue to re-price at prevailing interest rate levels and cash flows from the Bank’s earning asset portfolios will be reinvested into higher yielding earning assets, resulting in a widening of spreads and a stabilization of net interest income over the three year horizon and beyond. Management believes moderate to strong earning asset growth will be necessary to meaningfully increase the current level of net interest income over the one-year and two-year horizons should short-term and long-term interest rates rise in parallel.
Interest rates plummeted during 2008 and have remained historically low ever since, as
The Federal Reserve has maintainedmaintain short-term interest rates at historically low levels, for an extended period of time, threatening net interest income. Net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curve, and changes in the size and composition of the Bank’s loan, investment and deposit portfolios.
60
of Bar Harbor Bankshares
Bankshares:
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether(collectively, the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20162017 and 2015,2016, and the results of theirits operations and theirits cash flows for each of the twothree years in the period ended December 31, 2016,2017, in conformity with U.S.accounting principles generally accepted accounting principles.
in the United States of America.
/s/ RSM US LLP
Boston, Massachusetts
March 14, 2017
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Bar Harbor Bankshares:
We have audited the accompanying consolidated balance sheet of Bar Harbor Bankshares and subsidiaries as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows
audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Company's auditor since 2015.
/s/ KPMG LLP
13, 2018
62
DECEMBER 31, 2016 AND 2015
(in thousands, except share and per share data)
| 2016 |
| 2015 |
Assets |
|
|
|
Cash and cash equivalents | $ 8,439 |
| $ 9,720 |
Securities available for sale, at fair value | 528,856 |
| 504,969 |
Federal Home Loan Bank stock | 25,331 |
| 21,479 |
Loans | 1,129,064 |
| 990,070 |
Allowance for loan losses | (10,419) |
| (9,439) |
Loans, net of allowance for loan losses | 1,118,645 |
| 980,631 |
Premises and equipment, net | 23,419 |
| 20,674 |
Goodwill | 4,935 |
| 4,935 |
Bank owned life insurance | 24,450 |
| 23,747 |
Other assets | 21,274 |
| 13,900 |
TOTAL ASSETS | $1,755,349 |
| $1,580,055 |
|
|
|
|
Liabilities |
|
|
|
Deposits: |
|
|
|
Demand and other non-interest bearing deposits | $ 98,856 |
| $ 86,577 |
NOW accounts | 175,150 |
| 160,394 |
Savings and money market deposits | 359,857 |
| 299,087 |
Time deposits | 416,437 |
| 396,729 |
Total deposits | 1,050,300 |
| 942,787 |
Short-term borrowings | 394,480 |
| 333,909 |
Long-term advances from Federal Home Loan Bank | 137,116 |
| 135,882 |
Junior subordinated debentures | 5,000 |
| 5,000 |
Other liabilities | 11,713 |
| 8,325 |
TOTAL LIABILITIES | 1,598,609 |
| 1,425,903 |
|
|
|
|
Commitments and Contingencies (Note 17) |
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 6,788,407 shares |
|
|
|
at December 31, 2016 and December 31, 2015 | 13,577 |
| 13,577 |
Surplus | 23,027 |
| 21,624 |
Retained earnings | 130,489 |
| 122,260 |
Accumulated other comprehensive (loss) income: |
|
|
|
Prior service cost and unamortized net actuarial losses on employee |
|
|
|
benefit plans, net of tax of ($217) and ($249), at December 31, 2016 |
|
|
|
and December 31, 2015,respectively | (403) |
| (463) |
Net unrealized (depreciation) appreciation on securities available for sale, net of tax |
|
|
|
of ($1,214) and $2,828, at December 31, 2016 and December 31, 2015 respectively | (2,255) |
| 5,251 |
Portion of OTTI attributable to non-credit gains, net of tax of $70 and $249, at |
|
|
|
December 31, 2016 and December 31, 2015, respectively | 130 |
| 462 |
Net unrealized depreciation on derivative instruments, net of tax |
|
|
|
of $968 and $873, at December 31, 2016 and December 31, 2015, respectively | (1,798) |
| (1,621) |
Total accumulated other comprehensive income | (4,326) |
| 3,629 |
Less: cost of 711,344 and 778,196 shares of treasury stock at December 31, 2016 and |
|
|
|
December 31, 2015, respectively | (6,027) |
| (6,938) |
|
|
|
|
TOTAL SHAREHOLDERS' EQUITY | 156,740 |
| 154,152 |
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $1,755,349 |
| $1,580,055 |
The accompanying notes are an integral part of these consolidated financial statements
63
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(in thousands, except share and per share data)
| 2016 | 2015 | 2014 |
Interest and dividend income: |
|
|
|
Interest and fees on loans | $41,653 | $39,303 | $37,739 |
Interest on securities | 14,966 | 15,343 | 15,689 |
Dividends on FHLB stock | 868 | 578 | 290 |
Total interest and dividend income | 57,487 | 55,224 | 53,718 |
|
|
|
|
Interest expense: |
|
|
|
Deposits | 6,699 | 6,097 | 5,894 |
Short-term borrowings | 1,942 | 983 | 667 |
Long-term debt | 3,472 | 3,310 | 3,344 |
Total interest expense | 12,113 | 10,390 | 9,905 |
|
|
|
|
Net interest income | 45,374 | 44,834 | 43,813 |
Provision for loan losses | 979 | 1,785 | 1,833 |
Net interest income after provision for loan losses | 44,395 | 43,049 | 41,980 |
|
|
|
|
Non-interest income: |
|
|
|
Trust and other financial services | 3,829 | 3,888 | 3,976 |
Service charges on deposit accounts | 866 | 892 | 971 |
Debit card service charges and fees | 1,782 | 1,694 | 1,584 |
Net securities gains | 4,498 | 1,334 | 403 |
Other operating income | 1,374 | 1,171 | 824 |
Total non-interest income | 12,349 | 8,979 | 7,758 |
|
|
|
|
Non-interest expense: |
|
|
|
Salaries and employee benefits | 19,775 | 17,884 | 16,836 |
Occupancy expense | 2,334 | 2,248 | 2,143 |
Furniture and equipment expense | 2,276 | 2,321 | 2,166 |
Credit and debit card expenses | 495 | 452 | 429 |
FDIC insurance assessments | 805 | 833 | 699 |
Other operating expense | 10,250 | 7,170 | 6,938 |
Total non-interest expense | 35,935 | 30,908 | 29,211 |
|
|
|
|
Income before income taxes | 20,809 | 21,120 | 20,527 |
Income taxes | 5,876 | 5,967 | 5,914 |
|
|
|
|
Net income | $14,933 | $15,153 | $14,613 |
|
|
|
|
Per Common Share Data: |
|
|
|
Basic Earnings Per Share | $ 2.47 | $ 2.53 | $ 2.47 |
Diluted Earnings Per Share | $ 2.45 | $ 2.50 | $ 2.45 |
(in thousands, except share data) | December 31, 2017 | December 31, 2016 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 34,262 | $ | 8,219 | ||||
Interest-bearing deposit with the Federal Reserve Bank | 56,423 | 220 | ||||||
Total cash and cash equivalents | 90,685 | 8,439 | ||||||
Securities available for sale, at fair value | 717,242 | 528,856 | ||||||
Federal Home Loan Bank stock | 38,105 | 25,331 | ||||||
Total securities | 755,347 | 554,187 | ||||||
Commercial real estate | 826,746 | 418,119 | ||||||
Commercial and industrial | 379,423 | 151,240 | ||||||
Residential real estate | 1,155,682 | 506,612 | ||||||
Consumer | 123,762 | 53,093 | ||||||
Total loans | 2,485,613 | 1,129,064 | ||||||
Less: Allowance for loan losses | (12,325 | ) | (10,419 | ) | ||||
Net loans | 2,473,288 | 1,118,645 | ||||||
Premises and equipment, net | 47,708 | 23,419 | ||||||
Other real estate owned | 122 | 90 | ||||||
Goodwill | 100,085 | 4,935 | ||||||
Other intangible assets, net | 8,383 | 377 | ||||||
Cash surrender value of bank-owned life insurance | 57,997 | 24,450 | ||||||
Deferred tax assets, net | 7,180 | 5,990 | ||||||
Other assets | 24,389 | 14,817 | ||||||
Total assets | $ | 3,565,184 | $ | 1,755,349 | ||||
Liabilities | ||||||||
Demand and other non-interest bearing deposits | $ | 349,055 | $ | 98,856 | ||||
NOW deposits | 466,610 | 175,150 | ||||||
Savings deposits | 364,799 | 77,623 | ||||||
Money market deposits | 305,275 | 282,234 | ||||||
Time deposits | 866,346 | 416,437 | ||||||
Total deposits | 2,352,085 | 1,050,300 | ||||||
Senior borrowings | 786,688 | 531,596 | ||||||
Subordinated borrowings | 43,033 | 5,000 | ||||||
Total borrowings | 829,721 | 536,596 | ||||||
Other liabilities | 28,737 | 11,713 | ||||||
Total liabilities | 3,210,543 | 1,598,609 | ||||||
Shareholders’ equity | ||||||||
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 10,182,611 shares at December 31, 2017 and December 31, 2016, respectively | 32,857 | 13,577 | ||||||
Additional paid-in capital | 186,702 | 23,027 | ||||||
Retained earnings | 144,977 | 130,489 | ||||||
Accumulated other comprehensive loss | (4,554 | ) | (4,326 | ) | ||||
Less: 985,462 and 1,067,016 shares of treasury stock at December 31, 2017 and December 31, 2016, respectively, at cost | (5,341 | ) | (6,027 | ) | ||||
Total shareholders’ equity | 354,641 | 156,740 | ||||||
Total liabilities and shareholders’ equity | $ | 3,565,184 | $ | 1,755,349 |
64
Years Ended December 31, | ||||||||||||
(in thousands, except per share data) | 2017 | 2016 | 2015 | |||||||||
Interest and dividend income | ||||||||||||
Loans | $ | 94,976 | $ | 41,653 | $ | 39,303 | ||||||
Securities and other | 21,093 | 15,834 | 15,921 | |||||||||
Total interest and dividend income | 116,069 | 57,487 | 55,224 | |||||||||
Interest expense | ||||||||||||
Deposits | 11,307 | 6,699 | 6,097 | |||||||||
Borrowings | 12,607 | 5,414 | 4,293 | |||||||||
Total interest expense | 23,914 | 12,113 | 10,390 | |||||||||
Net interest income | 92,155 | 45,374 | 44,834 | |||||||||
Provision for loan losses | 2,788 | 979 | 1,785 | |||||||||
Net interest income after provision for loan losses | 89,367 | 44,395 | 43,049 | |||||||||
Non-interest income | ||||||||||||
Trust and investment management fee income | 12,270 | 3,829 | 3,888 | |||||||||
Insurance and brokerage service income | 1,097 | — | — | |||||||||
Customer service fees | 8,484 | 2,648 | 2,586 | |||||||||
Gain on sales of securities, net | 19 | 4,498 | 1,334 | |||||||||
Bank-owned life insurance income | 1,539 | 703 | 606 | |||||||||
Other income | 2,573 | 671 | 565 | |||||||||
Total non-interest income | 25,982 | 12,349 | 8,979 | |||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits | 39,589 | 19,775 | 17,884 | |||||||||
Occupancy and equipment | 11,633 | 4,610 | 4,569 | |||||||||
Loss on premises and equipment, net | 94 | 248 | 7 | |||||||||
Outside services | 3,000 | 767 | 359 | |||||||||
Professional services | 1,655 | 1,489 | 1,485 | |||||||||
Communication | 1,289 | 586 | 388 | |||||||||
Amortization of intangible assets | 812 | 92 | 92 | |||||||||
Acquisition, conversion and other expenses | 3,302 | 2,650 | 54 | |||||||||
Other expenses | 11,352 | 5,718 | 6,070 | |||||||||
Total non-interest expense | 72,726 | 35,935 | 30,908 | |||||||||
Income before income taxes | 42,623 | 20,809 | 21,120 | |||||||||
Income tax expense | 16,630 | 5,876 | 5,967 | |||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 | ||||||
Earnings per share: | ||||||||||||
Basic | $ | 1.71 | $ | 1.65 | $ | 1.69 | ||||||
Diluted | $ | 1.70 | $ | 1.63 | $ | 1.67 | ||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 15,184 | 9,069 | 8,970 | |||||||||
Diluted | 15,290 | 9,143 | 9,090 |
(in thousands)
| 2016 | 2015 | 2014 |
Net income | $14,933 | $15,153 | $14,613 |
Other comprehensive (loss) income: |
|
|
|
Net unrealized (depreciation) appreciation on securities available for sale, net of tax of ($2,646), ($708) and $8,291, respectively | (4,914) | (1,321) | 15,730 |
Less reclassification adjustment for net gains related to securities available for sale included in net income, |
|
|
|
net of tax of ($1,575), ($467) and ($138), respectively | (2,924) | (867) | (262) |
Net unrealized depreciation on interest rate derivatives, net of tax of ($95), ($484) and ($389), respectively | (177) | (899) | (722) |
Net amortization of prior service cost and actuarial loss for supplemental executive retirement plan, |
|
|
|
net of related tax of $10, $13 and $0, respectively | 18 | 25 | --- |
Actuarial gains on supplemental executive retirement plan, net of related tax of $23, $0 and ($59), respectively | 42 | --- | (115) |
Total other comprehensive loss | (7,955) | (3,062) | 14,631 |
Total comprehensive income | $ 6,978 | $12,091 | $29,244 |
The accompanying notes are an integral part of these consolidated financial statements.
65
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(in thousands, except share and per share data)
|
|
|
| Accumulated |
|
|
|
|
|
| Other |
| Total |
| Capital |
| Retained | Comprehensive | Treasury | Shareholders' |
| Stock | Surplus | Earnings | Income (Loss) | Stock | Equity |
|
|
|
|
|
|
|
Balance December 31, 2014 | $ 9,051 | $25,085 | $103,907 | $(7,940) | $(8,724) | $121,379 |
Net income | --- | --- | 14,613 | --- | --- | 14,613 |
Total other comprehensive income | --- | --- | --- | 14,631 | --- | 14,631 |
Dividend declared: |
|
|
|
|
|
|
Common stock ($0.905 per share) | --- | --- | (5,362) | --- | --- | (5,362) |
Purchase of Treasury Stock (327 shares) | --- | --- | --- | --- | (8) | (8) |
Net issuance of 38,083 to employee stock plans, including tax benefit | --- | (184) | (9) |
--- | 697 | 504 |
Three-for-two stock split | 4,526 | (4,526) | --- | --- | --- | �� --- |
Recognition of stock based compensation expense | --- | 530 | --- | --- | --- | 530 |
Balance September 30, 2015 | $13,577 | $20,905 | $113,149 | $ 6,691 | $(8,035) | $146,287 |
|
|
|
|
|
|
|
Balance December 31, 2014 | $13,577 | $20,905 | $113,149 | $ 6,691 | $(8,035) | $146,287 |
Net income | --- | --- | 15,153 | --- | --- | 15,153 |
Total other comprehensive loss | --- | --- | --- | (3,062) | --- | (3,062) |
Dividend declared: |
|
|
|
|
|
|
Common stock ($1.01 per share) | --- | --- | (6,040) | --- | --- | (6,040) |
Purchase of Treasury Stock (656 shares) | --- | --- | --- | --- | (24) | (24) |
Net issuance of 64,542 to employee stock plans, including tax benefit |
--- | (97) | (2) |
--- | 1,121 | 1,022 |
Recognition of stock based compensation expense | --- | 816 | --- | --- | --- | 816 |
Balance December 31, 2015 | $13,577 | $21,624 | $122,260 | $ 3,629 | $(6,938) | $154,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015 | $13,577 | $21,624 | $122,260 | $ 3,629 | $(6,938) | $154,152 |
Net income | --- | --- | 14,933 | --- | --- | 14,933 |
Total other comprehensive loss | --- | --- | --- | (7,955) | --- | (7,955) |
Dividend declared: |
|
|
|
|
|
|
Common stock ($1.09 per share) | --- | --- | (6,577) | --- | --- | (6,577) |
Purchase of Treasury Stock (15,381 shares) | --- | --- | --- | --- | (497) | (497) |
Net issuance of 82,233 to employee stock plans, including tax benefit |
--- | 125 | (127) |
--- | 1,408 | 1,406 |
Recognition of stock based compensation expense | --- | 1,278 | --- | --- | --- | 1,278 |
Balance December 31, 2016 | $13,577 | $23,027 | $130,489 | $(4,326) | $(6,027) | $156,740 |
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 | ||||||
Other comprehensive income (loss), before tax: | ||||||||||||
Changes in unrealized loss on securities available-for-sale | 528 | (12,059 | ) | (3,365 | ) | |||||||
Changes in unrealized loss on derivative hedges | (838 | ) | (272 | ) | (1,383 | ) | ||||||
Changes in unrealized loss on post-retirement plans | (328 | ) | 90 | 27 | ||||||||
Income taxes related to other comprehensive income (loss): | ||||||||||||
Changes in unrealized loss on securities available-for-sale | (114 | ) | 4,221 | 1,177 | ||||||||
Changes in unrealized loss on derivative hedges | 386 | 95 | 484 | |||||||||
Changes in unrealized loss on post-retirement plans | 138 | (30 | ) | (2 | ) | |||||||
Total other comprehensive loss | (228 | ) | (7,955 | ) | (3,062 | ) | ||||||
Total comprehensive income | $ | 25,765 | $ | 6,978 | $ | 12,091 |
66
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(in thousands)
CHANGES IN SHAREHOLDERS’ EQUITY
| 2016 | 2015 | 2014 |
Cash flows from operating activities: |
|
|
|
Net income | $ 14,933 | $ 15,153 | $ 14,613 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
Depreciation of premises and equipment | 1,551 | 1,710 | 1,629 |
Amortization of core deposit intangible | 92 | 92 | 92 |
Provision for loan losses | 979 | 1,785 | 1,833 |
Net securities gains | (4,498) | (1,334) | (403) |
Net amortization of bond premiums and discounts | 3,415 | 2,403 | 2,776 |
Deferred tax benefit | 470 | 142 | 240 |
Recognition of stock based compensation expense | 1,114 | 711 | 418 |
Gains on sale of other real estate owned | (9) | (84) | --- |
Net income from bank owned life insurance | (703) | (606) | (262) |
Net change in other assets and liabilities | (553) | 359 | (5,405) |
Net cash provided by operating activities | 16,791 | 20,331 | 15,531 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
Purchases of securities available for sale | (210,824) | (168,432) | (110,239) |
Proceeds from maturities, calls and principal paydowns of mortgage-backed securities | 109,377 | 106,801 | 73,854 |
Proceeds from sales of securities available for sale | 66,583 | 22,753 | 37,278 |
Purchases of Bank Owned Life Insurance | - | (15,000) | - |
Net increase in Federal Home Loan Bank stock | (3,852) | (125) | (2,984) |
Net (increase) decrease in total loans originated | (10,042) | (21,088) | 22,668 |
Purchases of loans | (128,951) | (51,698) | (89,854) |
Proceeds from sale of other real estate owned | 119 | 672 | 1,129 |
Purchases of premises and equipment, net | (4,296) | (1,866) | (2,002) |
Net cash used in investing activities | (181,886) | (127,983) | (70,150) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
Net increase in deposits | 107,513 | 84,738 | 22,398 |
Net increase (decrease) in securities sold under repurchase agreements and fed funds purchased | 871 | 1,189 | (535) |
Proceeds from Federal Home Loan Bank advances | 71,950 | 47,593 | 92,100 |
Repayments of Federal Home Loan Bank advances | (11,016) | (21,011) | (53,990) |
Purchases of Treasury Stock | (497) | (24) | (8) |
Proceeds from stock option exercises, including excess tax benefits | 1,570 | 1,127 | 616 |
Payments of dividends | (6,577) | (6,040) | (5,362) |
Net cash provided by financing activities | 163,814 | 107,572 | 55,219 |
|
|
|
|
Net (decrease) increase in cash and cash equivalents | (1,281) | (80) | 600 |
Cash and cash equivalents at beginning of year | 9,720 | 9,800 | 9,200 |
Cash and cash equivalents at end of year | $ 8,439 | $ 9,720 | $ 9,800 |
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
Cash paid during the period for: |
|
|
|
Interest | $ 11,944 | $ 10,362 | $ 9,920 |
Income taxes | $ 6,286 | $ 5,566 | $ 6,237 |
|
|
|
|
Schedule of noncash investing activities: |
|
|
|
Transfers from loans to other real estate owned | $ --- | $ 425 | $ 320 |
Restricted and Performance stock grants | $ 404 | $ 151 | $ 115 |
(in thousands, except share data) | Common stock amount | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Treasury stock | Total | ||||||||||||||||||
Balance at December 31, 2014 | $ | 13,577 | $ | 20,905 | $ | 113,149 | $ | 6,691 | $ | (8,035 | ) | $ | 146,287 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 15,153 | — | — | 15,153 | ||||||||||||||||||
Other comprehensive loss | — | — | — | (3,062 | ) | — | (3,062 | ) | ||||||||||||||||
Total comprehensive income | — | — | 15,153 | (3,062 | ) | — | 12,091 | |||||||||||||||||
Cash dividends declared ($0.67 per share) | — | — | (6,040 | ) | — | — | (6,040 | ) | ||||||||||||||||
Treasury stock purchased (984 shares) | — | — | — | — | (24 | ) | (24 | ) | ||||||||||||||||
Net issuance (96,813 shares) to employee stock plans, including related tax effects | — | (97 | ) | (2 | ) | — | 1,121 | 1,022 | ||||||||||||||||
Recognition of stock based compensation | — | 816 | — | — | 816 | |||||||||||||||||||
Balance at December 31, 2015 | $ | 13,577 | $ | 21,624 | $ | 122,260 | $ | 3,629 | $ | (6,938 | ) | $ | 154,152 | |||||||||||
Balance at December 31, 2015 | $ | 13,577 | $ | 21,624 | $ | 122,260 | $ | 3,629 | $ | (6,938 | ) | $ | 154,152 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 14,933 | — | — | 14,933 | ||||||||||||||||||
Other comprehensive loss | — | — | — | (7,955 | ) | — | (7,955 | ) | ||||||||||||||||
Total comprehensive income | — | — | 14,933 | (7,955 | ) | — | 6,978 | |||||||||||||||||
Cash dividends declared ($0.73 per share) | — | — | (6,577 | ) | — | — | (6,577 | ) | ||||||||||||||||
Treasury stock purchased (23,072 shares) | — | — | — | — | (497 | ) | (497 | ) | ||||||||||||||||
Net issuance (123,349 shares) to employee stock plans, including related tax effects | — | 125 | (127 | ) | — | 1,408 | 1,406 | |||||||||||||||||
Recognition of stock based compensation | — | 1,278 | — | — | 1,278 | |||||||||||||||||||
Balance at December 31, 2016 | $ | 13,577 | $ | 23,027 | $ | 130,489 | $ | (4,326 | ) | $ | (6,027 | ) | $ | 156,740 | ||||||||||
Balance at December 31, 2016 | $ | 13,577 | $ | 23,027 | $ | 130,489 | $ | (4,326 | ) | $ | (6,027 | ) | $ | 156,740 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 25,993 | — | — | 25,993 | ||||||||||||||||||
Other comprehensive loss | — | — | — | (228 | ) | — | (228 | ) | ||||||||||||||||
Total comprehensive income | — | — | 25,993 | (228 | ) | — | 25,765 | |||||||||||||||||
Cash dividends declared ($0.75 per share) | — | — | (11,505 | ) | — | — | (11,505 | ) | ||||||||||||||||
Acquisition of Lake Sunapee Bank Group (6,245,780 shares) | 8,328 | 173,591 | — | — | — | 181,919 | ||||||||||||||||||
Treasury stock purchased (9,603 shares) | — | — | — | �� | (282 | ) | (282 | ) | ||||||||||||||||
Net issuance (91,517 shares) to employee stock plans, including related tax effects | — | (222 | ) | — | — | 968 | 746 | |||||||||||||||||
Three-for-two stock split | 10,952 | (10,968 | ) | — | — | — | (16 | ) | ||||||||||||||||
Recognition of stock based compensation | — | 1,274 | — | — | — | 1,274 | ||||||||||||||||||
Balance at December 31, 2017 | $ | 32,857 | $ | 186,702 | $ | 144,977 | $ | (4,554 | ) | $ | (5,341 | ) | $ | 354,641 |
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for loan losses | 2,788 | 979 | 1,785 | |||||||||
Net amortization of securities | 5,214 | 3,415 | 2,403 | |||||||||
Deferred income taxes | 6,886 | 470 | 142 | |||||||||
Change in unamortized net loan costs and premiums | (933 | ) | (557 | ) | 295 | |||||||
Premises and equipment depreciation and amortization expense | 3,553 | 1,551 | 1,710 | |||||||||
Stock-based compensation expense | 1,274 | 1,278 | 816 | |||||||||
Accretion of purchase accounting entries, net | (3,337 | ) | — | — | ||||||||
Amortization of other intangibles | 812 | 92 | 92 | |||||||||
Income from cash surrender value of bank-owned life insurance policies | (1,539 | ) | (703 | ) | (606 | ) | ||||||
Gain on sales of securities, net | (19 | ) | (4,498 | ) | (1,334 | ) | ||||||
Loss on premises and equipment, net | 94 | — | — | |||||||||
Net change in other assets and liabilities | (654 | ) | (169 | ) | (125 | ) | ||||||
Net cash provided by operating activities | 40,132 | 16,791 | 20,331 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from sales of securities available for sale | 1,599 | 66,583 | 22,753 | |||||||||
Proceeds from maturities, calls and prepayments of securities available for sale | 121,583 | 109,377 | 106,801 | |||||||||
Purchases of securities available for sale | (172,116 | ) | (210,824 | ) | (168,432 | ) | ||||||
Purchase of bank owned life insurance | — | — | (15,000 | ) | ||||||||
Net change in loans | (126,828 | ) | (10,042 | ) | (21,088 | ) | ||||||
Purchase of loans | (18,621 | ) | (128,951 | ) | (51,698 | ) | ||||||
Purchase of Federal Home Loan Bank stock | (1,325 | ) | (3,852 | ) | (125 | ) | ||||||
Purchase of premises and equipment, net | (3,157 | ) | (4,296 | ) | (1,866 | ) | ||||||
Acquisitions, net of cash (paid) acquired | 39,537 | — | — | |||||||||
Proceeds from sale of other real estate | 322 | 119 | 672 | |||||||||
Net cash used in investing activities | (159,006 | ) | (181,886 | ) | (127,983 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Net decrease in deposits | 151,900 | 107,513 | 84,738 | |||||||||
Net change in short-term advances from the Federal Home Loan Bank | 213,593 | 59,700 | 19,200 | |||||||||
Net change in long term advances from the Federal Home Loan Bank | (153,332 | ) | 1,234 | 7,382 | ||||||||
Net change in securities sold repurchase agreements | (222 | ) | 871 | 1,189 | ||||||||
Exercise of stock options | 968 | 1,570 | 1,127 | |||||||||
Purchase of treasury stock | (282 | ) | (497 | ) | (24 | ) | ||||||
Common stock cash dividends paid | (11,505 | ) | (6,577 | ) | (6,040 | ) | ||||||
Net cash provided by financing activities | 201,120 | 163,814 | 107,572 | |||||||||
Net change in cash and cash equivalents | 82,246 | (1,281 | ) | (80 | ) | |||||||
Cash and cash equivalents at beginning of year | 8,439 | 9,720 | 9,800 | |||||||||
Cash and cash equivalents at end of year | $ | 90,685 | $ | 8,439 | $ | 9,720 | ||||||
Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 21,399 | $ | 11,944 | $ | 10,362 | ||||||
Income taxes paid, net | 9,084 | 6,286 | 5,566 | |||||||||
Acquisition of non-cash assets and liabilities: | ||||||||||||
Assets acquired | 1,454,119 | — | — | |||||||||
Liabilities assumed | 1,406,887 | — | — | |||||||||
Other non-cash changes: | ||||||||||||
Real estate owned acquired in settlement of loans | 32 | — | 425 |
(All dollar amounts expressed in thousands, except share and per share data)
Note 1: Summary of Significant Accounting Policies
The Company’s principal business activityBankshares is retail and commercial banking and, to a lesser extent, financial services including trust, financial planning, investment management and third-party brokerage services. The Company’s business is conducted through the Company’s fourteen (14) banking offices located throughout downeast, midcoast and central Maine.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System. The Company is also a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. The Bank is subject toThese financial statements include the supervision, regulation, and examinationaccounts of the FDICCompany, its wholly-owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Maine BureauBank’s consolidated subsidiaries. The results of Financial Institutions.
operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless U.S. GAAP requires otherwise.
The Federal Reserve Bank requires the Bank to maintain certain reserve requirements of vault cash and/or deposits. The reserve requirement, included in cash and equivalents, was $12.7 million and $595 thousand at year-end 2017 and 2016, respectively.
68
2017.
Commercial real estate and commercial business loans are considered impaired when it becomes probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement.
69
Under the guidance of ASC 310, specific allowances are established in cases where management has identified significant conditions or circumstances related to individual loans where the probability of a loss may be incurred. Credit loss estimates for loans without specific allowances are determined under the guidance of ASC 450, which includes portfolio segmentation based on similar risk characteristics, determination of estimated historical loss rates, calculation of a time-based loss emergence and confirmation periods, and adjustments for certain qualitative risk factors.
70
Mortgage
The Company’s mortgage servicing rights accounted for under the amortization method are initially recorded at fair value. However, these mortgagecapitalized servicing rights are amortized in proportion to and over the period of estimated net servicing income.income, which includes prepayment assumptions. An impairment analysis is prepared on a quarterly basis by estimating the fair value of the mortgagecapitalized servicing rights and comparing that value to the carrying amount. A valuation allowance is established when the carrying amount of these mortgagecapitalized servicing rights exceeds fair value.
71
72
accumulated other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic cost. The measurement date, which is the date at which the benefit obligation and plan assets are measured, is the Company's fiscal year end.
The Company performs an analysis of its tax positions and has not identified any uncertain tax positions for which tax benefits should not be recognized as of December 31, 2016. The Company’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of income.
The Company’s income tax returns are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2013 through 2016.
For the years ended December 31, 2016, 2015, and 2014, the total anti-dilutive stock options amounted to 60 thousand, 86 thousand and 43 thousand shares, respectively.
Recently Adopted
In April 2015,Pronouncements
Standard | Description | Required Date of Adoption | Effect on financial statements |
Standards Adopted in 2017 | |||
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting | This ASU amends Topic 718, Stock Compensation, and intends to improve and simplify accounting for employee shared-based payments. The amendments update the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The transition method of accounting application (i.e. prospective, retrospective or modified retrospective application) differs by amendment and is defined in the guidance. | January 1, 2017 | The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. |
ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs | This ASU amends Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Current guidance generally requires entities to amortize a premium as a yield adjustment over the contractual life of the instrument. Shortening the amortization period is generally expected to more closely align the recognition of interest income with expectations incorporated into the pricing of the underlying securities. The amendments do not affect the accounting treatment of discounts. This ASU should be adopted on a modified retrospective basis. | January 1, 2019 | The Company elected to adopt this ASU as of March 31, 2017, which had no impact on its consolidated financial statements. |
Early adoption permitted, including in an interim period. |
Standard | Description | Required Date of Adoption | Effect on financial statements |
Standards Not Yet Adopted | |||
ASU 2014-09, Revenue from Contracts with Customers | This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry topics of the Codification. The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU may be adopted either retrospectively or on a modified retrospective basis. | January 1, 2018 | The Company performed an analysis to identify all revenue streams within the scope of this accounting guidance. After reviewing the related contracts as prescribed by the five steps within this ASU, the Company concludes that the adoption will have no material impact on the consolidated financial statements in 2018. |
ASU 2015-14, Deferral of the Effective Date | |||
ASU 2016-08, Principal versus Agent Considerations | |||
ASU 2016-10, Identifying Performance Obligations and Licensing | |||
ASU 2016-12, Narrow-Scope Improvements and Practical Expedience | |||
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers | |||
ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities | This ASU amends ASC Topic 825, Financial Instruments-Overall, and addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other minor amendments applicable to the Company, the main provisions require investments in equity securities to be measured at fair value with changes in fair value recognized through net income unless they qualify for a practicability exception (excludes investments accounted for under the equity method of accounting or those that result in consolidation of the investee). Except for disclosure requirements that will be adopted prospectively, the ASU must be adopted on a modified retrospective basis. | January 1, 2018 | The Company does not have any equity securities that would be in scope of this ASU. However, the Company is subject to the exit notion pricing required in fair value disclosures starting in the first quarter of 2018. Based on its review of the current methods utilized to calculate fair value, the Company concludes that this ASU will have no material impact to its consolidated financial statements. |
ASU 2016-02, Leases | This ASU creates ASU Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year. There are not significant changes to lessor accounting; however, there are certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures. This ASU should be adopted on a modified retrospective basis. | January 1, 2019 | The Company is currently evaluating its operating lease arrangement under this ASU. Early indications suggest that the Company will need to recognize right-of-use assets and lease liabilities for most of its operating lease commitments |
Standard | Description | Required Date of Adoption | Effect on financial statements |
Standards Not Yet Adopted (Continued) | |||
ASU 2016-13, Measurement of Credit Losses on Financial Instruments | This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and debt securities. Additional quantitative and qualitative disclosures are required upon adoption. | January 1, 2020 | The Company's early stages of this evaluation include a review of existing credit models and new methodologies may be leveraged to comply with the guidance under this ASU. |
While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for AFS securities, rather than reduce the amortized cost of the securities by direct write-offs. | |||
The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets. | |||
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments | This ASU amends Topic 230, Statement of Cash Flows, and provides clarification with respect to classification within the statement of cash flows where current guidance is unclear or silent. The ASU should be adopted retrospectively. | January 1, 2018 | Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. |
ASU 2017-04, Simplifying the Test for Goodwill Impairment | This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test. | January 1, 2020 | Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. |
Early adoption is permitted. | |||
ASU 2017-07, Compensation- Retirement Benefits | This ASU amends Topic 715, Retirement Benefits, and provides more prescriptive guidance around the presentation of net period pension and postretirement benefit cost in the income statement. The amendment requires that the service cost component be disaggregated from other components of net periodic benefit cost in the income statement. | January 1, 2018 | Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. |
Early adoption is permitted. |
Standard | Description | Required Date of Adoption | Effect on financial statements |
Standards Not Yet Adopted (Continued) | |||
ASU 2017-09, Stock Compensation: Scope of Modification Accounting | This ASU amends Topic 718, Compensation- Stock Compensation, and clarifies when modification accounting should be applied to changes in terms or conditions of share-based payment awards. The amendments narrow the scope of modification accounting by clarifying that modification accounting should be applied to awards if the change affects the fair value, vesting conditions, or classification of the award. The amendments do not impact current disclosure requirements for modifications, regardless of whether modification accounting is required under the new guidance. | January 1, 2018 | Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. |
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities | This ASU amends ASC 815, Derivatives and Hedging to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. | January 1, 2019 | Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements. |
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | The ASU amends Topic 220, Income Statement-Reporting Comprehensive Income, and is intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the recently enacted Tax Reform. The guidance allows entities to reclassify stranded tax effects in accumulated other comprehensive income to retained earnings. | January 1, 2019, with early adoption permitted for financial statements that have not yet been made available for issuance. | The Company has elected to adopt this ASU for financial reporting as of March 31, 2018. The effect of the reclassification is expected to be an increase to retained earnings and decrease accumulated other comprehensive income by $1.0 million, with zero net effect on total stockholders' equity. |
(in thousands, except shares) | As Acquired | Fair Value Adjustments | As Recorded at Acquisition | |||||||||||
Consideration paid: | ||||||||||||||
Bar Harbor Bankshares common stock issued to Lake Sunapee Bank Group stockholders (4,163,853 shares) | $ | 181,919 | ||||||||||||
Cash paid for fractional shares | 27 | |||||||||||||
Total consideration paid | 181,946 | |||||||||||||
Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value: | ||||||||||||||
Cash and short-term investments | $ | 40,970 | $ | (1,406 | ) | (a) | $ | 39,564 | ||||||
Investment securities | 156,960 | (1,381 | ) | (b) | 155,579 | |||||||||
Loans | 1,217,927 | (9,728 | ) | (c) | 1,208,199 | |||||||||
Premises and equipment | 22,561 | (351 | ) | (d) | 22,210 | |||||||||
Core deposit intangible | — | 7,786 | (e) | 7,786 | ||||||||||
Other assets | 102,298 | (50,419 | ) | (f) | 51,879 | |||||||||
Deposits | (1,149,865 | ) | (746 | ) | (g) | (1,150,611 | ) | |||||||
Borrowings | (232,261 | ) | (16 | ) | (h) | (232,277 | ) | |||||||
Deferred taxes, net | (1,921 | ) | 10,387 | (i) | 8,466 | |||||||||
Other liabilities | (19,912 | ) | (4,087 | ) | (j) | (23,999 | ) | |||||||
Total identifiable net assets | $ | 136,757 | $ | (49,961 | ) | $ | 86,796 | |||||||
Goodwill | $ | 95,150 |
a. | Represents in-process payments that were made on the date of acquisition that were not recorded on Lake Sunapee's general ledger until after acquisition. |
b. | Represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition. |
c. | Represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. The adjustment also includes the reversal of Lake Sunapee Bank's historic allowance for loan losses. Loans that met the criteria and are being accounted for in accordance with ASC 310-30, Loans and Securities Acquired with Deteriorated Credit Quality, had a book value of $23.34 million and have a fair value $18.45 million. Non-impaired loans accounted for under ASC 310-10 had a book value of $1.20 billion and have a fair value of $1.188 billion. ASC 310-30 loans have a $1.09 million fair value adjustment discount that is accretable in earnings over the weighted average life of three years using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected cash flows. ASC 310-10 loans have a $11.40 million fair value adjustment discount that is amortized into earnings over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility. |
d. | Represents the adjustment of the book value of buildings and equipment, to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets. |
e. | Represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized using a straight-line method over the average life of the deposit base, which is estimated to be twelve years. |
f. | Primarily represents the write-off of historical goodwill and unamortized intangibles recorded by Lake Sunapee from prior acquisitions that are not carried over to the Company's balance sheet. These adjustments are not accretable into earnings in the statement of income. Also represents the value of customer list intangibles which are accretable into earnings in the statement of income. |
g. | Represents adjustments made to time deposits due to the weighted average contractual interest rates exceeding the cost of similar funding at the time of acquisition. The amount will be amortized using a straight-line method over the estimated useful life of one year. |
h. | Represents the present value difference between cash flows of current debt instruments using contractual rates and those of similar borrowings on the date of acquisition. The adjustment will be amortized over the remaining four year weighted average contractual life. |
i. | Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments. |
j. | Primarily represents the impact of change in control effects on post-retirement liabilities assumed by the Company, which are not accretable into earnings in the statement of income. |
ASC 310-30 Loans | ||||
Gross contractual receivable amounts at acquisition | $ | 23,338 | ||
Contractual cash flows not expected to be collected (nonaccretable discount) | (3,801 | ) | ||
Expected cash flows at acquisition | 19,537 | |||
Interest component of expected cash flows (accretable discount) | (1,089 | ) | ||
Fair value of acquired loans | $ | 18,448 |
Accounting Standards Pending Adoption
In May 2014,combined financial results of the FASBCompany and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include inLake Sunapee had the transaction price and allocatingactually been completed at the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, nor does it indicate future results for any other interim or modified retrospective adoption, meaningfull-year period. Pro forma basic and diluted earnings per common share were calculated using the standardCompany's actual weighted-average shares outstanding for the periods presented plus 4.16 million shares issued as a result of the acquisition. The unaudited pro forma information is applied only tobased on the most current period presented in theactual financial statements withof the cumulative effect of initially applyingCompany and Lake Sunapee for the standard recognized atperiods shown until the date of initial application. In addition,acquisition, at which time Lake Sunapee operations became included in the FASB has begunCompany's financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of
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equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-relatedrecord revenue and expense. Quantitativeearnings separately. The revenue and qualitative disclosures will be required by lessees and lessors to meet the objectiveearnings of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recordedLake Sunapee Bank's operations are included in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of condition. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Financial Statements.
income.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.
31, 2016:
Pro Forma (unaudited) Twelve Months Ended December 31, | ||||||||
(in thousands, except earnings per share) | 2017 | 2016 | ||||||
Net interest income | $ | 93,200 | $ | 90,539 | ||||
Non-interest income | 26,072 | 32,484 | ||||||
Net income | 33,100 | 27,084 | ||||||
Pro forma earnings per share: | ||||||||
Basic | $ | 2.18 | $ | 1.77 | ||||
Diluted | $ | 2.16 | $ | 1.76 |
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Note 2: Three-for-two Common Stock Split
On April 22, 2014,the Company’sBoard of Directors declared a three-for-two split of its common stock, effectuated as a large stock dividend, which was paid on May 19, 2014 (the “payment date”) to all stockholders of record at the close of business on May 5, 2014. As of April 22, 2014, the Company had approximately 3,944,290 shares of common stock outstanding. After the stock split as a large stock dividend, the number of shares of Company common stock outstanding increased to 5,916,435. All previously reported share and per share data included in public filings subsequent to the payment date has been adjusted to reflect the retroactive effect of this three-for-two stock split.
Note 3: Securities Available For Sale
A
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
December 31, 2017 | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Debt securities: | ||||||||||||||||
Obligations of US Government sponsored enterprises | $ | 6,967 | $ | 5 | $ | — | $ | 6,972 | ||||||||
Mortgage-backed securities: | ||||||||||||||||
US Government-sponsored enterprises | 447,081 | 1,738 | 5,816 | 443,003 | ||||||||||||
US Government agency | 96,357 | 413 | 1,174 | 95,596 | ||||||||||||
Private label | 529 | 150 | 5 | 674 | ||||||||||||
Obligations of states and political subdivisions thereof | 138,522 | 2,407 | 729 | 140,200 | ||||||||||||
Corporate bonds | 30,527 | 323 | 53 | 30,797 | ||||||||||||
Total securities available for sale | $ | 719,983 | $ | 5,036 | $ | 7,777 | $ | 717,242 | ||||||||
December 31, 2016 | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Debt securities: | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
US Government-sponsored enterprises | $ | 330,635 | $ | 2,682 | $ | 4,865 | $ | 328,452 | ||||||||
US Government agency | 76,722 | 797 | 613 | 76,906 | ||||||||||||
Private label | 936 | 207 | 11 | 1,132 | ||||||||||||
Obligations of states and political subdivisions thereof | 123,832 | 1,941 | 3,407 | 122,366 | ||||||||||||
Corporate bonds | — | — | — | — | ||||||||||||
Total securities available for sale | $ | 532,125 | $ | 5,627 | $ | 8,896 | $ | 528,856 |
(“AFS”) securities segregated by contractual maturity at December 31, 2017 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 | ||||||||
Amortized | Fair | |||||||
(in thousands) | Cost | Value | ||||||
Within 1 year | $ | 6,997 | $ | 7,002 | ||||
Over 1 year to 5 years | 11,627 | 11,621 | ||||||
Over 5 years to 10 years | 46,942 | 47,776 | ||||||
Over 10 years | 110,450 | 111,569 | ||||||
Total bonds and obligations | 176,016 | 177,968 | ||||||
Mortgage-backed securities | 543,967 | 539,274 | ||||||
Total securities available for sale | $ | 719,983 | $ | 717,242 |
December 31, 2016 |
| Gross | Gross |
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| Amortized | Unrealized | Unrealized | Estimated |
Available for Sale: | Cost | Gains | Losses | Fair Value |
Mortgage-backed securities: |
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US Government-sponsored enterprises | $330,635 | $2,682 | $4,865 | $328,452 |
US Government agency | 76,722 | 797 | 613 | 76,906 |
Private label | 936 | 207 | 11 | 1,132 |
Obligations of states and political subdivisions thereof | 123,832 | 1,941 | 3,407 | 122,366 |
Total | $532,125 | $5,627 | $8,896 | $528,856 |
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December 31, 2015 |
| Gross | Gross |
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| Amortized | Unrealized | Unrealized | Estimated |
Available for Sale: | Cost | Gains | Losses | Fair Value |
Mortgage-backed securities: |
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US Government-sponsored enterprises | $304,106 | $ 5,042 | $2,155 | $306,993 |
US Government agency | 78,408 | 1,269 | 547 | 79,130 |
Private label | 2,713 | 762 | 11 | 3,464 |
Obligations of states and political subdivisions thereof | 110,952 | 4,758 | 328 | 115,382 |
Total | $496,179 | $11,831 | $3,041 | $504,969 |
(in thousands) | Proceeds from Sale of Securities Available for Sale | Realized Gains | Realized Losses | Net | ||||||||||||
2017 | $ | 1,599 | $ | 19 | $ | — | $ | 19 | ||||||||
2016 | 66,583 | 4,498 | — | 4,498 | ||||||||||||
2015 | 22,753 | 1,334 | — | 1,334 |
Less Than Twelve Months | Over Twelve Months | Total | ||||||||||||||||||||||
(in thousands) | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | ||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
US Government-sponsored enterprises | $ | 1,895 | $ | 189,486 | $ | 3,921 | $ | 117,156 | $ | 5,816 | $ | 306,642 | ||||||||||||
US Government agency | 559 | 45,221 | 615 | 30,155 | 1,174 | 75,376 | ||||||||||||||||||
Private label | — | 8 | 5 | 130 | 5 | 138 | ||||||||||||||||||
Obligations of states and political subdivisions thereof | 58 | 8,298 | 671 | 27,727 | 729 | 36,025 | ||||||||||||||||||
Corporate bonds | 53 | 8,943 | — | — | 53 | 8,943 | ||||||||||||||||||
Total securities available for sale | $ | 2,565 | $ | 251,956 | $ | 5,212 | $ | 175,168 | $ | 7,777 | $ | 427,124 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
US Government-sponsored enterprises | $ | 4,369 | $ | 197,914 | $ | 496 | $ | 10,120 | $ | 4,865 | $ | 208,034 | ||||||||||||
US Government agency | 472 | 36,941 | 141 | 4,263 | 613 | 41,204 | ||||||||||||||||||
Private label | — | 107 | 11 | 312 | 11 | 419 | ||||||||||||||||||
Obligations of states and political subdivisions thereof | 3,252 | 76,803 | 155 | 3,916 | 3,407 | 80,719 | ||||||||||||||||||
Corporate bonds | — | — | — | — | — | — | ||||||||||||||||||
Total securities available for sale | $ | 8,093 | $ | 311,765 | $ | 803 | $ | 18,611 | $ | 8,896 | $ | 330,376 |
December 31, 2017 | December 31, 2016 | |||||||||||||||
(in thousands) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||
Securities pledged for deposits | $ | 195,921 | $ | 194,681 | $ | 92,380 | $ | 92,149 | ||||||||
Securities pledged for repurchase agreements | 98,407 | 98,050 | 28,206 | 28,130 | ||||||||||||
Securities pledged for other borrowings (1) | 213,379 | 212,089 | 278,067 | 277,261 | ||||||||||||
Total securities pledged | $ | 507,707 | $ | 504,820 | $ | 398,653 | $ | 397,540 |
Despite still-elevated levels of delinquencies, defaults and losses in the underlying residential mortgage loan collateral, given credit enhancements resulting from the structures ofthe individual securities combined with OTTI write-downs recorded in prior periods, the Company currently expects that as of December 31, 2016, it will recover the amortized cost basis of its private-label mortgage-backed securities and has therefore concluded that such securities were not other-than-temporarily impaired as of that date. Nevertheless, given future market conditions, it is possible that adverse changes in repayment performance and fair value could occur in future periods that could impact the Company’s current best estimates.
The following table displays the beginning balance of OTTI related to historical credit losses on debt securities held by the Company at the beginning of the current reporting period as well as changes in estimated credit losses recognized in pre-tax earnings for the three years ended December 31, 2016.
| 2016 | 2015 | 2014 |
Estimated credit losses as of prior year-end, | $3,180 | $3,413 | $3,923 |
Additions for credit losses for securities on which OTTI has been previously recognized | --- | --- | --- |
Additions for credit losses for securities on which OTTI has not been previously recognized | --- | --- | --- |
Reductions for securities sold or paid off during the period | 1,483 | 233 | 510 |
Estimated credit losses as of December 31, | $1,697 | $3,180 | $3,413 |
Upon initial impairment of a security, total OTTI losses represent the excess of the amortized cost over the fair value. For subsequent impairments of the same security, total OTTI losses represent additional credit losses and or declines in fair value subsequent to the previously recorded OTTI losses, if applicable. Unrealized OTTI losses recognized in accumulated other comprehensive income (“OCI”)
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represent the non-credit component of OTTI losses on debt securities. Net impairment losses recognized in earnings represent the credit component of OTTI losses on debt securities.
As of December 31, 2016, the Company held four private label MBS (debt securities) with a total amortized cost (i.e. carrying value) of $42 for which OTTI losses have previously been recognized in pre-tax earnings dating back to the fourth quarter of 2008. For all of these securities, the Company previously recognized credit losses in excess of the unrealized losses in accumulated OCI, which contributed $130 to the net unrealized gain of $130, net of tax, as included in accumulated OCI as of December 31, 2016, compared with net unrealized gains of $462, net of tax, at December 31, 2015.
As of December 31, 2016, based on a review of the remaining securities in the securities portfolio, the Company concluded that it expects to recover its amortized cost basis for such securities. This conclusion was based on the issuers’ continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that they will continue to do so through the maturity of the security, the expectation that the Company will receive the entire amount of future contractual cash flows, as well as the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence. Accordingly, the Company concluded that the declines in the values of those securities were temporary and that any additional other-than-temporary impairment charges were not appropriate at December 31, 2016. As of that date, the Company did not intend to sell nor anticipated that it would more-likely-than-not that it would be required to sell any of its impaired securities, that is, where fair value is less than the cost basis of the security.
The following tables summarize the fair value of securities with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2016 and 2015. All securities referenced are debt securities. At December 31,2017, 2016 and 2015 the Company did not holdrecord any common stock or other equityother-than-temporary impairment (“OTTI”) losses.
the statement of income:
Twelve Months Ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Estimated credit losses as of prior year-end, | $ | 1,697 | $ | 3,180 | $ | 3,413 | ||||||
Reductions for securities paid off during the period | — | 1,483 | 233 | |||||||||
Estimated credit losses at end of the period | $ | 1,697 | $ | 1,697 | $ | 3,180 |
| Less than 12 months | 12 months or longer | Total | ||||||
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December 31, 2016 | Fair | Number of | Unrealized | Fair | Number of | Unrealized | Fair | Number of | Unrealized |
| Value | Investments | Losses | Value | Investments | Losses | Value | Investments | Losses |
Description of Securities: |
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Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
US Government- sponsored enterprises | $197,914 | 257 | $4,369 | $10,120 | 23 | $ 496 | $208,034 | 280 | $4,865 |
US Government agency | 36,941 | 54 | 472 | 4,263 | 15 | 141 | 41,204 | 69 | 613 |
Private label | 107 | 2 | --- | 312 | 7 | 11 | 419 | 9 | 11 |
Obligations of states and political subdivisions thereof | 76,803 | 151 | 3,252 | 3,916 | 9 | 155 | 80,719 | 160 | 3,407 |
Total | $311,765 | 464 | $8,093 | $18,611 | 54 | $ 803 | $330,376 | 518 | $8,896 |
|
|
|
|
|
|
|
|
|
|
| Less than 12 months | 12 months or longer | Total | ||||||
| Estimated |
|
| Estimated |
|
| Estimated |
|
|
December 31, 2015 | Fair | Number of | Unrealized | Fair | Number of | Unrealized | Fair | Number of | Unrealized |
| Value | Investments | Losses | Value | Investments | Losses | Value | Investments | Losses |
Description of Securities: |
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
US Government- sponsored enterprises | $112,770 | 142 | $1,342 | $23,646 | 33 | $ 813 | $136,416 | 175 | $2,155 |
US Government agency | 20,201 | 30 | 326 | 11,232 | 22 | 221 | 31,433 | 52 | 547 |
Private label | 235 | 2 | 2 | 178 | 5 | 9 | 413 | 7 | 11 |
Obligations of states and political subdivisions thereof | 14,853 | 25 | 210 | 3,700 | 11 | 118 | 18,553 | 36 | 328 |
Total | $148,059 | 199 | $1,880 | $38,756 | 71 | $1,161 | $186,815 | 270 | $3,041 |
76
For securities with unrealized losses, the following information was considered in determining that the impairments were not other-than-temporary:
·
Mortgage-backed
·
Mortgage-backed securities issued by U.S. Government agencies:As of December 31, 2016, the total unrealized losses on these securities amounted to $613, compared with unrealized losses of $547 at December 31, 2015.loss positions. Aggregate unrealized losses represented 0.8% and 0.7%3.4% of the amortized cost of securities in unrealized loss positions as of December 31, 2016 and 2015, respectively. The increase in unrealized losses was generally attributed to a lower interest rate environment at December 31, 2015 compared with December 31, 2016. All of these securities were credit rated “AA+” by the major credit rating agencies. Management’s analysis indicates that these securities bear little or no credit risk because they are backed by the full faith and credit of the United States. The Company attributes the unrealized losses at December 31, 2016, to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at December 31, 2016.
·
Private-label mortgage-backed securities: As of December 31, 2016 and 2015, the total unrealized losses on the Bank’s private-label mortgage-backed securities amounted to $11. Aggregate unrealized losses represented 1.2% and 0.4% of securities in unrealized loss positions as of December 31, 2016 and 2015, respectively. The Company attributes the unrealized losses at December 31, 2015, to the current illiquid market for non-agency mortgage-backed securities, risk-related market pricing discounts for non-agency mortgage-backed securities and credit rating downgrades on certain private-label MBS owned by the Company.positions. Based upon the foregoing considerations, and the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities at December 31, 2016.
·
securities.
Municipal bonds are frequently supported with insurance, which guarantees that in the event the issuer experiences financial problems, the insurer will step in and assume payment of both principal and interest. Historically, insurance support has strengthened an issuer’srisk. There were no material underlying credit rating to AAA or AA status. Starting in 2008 and continuing through 2016, many ofdowngrades during the insurance companies providing municipal bond insurance experienced financial difficulties and, accordingly, were downgraded by at least one of the major credit rating agencies. Consequently,
77
since 2008 a portion of the Bank’s municipal bond portfolio was downgraded by at least one of the major credit rating agencies. Notwithstanding the credit rating downgrades, at December 31, 2016, the Bank’s municipal bond portfolio did not contain any below investment gradequarter. All securities as reported by major credit rating agencies. In addition, at December 31, 2016, all municipal bond issuers were current on contractually obligated interest and principal payments.
The Company attributes the unrealized losses at December 31, 2016, to changes in credit ratings on certain securities and resulting changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased. The Company also attributes the unrealized losses to ongoing media attention and market concerns about municipal budget deficits and the prolonged recovery from the national economic recession and the impact they might have on the future financial stability of municipalities throughout the country. Notwithstanding the foregoing considerations, the Company does not consider these municipal securities to be other-than-temporarily impaired at December 31, 2016.
are performing.
Maturity Distribution:AFS corporate bonds were in an unrealized loss position. The following table summarizes the maturity distributionaggregate unrealized loss represents 0.6% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and estimated fair valuehas concluded that the amortized cost remains supported by the expected future cash flows of securities available for sale as of December 31, 2016.
these securities.
Securities Available for Sale | Amortized Cost | Estimated Fair Value |
Due one year or less | $ 134 | $ 134 |
Due after one year through five years | 6,230 | 6,283 |
Due after five years through ten years | 17,482 | 17,722 |
Due after ten years | 508,279 | 504,717 |
Total | $532,125 | $528,856 |
Actual maturities may differ from the final contractual maturities depicted above because of securities call or prepayment provisions with or without call or prepayment penalties. The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Monthly pay downs on mortgage-backed securities cause the average lives of the securities to be much different than their stated lives. Mortgage-backed securities are allocated among the maturity groupings based on their final maturity dates.
Realized Securities Gains and Losses:The following table summarizes realized gains and losses and other than temporary impairment losses on securities available for sale for the years ended December 31, 2016, 2015 and 2014.
| Proceeds |
|
|
|
| from Sale of |
|
|
|
| Securities |
|
|
|
| Available | Realized | Realized |
|
| for Sale | Gains | Losses | Net |
2016 | $66,583 | $4,498 | $ --- | $4,498 |
2015 | 22,753 | 1,334 | --- | 1,334 |
2014 | 37,278 | 809 | 406 | 403 |
78
At December 31, 2016,2017, the BankCompany owned 11,623 of Visa Class B shares with a then current conversion ratio to Visa Class A shares of 1.648 (or 19,158 Visa Class A shares). Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the BankCompany continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.
Note 4: Loans and Allowance for Loan Losses
lending.
Vermont.
December 31, 2016:
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(in thousands) | Business Activities Loans | Acquired Loans | Total | Business Activities Loans | Acquired Loans | Total | ||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction and land development | $ | 28,892 | $ | 16,781 | $ | 45,673 | $ | 14,695 | $ | — | $ | 14,695 | ||||||||||||
Other commercial real estate | 505,119 | 275,954 | 781,073 | 403,424 | — | 403,424 | ||||||||||||||||||
Total Commercial Real Estate | 534,011 | 292,735 | 826,746 | 418,119 | — | 418,119 | ||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||
Other Commercial | 198,051 | 68,069 | 266,120 | 103,586 | — | 103,586 | ||||||||||||||||||
Agricultural and other loans to farmers | 27,588 | — | 27,588 | 31,808 | — | 31,808 | ||||||||||||||||||
Tax exempt | 42,365 | 43,350 | 85,715 | 15,846 | — | 15,846 | ||||||||||||||||||
Total Commercial and Industrial | 268,004 | 111,419 | 379,423 | 151,240 | — | 151,240 | ||||||||||||||||||
Total Commercial Loans | 802,015 | 404,154 | 1,206,169 | 569,359 | — | 569,359 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Residential mortgages | 591,411 | 564,271 | 1,155,682 | 506,612 | — | 506,612 | ||||||||||||||||||
Total Residential Real Estate | 591,411 | 564,271 | 1,155,682 | 506,612 | — | 506,612 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Home equity | 51,376 | 62,217 | 113,593 | 46,921 | — | 46,921 | ||||||||||||||||||
Other consumer | 7,828 | 2,341 | 10,169 | 6,172 | — | 6,172 | ||||||||||||||||||
Total Consumer | 59,204 | 64,558 | 123,762 | 53,093 | — | 53,093 | ||||||||||||||||||
Total Loans | $ | 1,452,630 | $ | 1,032,983 | $ | 2,485,613 | $ | 1,129,064 | $ | — | $ | 1,129,064 |
LOAN PORTFOLIO SUMMARY
| 2016 | 2015 |
Commercial real estate mortgages | $ 403,594 | $371,002 |
Commercial and industrial | 103,586 | 79,911 |
Commercial construction and land development | 14,695 | 24,926 |
Agricultural and other loans to farmers | 31,808 | 31,003 |
Total commercial loans | 553,683 | 506,842 |
|
|
|
Residential real estate mortgages | 506,612 | 408,401 |
Home equity loans | 46,921 | 51,530 |
Other consumer loans | 6,172 | 7,949 |
Total consumer loans | 559,705 | 467,880 |
|
|
|
Tax exempt loans | 15,846 | 15,244 |
|
|
|
Net deferred loan costs and fees | (170) | 104 |
Total loans | 1,129,064 | 990,070 |
Allowance for loan losses | (10,419) | (9,439) |
Total loans net of allowance for loan losses | $1,118,645 | $980,631 |
Included
December 31, 2016:
(in thousands) | 2017 | 2016 | ||||||
Unamortized net loan origination costs | $ | 2,445 | $ | 1,518 | ||||
Unamortized net premium on purchased loans | (123 | ) | (129 | ) | ||||
Total unamortized net costs and premiums | $ | 2,322 | $ | 1,389 |
At year-end 2016,
the year ended December 31, 2017. (See Note 9 for detail on the Company's borrowed funds.)
Commercial Real Estate Mortgages:
Twelve Months Ended December 31, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Balance at beginning of period | $ | — | $ | — | ||||
Acquisitions | 3,398 | — | ||||||
Reclassification from nonaccretable difference for loans with improved cash flows | 1,925 | — | ||||||
Changes in expected cash flows that do not affect the nonaccretable difference | — | — | ||||||
Reclassification to TDR | — | — | ||||||
Accretion | (1,814 | ) | — | |||||
Balance at end of period | $ | 3,509 | $ | — |
(in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | 637 | $ | 637 | $ | 28,255 | $ | 28,892 | $ | — | ||||||||||||||
Other commercial real estate | 965 | 1,659 | 5,065 | 7,689 | 497,430 | 505,119 | 119 | |||||||||||||||||||||
Total Commercial Real Estate | 965 | 1,659 | 5,702 | 8,326 | 525,685 | 534,011 | 119 | |||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||
Other Commercial | 186 | 329 | 702 | 1,217 | 196,834 | 198,051 | 21 | |||||||||||||||||||||
Agricultural and other loans to farmers | 42 | 159 | 198 | 399 | 27,189 | 27,588 | 155 | |||||||||||||||||||||
Tax exempt | — | — | — | — | 42,365 | 42,365 | — | |||||||||||||||||||||
Total Commercial and Industrial | 228 | 488 | 900 | 1,616 | 266,388 | 268,004 | 176 | |||||||||||||||||||||
Total Commercial Loans | 1,193 | 2,147 | 6,602 | 9,942 | 792,073 | 802,015 | 295 | |||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||
Residential mortgages | 3,096 | 711 | 975 | 4,782 | 586,629 | 591,411 | — | |||||||||||||||||||||
Total Residential Real Estate | 3,096 | 711 | 975 | 4,782 | 586,629 | 591,411 | — | |||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||
Home equity | 515 | — | 199 | 714 | 50,662 | 51,376 | 199 | |||||||||||||||||||||
Other consumer | 36 | 24 | — | 60 | 7,768 | 7,828 | — | |||||||||||||||||||||
Total Consumer | 551 | 24 | 199 | 774 | 58,430 | 59,204 | 199 | |||||||||||||||||||||
Total Loans | $ | 4,840 | $ | 2,882 | $ | 7,776 | $ | 15,498 | $ | 1,437,132 | $ | 1,452,630 | $ | 494 |
(in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Current | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | 14,695 | $ | 14,695 | $ | — | ||||||||||||||
Other commercial real estate | 195 | 554 | 1,665 | 2,414 | 401,010 | 403,424 | — | |||||||||||||||||||||
Total Commercial Real Estate | 195 | 554 | 1,665 | 2,414 | 415,705 | 418,119 | — | |||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||
Other Commercial | 61 | 45 | 201 | 307 | 103,279 | 103,586 | — | |||||||||||||||||||||
Agricultural and other loans to farmers | 231 | — | — | 231 | 31,577 | 31,808 | — | |||||||||||||||||||||
Tax exempt | — | — | — | — | 15,846 | 15,846 | — | |||||||||||||||||||||
Total Commercial and Industrial | 292 | 45 | 201 | 538 | 150,702 | 151,240 | — | |||||||||||||||||||||
Total Commercial Loans | 487 | 599 | 1,866 | 2,952 | 566,407 | 569,359 | — | |||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||
Residential mortgages | 4,484 | 429 | 938 | 5,851 | 500,761 | 506,612 | — | |||||||||||||||||||||
Total Residential Real Estate | 4,484 | 429 | 938 | 5,851 | 500,761 | 506,612 | — | |||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||
Home equity | — | — | 15 | 15 | 46,906 | 46,921 | — | |||||||||||||||||||||
Other consumer | 103 | 1 | 6 | 110 | 6,062 | 6,172 | — | |||||||||||||||||||||
Total Consumer | 103 | 1 | 21 | 125 | 52,968 | 53,093 | — | |||||||||||||||||||||
— | ||||||||||||||||||||||||||||
Total Loans | $ | 5,074 | $ | 1,029 | $ | 2,825 | $ | 8,928 | $ | 1,120,136 | $ | 1,129,064 | $ | — |
(in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater Past Due | Total Past Due | Acquired Credit Impaired | Total Loans | Past Due > 90 days and Accruing | |||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||
Construction and land development | $ | 124 | $ | 9 | $ | — | $ | 133 | $ | 258 | $ | 16,781 | $ | — | ||||||||||||||
Other commercial real estate | 278 | — | 411 | 689 | 8,397 | 275,954 | — | |||||||||||||||||||||
Total Commercial Real Estate | 402 | 9 | 411 | 822 | 8,655 | 292,735 | — | |||||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||||||
Other Commercial | 125 | 14 | 49 | 188 | 632 | 68,069 | — | |||||||||||||||||||||
Agricultural and other loans to farmers | — | — | — | — | — | — | — | |||||||||||||||||||||
Tax exempt | — | — | — | — | — | 43,350 | — | |||||||||||||||||||||
Total Commercial and Industrial | 125 | 14 | 49 | 188 | 632 | 111,419 | — | |||||||||||||||||||||
Total Commercial Loans | 527 | 23 | 460 | 1,010 | 9,287 | 404,154 | — | |||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||
Residential mortgages | 752 | 388 | 614 | 1,754 | 3,259 | 564,271 | — | |||||||||||||||||||||
Total Residential Real Estate | 752 | 388 | 614 | 1,754 | 3,259 | 564,271 | — | |||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||
Home equity | 125 | 117 | 80 | 322 | 38 | 62,217 | 16 | |||||||||||||||||||||
Other consumer | 2 | — | — | 2 | 3 | 2,341 | — | |||||||||||||||||||||
Total Consumer | 127 | 117 | 80 | 324 | 41 | 64,558 | 16 | |||||||||||||||||||||
— | ||||||||||||||||||||||||||||
Total Loans | $ | 1,406 | $ | 528 | $ | 1,154 | $ | 3,088 | $ | 12,587 | $ | 1,032,983 | $ | 16 |
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(in thousands) | Business Activities Loans | Acquired Loans | Total | Business Activities Loans | Acquired Loans | Total | ||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction and land development | $ | 637 | $ | — | $ | 637 | $ | — | $ | — | $ | — | ||||||||||||
Other commercial real estate | 7,146 | 560 | 7,706 | 2,564 | — | 2,564 | ||||||||||||||||||
Total Commercial Real Estate | 7,783 | 560 | 8,343 | 2,564 | — | 2,564 | ||||||||||||||||||
Commercial and Industrial: | ||||||||||||||||||||||||
Other Commercial | 703 | 463 | 1,166 | 284 | — | 284 | ||||||||||||||||||
Agricultural and other loans to farmers | 43 | — | 43 | 31 | — | 31 | ||||||||||||||||||
Tax exempt | — | — | — | — | — | — | ||||||||||||||||||
Total Commercial and Industrial | 746 | 463 | 1,209 | 315 | — | 315 | ||||||||||||||||||
Total Commercial Loans | 8,529 | 1,023 | 9,552 | 2,879 | — | 2,879 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Residential mortgages | 3,408 | 858 | 4,266 | 3,419 | — | 3,419 | ||||||||||||||||||
Total Residential Real Estate | 3,408 | 858 | 4,266 | 3,419 | — | 3,419 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Home equity | 130 | 217 | 347 | 90 | — | 90 | ||||||||||||||||||
Other consumer | 95 | 58 | 153 | 108 | — | 108 | ||||||||||||||||||
Total Consumer | 225 | 275 | 500 | 198 | — | 198 | ||||||||||||||||||
Total Loans | $ | 12,162 | $ | 2,156 | $ | 14,318 | $ | 6,496 | $ | — | $ | 6,496 |
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||
Balance at end of period | ||||||||||||||||||||
Individually evaluated for impairment | $ | 7,604 | $ | 626 | $ | 1,404 | $ | 13 | $ | 9,647 | ||||||||||
Collectively evaluated | 526,407 | 267,378 | 590,007 | 59,191 | 1,442,983 | |||||||||||||||
Total | $ | 534,011 | $ | 268,004 | $ | 591,411 | $ | 59,204 | $ | 1,452,630 |
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||
Balance at end of period | ||||||||||||||||||||
Individually evaluated for impairment | $ | 4,481 | $ | 486 | $ | 1,709 | $ | 33 | $ | 6,709 | ||||||||||
Collectively evaluated | 413,638 | 150,754 | 504,903 | 53,060 | 1,122,355 | |||||||||||||||
Total | $ | 418,119 | $ | 151,240 | $ | 506,612 | $ | 53,093 | $ | 1,129,064 |
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||
Balance at end of period | ||||||||||||||||||||
Individually evaluated for impairment | $ | 241 | $ | 571 | $ | 271 | $ | 63 | $ | 1,146 | ||||||||||
Purchased credit impaired | 8,655 | 632 | 3,259 | 41 | 12,587 | |||||||||||||||
Collectively evaluated | 283,839 | 110,216 | 560,741 | 64,454 | 1,019,250 | |||||||||||||||
Total | $ | 292,735 | $ | 111,419 | $ | 564,271 | $ | 64,558 | $ | 1,032,983 |
December 31, 2017 | ||||||||||||
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
With no related allowance: | ||||||||||||
Construction and land development | $ | — | $ | — | $ | — | ||||||
Other commercial real estate | 5,896 | 5,903 | — | |||||||||
Other commercial | 218 | 217 | — | |||||||||
Agricultural and other loans to farmers | — | — | — | |||||||||
Tax exempt | — | — | — | |||||||||
Residential mortgages | 1,247 | 1,260 | — | |||||||||
Home equity | 13 | 13 | — | |||||||||
Other consumer | — | — | — | |||||||||
With an allowance recorded: | ||||||||||||
Construction and land development | $ | 637 | $ | 2,563 | $ | 59 | ||||||
Other commercial real estate | 1,071 | 1,132 | 388 | |||||||||
Other commercial | 408 | 408 | 3 | |||||||||
Agricultural and other loans to farmers | — | — | — | |||||||||
Tax exempt | — | — | — | |||||||||
Residential mortgages | 157 | 157 | 9 | |||||||||
Home equity | — | — | — | |||||||||
Other consumer | — | — | — | |||||||||
Total | ||||||||||||
Commercial real estate | $ | 7,604 | $ | 9,598 | $ | 447 | ||||||
Commercial and industrial | 626 | 625 | 3 | |||||||||
Residential real estate | 1,404 | 1,417 | 9 | |||||||||
Consumer | 13 | 13 | — | |||||||||
Total impaired loans | $ | 9,647 | $ | 11,653 | $ | 459 |
December 31, 2016 | ||||||||||||
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
With no related allowance: | ||||||||||||
Construction and land development | $ | — | $ | — | $ | — | ||||||
Other commercial real estate | 2,831 | 2,919 | — | |||||||||
Other commercial | 130 | 130 | — | |||||||||
Agricultural and other loans to farmers | 139 | 139 | — | |||||||||
Tax exempt | — | — | — | |||||||||
Residential mortgages | 1,387 | 1,504 | — | |||||||||
Home equity | 16 | 16 | — | |||||||||
Other consumer | 2 | 2 | — | |||||||||
With an allowance recorded: | ||||||||||||
Construction and land development | $ | — | $ | — | $ | — | ||||||
Other commercial real estate | 1,650 | 3,575 | 193 | |||||||||
Other commercial | 217 | 367 | 173 | |||||||||
Agricultural and other loans to farmers | — | — | — | |||||||||
Tax exempt | — | — | — | |||||||||
Residential mortgages | 322 | 322 | 49 | |||||||||
Home equity | — | — | — | |||||||||
Other consumer | 15 | 15 | 9 | |||||||||
Total | ||||||||||||
Commercial real estate | $ | 4,481 | $ | 6,494 | $ | 193 | ||||||
Commercial and industrial | 486 | 636 | 173 | |||||||||
Residential real estate | 1,709 | 1,826 | 49 | |||||||||
Consumer | 33 | 33 | 9 | |||||||||
Total impaired loans | $ | 6,709 | $ | 8,989 | $ | 424 |
December 31, 2017 | ||||||||||||
(in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
With no related allowance: | ||||||||||||
Construction and land development | $ | — | $ | — | $ | — | ||||||
Other commercial real estate | 241 | 352 | — | |||||||||
Other commercial | 571 | 584 | — | |||||||||
Agricultural and other loans to farmers | — | — | — | |||||||||
Tax exempt | — | — | — | |||||||||
Residential mortgages | 271 | 278 | — | |||||||||
Home equity | 63 | 156 | — | |||||||||
Other consumer | — | — | — | |||||||||
With an allowance recorded: | ||||||||||||
Construction and land development | $ | — | $ | — | $ | — | ||||||
Other commercial real estate | — | — | — | |||||||||
Other commercial | — | — | — | |||||||||
Agricultural and other loans to farmers | — | — | — | |||||||||
Tax exempt | — | — | — | |||||||||
Residential mortgages | — | — | — | |||||||||
Home equity | — | — | — | |||||||||
Other consumer | — | — | — | |||||||||
Total | ||||||||||||
Commercial real estate | $ | 241 | $ | 352 | $ | — | ||||||
Commercial and industrial | 571 | 584 | — | |||||||||
Residential real estate | 271 | 278 | — | |||||||||
Consumer | 63 | 156 | — | |||||||||
Total impaired loans | $ | 1,146 | $ | 1,370 | $ | — |
Twelve Months Ended December 31, 2017 | Twelve Months Ended December 31, 2016 | |||||||||||||||
(in thousands) | Average Recorded Investment | Cash Basis Interest Income Recognized | Average Recorded Investment | Cash Basis Interest Income Recognized | ||||||||||||
With no related allowance: | ||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | ||||||||
Other commercial real estate | 2,541 | 66 | 2,768 | 157 | ||||||||||||
Other commercial | 382 | 6 | 239 | 4 | ||||||||||||
Agricultural and other loans to farmers | 113 | 1 | 156 | 9 | ||||||||||||
Tax exempt | — | — | — | — | ||||||||||||
Residential mortgages | 2,174 | 39 | 1,514 | 73 | ||||||||||||
Home equity | 27 | — | 17 | 1 | ||||||||||||
Other consumer | 53 | 3 | 2 | 2 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Construction and land development | $ | 637 | $ | — | $ | — | $ | — | ||||||||
Other commercial real estate | 735 | — | 1,619 | — | ||||||||||||
Other commercial | 105 | 1 | 118 | — | ||||||||||||
Agricultural and other loans to farmers | — | — | — | — | ||||||||||||
Tax exempt | — | — | — | — | ||||||||||||
Residential mortgages | 157 | 5 | 325 | — | ||||||||||||
Home equity | — | — | — | — | ||||||||||||
Other consumer | — | — | 16 | — | ||||||||||||
Total | ||||||||||||||||
Commercial real estate | $ | 3,913 | $ | 66 | $ | 4,387 | $ | 157 | ||||||||
Commercial and industrial | 600 | 8 | 513 | 13 | ||||||||||||
Residential real estate | 2,331 | 44 | 1,839 | 73 | ||||||||||||
Consumer | 80 | 3 | 35 | 3 | ||||||||||||
Total impaired loans | $ | 6,924 | $ | 121 | $ | 6,774 | $ | 246 |
Twelve Months Ended December 31, 2017 | Twelve Months Ended December 31, 2016 | |||||||||||||||
(in thousands) | Average Recorded Investment | Cash Basis Interest Income Recognized | Average Recorded Investment | Cash Basis Interest Income Recognized | ||||||||||||
With no related allowance: | ||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | ||||||||
Other commercial real estate | 136 | — | — | — | ||||||||||||
Other commercial | 264 | 1 | — | — | ||||||||||||
Agricultural and other loans to farmers | — | — | — | — | ||||||||||||
Tax exempt | — | — | — | — | ||||||||||||
Residential mortgages | 140 | 1 | — | — | ||||||||||||
Home equity | 58 | — | — | — | ||||||||||||
Other consumer | — | — | — | — | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | ||||||||
Other commercial real estate | — | — | — | — | ||||||||||||
Other commercial | — | — | — | — | ||||||||||||
Agricultural and other loans to farmers | — | — | — | — | ||||||||||||
Tax exempt | — | — | — | — | ||||||||||||
Residential mortgages | — | — | — | — | ||||||||||||
Home equity | — | — | — | — | ||||||||||||
Other consumer | — | — | — | — | ||||||||||||
Total | ||||||||||||||||
Commercial real estate | $ | 136 | $ | — | $ | — | $ | — | ||||||||
Commercial and industrial | 264 | 1 | — | — | ||||||||||||
Residential real estate | 140 | 1 | — | — | ||||||||||||
Consumer | 58 | — | — | — | ||||||||||||
Total impaired loans | $ | 598 | $ | 2 | $ | — | $ | — |
Twelve Months Ended December 31, 2017 | |||||||||||
(in thousands, except modifications) | Number of Modifications | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||
Troubled Debt Restructurings | |||||||||||
Other commercial real estate | 6 | $ | 388 | $ | 222 | ||||||
Other commercial | 6 | 563 | 545 | ||||||||
Agricultural and other loans to farmers | 1 | 19 | 18 | ||||||||
Residential mortgages | 3 | 692 | 670 | ||||||||
Home equity | 1 | 13 | 13 | ||||||||
Other consumer | 1 | 38 | 36 | ||||||||
Total | 18 | $ | 1,713 | $ | 1,504 |
Twelve Months Ended December 31, 2016 | |||||||||||
(in thousands, except modifications) | Number of Modifications | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||
Troubled Debt Restructurings | |||||||||||
Other commercial real estate | 6 | $ | 1,459 | $ | 1,354 | ||||||
Other commercial | 2 | 38 | 48 | ||||||||
Agricultural and other loans to farmers | 3 | 29 | 44 | ||||||||
Residential mortgages | — | — | — | ||||||||
Home equity | — | — | — | ||||||||
Other consumer | 2 | 11 | 11 | ||||||||
Total | 13 | $ | 1,537 | $ | 1,457 |
Twelve Months Ended December 31, 2015 | |||||||||||
(in thousands, except modifications) | Number of Modifications | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||
Troubled Debt Restructurings | |||||||||||
Other commercial real estate | 4 | $ | 342 | $ | 352 | ||||||
Other commercial | — | — | — | ||||||||
Agricultural and other loans to farmers | 1 | 18 | 15 | ||||||||
Residential mortgages | — | — | — | ||||||||
Home equity | — | — | — | ||||||||
Other consumer | 5 | 1,435 | 1,433 | ||||||||
Total | 10 | $ | 1,795 | $ | 1,800 |
(in thousands) | 2017 | 2016 | ||||||
Beginning balance | $ | 10,620 | $ | 4,100 | ||||
Changes in composition (1) | 249 | 7,017 | ||||||
New Loans | 1,124 | 1,127 | ||||||
Less: repayments | (1,506 | ) | (1,624 | ) | ||||
Ending balance | $ | 10,487 | $ | 10,620 |
Commercial and Industrial Loans: Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably, and prudently expand its business. Commercial and industrial loans are primarily made in the Bank’ssecondary market areas and are underwritten onretains the basis of the borrower’s ability to service the debt from income. These loans typically have variable interest rates and amortize over a periodmany of less than 10 years. As a general practice, the Bank takes as collateral a lien on available real estate, equipment or other assets owned by the borrower and obtains a personal guaranty of the borrower(s) or principal(s). Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. The risk in commercial and industrial loans is principally due to the type of collateral securing these loans. The increased risk also derives fromBank earns fees for the expectation that commercialservicing provided. At year-end 2017 and industrial2016, the Company was servicing loans generally will befor participants totaling $497.9 million and $11.2 million, respectively. Loans serviced principally from the operations of the business, and, iffor others are not successful, these loans are primarily secured by tangible, non-real estate collateral.
Construction and Land Development Loans: The Bank makes loans to finance the construction of residential and non-residential properties. Construction loans generally are collateralized by first liens on real estate with terms of six to twenty-four months. The Bank conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described immediately above are also usedincluded in the Bank’s construction lending activities. Construction loans involve additionalaccompanying consolidated balance sheets. The risks attributable to the fact that loan funds are advanced against a project under construction and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed projectservicing assets relate primarily to changes in prepayments that result from shifts in interest rates. Contractually-specified servicing fees were $1.2 million, $28 thousand, and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. In many cases the success of the project can also depend upon the financial support/strength of the sponsorship. If the Bank is forced to foreclose on a project prior to completion, there is no assurance that the Bank will be able to recover the entire unpaid portion of the loan. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.
Residential Real Estate Mortgage Loans: The Bank originates and purchases first-lien, adjustable-rate and fixed-rate, one-to-four-family residential real estate loans$33 thousand for the construction, purchase or refinancingyears 2017, 2016, and 2015, respectively, and included as a component of residential property. These loans are principally collateralized by owner-occupied properties,other income within non-interest income.
2016 was as follows:
At or for the Twelve Months Ended December 31, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Balance at beginning of year | $ | 5 | $ | 8 | ||||
Acquired from Lake Sunapee Bank Group | 3,417 | — | ||||||
Additions | 134 | — | ||||||
Amortization | (324 | ) | (3 | ) | ||||
Balance at end of year | $ | 3,232 | $ | 5 |
Home Equity Loans: The Bank originates home equity lines of credit and second mortgage loans (loans which are secured by a junior lien position on one-to-four-family residential real estate). Home equity loans are mostly originated in amounts of no more than 85% of the combined loan-to-value ratio (first and second liens), or have private mortgage insurance. These loans carry a higher risk than first mortgage
79
Troubled Debt Restructures:A Troubled Debt Restructure (“TDR”) results from a modificationloan portfolio. The allowance is increased by provisions charged to a loan to a borrower who is experiencing financial difficulty in which the Bank grants a concession to the debtor that it would not otherwise consider but for the debtor’s financial difficulties. Financial difficulty arises when a debtor is bankrupt or contractually past due, or is likely to become so, based upon its ability to pay. A concession represents an accommodation not generally available to other customers, which may include a below-market interest rate, deferment of principal payments, extension of maturity dates, etc. Such accommodations extended to customers whooperating expense and reduced by net charge-offs. Loans are not experiencing financial difficulty do not result in TDR classification.
As of December 31, 2016, the Bank had eight real estate secured loans, five commercial and industrial loans, 12 commercial real estate loans, four agricultural loan, and three other consumer loan, outstanding to 27 relationships totaling $4,236 that were classified as TDRs. At December 31, 2016, there were 17 of these TDRs totaling $1,523 that were classified as non-accrual, and none were past due 30 days or more and still accruing.
As of December 31, 2015, the Bank had eight real estate secured loans, four commercial and industrial loans, seven commercial real estate loans two agricultural loan, and one other consumer loan, outstanding to 17 relationships totaling $3,162 that were classified as TDRs. At December 31, 2016, six of these TDRs totaling $826 were classified as non-accrual, and none were past due 30 days or more and still accruing.
Troubled debt restructurings and related delinquency trends in general are considered in management’s evaluation ofcharged against the allowance for loan losses when we believe that collectability is unlikely. While we use the best information available to make our evaluation, future adjustments may be necessary if there are significant changes in conditions.
losses is as follows:
80
Summary information pertaining to the TDRs granted by
| For the Twelve Months Ended | ||
| December 31, 2016 | ||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
Commercial real estate mortgages | 6 | $1,459 | $1,354 |
Commercial and industrial loans | 2 | 38 | 48 |
Agricultural and other loans to farmers | 3 | 29 | 44 |
Total commercial loans | 11 | 1,526 | 1,446 |
|
|
|
|
Other consumer loans | 2 | 11 | 11 |
Total consumer loans | 2 | 11 | 11 |
Total | 13 | $1,537 | $ 1,457 |
| For the Twelve Months Ended | ||
| December 31, 2015 | ||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
Commercial real estate mortgages | 4 | $ 342 | $ 352 |
Commercial and industrial loans | --- | --- | --- |
Agricultural and other loans to farmers | 1 | 18 | 15 |
Total commercial loans | 5 | 360 | 367 |
|
|
|
|
Other consumer loans | 5 | 1,435 | 1,433 |
Total consumer loans | 5 | 1,435 | 1,433 |
Total | 10 | $1,795 | $1,800 |
| For the Twelve Months Ended | ||
| December 31, 2014 | ||
| Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
Commercial real estate mortgages | 1 | $ 30 | $ 30 |
Commercial and industrial loans | --- | --- | --- |
Agricultural and other loans to farmers | 1 | 100 | 97 |
Total commercial loans | 2 | 130 | 127 |
Other consumer loans | --- | --- | --- |
Total consumer loans | --- | --- | --- |
|
|
|
|
Total | 2 | $130 | $127 |
The following table shows the Company’s post-modification balancethat may also have credit weaknesses. Such loan relationships are identified primarily through our analysis of TDRs listed by type of modification for the twelve months ended December 31, 2016 and 2015:
| 2016 | 2015 |
Extended maturity and adjusted interest rate | $ 440 | $ 132 |
Adjusted payment | 981 | 735 |
Adjusted payment and capitalized interest | --- | 187 |
Extended maturity, adjusted interest rate, and adjusted payment | --- | 746 |
Extended amortization and adjusted interest rate | 9 | --- |
Court ordered concession | 1 | --- |
Other concession | 26 | --- |
Total | $1,457 | $1,800 |
During the twelve months ended December 31, 2016, 2015 and 2014, there were no defaults on loans that had been modified as TDRs within the previous twelve months. A default for purposes of this disclosure is a TDR in which the borrower is 90 days or moreinternal loan evaluations, past due loan reports and loans adversely classified internally or results in foreclosureby regulatory authorities. Each loan so identified is then individually evaluated to determine whether it is impaired- that is, based on current information and repossession of the applicable collateral.
Past Due Loans:The following tables set forth information regarding past due loans at December 31, 2016 and December 31, 2015. Amounts shown exclude deferred loan origination fees and costs.
81
December 31, 2016 | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater | Total Past Due | Current | Total Loans | Non- Accrual | >90 Days Past Due and Accruing |
Commercial real estate mortgages | $ 195 | $ 554 | $1,665 | $2,414 | $ 401,180 | $ 403,594 | $2,564 | $ --- |
Commercial and industrial | 61 | 45 | 201 | 307 | 103,279 | 103,586 | 284 | --- |
Commercial construction and land development | --- | --- | --- | --- | 14,695 | 14,695 | --- | --- |
Agricultural and other loans to farmers | 231 | --- | --- | 231 | 31,577 | 31,808 | 31 | --- |
Residential real estate mortgages | 4,484 | 429 | 938 | 5,851 | 500,761 | 506,612 | 3,419 | --- |
Home equity | --- | --- | 15 | 15 | 46,906 | 46,921 | 90 | --- |
Other consumer loans | 103 | 1 | 6 | 110 | 6,062 | 6,172 | 108 | --- |
Tax exempt | --- | --- | --- | --- | 15,846 | 15,846 | --- | --- |
Total | $5,074 | $1,029 | $2,825 | $8,928 | 1,120,306 | $1,129,234 | $6,496 | $ --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater | Total Past Due | Current | Total Loans | Non-Accrual | >90 Days Past Due and Accruing |
Commercial real estate mortgages | $ 99 | $287 | $ 241 | 627 | $370,375 | $ 371,002 | $1,279 | $ --- |
Commercial and industrial | 9 | 1 | 271 | 281 | 79,630 | 79,911 | 292 | --- |
Commercial construction and land development | --- | --- | 1,111 | 1,111 | 23,815 | 24,926 | 1,111 | --- |
Agricultural and other loans to farmers | 12 | 70 | 3 | 85 | 30,918 | 31,003 | 16 | 3 |
Residential real estate mortgages | 1,313 | 452 | 1,299 | 3,064 | 403,588 | 406,652 | 3,452 | 25 |
Home equity | 245 | --- | 797 | 1,042 | 50,488 | 51,530 | 820 | --- |
Other consumer loans | 66 | --- | --- | 66 | 9,632 | 9,698 | 10 | --- |
Tax exempt | --- | --- | --- | --- | 15,244 | 15,244 | --- | --- |
Total | $1,744 | $810 | $3,722 | $6,276 | $983,690 | $ 989,966 | $6,980 | $ 28 |
Impaired Loans: Impaired loans are all commercial loans for which the Company believesevents, it is probable that itwe will be unable to collect all amounts due according toin accordance with the contractual terms of the underlying loan agreement, as well asagreement. Substantially all loans modified into a troubled debt restructure, if any. Allowances for losses onof our impaired loans are determined by the lowerhistorically have been collateral dependent, meaning repayment of the present valueloan is expected or is considered to be provided solely from the sale of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or in the case of collateral dependentloan's underlying collateral. For such loans, the lower of the fair value of the collateral, less estimated costs to dispose, and the recorded amount of the loans. When foreclosure is probable,we measure impairment is measured based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve is 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.
82
Details Our policy is to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained.
Business Activities Loans | At or for the Twelve Months Ended December 31, 2017 | |||||||||||||||||||
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
Balance at beginning of period | $ | 5,145 | $ | 1,952 | $ | 2,721 | $ | 601 | $ | 10,419 | ||||||||||
Charged-off loans | (124 | ) | (189 | ) | (226 | ) | (162 | ) | (701 | ) | ||||||||||
Recoveries on charged-off loans | 49 | 11 | 65 | 18 | 143 | |||||||||||||||
Provision/(releases) for loan losses | 967 | 599 | 797 | (71 | ) | 2,292 | ||||||||||||||
Balance at end of period | $ | 6,037 | $ | 2,373 | $ | 3,357 | $ | 386 | $ | 12,153 | ||||||||||
Individually evaluated for impairment | 447 | 3 | 9 | — | 459 | |||||||||||||||
Collectively evaluated | 5,590 | 2,370 | 3,348 | 386 | 11,694 | |||||||||||||||
Total | $ | 6,037 | $ | 2,373 | $ | 3,357 | $ | 386 | $ | 12,153 |
Business Activities Loans | At or for the Twelve Months Ended December 31, 2016 | |||||||||||||||||||
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
Balance at beginning of period | $ | 4,430 | $ | 1,590 | $ | 2,747 | $ | 672 | $ | 9,439 | ||||||||||
Charged-off loans | (133 | ) | (90 | ) | (141 | ) | (47 | ) | (411 | ) | ||||||||||
Recoveries on charged-off loans | 40 | 289 | 44 | 39 | 412 | |||||||||||||||
Provision/(releases) for loan losses | 808 | 163 | 71 | (63 | ) | 979 | ||||||||||||||
Balance at end of period | $ | 5,145 | $ | 1,952 | $ | 2,721 | $ | 601 | $ | 10,419 | ||||||||||
Individually evaluated for impairment | 193 | 173 | 49 | 9 | 424 | |||||||||||||||
Collectively evaluated | 4,952 | 1,779 | 2,672 | 592 | 9,995 | |||||||||||||||
Total | $ | 5,145 | $ | 1,952 | $ | 2,721 | $ | 601 | $ | 10,419 |
Business Activities Loans | At or for the Twelve Months Ended December 31, 2015 | |||||||||||||||||||
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
Balance at beginning of period | $ | 4,613 | $ | 1,277 | $ | 2,714 | $ | 365 | $ | 8,969 | ||||||||||
Charged-off loans | (667 | ) | (395 | ) | (70 | ) | (487 | ) | (1,619 | ) | ||||||||||
Recoveries on charged-off loans | 98 | 54 | 129 | 23 | 304 | |||||||||||||||
Provision/(releases) for loan losses | 386 | 654 | (26 | ) | 771 | 1,785 | ||||||||||||||
Balance at end of period | $ | 4,430 | $ | 1,590 | $ | 2,747 | $ | 672 | $ | 9,439 | ||||||||||
Individually evaluated for impairment | 101 | 175 | 97 | — | 373 | |||||||||||||||
Collectively evaluated | 4,329 | 1,415 | 2,650 | 672 | 9,066 | |||||||||||||||
Total | $ | 4,430 | $ | 1,590 | $ | 2,747 | $ | 672 | $ | 9,439 |
Acquired Loans | At or for the Twelve Months Ended December 31, 2017 | |||||||||||||||||||
(in thousands) | Commercial real estate | Commercial and industrial | Residential real estate | Consumer | Total | |||||||||||||||
Balance at beginning of period | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Charged-off loans | (151 | ) | (18 | ) | (29 | ) | (127 | ) | (325 | ) | ||||||||||
Recoveries on charged-off loans | 1 | — | — | — | 1 | |||||||||||||||
Provision/(releases) for loan losses | 247 | 34 | 88 | 127 | 496 | |||||||||||||||
Balance at end of period | $ | 97 | $ | 16 | $ | 59 | $ | — | $ | 172 | ||||||||||
Individually evaluated for impairment | — | — | — | — | — | |||||||||||||||
Collectively evaluated | 97 | 16 | 59 | — | 172 | |||||||||||||||
Total | $ | 97 | $ | 16 | $ | 59 | $ | — | $ | 172 |
2015.
|
| Unpaid |
|
| Unpaid |
|
| Recorded | Principal | Related | Recorded | Principal | Related |
| Investment | Balance | Allowance | Investment | Balance | Allowance |
With no related allowance: |
|
|
|
|
|
|
Commercial real estate mortgages | $2,831 | $2,919 | $ --- | $1,692 | $1,736 | $ --- |
Commercial and industrial | 130 | 130 | --- | 202 | 352 | --- |
Commercial construction and land development | --- | --- | --- | --- | --- | --- |
Agricultural and other loans to farmers | 139 | 139 | --- | 106 | 106 | --- |
Residential real estate loans | 1,387 | 1,504 | --- | 1,332 | 1,362 | --- |
Home equity loans | 16 | 16 | --- | 18 | 18 | --- |
Other consumer | 2 | 2 | --- | --- | --- | --- |
Subtotal | $4,505 | $4,710 | $ --- | $3,350 | $3,574 | $ --- |
|
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|
|
With an allowance: |
|
|
|
|
|
|
Commercial real estate mortgages | $1,650 | $3,575 | $193 | $ 531 | $ 531 | $ 43 |
Commercial and industrial | 217 | 367 | 173 | 224 | 374 | 175 |
Commercial construction and land development | --- | --- | --- | 1,111 | 3,036 | 58 |
Agricultural and other loans to farmers | --- | --- | --- | --- | --- | --- |
Residential real estate loans | 322 | 322 | 49 | 515 | 515 | 97 |
Home equity loans | --- | --- | --- | --- | --- | --- |
Other consumer | 15 | 15 | 9 | 8 | 8 | --- |
Subtotal | $2,204 | $4,279 | $424 | $2,389 | $4,464 | $373 |
Total | $6,709 | $8,989 | $424 | $5,739 | $8,038 | $373 |
Details of impaired loans as of December 31, 2016, 2015, and 2014 are as follows:
| For the Twelve Months Ended | For the Twelve Months Ended | For the Twelve Months Ended | |||
| Average Recorded Investment | Cash Basis Interest Income Recognized | Average Recorded Investment | Cash Basis Interest Income Recognized | Average Recorded Investment | Cash Basis Interest Income Recognized |
With no related allowance: |
|
|
|
|
|
|
Commercial real estate mortgages | $2,768 | $157 | $2,663 | $ 60 | $1,589 | $66 |
Commercial and industrial | 239 | 4 | 346 | 10 | 537 | 4 |
Commercial construction and land development | --- | --- | --- | --- | 1,514 | --- |
Agricultural and other loans to farmers | 156 | 9 | 143 | 8 | 162 | 3 |
Residential real estate mortgages | 1,514 | 73 | 1,327 | 42 | 470 | 25 |
Home equity loans | 17 | 1 | 18 | --- | --- | --- |
Other consumer | 2 | 2 | --- | 1 | --- | --- |
Subtotal | $4,696 | $246 | $4,497 | $121 | $4,272 | $98 |
|
|
|
|
|
|
|
With an allowance: |
|
|
|
|
|
|
Commercial real estate mortgages | $1,619 | $ --- | $ 532 | $ --- | $ 572 | $--- |
Commercial and industrial | 118 | --- | 227 | --- | 376 | --- |
Commercial construction and land development | --- | --- | 1,243 | --- | --- | --- |
Agricultural and other loans to farmers | --- | --- | --- | --- | --- | --- |
Residential real estate mortgages | 325 | --- | 650 | --- | --- | --- |
Home equity loans | --- | --- | --- | --- | --- | --- |
Other consumer | 16 | --- | 9 | --- | 12 | 1 |
Subtotal | $2,078 | $ --- | $2,661 | $ --- | $ 960 | $ 1 |
Total | $6,774 | $246 | $7,158 | $121 | $5,232 | $99 |
Loan Origination/Risk Management:The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Bank’s boardBoard of directorsDirectors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the boardBank's Board of Directors with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing loans and potential problem loans. The Bank seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.
83
Consistent with regulatory guidelines, the Bank provides for the classification of loans which are considered to be of lesser quality as substandard, doubtful, or loss (i.e. risk rated 7, 8 and 9, respectively).
loss.
84
Construction and land development | Commercial real estate other | Total commercial real estate | ||||||||||||||||||||||
(in thousands) | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 28,180 | $ | 14,695 | $ | 483,711 | $ | 376,968 | $ | 511,891 | $ | 391,663 | ||||||||||||
Special mention | 73 | — | 5,706 | 5,868 | 5,779 | 5,868 | ||||||||||||||||||
Substandard | 639 | — | 15,702 | 20,588 | 16,341 | 20,588 | ||||||||||||||||||
Total | $ | 28,892 | $ | 14,695 | $ | 505,119 | $ | 403,424 | $ | 534,011 | $ | 418,119 |
Commercial other | Agricultural and other loans to farmers | Tax exempt loans | Total commercial and industrial | |||||||||||||||||||||||||||||
(in thousands) | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||||||
Pass | $ | 194,147 | $ | 98,968 | $ | 27,046 | $ | 31,279 | $ | 42,208 | $ | 15,679 | $ | 263,401 | $ | 145,926 | ||||||||||||||||
Special mention | 1,933 | 2,384 | 63 | 251 | 157 | 167 | 2,153 | 2,802 | ||||||||||||||||||||||||
Substandard | 1,971 | 2,234 | 479 | 278 | — | — | 2,450 | 2,512 | ||||||||||||||||||||||||
Total | $ | 198,051 | $ | 103,586 | $ | 27,588 | $ | 31,808 | $ | 42,365 | $ | 15,846 | $ | 268,004 | $ | 151,240 |
Commercial construction and land development | Commercial real estate other | Total commercial real estate | ||||||||||||||||||||||
(in thousands) | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 16,523 | $ | — | $ | 266,477 | $ | — | $ | 283,000 | $ | — | ||||||||||||
Special mention | 235 | — | 2,440 | — | 2,675 | — | ||||||||||||||||||
Substandard | 23 | — | 7,037 | — | 7,060 | — | ||||||||||||||||||
Total | $ | 16,781 | $ | — | $ | 275,954 | $ | — | $ | 292,735 | $ | — |
�� | Commercial other | Agricultural and other loans to farmers | Tax exempt loans | Total commercial and industrial | ||||||||||||||||||||||||||||
(in thousands) | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||||||
Pass | $ | 60,300 | $ | — | $ | — | $ | — | $ | 43,350 | $ | — | $ | 103,650 | $ | — | ||||||||||||||||
Special mention | 5,753 | — | — | — | — | — | 5,753 | — | ||||||||||||||||||||||||
Substandard | 2,016 | — | — | — | — | — | 2,016 | — | ||||||||||||||||||||||||
Total | $ | 68,069 | $ | — | $ | — | $ | — | $ | 43,350 | $ | — | $ | 111,419 | $ | — |
payment activity.
December 31, 2016 | Commercial real estate mortgages | Commercial and industrial | Commercial construction and land development | Agricultural and other loans to farmers | Total |
Pass | $376,998 | $ 98,798 | $14,695 | $31,277 | $521,768 |
Other Assets Especially Mentioned | 5,868 | 2,550 | --- | 251 | 8,669 |
Substandard | 20,728 | 2,238 | --- | 280 | 23,246 |
Doubtful | --- | --- | --- | --- | --- |
Loss | --- | --- | --- | --- | --- |
Total | $403,594 | $103,586 | $14,695 | $31,808 | $553,683 |
|
|
|
|
|
|
December 31, 2015 | Commercial real estate mortgages | Commercial and industrial | Commercial construction and land development | Agricultural and other loans to farmers | Total |
Pass | $345,197 | $ 74,771 | $23,460 | $30,688 | $474,116 |
Other Assets Especially Mentioned | 7,381 | 2,349 | 355 | 168 | 10,253 |
Substandard | 18,424 | 2,790 | 1,111 | 147 | 22,472 |
Doubtful | --- | --- | --- | --- | --- |
Loss | --- | 1 | --- | --- | 1 |
Total | $371,002 | $ 79,911 | $24,926 | $31,003 | $506,842 |
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(in thousands) | Business Activities Loans | Acquired Loans | Total | Business Activities Loans | Acquired Loans | Total | ||||||||||||||||||
Non-accrual | $ | 12,162 | $ | 2,156 | $ | 14,318 | $ | 6,496 | $ | — | $ | 6,496 | ||||||||||||
Substandard accruing | 10,284 | 7,833 | 18,117 | 20,368 | — | 20,368 | ||||||||||||||||||
Total classified | 22,446 | 9,989 | 32,435 | 26,864 | — | 26,864 | ||||||||||||||||||
Special mention | 7,913 | 8,429 | 16,342 | 8,669 | — | 8,669 | ||||||||||||||||||
Total Criticized | $ | 30,359 | $ | 18,418 | $ | 48,777 | $ | 35,533 | $ | — | $ | 35,533 |
Allowance for Loan Losses:The Bank’s allowance for loan losses consists of two principal elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) general valuation allowances, determined by taking historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, for economic conditions and other qualitative risk factors both internal and external to the Bank.
85
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship level for all commercial loans. When a loan has a classification of substandard or worse and is non-accruing, or considered a TDR (regardless of accrual status or risk rating). The Bank analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts contractually owed and collateral deficiencies, among other observable considerations.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off, and is the first step to determining the general allowance component of the reserve. The Bank calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual net charge-offs experienced to the total loan balance in the pool. The historical loss ratios are updated quarterly based on this net charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss rate and the total dollar amount of the loans in the pool, net of any loans for which reserves are already established. The Bank’s pools of similar loans include similarly risk-graded groups of commercial real estate loans, commercial and industrial loans, commercial construction and development loans, agricultural, tax-exempt loans, residential mortgage loans, home equity loans and consumer loans.
The general valuation allowances are determined by making adjustments to the historical valuation allowances (above), where adjustments are based on general economic conditions and other qualitative risk factors both internal and external to the Bank. Such qualitative factor adjustments are determined by evaluating, among other things: (i) changes in lending policies and procedures; (ii) economic and business conditions; (iii) changes in the volume and nature of the loan portfolio; (iv) experience, ability and depth of lending management and staff; (v) changes in asset quality and problem loan trends; (vi) quality of internal controls and effectiveness of loan review; (vii) concentrations of credit; (viii) external factors, including changes in competition, legal, and regulatory matters; and (ix) real estate market conditions and valuations of collateral. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. The results are then used to determine an appropriate general valuation allowance.
Once established, the general valuation allowance is then modified by a Loss Emergence Period (“LEP”) established for each pool of homogeneous loans. The LEP is anan estimated adjustment, which improves the Bank’s ability to more accurately forecast probable losses that may exist in the loan portfolio that have not yet emerged into “problem loan” status. The Bank’s process for determining the appropriate level of the allowance is designed to account for credit deterioration as it occurs.
86
Loans identified as losses by management, external loan review and/or bank examiners, are charged-off. Furthermore, consumer loan accounts are charged-off based on regulatory requirements.
The Company’s December 31, 2016 and 2015 Allowance calculations included the use of more definitive and distinct LEPs for each loan segment, allowing the Company to more accurately forecast probable losses that have already occurred in the loan portfolio, which may not have emerged into “problem loan” status.
As of December 31, 2016, Management believes that the overall model methodology and Allowance calculation provides a reasonable and supportable basis for determining and reporting on probable losses that have already occurred in the Company’s loan portfolio.
87
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016, 2015, and 2014. The tables also provide details regarding the Company’s recorded investment in loans related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology. Allocation of a portion of the Allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Twelve Months Ended December 31, 2016 | Commercial Real Estate | Commercial and Industrial | Commercial Construction and land development | Agricultural | Residential Real Estate | Consumer | Home Equity | Tax Exempt | Total |
Beginning Balance | $ 4,246 | $ 1,236 | $ 184 | $ 307 | $ 2,747 | $ 111 | $ 561 | $ 47 | $ 9,439 |
Charged Off | (133) | (90) | --- | --- | (141) | (37) | (10) | --- | (411) |
Recoveries | 40 | 242 | --- | 47 | 44 | 29 | 10 | --- | 412 |
Provision | 913 | 122 | (105) | 36 | 71 | (4) | (59) | 5 | 979 |
Ending Balance | $ 5,066 | $ 1,510 | $ 79 | $ 390 | $ 2,721 | $ 99 | $ 502 | $ 52 | $ 10,419 |
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|
|
|
|
|
|
|
|
|
Amount for loans individually |
|
|
|
|
|
|
|
|
|
evaluated for impairment | $ 193 | $ 173 | $ --- |
| $ 49 | $ 9 | $ --- | $ --- | $ 424 |
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|
|
|
|
|
|
|
|
Amount for loans collectively |
|
|
|
|
|
|
|
|
|
evaluated for impairment | $ 4,873 | $ 1,337 | $ 79 | $ 390 | $ 2,672 | $ 90 | $ 502 | $ 52 | $ 9,995 |
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|
|
|
|
|
|
|
|
|
Loans individually evaluated |
|
|
|
|
|
|
|
|
|
for impairment | $ 4,481 | $ 347 | $ --- | $ 139 | $ 1,709 | $ 17 | $ 16 | $ --- | $ 6,709 |
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|
|
|
|
|
|
|
|
|
Loans collectively evaluated |
|
|
|
|
|
|
|
|
|
for impairment | $399,113 | $103,239 | $ 14,695 | $31,669 | $504,903 | $ 6,155 | $46,905 | $ 15,846 | $ 1,122,525 |
Twelve Months Ended December 31, 2015 | Commercial Real Estate | Commercial and Industrial | Commercial Construction and Land Development | Agricultural | Residential Real Estate | Consumer | Home Equity | Tax Exempt | Total |
Beginning Balance | $ 4,468 | $ 929 | $ 145 | $ 277 | $ 2,714 | $ 94 | $ 271 | $ 71 | $ 8,969 |
Charged Off | (667) | (323) | --- | (72) | (70) | (111) | (376) | --- | (1,619) |
Recoveries | 98 | 36 | --- | 18 | 129 | 22 | 1 | --- | 304 |
Provision | 347 | 594 | 39 | 84 | (26) | 106 | 665 | (24) | 1,785 |
Ending Balance | $ 4,246 | $ 1,236 | $ 184 | $ 307 | $ 2,747 | $ 111 | $ 561 | $ 47 | $ 9,439 |
|
|
|
|
|
|
|
|
|
|
Amount for loans individually |
|
|
|
|
|
|
|
|
|
evaluated for impairment | $ 43 | $ 175 | $ 58 | $ --- | $ 97 | $ --- | $ --- | $ --- | $ 373 |
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|
|
|
|
|
|
|
|
|
Amount for loans collectively |
|
|
|
|
|
|
|
|
|
evaluated for impairment | $ 4,203 | $ 1,061 | $ 126 | $ 307 | $ 2,650 | $ 111 | $ 561 | $ 47 | $ 9,066 |
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|
|
|
|
|
|
|
|
|
Loans individually evaluated |
|
|
|
|
|
|
|
|
|
for impairment | $ 2,223 | $ 426 | $ 1,111 | $ 106 | $ 1,847 | $ 8 | $ 18 | $ --- | $ 5,739 |
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|
|
|
|
|
|
|
|
|
Loans Collectively evaluated |
|
|
|
|
|
|
|
|
|
for impairment | $368,779 | $ 79,485 | $23,815 | $30,897 | $404,805 | $ 9,690 | $51,512 | $15,244 | $984,227 |
Twelve Months Ended December 31, 2014 | Commercial Real Estate | Commercial and Industrial | Commercial Construction and Land Development | Agricultural | Residential Real Estate | Consumer | Home Equity | Tax Exempt | Total |
Beginning Balance | $ 4,825 | $ 1,266 | $ 314 | $ 335 | $ 1,166 | $ 137 | $ 264 | $ 168 | $ 8,475 |
Charged-off | (238) | (475) | --- | (14) | (650) | (191) | (52) | --- | (1,620) |
Recoveries | 85 | 16 | --- | 130 | 12 | 37 | 1 | --- | 281 |
Provision | (204) | 122 | (169) | (174) | 2,186 | 111 | 58 | (97) | 1,833 |
Ending Balance | $ 4,468 | $ 929 | $ 145 | $ 277 | $ 2,714 | $ 94 | $ 271 | $ 71 | $ 8,969 |
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|
|
|
|
|
|
|
|
Amount for loans |
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|
|
|
|
|
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|
individually evaluated for impairment | $ 776 | $ 187 | $ --- | $ --- | $ --- | $ 1 | $ --- | $ --- | $ 964 |
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|
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|
|
|
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|
|
Amount for loans |
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|
|
|
|
|
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|
|
collectively evaluated for impairment | $ 3,692 | $ 742 | $ 145 | $ 277 | $ 2,714 | $ 93 | $ 271 | $ 71 | $ 8,005 |
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|
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|
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Loans individually |
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|
|
|
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|
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evaluated for impairment | $ 3,592 | $ 634 | $ 1,328 | $ 181 | $ 389 | $ 10 | $ --- | $ --- | $ 6,134 |
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Loans collectively |
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|
|
|
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|
|
|
evaluated for impairment | $322,357 | $73,259 | $24,093 | $30,290 | $382,289 | $12,130 | $51,795 | $16,693 | $912,906 |
88
Loan Concentrations:Because of the Company’s proximity to Acadia National Park, a large part of the economic activity in the Bank’s area is generated from the lodging and hospitality business associated with tourism. At December 31, 2016 and 2015, loans to the lodging and hospitality industry amounted to approximately $128,680 and $98,231, respectively.
Loans to Related Parties: In the ordinary course of business, the Bank has made loans at prevailing rates and terms to directors, officers and other related parties. In management’s opinion, such loans do not present more than the normal risk of collectability or incorporate other unfavorable features, and were made under terms that are consistent with the Bank’s lending policies.
Loan to related parties at December 31 are summarized below. Balances have been adjusted to reflect changes in status of directors and officers for each year presented.
| 2016 | 2015 |
Beginning balance | $4,100 | $2,902 |
Changes in composition | 7,017 | 1,675 |
New loans | 1,127 | 236 |
Less: repayments | (1,624) | (713) |
Ending balance | $10,620 | $4,100 |
As of December 31, 2016, and 2015, there were no past due or non-performing loans to related parties.
Real Estate Loans Under Foreclosure: At December 31, 2016, the Bank had consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions totaling $2,394 compared with $4,575 at December 31, 2015.
89
Note 5: Other Real Estate Owned
At December 31, 2016, total other real estate owned (“OREO”) amounted to $90 compared with $256 at December 31, 2015.
The Company's OREO activity for the years ended December 31, 2016 and 2015 are presented below:
| 2016 | 2015 |
Balance at beginning of year | $256 | $523 |
Additions | --- | 425 |
Disposals | (119) | (672) |
Writedowns | (47) | (20) |
Balance at end of year | $ 90 | $256 |
The Company's OREO portfolio by property type is presented in the table below as of December 31, 2016 and 2015:
| 2016 | 2015 | ||
| Number of properties | Carrying value | Number of properties | Carrying value |
Residential | --- | $ --- | 2 | $131 |
Commercial | 1 | 90 | 1 | 125 |
Total | 1 | $ 90 | 3 | $256 |
The Company's net gains and losses on OREO properties are presented within non-interest expense on the consolidated statements of income.
The Company recorded net gains and losses on OREO properties for the years ended December 31, 2016, 2015 and 2014 as follows:
| 2016 | 2015 | 2014 |
Net gains (losses) on OREO | $ (44) | $ 57 | $ (397) |
Note 6: Reclassifications Out of Accumulated Other Comprehensive Income
The following table summarizes the reclassifications out of Accumulated Other Comprehensive Income for the years ended December 31, 2016, 2015 and 2014.
| 2016 | 2015 | 2014 | Affected Line Item in the Statement Where Net Income is Presented |
Realized gains and losses on available-for-sale securities | $ 4,498 | $1,334 | $400 | Net securities gains |
Tax (expense) or benefit | (1,574) | (467) | (138) | Provision for income taxes |
Net of tax | $ 2,924 | $ 867 | $262 | Net income |
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|
|
|
Amortization of prior service cost and actuarial (loss) gain for supplemental executive retirement plan | $ (28) | $ (38) | $ (25) | Salaries and benefits |
Tax (expense) or benefit | 10 | 13 | --- | Provision for income taxes |
Net of tax | $ (18) | $ (25) | $ (25) | Net income |
Total reclassification for the period | $ 2,906 | $ 842 | $237 |
|
Note 7: Premises and Equipment
The detail of
(in thousands, except years) | 2017 | 2016 | Estimated Useful Life | |||||||
Land | $ | 4,849 | $ | 2,474 | N/A | |||||
Buildings and improvements | 48,952 | 27,448 | 5 -39 years | |||||||
Furniture and equipment | 6,972 | 8,738 | 3 - 7 years | |||||||
Premises and equipment, gross | 60,773 | 38,660 | ||||||||
Accumulated depreciation and amortization | (13,065 | ) | (15,241 | ) | ||||||
Premises and equipment, net | $ | 47,708 | $ | 23,419 |
(in thousands) | 2017 | 2016 | ||||||
Balance at beginning of year | $ | 4,935 | $ | 4,935 | ||||
Lake Sunapee Bank Group acquisition | 95,150 | — | ||||||
Balance at end of year | $ | 100,085 | $ | 4,935 |
2017 | ||||||||||||
(in thousands) | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | |||||||||
Core deposit intangible (non-maturity deposits) | $ | 8,585 | $ | (1,136 | ) | $ | 7,449 | |||||
Customer list and other intangibles | 1,016 | (82 | ) | 934 | ||||||||
Total | $ | 9,601 | $ | (1,218 | ) | $ | 8,383 |
2016 | ||||||||||||
(in thousands) | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | |||||||||
Core deposit intangible (non-maturity deposits) | $ | 783 | $ | (406 | ) | $ | 377 | |||||
Total | $ | 783 | $ | (406 | ) | $ | 377 |
(in thousands) | December 31, 2017 | December 31, 2016 | ||||||
Time less than $100,000 | $ | 579,856 | $ | 304,393 | ||||
Time $100,000 or more | 286,490 | 112,044 | ||||||
Total time deposits | $ | 866,346 | $ | 416,437 |
(in thousands) | December 31, 2017 | December 31, 2016 | ||||||
Within 1 year | $ | 406,295 | $ | 165,296 | ||||
Over 1 year to 2 years | 305,895 | 95,728 | ||||||
Over 2 years to 3 years | 115,878 | 79,306 | ||||||
Over 3 years to 4 years | 24,459 | 56,717 | ||||||
Over 4 years to 5 years | 13,685 | 18,145 | ||||||
Over 5 years | 134 | 1,245 | ||||||
Total | $ | 866,346 | $ | 416,437 |
December 31, 2017 | December 31, 2016 | |||||||||||||
(in thousands, except ratios) | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||
Short-term borrowings | ||||||||||||||
Advances from the FHLB | $ | 608,792 | 1.49 | % | $ | 372,700 | 0.97 | % | ||||||
Other borrowings | 40,706 | 0.59 | 21,780 | 0.29 | ||||||||||
Total short-term borrowings | 649,498 | 1.43 | 394,480 | 0.93 | ||||||||||
Long-term borrowings | ||||||||||||||
Advances from the FHLB | 137,190 | 1.72 | 137,116 | 1.59 | ||||||||||
Subordinated borrowings | 38,033 | 4.88 | — | — | ||||||||||
Junior subordinated borrowings | 5,000 | 4.89 | 5,000 | 4.41 | ||||||||||
Total long-term borrowings | 180,223 | 2.47 | 142,116 | 1.69 | ||||||||||
Total | $ | 829,721 | 1.66 | % | $ | 536,596 | 1.13 | % |
December 31, 2017 | |||||||
(in thousands, except rates) | Amount | Weighted Average Rate | |||||
Fixed rate advances maturing: | |||||||
2018 | $ | 608,792 | 1.49 | % | |||
2019 | 104,954 | 1.66 | |||||
2020 | 29,920 | 1.87 | |||||
2021 | 1,633 | 2.32 | |||||
2022 | — | — | |||||
2023 and thereafter | 683 | 2.80 | |||||
Total FHLB advances | $ | 745,982 | 1.53 | % |
|
|
| Estimated useful |
| 2016 | 2015 | lives (in years) |
Land | $ 2,474 | $ 2,474 | n/a |
Buildings and leasehold improvements | 27,448 | 25,034 | 5-39 |
Furniture and equipment | 8,738 | 8,085 | 3-7 |
Less: accumulated depreciation | (15,241) | (14,919) |
|
Total | $ 23,419 | $ 20,674 |
|
Depreciation expense amounted to $1,551, $1,710 and $1,629
Note 8: Goodwill and Other Intangible Assets
The Company tests goodwillthe amount of $5.0 million due in 2023. These debt securities qualify as Tier 2 capital for impairment on an annual basis using fourth quarter data. The results of the qualitative assessment indicated it is more likely than not that the reporting unit’s fair value exceeds its carrying amount, and accordingly, the two-step impairment test was not performed. If events or changes in circumstances indicate that impairment is possible, the Company will perform additional reviews. Goodwill totaled $4,935 atand the Bank. The subordinated debt securities are callable by the Bank after five years without penalty. The interest rate is three-month LIBOR plus 3.45%. At December 31, 20162017 and 2015, respectively. No impairment was recorded on goodwill for 2016 or 2015.
Core Deposit Intangible Asset:The Company has a finite-lived intangible asset capitalized on its consolidated balance sheet in the form of a core deposit intangible asset related to the Border Trust Company transaction. The core deposit intangible is being amortized over an estimated useful life of eight and one-half years and is included in other assets on the Company’s consolidated balance sheet. At December 31, 2016 the balanceinterest rate was 5.04% and 4.41%, respectively.
(in thousands) | 2017 | |||
Change in projected benefit obligation: | ||||
Projected benefit obligation on acquisition date | $ | 8,642 | ||
Service cost | — | |||
Interest cost | 334 | |||
Actuarial gain | 662 | |||
Benefits paid | (269 | ) | ||
Settlements | (349 | ) | ||
Projected benefit obligation at end of year | 9,020 | |||
Accumulated benefit obligation | 9,020 | |||
Change in fair value of plan assets: | ||||
Fair value of plan assets on acquisition date | 10,622 | |||
Expected return on plan assets | 1,022 | |||
Contributions by employer | — | |||
Benefits paid | (269 | ) | ||
Settlements | (349 | ) | ||
Fair value of plan assets at end of year | 11,026 | |||
Overfunded status | $ | (2,006 | ) | |
Amounts recognized in consolidated balance sheet: | ||||
Other assets | $ | 2,006 |
(in thousands) | 2017 | |||
Interest cost | $ | 334 | ||
Expected return on plan assets | (706 | ) | ||
Settlement Charge | 13 | |||
Net periodic pension benefit | $ | (359 | ) |
(in thousands) | 2017 | |||
Actuarial loss | $ | 346 | ||
Settlement charge | (13 | ) | ||
Total recognized in accumulated other comprehensive income (pre-tax) | 333 | |||
Total recognized in net periodic pension cost and other comprehensive income (pre-tax) | $ | (26 | ) |
2017 | |||
Projected benefit obligation | |||
Discount rate | 3.56 | % | |
Net periodic pension cost | |||
Discount rate | 4.09 | % | |
Long term rate of return on plan assets | 7.00 |
historical returns earned by equities and fixed income securities.
| 2016 | 2015 |
Gross carrying amount | $783 | $783 |
Less: accumulated amortization | (406) | (313) |
Net carrying amount | $377 | $470 |
Amortization expense
(in thousands) | Total | Level 1 | Level 2 | |||||||||
Asset Category | ||||||||||||
Equity mutual funds: | ||||||||||||
Large-cap | $ | 2,143 | $ | 2,143 | $ | — | ||||||
Mid-cap | 612 | 612 | — | |||||||||
Small-cap | 613 | 613 | — | |||||||||
International | 1,150 | 1,150 | ||||||||||
Fixed income funds: | ||||||||||||
Fixed-income - core plus | 3,896 | 3,896 | — | |||||||||
Intermediate duration | 1,316 | 1,316 | — | |||||||||
Common stock | 610 | 610 | — | |||||||||
Common/collective trusts - large-cap | 555 | — | 555 | |||||||||
Cash equivalents - money market | 130 | 130 | — | |||||||||
Total | $ | 11,025 | $ | 10,470 | $ | 555 |
Year | Payments in Thousands | |||
2018 | $ | 342 | ||
2019 | 368 | |||
2020 | 392 | |||
2021 | 422 | |||
2022 | 439 | |||
2023-2027 | 2,316 |
(in thousands) | 2017 | 2016 | ||||||
Change in benefit obligation: | ||||||||
Projected benefit obligation at beginning of year | $ | 3,670 | $ | 3,811 | ||||
Service cost | — | 72 | ||||||
Interest cost | 116 | 128 | ||||||
Actuarial loss/(gain) | 16 | (50 | ) | |||||
Benefits paid | (351 | ) | (291 | ) | ||||
Projected benefit obligation at end of year | 3,451 | 3,670 | ||||||
Accumulated benefit obligation | $ | 3,451 | $ | 3,670 | ||||
Change in fair value of plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | — | $ | — | ||||
Expected return on plan assets | — | — | ||||||
Contributions by employer | 351 | 291 | ||||||
Benefits paid | (351 | ) | (291 | ) | ||||
Fair value of plan assets at end of year | $ | — | $ | — | ||||
Underfunded status | $ | 3,451 | $ | 3,670 | ||||
Amounts recognized in consolidated balance sheet | ||||||||
Other liabilities | $ | 3,451 | $ | 3,720 |
(in thousands) | 2017 | 2016 | ||||||
Service cost | $ | — | $ | 72 | ||||
Interest cost | 116 | 128 | ||||||
Expected return on plan assets | — | — | ||||||
Amortization of unrecognized actuarial loss | 21 | 28 | ||||||
Net periodic benefit cost | $ | 137 | $ | 228 |
(in thousands) | 2017 | 2016 | ||||||
Amortization of actuarial loss | $ | (21 | ) | $ | (28 | ) | ||
Amortization of prior service credit | — | — | ||||||
Actuarial loss (gain) | 16 | (50 | ) | |||||
Total recognized in accumulated other comprehensive income (pre-tax) | (5 | ) | (78 | ) | ||||
Total recognized in net periodic benefit cost and other comprehensive income (pre-tax) | $ | 132 | $ | 150 |
2017 | 2016 | |||||
Discount rate beginning of year | 3.31 | % | 3.48 | % | ||
Discount rate end of year | 3.13 | 3.31 |
(in thousands) | Payments | |||
2018 | $ | 378 | ||
2019 | 378 | |||
2020 | 293 | |||
2021 | 260 | |||
2022 | 260 | |||
2023-2036 | 2,778 |
and $8.1 million at December 31, 2017. Expense recorded in 2017 under these agreements was $581 thousand.
Note 9: Income Taxes
31, 2017,
2016 and 2015:(in thousands) | 2017 | 2016 | 2015 | |||||||||
Current: | ||||||||||||
Federal Tax Expense | $ | 8,705 | $ | 5,189 | $ | 5,607 | ||||||
State Tax Expense | 1,039 | 217 | 218 | |||||||||
Total Current Expense | 9,744 | 5,406 | 5,825 | |||||||||
Deferred | 2,898 | 470 | 142 | |||||||||
Impact of federal tax reform enactment | 3,988 | — | — | |||||||||
Total Income Tax Expense | $ | 16,630 | $ | 5,876 | $ | 5,967 |
| 2016 | 2015 | 2014 |
Current |
|
|
|
Federal | $5,189 | $5,607 | $5,411 |
State | 217 | 218 | 263 |
| 5,406 | 5,825 | 5,674 |
Deferred | 470 | 142 | 240 |
| $5,876 | $5,967 | $5,914 |
31, 2017,
2016 and 2015:2017 | 2016 | 2015 | |||||||||||||||||||
(in thousands, except ratios) | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||
Statutory Tax Rate | $ | 14,918 | 35.00 | % | $ | 7,283 | 35.00 | % | $ | 7,392 | 35.00 | % | |||||||||
Increase (Decrease) Resulting From: | |||||||||||||||||||||
State taxes, net of federal benefit | 986 | 2.31 | 141 | 0.68 | 142 | 0.67 | |||||||||||||||
Tax exempt interest | (2,074 | ) | -4.87 | (1,388 | ) | -6.67 | (1,303 | ) | -6.17 | ||||||||||||
Federal tax credits | (130 | ) | -0.30 | — | — | — | — | ||||||||||||||
Officers' life insurance | (538 | ) | -1.26 | (244 | ) | -1.17 | (209 | ) | -0.99 | ||||||||||||
Acquisition Costs | 89 | 0.21 | 289 | 1.39 | — | — | |||||||||||||||
Stock-based compensation plans | (241 | ) | -0.57 | — | — | — | — | ||||||||||||||
Impact of federal tax reform enactment | 3,988 | 9.36 | — | — | — | — | |||||||||||||||
Other | (368 | ) | -0.86 | (205 | ) | -0.99 | (55 | ) | -0.26 | ||||||||||||
Effective Tax Rate | $ | 16,630 | 39.02 | % | $ | 5,876 | 28.24 | % | $ | 5,967 | 28.25 | % |
| 2016 | 2015 | 2014 | |||
|
|
|
|
|
|
|
Computed tax expense | $7,283 | 35.00% | $ 7,392 | 35.00% | $ 7,184 | 35.00% |
Increase (reduction) in income taxes resulting from: |
|
|
|
|
|
|
Officers' life insurance | (244) | -1.17% | (209) | -0.99% | (88) | -0.43% |
Tax exempt interest | (1,388) | -6.67% | (1,303) | -6.17% | (1,325) | -6.44% |
Acquisition costs | 289 | 1.39% | --- | 0.00% | --- | 0.00% |
State taxes, net of federal benefit | 141 | 0.68% | 142 | 0.67% | 171 | 0.83% |
Other | (205) | -0.99% | (55) | -0.26% | (28) | -0.22% |
| $5,876 | 28.24% | $ 5,967 | 28.25% | $ 5,914 | 28.74% |
2017 | 2016 | |||||||||||||||
(in thousands) | Assets (1) | Liabilities (1) | Assets (2) | Liabilities (2) | ||||||||||||
Allowance for loan losses | $ | 2,729 | $ | — | $ | 3,733 | $ | — | ||||||||
Deferred compensation | 3,333 | — | 1,018 | — | ||||||||||||
Unrealized gain or loss on securities available for sale | 649 | — | 1,144 | — | ||||||||||||
Unrealized gain or loss on derivatives | 853 | — | 968 | — | ||||||||||||
Unfunded post-retirement benefits | — | 219 | — | |||||||||||||
Depreciation | — | 1,356 | — | 537 | ||||||||||||
Deferred loan origination costs | — | 655 | — | 517 | ||||||||||||
Other real estate owned | 8 | — | 12 | — | ||||||||||||
Non-accrual interest | 273 | — | 215 | — | ||||||||||||
Write down of impaired investments | — | — | 626 | — | ||||||||||||
Branch acquisition costs and goodwill | — | 737 | — | 760 | ||||||||||||
Core deposit intangible | — | 1,525 | 82 | — | ||||||||||||
Acquisition fair value adjustments | 4,000 | — | — | — | ||||||||||||
Prepaid expenses | — | 302 | — | 275 | ||||||||||||
Interest rate cap premium amortization | — | 276 | — | 352 | ||||||||||||
Mortgage servicing rights | — | 769 | — | 5 | ||||||||||||
Equity compensation | 297 | — | 310 | — | ||||||||||||
Prepaid pension | — | 345 | — | — | ||||||||||||
Contract incentives | 594 | — | — | — | ||||||||||||
Other | 409 | — | 110 | 1 | ||||||||||||
Total | $ | 13,145 | $ | 5,965 | $ | 8,437 | $ | 2,447 |
| 2016 | 2015 | ||
| Asset | Liability | Asset | Liability |
Allowance for possible losses on |
|
|
|
|
loans and other real estate owned | $3,733 | $ --- | $3,379 | $ --- |
Deferred compensation | 1,018 | --- | 1,035 | --- |
Unrealized gain or loss on securities available for sale | 1,144 |
--- | --- | 3,076 |
Unrealized gain or loss on derivatives | 968 | --- | 873 | --- |
Unfunded post-retirement benefits | 219 | --- | 249 | --- |
Depreciation | --- | 537 | --- | 615 |
Deferred loan origination costs | --- | 517 | --- | 475 |
Other real estate owned | 12 | --- | 22 | --- |
Non-accrual interest | 215 | --- | 211 | --- |
Write down of impaired investments | 626 | --- | 1,113 | --- |
Branch acquisition costs & goodwill | --- | 760 | --- | 639 |
Prepaid expenses | --- | 275 | --- | 151 |
Interest rate cap premium amortization |
| 352 |
| 200 |
Equity compensation | 310 | --- | 253 | --- |
Other | 187 | 1 | 198 | 3 |
| $8,432 | $2,442 | $7,333 | $5,159 |
Note 10: Deposits
financial reporting bases of fixed assets was recorded as a provisional amount based upon reasonable estimates. The aggregate amountfinal determination of jumbo time deposits, each withthis deferred tax liability is awaiting completion of a minimum denominationcost segregation analysis to determine the impact of $100, was $112,044 and $93,481 at December 31, 2016 and 2015, respectively.
92
At December 31, 2016, the scheduled maturities of jumbo certificates of deposit were as follows:
| |
|
|
|
|
|
|
|
|
|
At December 31, 2016, the scheduled maturities of total time deposits were as follows:
| Amount |
2017 | $165,296 |
2018 | 95,728 |
2019 | 79,306 |
2020 | 56,717 |
2021 | 18,145 |
2022 & thereafter | 1,245 |
| $416,437 |
Note 11: Short-term Borrowings
The Company’s short-term borrowings (i.e. with maturities of twelve months or less) consist of borrowings from the Federal Home Loan Bank (the “FHLB”), and securities sold under agreementsapplying accelerated tax depreciation to repurchase. The following table summarizes short-term borrowings at December 31, 2016 and 2015.
| 2016 | 2015 | ||
|
| Weighted |
| Weighted |
| Total | Average | Total | Average |
| Principal | Rate | Principal | Rate |
Federal Home Loan Bank Advances | $372,700 | 0.97% | $313,000 | 0.54% |
Securities sold under agreements to repurchase | 21,780 | 0.29 | 20,909 | 0.28 |
Total short-term borrowings | $394,480 |
| $333,909 |
|
Federal Home Loan Bank Advances:Information concerning short-term Federal Home Loan Bank advances for 2016 and 2015 is summarized below:
| 2016 | 2015 |
Average daily balance during the year | $357,848 | $295,479 |
Maximum month-end balance during the year | 410,050 | 342,000 |
Amount outstanding at end of year | 372,700 | 313,000 |
All short-term FHLB advances are fixed-rate instruments. Pursuant to an agreement with the FHLB, advances are collateralized by stock in the FHLB, investment securities and liens on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, and other qualifying assets such as certain commercial real estate loans. All short-term advances are payable at their call date or final maturity.
93
Securities Sold Under Agreements to Repurchase:Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Information concerning securities sold under agreements to repurchase for 2016 and 2015 is summarized below:
| 2016 | 2015 |
Average daily balance during the year | $17,529 | $17,001 |
Average interest rate during the year | 0.29% | 0.28% |
Maximum month-end balance during the year | $21,780 | $21,239 |
Amount outstanding at end of year | 21,780 | 20,909 |
Securities collateralizing repurchase agreements, which are held in safekeeping by nonaffiliated financial institutions and not under the Bank's control, were as follows at December 31:
| 2016 | 2015 |
Carrying value | $28,206 | $28,324 |
Estimated fair value | 28,130 | 28,981 |
Note 12: Long-term Debt
A summary of long-term debt by contractual maturity is as follows:
| December 31, 2016 | ||||
| Total |
| Range of | ||
Maturity | Principal | Rate | Interest Rates | ||
2017 | $ --- | ---% | 0.00% | to | 0.00% |
2018 | 30,750 | 1.28 | 1.04 | to | 2.25 |
2019 | 85,000 | 1.64 | 1.07 | to | 2.15 |
2020 | 20,000 | 1.83 | 1.60 | to | 2.45 |
2021 | 1,000 | 2.43 | 2.43 | to | 2.43 |
2022 and thereafter | 366 | 1.85 | 1.85 | to | 1.85 |
Total long-term debt | $137,116 | 1.59% |
|
|
|
Allbuilding costs, including application of the long-term debt represents advances fromAct's new provisions for 100% bonus depreciation.
94
The maturity distribution of the long-term debt with callable features was as follows:
| December 31, 2016 | ||||
| Total |
| Range of | ||
Maturity | Principal | Rate | Interest Rates | ||
2017 | $ --- | 0.00% | 0.00% | to | 0.00% |
2018 | $2,000 | 2.25 | 2.25 | to | 2.25 |
2019 | --- | --- | --- | to | --- |
2020 | --- | --- | --- | to | --- |
2021 | --- | --- | --- | to | --- |
2022 and thereafter | --- | --- | --- | to | --- |
Total long-term debt | $2,000 | 2.25% |
|
|
|
Junior Subordinated Debentures:In April 2008, the Company’s wholly-owned subsidiary, Bar Harbor Bank & Trust (the “Bank”), issued $5,000 aggregate principal amount of subordinated debentures. These debt securities qualify as Tier 2 capital for the Company and the Bank. The subordinated debt securities are due in 2023, but are callable by the Bank after five years without penalty. The rate of interest on these debt securities is three month LIBOR plus 345 basis points. At December 31, 2016 the interest rate was 4.41%. The subordinated debt securities are classified as borrowings on the Company’s consolidated balance sheet. seeking further clarifications before completing its analysis.
period the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.
Note 13: Financial Derivative Instruments
95
At
Weighted Average Maturity | Estimated Fair Value Asset (Liability) | |||||||||
(in thousands, except years) | Notional Amount | |||||||||
Cash flow hedges: | ||||||||||
Interest rate caps agreements | $ | 90,000 | 5.1 | $ | 669 | |||||
Total cash flow hedges | 90,000 | 5.1 | 669 | |||||||
Economic hedges: | ||||||||||
Forward sale commitments | 20,352 | 0.2 | (221 | ) | ||||||
Total economic hedges | 20,352 | 0.2 | (221 | ) | ||||||
Non-hedging derivatives: | ||||||||||
Interest rate lock commitments | 19,853 | 0.2 | (1 | ) | ||||||
Total non-hedging derivatives | 19,853 | 0.2 | (1 | ) | ||||||
Total | $ | 130,205 | $ | 447 |
follows:
Twelve Months Ended December 31, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Cash flow hedges: | ||||||||
Interest rate cap agreements | ||||||||
Realized in interest expense | $ | (257 | ) | $ | (50 | ) | ||
Economic hedges: | ||||||||
Forward commitments | ||||||||
Realized loss in other non-interest income | (77 | ) | — | |||||
Non-hedging derivatives: | ||||||||
Interest rate lock commitments | ||||||||
Realized loss in other non-interest income | (22 | ) | — |
The details of the Bank’s financial derivative instruments are summarized below:
Interest Rate Cap Agreements as of December 31, 2016 | |||||
Notional Amount | Termination Date | 3-Month LIBOR Strike Rate | Premium Paid | Unamortized Premium | Fair Value |
|
|
|
|
|
|
$25,000 | 06/02/21 | 3.00% | $ 922 | $ 901 | $ 228 |
20,000 | 06/04/24 | 3.00 | 1,470 | 1,453 | 553 |
20,000 | 10/21/21 | 3.00 | 632 | 626 | 209 |
25,000 | 10/21/24 | 3.00 | 1,542 | 1,534 | 758 |
| Interest Rate Cap Agreements as of December 31, 2015 |
| |||
Notional Amount | Termination Date | 3-month LIBOR Strike Rate | Premium Paid | Unamortized Premium | Fair Value |
$25,000 | 06/02/21 | 3.00% | $ 922 | $ 920 | $291 |
20,000 | 06/04/24 | 3.00 | 1,470 | 1,470 | 637 |
20,000 | 10/21/21 | 3.00 | 632 | 632 | 269 |
25,000 | 10/21/24 | 3.00 | 1,542 | 1,542 | 872 |
At December 31, 2016 and 2015, the total fair value of the interest rate cap agreements was $1,748 and $2,069, respectively. The fair values of the interest rate cap agreements are included in other assets on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax.
The premiums paid on the interest rate cap agreements are being recognized as increases in interest expense over the duration of the agreements using the caplet method. During 2016, $50
96
A summaryfunding of the hedging related balancesloan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in noninterest income in the Company’s consolidated statements of income. Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
(in thousands) | 2017 | 2016 | ||||||
Commitments to originate new loans | $ | 52,438 | $ | 41,731 | ||||
Unused funds on commercial and other lines of credit | 243,153 | 98,823 | ||||||
Unadvanced funds on construction and real estate loans | 87,915 | 20,330 | ||||||
Standby letters of credit | 486 | 385 | ||||||
Total | $ | 383,992 | $ | 161,269 |
(in thousands) | Amount | |||
2018 | $ | 841 | ||
2019 | 764 | |||
2020 | 551 | |||
2021 | 378 | |||
2022 | 349 | |||
2023 and thereafter | 577 | |||
Total | $ | 3,460 |
| December 31, 2016 | |
| Gross | Net of Tax |
Unrealized loss on interest rate caps | $(2,766) | $(1,798) |
Unamortized premium on interest rate caps | 4,514 | 2,934 |
Total | $ 1,748 | $ 1,136 |
| December 31, 2015 | |
| Gross | Net of Tax |
Unrealized losses on interest rate caps | $(2,495) | $(1,621) |
Unamortized premium on interest rate caps | 4,564 | 2,966 |
Total | $2,069 | $ 1,345 |
Note 14: Capital Resources
Regulatory Capital Requirements:Thethe Company recorded $872 thousand, $352 thousand, and $394 thousand in rent expense, respectively, which is included in occupancy and equipment expense in the consolidated statements of income.
2017 | |||||||||||||||||||||
Actual | Minimum Capital Requirement | Minimum to be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||
(in thousands, except ratios) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
Company (consolidated) | |||||||||||||||||||||
Total capital to risk weighted assets | $ | 307,305 | 13.73 | % | $ | 179,047 | 8.00 | % | $ | 234,999 | 10.50 | % | |||||||||
Common equity tier 1 capital to risk weighted assets | 252,096 | 11.26 | 100,714 | 4.50 | 145,476 | 6.50 | |||||||||||||||
Tier 1 capital to risk weighted assets | 272,716 | 12.19 | 134,286 | 6.00 | 179,047 | 8.00 | |||||||||||||||
Tier 1 capital to average assets | 272,716 | 8.10 | 134,758 | 4.00 | 168,447 | 5.00 | |||||||||||||||
Bank | |||||||||||||||||||||
Total capital to risk weighted assets | $ | 306,495 | 13.71 | % | $ | 178,868 | 8.00 | % | $ | 234,764 | 10.50 | % | |||||||||
Common equity tier 1 capital to risk weighted assets | 288,906 | 12.92 | 100,613 | 4.50 | 145,331 | 6.50 | |||||||||||||||
Tier 1 capital to risk weighted assets | 288,906 | 12.92 | 134,151 | 6.00 | 178,868 | 8.00 | |||||||||||||||
Tier 1 capital to average assets | 288,906 | 8.58 | 134,702 | 4.00 | 168,378 | 5.00 |
2016 | |||||||||||||||||||||
Actual | Minimum Capital Requirement | Minimum to be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||
(in thousands, except ratios) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
Company (consolidated) | |||||||||||||||||||||
Total capital to risk weighted assets | $ | 171,558 | 16.52 | % | $ | 83,097 | 8.00 | % | $ | 109,065 | 10.50 | % | |||||||||
Common equity tier 1 capital to risk weighted assets | 155,905 | 15.01 | 46,742 | 4.50 | 67,516 | 6.50 | |||||||||||||||
Tier 1 capital to risk weighted assets | 155,905 | 15.01 | 62,323 | 6.00 | 83,097 | 8.00 | |||||||||||||||
Tier 1 capital to average assets | 155,905 | 8.94 | 69,722 | 4.00 | 87,152 | 5.00 | |||||||||||||||
Bank | |||||||||||||||||||||
Total capital to risk weighted assets | $ | 173,458 | 16.71 | % | $ | 83,031 | 8.00 | % | $ | 108,978 | 10.50 | % | |||||||||
Common equity tier 1 capital to risk weighted assets | 157,805 | 15.20 | 46,705 | 4.50 | 67,463 | 6.50 | |||||||||||||||
Tier 1 capital to risk weighted assets | 157,805 | 15.20 | 62,273 | 6.00 | 83,031 | 8.00 | |||||||||||||||
Tier 1 capital to average assets | 157,805 | 9.06 | 69,683 | 4.00 | 87,104 | 5.00 |
On July 2, 2013, the Board of Governors of the Federal Reserve Bank issued a final rule implementing a revised regulatory capital framework for U.S. banks in accordance with the Basel III international accordrule that requires the Company and satisfying related mandates under the Dodd-Frank Wall Street ReformBank to assess their Common equity tier 1 capital to risk weighted assets and Consumer Protection Act. The revised regulatorythe Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital framework (the "Basel III Capital Rules") substantially revised the risk basedrules added a requirement to maintain a minimum conservation buffer, composed of common equity tier 1 capital, requirements applicable to bank holding companies and depository institutions by defining the components of capital and addressing other issues affecting the numerator in banking institutions’ regulatory capital ratios, addressing risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replacing the existing risk weighting approach with a more risk sensitive approach. The final rules also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios,of risk-weighted assets, to be phased in over three years and when fully effective in 2019, will result inapplied to the following minimum ratios: (i) a common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%; (ii), a minimum Tier 1 risk-based capital ratio of 8.5%; and (iii) a totalminimum Total risk-based capital ratio of 10.5%.
not met.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios as set forth in the table below. As of
(in thousands) | 2017 | 2016 | ||||||
Other accumulated comprehensive loss, before tax: | ||||||||
Net unrealized loss on AFS securities | $ | (2,741 | ) | $ | (3,269 | ) | ||
Net unrealized loss on derivative hedges | (3,604 | ) | (2,766 | ) | ||||
Net unrealized loss on post-retirement plans | (950 | ) | (622 | ) | ||||
Income taxes related to items of accumulated other comprehensive loss: | ||||||||
Net unrealized loss on AFS securities | 1,030 | 1,144 | ||||||
Net unrealized loss on derivative hedges | 1,354 | 968 | ||||||
Net unrealized loss on post-retirement plans | 357 | 219 | ||||||
Accumulated other comprehensive loss | $ | (4,554 | ) | $ | (4,326 | ) |
2017 | ||||||||||||
(in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||
Net unrealized gain on AFS securities: | ||||||||||||
Net unrealized gain arising during the period | $ | 547 | $ | (121 | ) | $ | 426 | |||||
Less: reclassification adjustment for gains (losses) realized in net income | 19 | (7 | ) | 12 | ||||||||
Net unrealized gain on AFS securities | 528 | (114 | ) | 414 | ||||||||
Net unrealized loss on derivative hedges: | ||||||||||||
Net unrealized loss arising during the period | (838 | ) | 386 | (452 | ) | |||||||
Less: reclassification adjustment for gains (losses) realized in net income | — | — | — | |||||||||
Net unrealized loss on derivative hedges | (838 | ) | 386 | (452 | ) | |||||||
Net unrealized loss on post-retirement plans: | ||||||||||||
Net unrealized loss arising during the period | (349 | ) | 146 | (203 | ) | |||||||
Less: reclassification adjustment for gains (losses) realized in net income | (21 | ) | 8 | (13 | ) | |||||||
Net unrealized loss on post-retirement plans | (328 | ) | 138 | (190 | ) | |||||||
Other comprehensive loss | $ | (638 | ) | $ | 410 | $ | (228 | ) |
2016 | ||||||||||||
(in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||
Net unrealized loss on AFS securities: | ||||||||||||
Net unrealized loss arising during the period | $ | (7,561 | ) | $ | 2,647 | $ | (4,914 | ) | ||||
Less: reclassification adjustment for gains (losses) realized in net income | 4,498 | (1,574 | ) | 2,924 | ||||||||
Net unrealized loss on AFS securities | (12,059 | ) | 4,221 | (7,838 | ) | |||||||
Net unrealized loss on derivative hedges: | ||||||||||||
Net unrealized loss arising during the period | (272 | ) | 95 | (177 | ) | |||||||
Less: reclassification adjustment for gains (losses) realized in net income | — | — | — | |||||||||
Net unrealized loss on derivative hedges | (272 | ) | 95 | (177 | ) | |||||||
Net unrealized loss on post-retirement plans: | ||||||||||||
Net unrealized gain arising during the period | 62 | (20 | ) | 42 | ||||||||
Less: reclassification adjustment for gains (losses) realized in net income | (28 | ) | 10 | (18 | ) | |||||||
Net unrealized gain on post-retirement plans | 90 | (30 | ) | 60 | ||||||||
Other comprehensive loss | $ | (12,241 | ) | $ | 4,286 | $ | (7,955 | ) |
2015 | ||||||||||||
(in thousands) | Before Tax | Tax Effect | Net of Tax | |||||||||
Net unrealized loss on AFS securities: | ||||||||||||
Net unrealized loss arising during the period | $ | (2,031 | ) | $ | 710 | $ | (1,321 | ) | ||||
Less: reclassification adjustment for gains (losses) realized in net income | 1,334 | (467 | ) | 867 | ||||||||
Net unrealized loss on AFS securities | (3,365 | ) | 1,177 | (2,188 | ) | |||||||
Net unrealized loss on derivative hedges: | ||||||||||||
Net unrealized loss arising during the period | (1,383 | ) | 484 | (899 | ) | |||||||
Less: reclassification adjustment for gains (losses) realized in net income | — | — | — | |||||||||
Net unrealized loss on derivative hedges | (1,383 | ) | 484 | (899 | ) | |||||||
Net unrealized loss on post-retirement plans: | ||||||||||||
Net unrealized gain arising during the period | (11 | ) | 11 | — | ||||||||
Less: reclassification adjustment for gains (losses) realized in net income | (38 | ) | 13 | (25 | ) | |||||||
Net unrealized gain on post-retirement plans | 27 | (2 | ) | 25 | ||||||||
Other comprehensive loss | $ | (4,721 | ) | $ | 1,659 | $ | (3,062 | ) |
2017 | ||||||||||||||||
(in thousands) | Net unrealized gain on AFS Securities | Net loss on effective derivative hedges | Net unrealized loss on post-retirement plans | Total | ||||||||||||
Balance at beginning of period | $ | (2,125 | ) | $ | (1,798 | ) | $ | (403 | ) | $ | (4,326 | ) | ||||
Other comprehensive gain/(loss) before reclassifications | 426 | (452 | ) | (203 | ) | (229 | ) | |||||||||
Less: amounts reclassified from accumulated other comprehensive income | 12 | — | (13 | ) | (1 | ) | ||||||||||
Total other comprehensive loss | 414 | (452 | ) | (190 | ) | (228 | ) | |||||||||
Balance at end of period | $ | (1,711 | ) | $ | (2,250 | ) | $ | (593 | ) | $ | (4,554 | ) |
2016 | ||||||||||||||||
(in thousands) | Net unrealized gain on AFS Securities | Net loss on effective derivative hedges | Net unrealized loss on post-retirement plans | Total | ||||||||||||
Balance at beginning of period | $ | 5,713 | $ | (1,621 | ) | $ | (463 | ) | $ | 3,629 | ||||||
Other comprehensive gain/(loss) before reclassifications | (4,914 | ) | (177 | ) | 42 | (5,049 | ) | |||||||||
Less: amounts reclassified from accumulated other comprehensive income | 2,924 | — | (18 | ) | 2,906 | |||||||||||
Total other comprehensive loss | (7,838 | ) | (177 | ) | 60 | (7,955 | ) | |||||||||
Balance at end of period | $ | (2,125 | ) | $ | (1,798 | ) | $ | (403 | ) | $ | (4,326 | ) |
2015 | ||||||||||||||||
(in thousands) | Net unrealized gain on AFS Securities | Net loss on effective derivative hedges | Net unrealized loss on post-retirement plans | Total | ||||||||||||
Balance at beginning of period | $ | 7,901 | $ | (722 | ) | $ | (488 | ) | $ | 6,691 | ||||||
Other comprehensive gain/(loss) before reclassifications | (1,321 | ) | (899 | ) | — | (2,220 | ) | |||||||||
Less: amounts reclassified from accumulated other comprehensive income | 867 | — | (25 | ) | 842 | |||||||||||
Total other comprehensive loss | (2,188 | ) | (899 | ) | 25 | (3,062 | ) | |||||||||
Balance at end of period | $ | 5,713 | $ | (1,621 | ) | $ | (463 | ) | $ | 3,629 |
97
(“CET1”). The new Basel III capital adequacy guidelines require all banksamounts reclassified out of each component of accumulated other comprehensive income (loss) in 2017, 2016 and bank holding companies to maintain minimum capital ratios depicted in2015:
(in thousands) | 2017 | 2016 | 2015 | Affected Line Item where Net Income is Presented | ||||||||||
Realized gains on AFS securities: | ||||||||||||||
Before tax | $ | 19 | $ | 4,498 | $ | 1,334 | Non-interest income | |||||||
Tax effect | (7 | ) | (1,574 | ) | (467 | ) | Tax expense | |||||||
Total reclassifications for the period | $ | 12 | $ | 2,924 | $ | 867 | Net of tax |
(in thousands) | 2017 | 2016 | 2015 | Affected Line Item where Net Income is Presented | ||||||||||
Realized loss on post-retirement plans: | ||||||||||||||
Before tax | $ | (21 | ) | $ | (28 | ) | $ | (38 | ) | Salaries and benefits | ||||
Tax effect | 8 | 10 | 13 | Tax benefit | ||||||||||
Total reclassifications for the period | $ | (13 | ) | $ | (18 | ) | $ | (25 | ) | Net of tax |
|
Actual | Minimum Capital Requirement | Minimum to be Well Capitalized Under Prompt Corrective Action Provisions | |||
As of December 31, 2016 | Amount | Ratio | Amount | Ratio | Amount | Ratio |
Total Capital |
|
|
|
|
|
|
(To Risk-Weighted Assets) |
|
|
|
|
|
|
Consolidated | $171,558 | 16.52% | $83,097 | 8.00% | $109,065 | 10.50% |
Bank | 173,458 | 16.71 | 83,031 | 8.00 | 108,978 | 10.50 |
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Common Equity Tier 1 |
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|
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|
(To Risk-Weighted Assets) |
|
|
|
|
|
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Consolidated | $155,905 | 15.01% | $46,742 | 4.50% | $ 67,516 | 6.50% |
Bank | 157,805 | 15.20 | 46,705 | 4.50 | 67,463 | 6.50 |
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Tier 1 Capital |
|
|
|
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|
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(To Risk-Weighted Assets) |
|
|
|
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|
|
Consolidated | $155,905 | 15.01% | $62,323 | 6.00% | $ 83,097 | 8.00% |
Bank | 157,805 | 15.20 | 62,273 | 6.00 | 83,031 | 8.00 |
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Leverage Capital Ratio |
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Total Capital |
|
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|
|
(To Total Assets for Leverage Ratio) |
|
|
|
|
|
|
Consolidated | $155,905 | 8.94% | $69,722 | 4.00% | $ 87,152 | 5.00% |
Bank | 157,805 | 9.06 | 69,683 | 4.00 | 87,104 | 5.00 |
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| |
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|
Actual |
Minimum Capital Requirement | Minimum to be Well Capitalized Under Prompt Corrective Action Provisions | |||
| ||||||
| ||||||
As of December 31, 2015 | Amount | Ratio | Amount | Ratio | Amount | Ratio |
Total Capital |
|
|
|
|
|
|
(To Risk-Weighted Assets) |
|
|
|
|
|
|
Consolidated | $160,042 | 17.12% | $74,793 | 8.00% | $ 98,166 | 10.50% |
Bank | 161,905 | 17.34 | 74,713 | 8.00 | 98,060 | 10.50 |
|
|
|
|
|
|
|
Common Equity Tier 1 |
|
|
|
|
|
|
(To Risk-Weighted Assets) |
|
|
|
|
|
|
Consolidated | $145,400 | 15.55% | $42,071 | 4.50% | $ 65,444 | 6.50% |
Bank | 147,263 | 15.77 | 42,026 | 4.50 | 65,374 | 6.50 |
|
|
|
|
|
|
|
Tier 1 Capital |
|
|
|
|
|
|
(To Risk-Weighted Assets) |
|
|
|
|
|
|
Consolidated | $145,400 | 15.55% | $56,095 | 6.00% | $ 79,468 | 8.00% |
Bank | 147,263 | 15.77 | 56,035 | 6.00 | 79,382 | 8.00 |
|
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|
|
|
|
|
Leverage Capital Ratio |
|
|
|
|
|
|
Total Capital |
|
|
|
|
|
|
(To Total Assets for Leverage Ratio) |
|
|
|
|
|
|
Consolidated | $145,400 | 9.37% | $62,087 | 4.00% | $ 62,087 | 5.00% |
Bank | 147,263 | 9.49 | 62,050 | 4.00 | 62,050 | 5.00 |
Dividend Limitations:Dividends paid byfollowing (average diluted shares outstanding are calculated using the Bank are the primary source of funds available to the Company for payment of dividends to its shareholders. The Bank is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the Bank to the Company. At December 31, 2016, the Bank had $69,669 available for dividends that could be paid without prior regulatory approval.
Stock Repurchase Plan:In August 2008, the Company’s Board of Directors approved a 24 month program to repurchase up to 450,000 shares of the Company’s commontreasury stock or approximately 10.2% of the shares then currently outstanding. The Company’s Board of Directors authorized the continuance of this program for additional 24 month periods in August 2010, 2012 and 2014. On August 16, 2016, the Company’s Board of Directors authorized the continuance of this program through August 17, 2018.
method:
(in thousands, except per share and share data) | 2017 | 2016 | 2015 | |||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 | ||||||
Average number of basic common shares outstanding | 15,183,615 | 9,068,624 | 8,970,368 | |||||||||
Plus: dilutive effect of stock options and awards outstanding | 106,795 | 74,029 | 120,018 | |||||||||
Average number of diluted common shares outstanding | 15,290,410 | 9,142,653 | 9,090,386 | |||||||||
Anti-dilutive options excluded from earnings calculation | 8,659 | 90,249 | 129,198 | |||||||||
Earnings per share: | ||||||||||||
Basic | $ | 1.71 | $ | 1.65 | $ | 1.69 | ||||||
Diluted | $ | 1.70 | $ | 1.63 | $ | 1.67 |
Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions.
As of December 31, 2016, the Company had repurchased 173,794 shares of stock under this plan, at a total cost of $3,465 and an average price of $19.94 per share. During 2016, the Company repurchased 15,381 shares under the plan, at a total cost of $497 and an average price of $32.30. The Company records repurchased shares as treasury stock.
As of December 31, 2015, the Company had repurchased 158,413 shares of stock under this plan, at a total cost of $2,968 and an average price of $18.74 per share. During 2015, the Company repurchased 656 shares under the plan. The Company records repurchased shares as treasury stock.
Note 15: Stock-Based Compensation Plans
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Stock options and restricted stock awards | $ | 399 | $ | 543 | $ | 306 | ||||||
Performance stock units | 290 | 304 | 376 | |||||||||
Restricted stock units | 585 | 431 | 134 | |||||||||
Total compensation expense | $ | 1,274 | $ | 1,278 | $ | 816 |
$135 thousand, respectively. The total tax benefit recognized associated with restricted stock units and performance stock units for the years ended 2017, 2016 and 2015 was $423 thousand, $320 thousand, and $214 thousand, respectively.
| 2016 | 2015 | 2014 |
|
|
|
|
Stock options and restricted stock awards | $ 543 | $ 306 | $296 |
Performance stock units | 304 | 376 | 173 |
Restricted stock units | 431 | 134 | 61 |
Total compensation expense | $1,278 | $816 | $530 |
98
31, 2015:
| 2015 | 2014 |
|
|
|
Risk free interest rate | 1.16% | 1.24% |
Expected market volatility factor for the Company's stock | 41.22% | 29.38% |
Dividend yield | 6.00% | 6.20% |
Expected life of the options (years) | 6.0 | 6.2 |
Options granted | 83,513 | 45,000 |
Estimated fair value of options granted | $ 9.73 | $ 5.00 |
2015 | ||||
Risk free interest rate | 1.16 | % | ||
Expected market volatility factor for the Company's stock | 41.22 | % | ||
Dividend yield | 3.07 | % | ||
Expected life of the options (years) | 6.0 | |||
Options granted | 125,269 | |||
Estimated fair value of options granted | $ | 6.49 |
Stock Options | Number of Stock Options Outstanding | Weighted Average Exercise Price | Aggregate Intrinsic Value |
Outstanding at January 1, 2016 | 229,435 | $26.33 |
|
Granted | --- | --- |
|
Exercised | (56,726) | 24.15 |
|
Forfeited | (14,874) | 27.73 |
|
Outstanding at December 31, 2016 | 157,835 | $26.98 | $3,212 |
|
|
|
|
Ending vested and expected to vest December 31, 2016 | 156,467 | $27.06 | $3,172 |
Exercisable at December 31, 2016 | 60,538 | $24.12 | $1,405 |
Stock Options | Number of Stock Options Outstanding | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||
Outstanding at January 1, 2017 | 236,763 | $ | 17.99 | ||||||||
Granted | — | — | |||||||||
Exercised | (55,725 | ) | 15.19 | ||||||||
Forfeited | (11,117 | ) | 17.38 | ||||||||
Outstanding at December 31, 2017 | 169,921 | $ | 18.95 | $ | 1,370 | ||||||
Ending vested and expected to vest December 31, 2017 | 169,921 | $ | 18.95 | $ | 1,370 | ||||||
Exercisable at December 31, 2017 | 100,317 | $ | 18.66 | $ | 838 |
Stock Options | Number of Stock Options Outstanding | Weighted Average Exercise Price | Aggregate Intrinsic Value |
Outstanding at January 1, 2015 | 240,308 | $22.21 |
|
Granted | 83,513 | 33.27 |
|
Exercised | (55,642) | 21.69 |
|
Forfeited | (38,744) | 22.37 |
|
Outstanding at December 31, 2015 | 229,435 | $26.33 | $1,860 |
|
|
|
|
Ending vested and expected to vest December 31, 2015 | 226,219 | $26.45 | $1,807 |
Exercisable at December 31, 2015 | 68,104 | $21.30 | $ 895 |
Stock Options | Number of Stock Options Outstanding | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||
Outstanding at January 1, 2016 | 344,159 | $ | 17.56 | |||||||
Granted | — | — | ||||||||
Exercised | (85,085 | ) | 16.10 | |||||||
Forfeited | (22,311 | ) | 18.49 | |||||||
Outstanding at December 31, 2016 | 236,763 | $ | 17.99 | 3,213 | ||||||
Ending vested and expected to vest December 31, 2016 | 234,709 | $ | 18.04 | 3,173 | ||||||
Exercisable at December 31, 2016 | 90,807 | $ | 16.08 | 1,406 |
Restricted Stock Awards | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2017 | — | — | |||||
Awarded | 8,004 | $ | 29.96 | ||||
Vested | (8,004 | ) | 29.96 | ||||
Forfeited | — | — | |||||
Outstanding at December 31, 2017 | — | $ | — |
Restricted Stock Awards | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2016 | — | — | |||||
Awarded | 5,190 | $ | 28.86 | ||||
Vested | (5,190 | ) | 28.86 | ||||
Forfeited | — | — | |||||
Outstanding at December 31, 2016 | — | $ | — |
Restricted Stock Awards | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2016 | --- | $ --- |
Awarded | 3,460 | 43.28 |
Released | (3,460) | 43.28 |
Forfeited | --- | --- |
Outstanding at December 31, 2016 | --- | $ --- |
Restricted Stock Awards | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2015 | --- | $ --- |
Awarded | 2,860 | 34.81 |
Released | (2,860) | 34.81 |
Forfeited | --- | --- |
Outstanding at December 31, 2015 | --- | $ --- |
99
The tax benefit received related to the exercise of options in 2016, 2015 and 2014, was $198, $159 and $43, respectively.
2016:
Performance Stock Units | Number of Performance Stock Units Outstanding | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2016 | 24,349 | $27.72 |
Granted | 9,310 | 31.52 |
Vested | 13,933 | 24.14 |
Forfeited | 2,415 | 30.57 |
Outstanding at December 31, 2016 | 17,311 | $32.11 |
Performance Stock Units | Number of Performance Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2017 | 34,246 | $ | 21.25 | ||||
Awarded | 17,711 | 26.74 | |||||
Vested | (15,121 | ) | 18.84 | ||||
Forfeited | (3,209 | ) | 21.51 | ||||
Outstanding at December 31, 2017 | 33,627 | $ | 25.21 |
Performance Stock Units | Number of Performance Stock Units Outstanding | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2015 | 17,895 | $25.77 |
Granted | 9,207 | 32.20 |
Vested | --- | --- |
Forfeited | 2,753 | 30.00 |
Outstanding at December 31, 2015 | 24,349 | $27.72 |
Performance Stock Units | Number of Performance Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2016 | 36,525 | $ | 18.49 | ||||
Awarded | 20,351 | 21.02 | |||||
Vested | (20,899 | ) | 16.09 | ||||
Forfeited | (1,731 | ) | 22.40 | ||||
Outstanding at December 31, 2016 | 34,246 | $ | 21.25 |
100
2016:
Restricted Stock Units | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2017 | 40,681 | $ | 22.03 | ||||
Granted | 57,561 | 28.48 | |||||
Vested and exercised | (12,667 | ) | 21.49 | ||||
Forfeited | (11,407 | ) | 25.43 | ||||
Outstanding at December 31, 2017 | 74,168 | $ | 26.60 |
Restricted Stock Units | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2016 | 25,392 | $30.95 |
Granted | 11,663 | 34.80 |
Vested | 8,114 | 29.00 |
Forfeited | 2,249 | 32.15 |
Outstanding at December 31, 2016 | 26,692 | $33.12 |
Restricted Stock Units | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2016 | 38,098 | $ | 20.64 | ||||
Granted | 17,500 | 23.20 | |||||
Vested and exercised | (12,174 | ) | 19.34 | ||||
Forfeited | (2,743 | ) | 22.10 | ||||
Outstanding at December 31, 2016 | 40,681 | $ | 22.03 |
Restricted Stock Units | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2015 | 13,178 | $26.42 |
Granted | 21,755 | 32.66 |
Vested | 6,040 | 27.43 |
Forfeited | 3,501 | 30.58 |
Outstanding at December 31, 2015 | 25,392 | $30.95 |
Note 16: Retirement Benefit Plans
The Company has non-qualified supplemental executive retirement agreements with certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company also has a supplemental executive retirement agreement with a current executive officer. This agreement provides a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the participating executive leaves the Company following a change of control event.
The after tax components of accumulated other comprehensive loss, which have not yet been recognized in net periodic benefit cost, related to post-retirement benefits are net actuarial losses related to supplemental retirement plans of $439 and $417, as of December 31, 2016 and 2015, respectively.
101
A December 31 measurement date is used for the supplemental executive retirement plans. The following table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the plans as of and for the years ended December 31:
Supplemental Executive Retirement Plans | ||
| 2016 | 2015 |
Obligations and Funded Status |
|
|
|
|
|
Change in Benefit Obligation |
|
|
Benefit obligation at beginning of year | $ 3,811 | $ 3,969 |
Service cost | 72 | 71 |
Interest cost | 128 | 125 |
Actuarial (gain) loss on supplemental retirement plans | (50) | (63) |
Benefits and expenses paid | (291) | (291) |
Benefit obligation at end of year | $ 3,670 | $ 3,811 |
Change in plan assets |
|
|
Fair value of plan assets at beginning of year | $ --- | $ --- |
Benefits and expenses paid | (291) | (291) |
Contributions | 291 | 291 |
Fair value of plan assets at end of year | $ --- | $ --- |
Funded status at end of year | $(3,720) | $(3,874) |
As of December 31, 2016 and 2015, the Company had recognized liabilities of $3,720 and $3,874, respectively, for the supplemental executive retirement plans. These amounts are reported within other liabilities on the consolidated balance sheets.
The following table summarizes the assumptions, based on long-term bond yields, used to determine the benefit obligations and net periodic benefit costs for the years ended December 31, 2016, 2015, and 2014:
| 2016 | 2015 | 2014 |
Weighted-average discount rate beginning of the year | 3.48% | 3.27% | 4.02% |
Weighted-average discount rate end of the year | 3.31 | 3.48 | 3.27 |
The discount rate was chosen based on high-quality long-term bond yields with maturity dates that match the timing and amount of the expected future benefit payments as of the measurement date.
102
The net periodic benefit cost for the years ended December 31 included the following components:
Components of Net Periodic Benefit Cost and Other Amounts Recognized in the Consolidated Income Statements | 2016 | 2015 | 2014 |
|
|
|
|
Service cost | $ 72 | $ 71 | $ 64 |
Interest cost | 128 | 125 | 149 |
Recognition of net actuarial loss | 28 | 38 | 28 |
Total recognized in the consolidated income statements | $228 | $234 | $241 |
|
|
|
|
Other Changes and Benefit Obligations Recognized in Other Comprehensive Income (pre-tax) |
|
|
|
Recognition of net actuarial loss | 60 | 79 | 174 |
Total recognized in other comprehensive income (pre-tax) | 60 | 79 | 174 |
Total recognized in the consolidated income statements and other comprehensive income (pre-tax) | $288 | $313 | $415 |
The estimated net actuarial loss for the supplemental executive retirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $21.
The Company expects to contribute the following amounts to fund benefit payments under the supplemental executive retirement plans:
| Amount |
2017 | $ 378 |
2018 | 378 |
2019 | 378 |
2020 | 293 |
2021 | 260 |
2022 & thereafter | 3,038 |
| $4,725 |
401(k) Plan: The Company maintains a Section 401(k) savings plan for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the first day of any quarter following their date of hire and attainment of age 21 ½ . Under the plan, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plan allows for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. The total expense for this plan in 2016, 2015, and 2014 was $439, $411, and $375, respectively.
Note 17: Commitments and Contingent Liabilities
The Bank is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit.
Commitments to originate loans, including unused lines of credit, are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank uses the same credit policy to make such
103
commitments as it uses for on-balance-sheet items, such as loans. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower.
The Bank guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are primarily issued in support of third party debt or obligations. 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 credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet instruments. Exposure to credit loss in the event of non-performance by the counter-party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. Typically, these standby letters of credit have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.
The following table summarizes the contractual amounts of commitments and contingent liabilities as of December 31, 2016 and 2015.
| 2016 | 2015 |
Commitments to originate loans | $ 41,731 | $ 41,529 |
Unused lines of credit | 98,823 | 97,283 |
Un-advanced portions of construction loans | 20,330 | 12,719 |
Total | $160,884 | $151,531 |
As of December 31, 2016 and 2015, the fair values of the standby letters of credit were not significant to the Company’s consolidated financial statements.
Operating Lease Obligations
The Company leases certain properties used in operations under terms of operating leases, which include renewal options. The following table sets forth the approximate future lease payments over the remaining terms of the non-cancelable leases as of December 31, 2016.
| Amount |
2017 | $271 |
2018 | 249 |
2019 | 237 |
2020 | 237 |
2021 | 190 |
2022 and thereafter | 520 |
| $1,704 |
In connection the foregoing lease obligations, in 2016, 2015 and 2014, the Company recorded $352, $394, and $431 in rent expense, respectively, which is included in occupancy and furniture and fixtures expense in the consolidated statements of income.
Note 18: Fair Value Measurements
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the
104
market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The Company’s fair value measurements employ valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets (Level 1 measurements) for identical assets or liabilities and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is as follows:
·
Level 1 – Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
·
Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-based techniques for which all significant assumptions are observable in the market.
·
Level 3 – Valuation is principally generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.
The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The most significant instruments that the Company values are securities, all of which fall into Level 2 in the fair value hierarchy. The securities in the available for sale portfolio are priced by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether valuations are appropriately placed within the fair value hierarchy and whether the valuations are representative of an exit price in the Company’s principal markets. The Company’s principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Additionally, the Company periodically tests the reasonableness of the prices provided by these third parties by obtaining fair values from other independent providers and by obtaining desk bids from a variety of institutional brokers.
These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.
December 31, 2017 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | Inputs | Inputs | Inputs | Fair Value | ||||||||||||
Available for sale securities: | ||||||||||||||||
Obligations of US Government sponsored enterprises | $ | — | $ | 6,972 | $ | — | $ | 6,972 | ||||||||
Mortgage-backed securities: | ||||||||||||||||
US Government-sponsored enterprises | — | 443,003 | — | 443,003 | ||||||||||||
US Government agency | — | 95,596 | — | 95,596 | ||||||||||||
Private label | — | 674 | — | 674 | ||||||||||||
Obligations of states and political subdivisions thereof | — | 140,200 | — | 140,200 | ||||||||||||
Corporate bonds | — | 30,797 | — | 30,797 | ||||||||||||
Derivative assets | — | 669 | — | 669 | ||||||||||||
Derivative liabilities | — | (222 | ) | (222 | ) |
December 31, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | Inputs | Inputs | Inputs | Fair Value | ||||||||||||
Available for sale securities: | ||||||||||||||||
Obligations of US Government sponsored enterprises | $ | — | $ | — | $ | — | $ | — | ||||||||
Mortgage-backed securities: | ||||||||||||||||
US Government-sponsored enterprises | — | 328,452 | — | 328,452 | ||||||||||||
US Government agency | — | 76,906 | — | 76,906 | ||||||||||||
Private label | — | 1,132 | — | 1,132 | ||||||||||||
Obligations of states and political subdivisions thereof | — | 122,366 | — | 122,366 | ||||||||||||
Corporate bonds | — | — | — | — | ||||||||||||
Derivative assets | — | 1,748 | — | 1,748 | ||||||||||||
Derivative liabilities | — | — | — | — |
105
systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.
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 considered factors that are not observable. As such, mandatory delivery forward commitments are classified as Level 3 measurements.
Assets (Liabilities) | ||||||||
Interest Rate Lock | Forward | |||||||
(in thousands) | Commitments | Commitments | ||||||
December 31, 2016 | 0 | 0 | ||||||
Acquisition of Lake Sunapee Bank, January 13, 2017 | $ | 96 | $ | 23 | ||||
Goodwill adjustment Lake Sunapee Bank Merger | (75 | ) | (167 | ) | ||||
Realized (loss) recognized in non-interest income | (22 | ) | (77 | ) | ||||
December 31, 2017 | $ | (1 | ) | $ | (221 | ) |
(in thousands, except ratios) | Fair Value December 31, 2017 | Valuation Techniques | Unobservable Inputs | Significant Unobservable Input Value | ||||||||
Assets (Liabilities) | ||||||||||||
Interest Rate Lock Commitment | $ | (1 | ) | Historical trend | Closing Ratio | 90 | % | |||||
Pricing Model | Origination Costs, per loan | $ | 1.7 | |||||||||
Forward Commitments | (221 | ) | Quoted prices for similar loans in active markets. | Freddie Mac pricing system | Pair-off contract price | |||||||
Total | $ | (222 | ) |
December 31, 2016 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value |
Securities available for sale: |
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|
|
Mortgage-backed securities: |
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|
|
US Government-sponsored enterprises | $ --- | $328,452 | $ --- | $328,452 |
US Government agencies | --- | 76,906 | --- | 76,906 |
Private label | --- | 1,132 | --- | 1,132 |
Obligations of states and political subdivisions thereof | --- | 122,366 | --- | 122,366 |
Derivative assets | --- | 1,748 | --- | 1,748 |
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December 31, 2015 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value |
Securities available for sale: |
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|
|
Mortgage-backed securities: |
|
|
|
|
US Government-sponsored enterprises | $ --- | $306,993 | $ --- | $306,993 |
US Government agencies | --- | 79,130 | --- | 79,130 |
Private label | --- | 3,464 | --- | 3,464 |
Obligations of states and political subdivisions thereof | --- | 115,382 | --- | 115,382 |
Derivative assets | --- | 2,069 | --- | 2,069 |
During the years ended December 31, 2016 and 2015, there were2016. There are no transfers between levels of the fair value hierarchy.
106
The following table summarizes financial assets and financial liabilities measured at fair value on a non-recurring basisbasis.
December 31, 2017 | December 31, 2016 | December 31, 2017 | Fair Value Measurement Date as of December 31, 2017 | |||||||||||
(in thousands) | Level 3 Inputs | Level 3 Inputs | Total Gains (Losses) | Level 3 Inputs | ||||||||||
Assets | ||||||||||||||
Impaired loans | $ | 10,793 | $ | 6,709 | $ | (231 | ) | December 2017 | ||||||
Capitalized servicing rights | 4,158 | 5 | — | December 2017 | ||||||||||
Other real estate owned | 122 | 90 | — | Jan 2017 - Mar 2017 | ||||||||||
Total | $ | 15,073 | $ | 6,804 | $ | (231 | ) |
As of December 31, 2016 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Fair Value | Loss |
Other real estate owned | $ --- | $ --- | $ 90 | $ 90 | $53 |
Collateral dependent impaired loans | --- | --- | 2,899 | 2,899 | --- |
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As of December 31, 2015 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Fair Value | Loss |
Other real estate owned | $ --- | $ --- | $ 256 | $ 256 | $27 |
Collateral dependent impaired loans | --- | --- | 1,687 | 1,687 | -- |
The Company had total collateral dependent impaired loans with carrying values of approximately $3,268 and $1,999 which had specific reserves included in the allowance of $369 and $312, respectively, at December 31, 2016 is as follows:
Fair Value | ||||||||||||
(in thousands, except ratios) | December 31, 2017 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) (a) | ||||||||
Assets | ||||||||||||
Impaired loans | $ | 8,586 | Fair value of collateral - appraised value | Loss severity | 15.7% to 45.28% | |||||||
Appraised value | $100 to $7,545 | |||||||||||
Impaired loans | 2,207 | Discounted cash flow | Discount rate | 2.63% to 9.50% | ||||||||
Cash flows | $6 to $320 | |||||||||||
Capitalized servicing rights | 4,158 | Discounted cash flow | Constant prepayment rate (CPR) | 10.97 | % | |||||||
Discount rate | 10.10 | % | ||||||||||
Other real estate owned | 122 | Fair value of collateral | Appraised value | $122 | ||||||||
Total | $ | 15,073 |
(a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties. |
Fair Value | ||||||||||||
(in thousands, except ratios) | December 31, 2016 | Valuation Techniques | Unobservable Inputs | Range (Weighted Average) (a) | ||||||||
Assets | ||||||||||||
Impaired loans | $ | 3,268 | Fair value of collateral - appraised value | Loss severity | 0% to 51% | |||||||
Appraised value | $0 to $1,732 | |||||||||||
Impaired loans | 3,441 | Discount cash flow | Discount rate | 3.25% to 18.25% | ||||||||
Cash flows | $6 to $861 | |||||||||||
Capitalized servicing rights | 5 | Discounted cash flow | Constant prepayment rate (CPR) | 17.09 | % | |||||||
Discount rate | 7.55 | % | ||||||||||
Other real estate owned | 90 | Fair value of collateral | Appraised value | $ | 120 | |||||||
Total | $ | 6,804 |
(a) | Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties. |
In estimatingbased on the fair value of OREO, the Company generally uses market appraisals less estimated costs to dispose ofunderlying collateral supporting the property, which generally range from 10% to 30% of appraised value. Management may also make adjustments to reflect estimated fair value declines, or may apply other discounts to appraised values for unobservable factors resulting from its knowledge ofloan and, as a result, the property or consideration of broker quotes. The appraisers use a market, income, and/or a cost approach in determining thecarrying value of the collateral.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, theynonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been categorizedclassified as Level 3.
of the valuation hierarchy.
Note 19:
December 31, 2017 | ||||||||||||||||||||
(in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 90,685 | $ | 90,685 | $ | 90,685 | $ | — | $ | — | ||||||||||
Securities available for sale | 717,242 | 717,242 | — | 717,242 | — | |||||||||||||||
FHLB bank stock | 38,105 | 38,105 | — | 38,105 | — | |||||||||||||||
Net loans | 2,473,288 | 2,433,557 | — | — | 2,433,557 | |||||||||||||||
Accrued interest receivable | 3,347 | 3,347 | — | 3,347 | — | |||||||||||||||
Cash surrender value of bank-owned life insurance policies | 57,997 | 57,997 | — | 57,997 | — | |||||||||||||||
Derivative assets | 669 | 669 | — | 669 | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Total deposits | $ | 2,352,085 | $ | 2,348,574 | $ | — | $ | 2,348,574 | $ | — | ||||||||||
Securities sold under agreements to repurchase | 40,706 | 40,680 | — | 40,680 | — | |||||||||||||||
Federal Home Loan Bank advances | 745,982 | 744,006 | — | 744,006 | — | |||||||||||||||
Subordinated borrowings | 38,033 | 38,033 | — | 38,033 | — | |||||||||||||||
Junior subordinated borrowings | 5,000 | 3,782 | — | 3,782 | — | |||||||||||||||
Derivative liabilities | (222 | ) | (222 | ) | — | — | (222 | ) |
December 31, 2016 | ||||||||||||||||||||
(in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 8,439 | $ | 8,439 | $ | 8,439 | $ | — | $ | — | ||||||||||
Securities available for sale | 528,856 | 528,856 | — | 528,856 | — | |||||||||||||||
FHLB bank stock | 25,331 | 25,331 | — | 25,331 | — | |||||||||||||||
Net loans | 1,118,645 | 1,100,601 | — | — | 1,100,601 | |||||||||||||||
Accrued interest receivable | 6,051 | 6,051 | — | 6,051 | — | |||||||||||||||
Cash surrender value of bank-owned life insurance policies | 24,450 | 24,450 | — | 24,450 | — | |||||||||||||||
Derivative assets | 1,748 | 1,748 | — | 1,748 | — | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Total deposits | $ | 1,050,300 | $ | 1,048,932 | $ | — | $ | 1,048,932 | $ | — | ||||||||||
Securities sold under agreements to repurchase | 21,780 | 21,773 | — | 21,773 | — | |||||||||||||||
Federal Home Loan Bank advances | 509,816 | 509,793 | — | 509,793 | — | |||||||||||||||
Subordinated borrowings | — | — | — | — | — | |||||||||||||||
Junior subordinated borrowings | 5,000 | 3,560 | — | 3,560 | — | |||||||||||||||
Derivative liabilities | — | — | — | — | — |
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company.
The following describes the methods and significant assumptions used by the Company in estimating the fair values of significant financial instruments:
value.
Federal Home Loan Bank Stock: For Federal Home Loan Bank stock,
Loans:For variable ratecash flows of the loans that re-price frequentlydiscounted over their respective loan origination rates. The origination rates are adjusted for substandard and have no significant changespecial mention loans to factor the impact of declines in the loan’s credit risk, fair values are based on carrying values.standing. The fair value of otherthe loans is estimated by discounting the future
108
cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers withof similar credit ratings and for the same remaining maturities.
quality.
Deposits:
Borrowings:For borrowings that mature or re-price in 90 days or less, carrying value approximates fair value.
Accrued interest receivabledebt and payable:debentures in the table above.
its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.
Off-balance sheet
A summary of the carrying values and estimated fair values ofconsidered immaterial to the Company’s significant financial instruments at December 31, 2016 and 2015 follows:
December 31, 2016 | Carrying Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value |
Financial Assets: |
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|
Cash and cash equivalents | $ 8,439 | $8,439 | $ --- | $ --- | $ 8,439 |
Federal Home Loan Bank stock | 25,331 | --- | 25,331 | --- | 25,331 |
Loans, net | 1,118,645 | --- | --- | 1,100,601 | 1,100,601 |
Interest receivable | 6,051 | --- | 6,051 | --- | 6,051 |
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Financial liabilities: |
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Deposits (with no stated maturity) | $ 633,863 | $ --- | $633,863 | $ --- | $ 633,863 |
Time deposits | 416,437 | --- | 417,805 | --- | 417,805 |
Borrowings | 536,596 | --- | 535,126 | --- | 535,126 |
Interest payable | 697 | --- | 697 | --- | 697 |
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December 31, 2015 | Carrying Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value |
Financial Assets: |
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|
Cash and cash equivalents | $ 9,720 | $9,720 | $ --- | $ --- | $ 9,720 |
Federal Home Loan Bank stock | 21,479 | --- | 21,479 | --- | 21,479 |
Loans, net | 980,631 | --- | --- | 975,610 | 975,610 |
Interest receivable | 5,420 | --- | 5,420 |
| 5,420 |
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Financial liabilities: |
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Deposits (with no stated maturity) | $ 546,058 | $ --- | $546,058 | $ --- | $ 546,058 |
Time deposits | 396,729 | --- | 399,146 | --- | 399,146 |
Borrowings | 474,791 | --- | 473,404 | --- | 473,404 |
Interest payable | 527 | --- | 527 | --- | 527 |
109
Note 20: Legal Contingencies
The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of management based upon currently available information will have no material effect on the Company's consolidated financial statements.
Note 21: Condensed Financial Information – Parent Company Only
December 31, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Assets | ||||||||
Cash due from Bar Harbor Bank and Trust | $ | 2,400 | $ | 1,302 | ||||
Investment in subsidiaries | 392,073 | 158,967 | ||||||
Premises and equipment | 687 | 687 | ||||||
Other assets | 939 | 137 | ||||||
Total assets | $ | 396,099 | $ | 161,093 | ||||
Liabilities and Shareholders Equity | ||||||||
Subordinated notes | $ | 38,033 | $ | — | ||||
Accrued expenses | 3,425 | 4,353 | ||||||
Shareholders equity | 354,641 | 156,740 | ||||||
Total Liabilities and shareholders equity | $ | 396,099 | $ | 161,093 |
| 2016 | 2015 |
Cash | $ 1,302 | $ 918 |
Investment in subsidiaries | 158,967 | 156,396 |
Premises | 687 | 688 |
Other assets | 137 | 320 |
Total assets | $161,093 | $158,322 |
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|
Liabilities |
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|
Total liabilities | $ 4,353 | $ 4,170 |
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Shareholders' equity |
|
|
Total shareholders' equity | $156,740 | $154,152 |
|
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|
Liabilities and Shareholders' equity | $161,093 | $158,322 |
Years Ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Income: | ||||||||||||
Dividends from subsidiaries | $ | 13,907 | $ | 6,473 | $ | 5,407 | ||||||
Other | 25 | — | — | |||||||||
Total income | 13,932 | 6,473 | 5,407 | |||||||||
Interest expense | 1,857 | — | — | |||||||||
Non-interest expense | 2,979 | 2,949 | 2,183 | |||||||||
Total expense | 4,836 | 2,949 | 2,183 | |||||||||
Income before taxes and equity in undistributed income of subsidiaries | 9,096 | 3,524 | 3,224 | |||||||||
Income tax benefit | (1,210 | ) | (1,029 | ) | (657 | ) | ||||||
Income before equity in undistributed income of subsidiaries | 10,306 | 4,553 | 3,881 | |||||||||
Equity in undistributed income of subsidiaries | 15,687 | 10,380 | 11,272 | |||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 |
| 2016 | 2015 | 2014 |
Dividend income from subsidiaries | $ 6,473 | $ 5,407 | $ 5,697 |
Equity in undistributed earnings of subsidiaries | 10,380 | 11,272 | 10,141 |
Bankshares expenses | (2,949) | (2,183) | (1,705) |
Tax benefit | 1,029 | 657 | 480 |
Net income | $14,933 | $15,153 | $14,613 |
110
Years Ended December 31, | ||||||||||||
(in thousands) | 2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 25,993 | $ | 14,933 | $ | 15,153 | ||||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||||||
Equity in undistributed income of subsidiaries | (15,687 | ) | (10,380 | ) | (11,272 | ) | ||||||
Other, net | (312 | ) | 1,336 | 854 | ||||||||
Net cash provided by operating activities | 9,994 | 5,889 | 4,735 | |||||||||
Cash flows from investing activities: | ||||||||||||
Acquisitions, net of cash paid | 1,939 | — | — | |||||||||
Purchase of securities | — | — | — | |||||||||
Other, net | — | (1 | ) | (1 | ) | |||||||
Net cash provided by/(used in) investing activities | 1,939 | (1 | ) | (1 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Proceed from issuance of short term debt | — | — | — | |||||||||
Net proceeds from common stock | — | — | — | |||||||||
Net proceeds from reissuance of treasury stock | 686 | 1,073 | 1,103 | |||||||||
Common stock cash dividends paid | (11,505 | ) | (6,577 | ) | (6,040 | ) | ||||||
Other, net | (16 | ) | — | — | ||||||||
Net cash used in financing activities | (10,835 | ) | (5,504 | ) | (4,937 | ) | ||||||
Net change in cash and cash equivalents | 1,098 | 384 | (203 | ) | ||||||||
Cash and cash equivalents at beginning of year | 1,302 | 918 | 1,121 | |||||||||
Cash and cash equivalents at end of year | $ | 2,400 | $ | 1,302 | $ | 918 |
| 2016 | 2015 | 2014 |
Cash flows from operating activities: |
|
|
|
Net income | $ 14,933 | $ 15,153 | $ 14,613 |
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Adjustments to reconcile net income to cash |
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provided by operating activities: |
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Depreciation | 1 | 1 | --- |
Recognition of stock based expense | 1,114 | 711 | 418 |
Net change in other assets | 38 | (281) | (189) |
Net change in other liabilities | 183 | 423 | 415 |
Equity in undistributed earnings of subsidiaries | (10,380) | (11,272) | (10,141) |
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Net cash provided by operating activities | 5,889 | 4,735 | 5,116 |
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Cash flows from investing activities: |
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Additional investments in subsidiaries | --- | --- | --- |
Capital expenditures | (1) | (1) | (1) |
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Net cash used in investing activities | (1) | (1) | (1) |
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Cash flows from financing activities: |
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|
Purchases of treasury stock | (497) | (24) | (8) |
Purchase of preferred stock and warrants | --- | --- | --- |
Proceeds from issuance of equity instruments | --- | --- | --- |
Proceeds from stock option exercises | 1,570 | 1,127 | 616 |
Dividend paid | (6,577) | (6,040) | (5,362) |
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Net cash used in financing activities | (5,504) | (4,937) | (4,754) |
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Net (decrease) increase in cash | 384 | (203) | 361 |
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Cash and cash equivalents, beginning of year | 918 | 1,121 | 760 |
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Cash and cash equivalents, end of year | $ 1,302 | $ 918 | $ 1,121 |
Note 22: Selected
results of operations were as follows during
2017 and 2016:2017 | ||||||||||||||||
(in thousands, except per share data) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||
Interest and dividend income | $ | 30,156 | $ | 30,063 | $ | 29,665 | $ | 26,185 | ||||||||
Interest expense | 6,660 | 6,585 | 5,856 | 4,813 | ||||||||||||
Net interest income | 23,496 | 23,478 | 23,809 | 21,372 | ||||||||||||
Non-interest income | 6,518 | 6,960 | 6,558 | 5,946 | ||||||||||||
Total revenue | 30,014 | 30,438 | 30,367 | 27,318 | ||||||||||||
Provision for loan losses | 597 | 660 | 736 | 795 | ||||||||||||
Non-interest expense | 14,263 | 17,586 | 20,046 | 20,831 | ||||||||||||
Income before income taxes | 15,154 | 12,192 | 9,585 | 5,692 | ||||||||||||
Income tax expense | 8,545 | 3,575 | 3,029 | 1,481 | ||||||||||||
Net income | $ | 6,609 | $ | 8,617 | $ | 6,556 | $ | 4,211 | ||||||||
Basic earnings per share | $ | 0.43 | $ | 0.56 | $ | 0.43 | $ | 0.29 | ||||||||
Diluted earnings per share | $ | 0.43 | $ | 0.56 | $ | 0.42 | $ | 0.29 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 15,437 | 15,420 | 15,393 | 14,471 | ||||||||||||
Diluted | 15,537 | 15,511 | 15,506 | 14,591 |
2016 | ||||||||||||||||
(in thousands, except per share data) | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||
Interest and dividend income | $ | 14,846 | $ | 14,123 | $ | 14,354 | $ | 14,164 | ||||||||
Interest expense | 3,189 | 3,124 | 2,972 | 2,828 | ||||||||||||
Net interest income | 11,657 | 10,999 | 11,382 | 11,336 | ||||||||||||
Non-interest income | 2,035 | 3,372 | 3,614 | 3,328 | ||||||||||||
Total revenue | 13,692 | 14,371 | 14,996 | 14,664 | ||||||||||||
Provision for loan losses | 225 | 139 | 150 | 465 | ||||||||||||
Non-interest expense | 10,457 | 8,750 | 8,731 | 7,997 | ||||||||||||
Income before income taxes | 3,010 | 5,482 | 6,115 | 6,202 | ||||||||||||
Income tax expense | 426 | 1,850 | 1,804 | 1,796 | ||||||||||||
Net income | $ | 2,584 | $ | 3,632 | $ | 4,311 | $ | 4,406 | ||||||||
Basic earnings per share | $ | 0.28 | $ | 0.40 | $ | 0.48 | $ | 0.49 | ||||||||
Diluted earnings per share | $ | 0.28 | $ | 0.40 | $ | 0.47 | $ | 0.48 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 9,096 | 9,064 | 9,032 | 9,014 | ||||||||||||
Diluted | 9,215 | 9,162 | 9,129 | 9,122 |
Note 23: Subsequent Events
Lake Sunapee Bank Group Acquisition Update: On January 13,
issued.
Three-for-Two Stock Split as a Large Stock Dividend: On February 21, 2017, the Company announced that its Board of Directors declared a three-for-two split of its common stock payable in the form of a large stock dividend. The three-for-two stock split is payable March 21, 2017, to the Company’s common stockholders of record at the close of business on March 7, 2017. The additional shares will be distributed by the Company’s transfer agent, American Stock Transfer & Trust Company, and the per share price of the Company’s common stock will adjust accordingly on the NYSE MKT, LLC. Stockholders will receive cash in lieu of any fractional share of common stock that they otherwise would have been entitled to receive in connection with the split, except that those shareholders participating in the Company’s dividend reinvestment and share purchase plan will have fractional shares credited to their accounts. After giving effect to the stock split, and as of March 10, 2017, the number of shares of common stock outstanding will increase to approximately 15,384,662.
111
DISCLOSURE
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Report of Independent Registered Public Accounting Firm
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We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Bar Harbor Bankshares and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2016, and our report dated March 14, 2017, expressed an unqualified opinion.
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(a)
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3. Exhibits. See Item 15(b) to this Annual Report on Form 10-K.
(b) A list of exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.
(c) There are no other financial statements and financial statement schedules, which were excluded from this report, which are required to be included herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons have signed this report in the capacities indicated on behalf of the Registrant.
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EXHIBIT INDEX
The following exhibits are included as part of this Form 10-K.
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| Articles of Incorporation, as amended to date | ||
3.2 | Bylaws, as amended to date | ||
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| Certificate of Designations, Fixed Rate Cumulative Perpetual Preferred Stock, Series A | ||
4.2 | Form of Specimen Stock Certificate for Series A Preferred Sock | ||
4.3 | Debt Securities Purchase Agreement | ||
4.4 | Form of Subordinated Debt Security of Bar Harbor Bank & Trust | ||
4.5 | Description of Company Common Stock | ||
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Employment Agreement by and between William J. McIver, Bar Harbor Bankshares and Bar Harbor Bank & Trust, dated May 5, 2016. | |||
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| Statement of re computation of per share earnings | ||
21 | Subsidiaries of the Registrant | ||
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| Consent of Independent Registered Public Accounting Firm, RSM US LLP | ||
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| Certification of Chief Executive Officer under Rule 13a-14(a)/15d-14(a) | ||
31.2 | Certification of Chief Financial Officer under Rule 13a-14(a)/15d-14(a) | ||
32.1 | Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350. | ||
32.2 | Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350. | ||
| The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, |
* Management contract
+ Mr. Shencavitz left employment positions with15(d) of the Company effective August 15, 2016.
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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/s/ David B. Woodside David B. Woodside, Chairman, Board of Directors | /s/ Curtis C. Simard Curtis C. Simard, Director President & Chief Executive Officer |
/s/ Daina H. Belair Daina H. Belair, Director | /s/ Josephine Iannelli Josephine Iannelli EVP, Chief Financial Officer and Principal Accounting Officer |
/s/ Matthew L. Caras Matthew Caras, Director | /s/ Lauri E. Fernald Lauri E. Fernald, Director |
/s/ David M. Colter David M. Colter, Director | /s/ Kenneth E. Smith Kenneth E. Smith, Director |
/s/ Steven H. Dimick Steven H. Dimick, Director | /s/ Stephen R. Theroux Stephen R. Theroux, Director |
/s/ Martha Tod Dudman Martha Tod Dudman, Director | /s/ Scott G. Toothaker Scott G. Toothaker, Director |
/s/ Stephen W. Ensign Stephen W. Ensign, Director |