Docoh
Loading...

CAC Camden National

Filed: 5 Nov 20, 1:04pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.      0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Maine01-0413282
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
  
2 ELM STREETCAMDENME04843
(Address of principal executive offices)(Zip Code)
 
Registrant's telephone number, including area code:  (207) 236-8821

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, without par valueCACThe NASDAQ Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x          No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes x          No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes          No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at October 29, 2020:  Common stock (no par value) 14,916,644 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
  PAGE
PART I.  FINANCIAL INFORMATION 
ITEM 1.FINANCIAL STATEMENTS 
 Consolidated Statements of Condition (unaudited) - September 30, 2020 and December 31, 2019
 Consolidated Statements of Income (unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Comprehensive Income (unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2020 and 2019
 Notes to the Unaudited Consolidated Financial Statements
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 4.CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION 
ITEM 1.LEGAL PROCEEDINGS
ITEM 1A.RISK FACTORS
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
SIGNATURES
2


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(In thousands, except number of shares)September 30,
2020
December 31,
2019
ASSETS  
Cash and due from banks$42,119 $39,586 
Interest-bearing deposits in other banks (including restricted cash)304,270 36,050 
Total cash, cash equivalents and restricted cash346,389 75,636 
Investments:  
Available-for-sale securities, at fair value (book value of $1,070,479 and $913,978, respectively)1,107,069 918,118 
Held-to-maturity securities, at amortized cost (fair value of $1,403 and $1,359, respectively)1,298 1,302 
Other investments13,345 13,649 
Total investments1,121,712 933,069 
Loans held for sale, at fair value (book value of $37,301 and $11,915, respectively)37,935 11,854 
Loans3,274,842 3,095,023 
Less: allowance for loan losses(36,414)(25,171)
Net loans3,238,428 3,069,852 
Goodwill94,697 94,697 
Core deposit intangible assets3,014 3,525 
Bank-owned life insurance94,262 92,344 
Premises and equipment, net40,517 41,836 
Deferred tax assets11,195 16,823 
Other assets165,644 89,885 
Total assets$5,153,793 $4,429,521 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Liabilities  
Deposits:  
Non-interest checking$800,582 $552,590 
Interest checking1,419,544 1,153,203 
Savings and money market1,306,868 1,119,193 
Certificates of deposit405,434 521,752 
Brokered deposits291,616 191,005 
Total deposits4,224,044 3,537,743 
Short-term borrowings210,055 268,809 
Long-term borrowings25,000 10,000 
Subordinated debentures59,306 59,080 
Accrued interest and other liabilities117,866 80,474 
Total liabilities4,636,271 3,956,106 
Commitments and Contingencies
Shareholders’ Equity  
Common stock, 0 par value: authorized 40,000,000 shares, issued and outstanding 14,917,344 and 15,144,719 shares on September 30, 2020 and December 31, 2019, respectively130,988 139,103 
Retained earnings366,959 340,580 
Accumulated other comprehensive income (loss):  
Net unrealized gain on available-for-sale debt securities, net of tax28,724 3,250 
Net unrealized loss on cash flow hedging derivative instruments, net of tax(6,078)(6,048)
Net unrecognized loss on postretirement plans, net of tax(3,071)(3,470)
Total accumulated other comprehensive income (loss)19,575 (6,268)
Total shareholders’ equity517,522 473,415 
Total liabilities and shareholders’ equity$5,153,793 $4,429,521 



The accompanying notes are an integral part of these consolidated financial statements.
3


CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands, except number of shares and per share data)2020201920202019
Interest Income  
Interest and fees on loans$33,025 $36,207 $100,190 $108,020 
Taxable interest on investments4,480 4,794 14,241 14,729 
Nontaxable interest on investments823 675 2,438 1,943 
Dividend income163 158 498 562 
Other interest income176 686 691 1,712 
Total interest income38,667 42,520 118,058 126,966 
Interest Expense    
Interest on deposits2,899 8,963 12,953 26,542 
Interest on borrowings394 801 1,591 2,660 
Interest on subordinated debentures893 833 2,668 2,373 
Total interest expense4,186 10,597 17,212 31,575 
Net interest income34,481 31,923 100,846 95,391 
Provision for credit losses987 730 12,160 2,647 
Net interest income after provision for credit losses33,494 31,193 88,686 92,744 
Non-Interest Income    
Mortgage banking income, net4,664 2,668 12,889 5,662 
Debit card income2,627 2,432 7,159 6,723 
Service charges on deposit accounts1,606 1,970 4,955 6,202 
Income from fiduciary services1,504 1,444 4,609 4,381 
Brokerage and insurance commissions755 625 2,034 1,942 
Bank-owned life insurance615 613 1,918 1,810 
Customer loan swap fees51 109 222 919 
Net gain on sale of securities28 
Other income874 877 2,373 2,498 
Total non-interest income12,696 10,739 36,159 30,165 
Non-Interest Expense    
Salaries and employee benefits13,739 13,604 41,693 40,043 
Furniture, equipment and data processing3,076 2,708 8,576 8,111 
Net occupancy costs1,785 1,710 5,785 5,263 
Consulting and professional fees913 892 2,877 2,679 
Debit card expense972 960 2,784 2,666 
Regulatory assessments510 182 971 1,091 
Amortization of core deposit intangible assets170 177 511 529 
Other real estate owned and collection costs, net71 251 270 353 
Other expenses3,985 3,264 9,824 9,754 
Total non-interest expense25,221 23,748 73,291 70,489 
Income before income tax expense20,969 18,184 51,554 52,420 
Income Tax Expense4,194 3,696 10,346 10,455 
Net Income$16,775 $14,488 $41,208 $41,965 
Per Share Data    
Basic earnings per share$1.12 $0.94 $2.74 $2.70 
Diluted earnings per share$1.11 $0.94 $2.73 $2.70 
Weighted average number of common shares outstanding14,961,465 15,339,093 15,008,004 15,482,765 
Diluted weighted average number of common shares outstanding15,001,047 15,381,928 15,044,427 15,522,501 
Cash dividends declared per share$0.33 $0.30 $0.99 $0.90 






The accompanying notes are an integral part of these consolidated financial statements.  
4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Net Income$16,775 $14,488 $41,208 $41,965 
Other comprehensive income: 
Net change in unrealized gain on available-for-sale securities, net of tax(586)3,572 25,474 25,310 
Net change in unrealized loss on cash flow hedging derivatives, net of tax672 

(41)

(30)

(1,918)
Net gain on postretirement plans, net of tax133 49 399 145 
Other comprehensive income219 3,580 25,843 23,537 
Comprehensive Income$16,994 $18,068 $67,051 $65,502 
 











































The accompanying notes are an integral part of these consolidated financial statements.
5


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended
 Common StockRetained
Earnings
Accumulated
Other Comprehensive
Income (Loss)
Total Shareholders’
Equity
(In thousands, except number of shares and per share data)Shares
Outstanding
Amount
Balance at June 30, 201915,457,480 $151,801 $320,421 $(4,463)$467,759 
Net income— — 14,488 — 14,488 
Other comprehensive income, net of tax— — — 3,580 3,580 
Stock-based compensation expense— 429 — — 429 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings4,858 51 — — 51 
Common stock repurchased(237,435)(10,066)— — (10,066)
Cash dividends declared ($0.30 per share)— — (4,569)— (4,569)
Balance at September 30, 201915,224,903 $142,215 $330,340 $(883)$471,672 
Balance at June 30, 202014,963,041 $131,981 $355,130 $19,356 $506,467 
Net income— — 16,775 — 16,775 
Other comprehensive income, net of tax— — — 219 219 
Stock-based compensation expense— 422 — — 422 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings2,218 (13)— — (13)
Common stock repurchased(47,915)(1,402)— — (1,402)
Cash dividends declared ($0.33 per share)— — (4,946)— (4,946)
Balance at September 30, 202014,917,344 $130,988 $366,959 $19,575 $517,522 

Nine Months Ended
 Common StockRetained
Earnings
Accumulated Other Comprehensive Income (Loss)Total Shareholders’
Equity
(In thousands, except number of shares and per share data)Shares
Outstanding
Amount
Balance at December 31, 201815,591,914 $158,215 $302,030 $(24,420)$435,825 
Cumulative-effect adjustment upon adoption of ASU 2016-02(1)
— — 254 — 254 
Net income— — 41,965 — 41,965 
Other comprehensive income, net of tax— — — 23,537 23,537 
Stock-based compensation expense— 1,364 — — 1,364 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings37,202 (190)— — (190)
Common stock repurchased(404,213)(17,174)— — (17,174)
Cash dividends declared ($0.90 per share)— — (13,909)— (13,909)
Balance at September 30, 201915,224,903 $142,215 $330,340 $(883)$471,672 
Balance at December 31, 201915,144,719 $139,103 $340,580 $(6,268)$473,415 
Net income— — 41,208 — 41,208 
Other comprehensive income, net of tax— — — 25,843 25,843 
Stock-based compensation expense— 1,373 — — 1,373 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings37,571 (113)— — (113)
Common stock repurchased(264,946)(9,375)— — (9,375)
Cash dividends declared ($0.99 per share)— — (14,829)— (14,829)
Balance at September 30, 202014,917,344 $130,988 $366,959 $19,575 $517,522 
(1)    Effective January 1, 2019, the Company adopted ASU 2016-02, Leases, on a modified-retrospective basis.








The accompanying notes are an integral part of these consolidated financial statements.
6


CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
(In thousands)20202019
Operating Activities  
Net Income$41,208 $41,965 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:  
Originations of mortgage loans held for sale(475,131)(176,782)
Proceeds from the sale of mortgage loans460,130 168,394 
Gain on sale of mortgage loans, net of origination costs(10,385)(3,928)
Provision for credit losses12,160 2,647 
Depreciation and amortization expense2,850 2,889 
Investment securities amortization and accretion, net3,115 2,148 
Stock-based compensation expense1,373 1,364 
Amortization of core deposit intangible assets511 529 
Purchase accounting accretion, net(924)(1,180)
Net increase in derivative collateral posted(30,250)(26,630)
Increase in other assets(10,088)(1,799)
Decrease in other liabilities(501)(6,767)
Net cash (used in) provided by operating activities(5,932)2,850 
Investing Activities  
Proceeds from sales and maturities of available-for-sale securities181,489 247,991 
Purchase of available-for-sale securities(341,100)(220,696)
Net increase in loans(180,174)(85,817)
Purchase of Federal Home Loan Bank stock(9,231)(4,340)
Proceeds from sale of Federal Home Loan Bank stock9,535 7,463 
Purchase of premises and equipment(2,591)(2,378)
Recoveries of previously charged-off loans352 228 
Proceeds from the sale of other real estate owned110 554 
Net cash used in investing activities(341,610)(56,995)
Financing Activities 
Net increase in deposits686,314 153,539 
Net (repayments of) proceeds from borrowings less than 90 days(58,754)2,586 
Proceeds from Federal Home Loan Bank long-term advances25,000 
Repayments of Federal Home Loan Bank long-term advances(10,000)
Common stock repurchases(9,140)(17,174)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings(113)(190)
Cash dividends paid on common stock(14,907)(14,004)
Finance lease payments(105)(79)
Net cash provided by financing activities618,295 124,678 
Net increase in cash, cash equivalents and restricted cash270,753 70,533 
Cash, cash equivalents, and restricted cash at beginning of period75,636 66,999 
Cash, cash equivalents and restricted cash at end of period$346,389 $137,532 
Supplemental information  
Interest paid$17,778 $31,402 
Income taxes paid10,689 9,785 
Transfer from loans and premises to other real estate owned24 543 
Unsettled common stock repurchase235 








The accompanying notes are an integral part of these consolidated financial statements.
7


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated interim financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the "Company") as of September 30, 2020 and December 31, 2019, the consolidated statements of income for the three and nine months ended September 30, 2020 and 2019, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2020 and 2019, the consolidated statements of changes in shareholders' equity for the three and nine months ended September 30, 2020 and 2019, and the consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019. The consolidated financial statements include the accounts of the Company and Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company (which includes the consolidated accounts of Healthcare Professional Funding Corporation ("HPFC"), Property A, Inc. and Property P, Inc.). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Bank in a fiduciary capacity, through Camden National Wealth Management, a division of the Bank, are not assets of the Company and, therefore, are not included in the consolidated statements of condition. The Company also owns 100% of the common stock of Camden Capital Trust A and Union Bankshares Capital Trust I. These entities are unconsolidated subsidiaries of the Company. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not impact net income or shareholders' equity as previously reported. Net income reported for the three and nine months ended September 30, 2020, is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

8


The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.
AFS:Available-for-saleHTM:Held-to-maturity
ALCO:Asset/Liability CommitteeIRS:Internal Revenue Service
ALL:Allowance for loan lossesLIBOR:London Interbank Offered Rate
AOCI:Accumulated other comprehensive income (loss)LTIP:Long-Term Performance Share Plan
ASC:Accounting Standards CodificationManagement ALCO:Management Asset/Liability Committee
ASU:Accounting Standards UpdateMBS:Mortgage-backed security
Bank:Camden National Bank, a wholly-owned subsidiary of Camden National CorporationMSPP:Management Stock Purchase Plan
BOLI:Bank-owned life insuranceN/A:Not applicable
Board ALCO:Board of Directors' Asset/Liability CommitteeN.M.:Not meaningful
CCTA:Camden Capital Trust A, an unconsolidated entity formed by Camden National CorporationOCC:Office of the Comptroller of the Currency
CDs:Certificate of depositsOCI:Other comprehensive income (loss)
Company:Camden National CorporationOREO:Other real estate owned
CMO:Collateralized mortgage obligationOTTI:Other-than-temporary impairment
DCRP:Defined Contribution Retirement PlanSBA:U.S. Small Business Administration
EPS:Earnings per shareSBA PPPU.S. Small Business Administration Paycheck Protection Program
FASB:Financial Accounting Standards BoardSERP:Supplemental executive retirement plans
FDIC:Federal Deposit Insurance CorporationTax Act:Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017
FHLB:Federal Home Loan BankTDR:Troubled-debt restructured loan
FHLBB:Federal Home Loan Bank of BostonUBCT:Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
FRB:Federal Reserve System Board of GovernorsU.S.:United States of America
FRBB:Federal Reserve Bank of Boston2003 Plan:2003 Stock Option and Incentive Plan
GAAP:Generally accepted accounting principles in the United States2012 Plan:2012 Equity and Incentive Plan
HPFC:Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank

9


NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2020

The Company adopted and updated its accounting policy for the following accounting standard(s) that became effective January 1, 2020, and were applied to the Company's interim consolidated financial statements for the three and nine months ended September 30, 2020:

Goodwill. The Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), effective January 1, 2020. In accordance with ASU 2017-04, the Company will recognize an impairment of goodwill to the extent the carrying value of a reporting unit exceeds its fair value ("Step 1"). ASU 2017-04 eliminated the need to calculate the implied fair value of goodwill for a reporting unit and recognize an impairment to the extent the carrying value exceeded its implied fair value ("Step 2"). The Company adopted ASU 2017-04 prospectively. Upon adoption, ASU 2017-04 did not have a material impact on the Company's consolidated financial statements. Under the new accounting guidance the Company is more likely to record an impairment of goodwill, as there are now less requirements.

In the second quarter of 2020, the Company determined that the COVID-19 pandemic and its impact on global, national and local markets and economy, as well as its impact on the Company's year-to-date consolidated financial results, was a "triggering event" in accordance with ASC 350-20, Goodwill, and an interim goodwill impairment assessment was completed. A quantitative assessment was performed using various valuation methodologies as of May 31, 2020. Through its assessment, the Company concluded that the indicated fair value of the reporting unit exceeded its book value, and, thus goodwill was not impaired as of May 31, 2020. As of June and September 30, 2020, the Company considered whether there were any new events or information that would materially change its quantitative analysis performed as of May 31, 2020, and there were none.

Accounting Standards Issued

The following are recently issued accounting pronouncements that have yet to be adopted by the Company:

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), updated by ASU No. 2018-19 - Financial Instruments - Credit Losses (Topic 326): Codification improvements to Topic 326 ("ASU 2018-19"), and ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"). The FASB issued ASU 2016-13, commonly referred to as “CECL,” to require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

On March 27, 2020, the Coronavirus, Relief, and Economic Security Act ("CARES Act") was signed into law in response to the COVID-19 pandemic. Under Section 4014 of the CARES Act, the Company was permitted to delay its compliance with CECL until the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic that the President of the United States declared on March 15, 2020 ("National Emergency") terminates, or (2) December 31, 2020. The Company opted to delay its compliance with CECL so it could devote its resources to serve its customers impacted by the pandemic and support the roll-out of the various federal relief programs introduced by the CARES Act. As the National Emergency was not terminated prior to September 30, 2020, the Company will adopt CECL on December 31, 2020, using a modified-retrospective approach as of January 1, 2020 which is the original effective date of the standard for the Company, and will record a cumulative-effect adjustment to retained earnings.

The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and HTM debt securities. CECL also applies to certain off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees and other similar investments. In addition, ASU 2016-13 made changes to the accounting for AFS debt securities, and a company will no longer immediately write-down a security for any impairment deemed to be a credit loss. Instead, a company will be required to present credit losses on AFS debt securities as an allowance on investments if it does not intend to sell the impaired security or it is not more-likely-than-not required to sell the impaired security before recovery of its amortized cost basis.

The Company assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation, and to identify new internal controls over enhanced accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, as well as assessing models for default and loss estimates. The Company engaged an independent third party to review its CECL model, methodologies and certain key assumptions, internal CECL policy, and internal controls framework.
10



The Company has completed the development of its process for estimation of the allowance for loan losses and off-balance sheet exposures in accordance with CECL. To estimate the allowance for loan losses, the Company will primarily utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and will include the impact of forecasted economic conditions. To estimate the off-balance sheet credit exposures, which are primarily unfunded loan commitments, the Company will apply certain assumptions, including, but not limited to, a funding assumption and expected loss rate.

The Company estimates that as of September 30, 2020, assuming adoption of CECL as of January 1, 2020, its ACL, which includes the allowance for loan losses and off-balance sheet exposures, would have been $39.0 million to $43.0 million, or 1.19% to 1.31% of total loans at September 30, 2020. The Company estimates that as of December 31, 2019, its ACL, assuming adoption of CECL, would have been $27.0 million to $31.0 million, or 0.87% to 1.00% of total loans at December 31, 2019. Based on these ACL estimates, the Company's provision for credit losses under CECL for the nine months ended September 30, 2020, would range from $9.0 million to $17.0 million, as compared to a provision for credit losses recorded under the incurred methodology of $12.2 million for the nine months ended September 30, 2020.

In March 2020, the regulatory banking agencies issued an interim final rule that allows banking institutions that implement CECL during 2020 to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. As an alternative, banking institutions may elect to forego the provided relief under the interim final rule, and may use the regulatory capital transition rule issued by the regulatory banking agencies in February 2019 that provided a three-year phase in option, effective upon adoption of CECL. The Company anticipates that it will elect to delay the capital impact of CECL in accordance with the interim final rule issued in March 2020 upon adoption of CECL.

ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform ("ASU 2020-04"). The FASB issued ASU 2020-04 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that are affected by reference rate reform, if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company, which has not yet adopted the amendments in this update, has assembled a cross-functional project team that is currently reviewing contracts and existing processes in order to assess the risks and potential impact to the Company of the transition away from LIBOR to a new reference rate.

11


NOTE 3 – INVESTMENTS

AFS and HTM Investments

The following table summarizes the amortized cost and estimated fair values of AFS and HTM investments, as of the dates indicated: 
(In thousands)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
September 30, 2020    
AFS Investments (carried at fair value):
Obligations of states and political subdivisions$120,636 $7,055 $(78)$127,613 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises549,930 19,036 (864)568,102 
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises389,382 11,313 (129)400,566 
Subordinated corporate bonds10,531 313 (56)10,788 
Total AFS investments$1,070,479 $37,717 $(1,127)$1,107,069 
HTM Investments (carried at amortized cost):
Obligations of states and political subdivisions$1,298 $105 $$1,403 
Total HTM investments$1,298 $105 $$1,403 
December 31, 2019    
AFS Investments (carried at fair value):
Obligations of states and political subdivisions$115,632 $2,779 $(328)$118,083 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises462,593 3,398 (2,605)463,386 
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises325,200 3,183 (2,478)325,905 
Subordinated corporate bonds10,553 191 10,744 
Total AFS investments$913,978 $9,551 $(5,411)$918,118 
HTM Investments (carried at amortized cost):
Obligations of states and political subdivisions$1,302 $57 $$1,359 
Total HTM investments$1,302 $57 $$1,359 

The net unrealized gain on AFS investments reported within AOCI at September 30, 2020, was $28.7 million, net of a deferred tax liability of $7.9 million. The net unrealized gain on AFS investments reported within AOCI at December 31, 2019, was $3.3 million, net of a deferred tax liability of $890,000.

Impaired AFS and HTM Investments:
Quarterly, management reviews the Company’s AFS and HTM investments to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, and recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.
 
12


The following table presents the estimated fair values and gross unrealized losses on AFS and HTM investments that were in a continuous loss position that was considered temporary, by length of time that an individual security in each category has been in a continuous loss position as of the dates indicated:  
 Less Than 12 Months12 Months or MoreTotal
(In thousands, except number of holdings)Number of
Holdings
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
September 30, 2020      
AFS Investments:
Obligations of states and political subdivisions$2,441 $(78)$$2,441 $(78)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises14 59,434 (858)1,004 (6)$60,438 (864)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises33,046 (129)33,046 (129)
Subordinated corporate bonds2,944 (56)$2,944 (56)
Total AFS investments26 $97,865 $(1,121)$1,004 $(6)$98,869 $(1,127)
December 31, 2019      
AFS Investments:
Obligations of states and political subdivisions11 $30,459 $(328)$$$30,459 $(328)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises59 162,964 (1,850)63,633 (755)226,597 (2,605)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises35 66,549 (733)68,614 (1,745)135,163 (2,478)
Total AFS investments105 $259,972 $(2,911)$132,247 $(2,500)$392,219 $(5,411)

At September 30, 2020 and December 31, 2019, unrealized losses within the AFS and HTM investment portfolios were reflective of current interest rates in excess of the yield received on debt investments, and were not indicative of an overall change in credit quality or other factors. At September 30, 2020 and December 31, 2019, gross unrealized losses on the Company's AFS and HTM investments were 1% of their respective fair values.

At September 30, 2020, the Company had the intent and ability to retain its debt investments in an unrealized loss position until the decline in value has recovered.

13


Sale of AFS Investments:
The following table details the Company's sales of AFS investments for the periods indicated below:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Proceeds from sales of investments(1)
$$97,042 $$142,868 
Gross realized gains1,015 1,386 
Gross realized losses(1,014)(1,358)
(1) The Company had 0t previously recorded any OTTI on these investments sold.

AFS and HTM Investments Pledged:
At September 30, 2020 and December 31, 2019, AFS and HTM investments with an amortized cost of $597.7 million and $709.0 million and estimated fair values of $622.6 million and $712.4 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities:
The amortized cost and estimated fair values of the Company's AFS and HTM investments by contractual maturity at September 30, 2020, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
(In thousands)Amortized
Cost
Fair
Value
AFS Investments
Due in one year or less$4,415 $4,448 
Due after one year through five years64,310 66,551 
Due after five years through ten years229,933 244,118 
Due after ten years771,821 791,952 
Total$1,070,479 $1,107,069 
HTM Investments
Due in one year or less$$
Due after one year through five years510 547 
Due after five years through ten years788 856 
Due after ten years
Total$1,298 $1,403 
 

14


Other Investments

The following table summarizes the cost and estimated fair values of the Company's investment in equity securities, FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated: 
(In thousands)CostUnrealized
Gains
Unrealized
Losses
Fair Value /
Carrying Value
September 30, 2020    
Equity securities - bank stock (carried at fair value)$544 $1,130 $$1,674 
FHLBB (carried at cost)6,297 — — 6,297 
FRB (carried at cost)5,374 — — 5,374 
Total other investments$12,215 $1,130 $$13,345 
December 31, 2019    
Equity securities - bank stock (carried at fair value)$544 $1,130 $$1,674 
FHLBB (carried at cost)6,601 — — 6,601 
FRB (carried at cost)5,374 — — 5,374 
Total other investments$12,519 $1,130 $$13,649 

For the three months ended September 30, 2020 and 2019, the Company recognized an unrealized loss of $0 and $22,000, respectively, due to the change in fair value of its bank stock equity securities, which was presented within other income on the consolidated statements of income. For the nine months ended September 30, 2020 and 2019, the Company recognized an unrealized gain of $0 and $62,000, respectively, due to the change in fair value of its bank stock equity securities, which was presented within other income on the consolidated statements of income.

The Company did not record any OTTI on its FHLBB and FRB stock for the three and nine months ended September 30, 2020 and 2019.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:
(In thousands)September 30,
2020
December 31,
2019
Commercial Loans:
Commercial real estate$1,333,733 $1,243,397 
Commercial360,629 421,108 
SBA PPP223,838 
HPFC14,919 21,593 
Total commercial loans1,933,119 1,686,098 
Retail Loans:
Residential real estate1,044,103 1,070,374 
Home equity274,743 312,779 
Consumer22,877 25,772 
Total retail loans1,341,723 1,408,925 
Total loans$3,274,842 $3,095,023 

15


The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination costs for the dates indicated:
(In thousands)September 30,
2020
December 31,
2019
Net unamortized fair value mark discount on acquired loans$(1,667)$(2,593)
Net unamortized loan (fees) origination costs(1)
(2,439)3,111 
Total$(4,106)$518 
(1)    The change in net unamortized loan (fees) origination costs from December 31, 2019 to September 30, 2020, was primarily driven by origination fees capitalized upon origination of SBA PPP loans during the second and third quarters of 2020. As of September 30, 2020, unamortized loan fees on originated SBA PPP loans were $5.4 million.

The Company's lending activities are primarily conducted in Maine, but also include loan production offices in Massachusetts and New Hampshire. The Company originates single- and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.

The HPFC loan portfolio is an acquired loan portfolio. It consists of niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians, across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. In 2016, the Company closed HPFC's operations and is no longer originating HPFC loans.

The Company participated in SBA PPP funding to qualifying businesses in the second and third quarter of 2020. Through September 30, 2020, the Company originated 3,034 SBA PPP loans totaling $244.8 million to qualifying businesses across our markets in need of financial support due to the COVID-19 pandemic. This program provided qualifying businesses a specialized low-interest loan by the U.S. Treasury Department and is administered by the SBA. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs, as well as certain other costs up to pre-established limits.

In the normal course of business, the Bank makes loans to certain officers, directors and their associated companies, under terms that are consistent with the Company's lending policies and regulatory requirements and that do not involve more than the normal risk of collectability or present other unfavorable features. At September 30, 2020 and December 31, 2019, outstanding loans to certain officers, directors and their associated companies was less than 5% of the Company's shareholders' equity.

The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions, including consideration of the effect and impact of the COVID-19 pandemic; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs. The Company has accounted for the estimated impact of the COVID-19 pandemic on its loan portfolio as of September 30, 2020 through adjustments to its economic qualitative factor ("Q-factor"), based on available information, as the Company has not yet experienced any significant COVID-19 credit deterioration through September 30, 2020.

As discussed in Note 2, the Company did not adopt ASU 2016-04, commonly referred to as "CECL", during the nine months ended September 30, 2020. The Company's ALL, as presented, has been determined in accordance with its policies and procedures described within its Annual Report on Form 10-K for the year ended December 31, 2019.

As of and for the three and nine months ended September 30, 2020, the Company has disclosed SBA PPP loans as a standalone loan segment, separate from the Company's commercial loan segment, as the credit risk profiles differ. Refer to discussion of each loan segment's risk characteristics below for further details. There were no other significant changes to the Company's ALL methodology during the three or nine months ended September 30, 2020.

16


The Board of Directors monitors credit risk through: (i) the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology under the incurred loss accounting methodology for March 31, 2020 and periods prior to; and (ii) the Audit Committee, which, effective June 30, 2020, has approval authority and oversight responsibility for ALL adequacy and methodology. The change in governance structure for the ALL methodology was done to align with the governance structure that will exist upon implementation of CECL on December 31, 2020, effective retrospectively as of January 1, 2020.

Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan rating system. Effective for annual and interim periods beginning January 1, 2020, the adequacy of the ALL is overseen by the Management Provision Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Risk, Compliance, and Commercial and Retail Banking. The Management Provision Committee is further supported by other management-level committees to ensure the adequacy of the ALL under the incurred model, as well as the CECL methodology upon adoption. The Management Provision Committee supports the oversight efforts of the director-level committees discussed in the paragraph above and the Board of Directors. The Company's practice is to manage the portfolio proactively such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.

For purposes of determining the ALL, the Company disaggregated its loans into portfolio segments, which include commercial real estate, commercial, SBA PPP, HPFC, residential real estate, home equity and consumer. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include the following:

Commercial Real Estate. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.

SBA PPP. SBA PPP loans are unsecured, fully-guaranteed commercial loans backed by the SBA, issued to qualifying small businesses as part of federal stimulus issued in response to the COVID-19 pandemic. Loans made under the PPP have terms of two or five years and are to be used by the borrower to offset certain payroll and other operating costs, such as rent and utilities. The loan and accrued interest, or a portion thereof, is eligible for forgiveness by the SBA should the qualifying small business meet certain conditions. PPP loans were originated under the guidance of the SBA, which has been subject to change.
HPFC. Prior to the Company's closing of HPFC's operations in 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral consists of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower.

Residential Real Estate. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residential properties, including for investment purposes.

17


Home Equity. Home equity loans and lines of credit are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer. Consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.












































18


The following tables present the activity in the ALL and select loan information by portfolio segment for the periods indicated:
(In thousands)Commercial
Real Estate
CommercialSBA PPPHPFCResidential
Real Estate
Home
Equity
ConsumerTotal
At or For The Three and Nine Months Ended September 30, 2020
ALL for the three months ended:      
Beginning balance$18,386 $4,679 $113 $170 $8,603 $3,084 $504 $35,539 
Loans charged off(33)(184)(25)(10)(55)(307)
Recoveries139 36 182 
Provision (credit)(1)
1,173 (246)(21)124 (51)19 1,000 
Ending balance$19,529 $4,388 $115 $149 $8,706 $3,023 $504 $36,414 
ALL for the nine months ended:
Beginning balance$12,414 $3,769 $$216 $5,842 $2,423 $507 $25,171 
Loans charged off(104)(857)(121)(61)(138)(1,281)
Recoveries10 255 27 56 352 
Provision (credit)(1)
7,209 1,221 115 (67)2,958 657 79 12,172 
Ending balance$19,529 $4,388 $115 $149 $8,706 $3,023 $504 $36,414 
ALL balance attributable to loans:      
Individually evaluated for impairment$36 $$$$371 $87 $$494 
Collectively evaluated for impairment19,493 4,388 115 149 8,335 2,936 504 35,920 
Total ending ALL$19,529 $4,388 $115 $149 $8,706 $3,023 $504 $36,414 
Loans:      
Individually evaluated for impairment$460 $171 $$$3,128 $365 $$4,124 
Collectively evaluated for impairment1,333,273 360,458 223,838 14,919 1,040,975 274,378 22,877 3,270,718 
Total ending loans balance$1,333,733 $360,629 $223,838 $14,919 $1,044,103 $274,743 $22,877 $3,274,842 
At or For The Three and Nine Months Ended September 30, 2019
ALL for the three months ended:
Beginning balance$12,152 $4,107 $$280 $6,249 $2,992 $383 $26,163 
Loans charged off(92)(183)(11)(411)(348)(258)(1,303)
Recoveries34 56 95 
Provision (credit)(1)
(18)124 (32)382 132 145 733 
Ending balance$12,076 $4,104 $$237 $6,222 $2,776 $273 $25,688 
ALL for the nine months ended:
Beginning balance$11,654 $3,620 $$337 $6,071 $2,796 $234 $24,712 
Loans charged off(157)(636)(11)(436)(392)(278)(1,910)
Recoveries41 167 14 228 
Provision (credit)(1)
538 953 (89)581 372 303 2,658 
Ending balance$12,076 $4,104 $$237 $6,222 $2,776 $273 $25,688 
ALL balance attributable to loans:      
Individually evaluated for impairment$29 $303 $$$337 $69 $$738 
Collectively evaluated for impairment12,047 3,801 237 5,885 2,707 273 24,950 
Total ending ALL$12,076 $4,104 $$237 $6,222 $2,776 $273 $25,688 
Loans:      
Individually evaluated for impairment$406 $646 $$$3,880 $585 $$5,517 
Collectively evaluated for impairment1,255,113 421,108 23,712 1,058,018 322,979 24,187 3,105,117 
Total ending loans balance$1,255,519 $421,754 $$23,712 $1,061,898 $323,564 $24,187 $3,110,634 
19


(In thousands)Commercial
Real Estate
CommercialSBA PPPHPFCResidential
Real Estate
Home
Equity
ConsumerTotal
At or For The Year Ended December 31, 2019
ALL:      
Beginning balance$11,654 $3,620 $— $337 $6,071 $2,796 $234 $24,712 
Loans charged off(300)(1,167)— (71)(462)(412)(301)(2,713)
Recoveries49 225 — — 16 19 310 
Provision (credit)(1)
1,011 1,091 — (50)217 38 555 2,862 
Ending balance$12,414 $3,769 $— $216 $5,842 $2,423 $507 $25,171 
ALL balance attributable to loans:
Individually evaluated for impairment$30 $— $— $— $364 $69 $— $463 
Collectively evaluated for impairment12,384 3,769 — 216 5,478 2,354 507 24,708 
Total ending ALL$12,414 $3,769 $— $216 $5,842 $2,423 $507 $25,171 
Loans:            
Individually evaluated for impairment$402 $319 $— $— $3,384 $373 $— $4,478 
Collectively evaluated for impairment1,242,995 420,789 — 21,593 1,066,990 312,406 25,772 3,090,545 
Total ending loans balance$1,243,397 $421,108 $— $21,593 $1,070,374 $312,779 $25,772 $3,095,023 
(1)     The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. At September 30, 2020 and 2019, and December 31, 2019, the reserve for unfunded commitments was $9,000, $11,000 and $21,000, respectively.

The following reconciles the provision for loan losses to the provision for credit losses as presented on the consolidated statements of income for the periods indicated:
Three Months Ended
September 30,
Nine Months Ended
September 30,
Year Ended December 31,
2019
(In thousands)2020201920202019
Provision for loan losses$1,000 $733 $12,172 $2,658 $2,862 
Change in reserve for unfunded commitments(13)(3)(12)(11)(1)
Provision for credit losses$987 $730 $12,160 $2,647 $2,861 

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored. As of September 30, 2020, the Company's total exposure to the lessors of nonresidential buildings' industry was 13% of total loans and 32% of total commercial real estate loans. There were 0 other industry exposures exceeding 10% of the Company's total loan portfolio as of September 30, 2020.

COVID-19 Loan Deferral Program:
In response to the COVID-19 pandemic, the Company worked with businesses and consumers to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. For loans temporarily modified due to the COVID-19 pandemic, under the CARES Act and regulatory guidance, the Company may apply the following accounting treatment in this order:
1.The Company may account for a loan modification in accordance with Section 4013 of the CARES Act if the loan modification (i) meets the criteria set forth in Section 4013 of the CARES Act and (ii) the Company elects to apply Section 4013 of the CARES Act. Section 4013 of the CARES Act suspended TDR designation for loan modifications related to the COVID-19 pandemic. In order for the loan modification to qualify under Section 4013 of the CARES Act, the loan must not have been more than 30 days past due as of December 31, 2019. This guidance is applicable for loan modifications beginning on March 1, 2020 and ending on the earlier of (i) December 31, 2020, or (ii) the date that is 60 days after the date the national emergency concerning the COVID-19 pandemic declared by the President on March 13, 2020 under the National Emergencies Act terminates.
20


2.Should a loan modification (i) not meet the criteria set forth in Section 4013 of the CARES Act or (ii) the Company elects to not apply Section 4013 of the CARES Act, but the loan modification (a) meets the criteria provided in the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)," issued by the banking agencies on April 7, 2020, and (b) the Company elects to apply this guidance, then the Company may account for the loan modification in accordance with the interagency guidance. Under this guidance, if the loan was no more than 30 days past due at the time the loan modification program was implemented, the modification was short-term in duration (generally, less than six months), and the modification was related to the COVID-19 pandemic, then it may be presumed that the borrower is not experiencing financial difficulty, and, therefore, that the modification does not qualify as a TDR.
3.Should a loan modification (i) not meet the criteria set forth in Section 4013 of the CARES Act or the interagency guidance described above, or (ii) the Company elects not to apply the guidance, then the Company would assess the loan modification under its existing accounting policies (GAAP).

All loans granted temporary payment relief by the Company complied with the terms of the CARES Act or bank regulator guidance, and, thus, were not individually assessed, designated or accounted for as TDRs.

For the dates indicated, the Company's loans impacted by the COVID-19 pandemic and operating under temporary short-term payment deferral arrangements for a period of 180 days or less were as follows:
September 30,
2020
June 30,
2020
(In thousands, except number of units)UnitsRecorded Investment% of
Total Loans
UnitsRecorded Investment% of
Total Loans
Commercial210 $105,879 3.2 %1,023 $415,606 12.5 %
Retail502 75,337 2.3 %740 131,116 3.9 %
Total712 $181,216 5.5 %1,763 $546,722 16.4 %

To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for loans in commercial, commercial real estate, residential real estate, and HPFC portfolio segments are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans.

The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:

Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.
Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
21


Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

Loans that were granted temporary debt relief due to the COVID-19 pandemic were not automatically downgraded into lower credit risk ratings. The Company will continue to actively monitor these loans for indications of deterioration as the deferral period matures, which could result in future downgrades.

The Company periodically reassesses asset quality indicators to reflect appropriately the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.


The following summarizes credit risk exposure indicators by portfolio segment as of the following dates:
(In thousands)Commercial
Real Estate
CommercialSBA PPPHPFCResidential 
Real Estate
Home
Equity
ConsumerTotal
September 30, 2020
Pass (Grades 1-6)$1,273,616 $354,160 $223,838 $14,100 $1,037,649 $— $— $2,903,363 
Performing— — — — — 272,246 22,873 295,119 
Special Mention (Grade 7)23,899 2,762 — — 405 — — 27,066 
Substandard (Grade 8)36,218 3,707 — 819 6,049 — — 46,793 
Non-performing— — — — — 2,497 2,501 
Total$1,333,733 $360,629 $223,838 $14,919 $1,044,103 $274,743 $22,877 $3,274,842 
December 31, 2019     
Pass (Grades 1-6)$1,196,683 $415,870 $— $20,667 $1,062,825 $— $— $2,696,045 
Performing— — — — — 310,653 25,748 336,401 
Special Mention (Grade 7)31,753 2,544 — 89 473 — — 34,859 
Substandard (Grade 8)14,961 2,694 — 837 7,076 — — 25,568 
Non-performing— — — — — 2,126 24 2,150 
Total$1,243,397 $421,108 $— $21,593 $1,070,374 $312,779 $25,772 $3,095,023 

In the second quarter of 2020, the Company downgraded one loan from special mention (Grade 7) to substandard (Grade 8), which drove the increase in substandard (Grade 8) loans for the nine months ended September 30, 2020. The loan was downgraded as a result of the Company's assessment of the borrower's 2019 financial performance and was not directly related to the impact of the COVID-19 pandemic on the borrower.

The Company closely monitors the performance of its loan portfolio. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan may return to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt.

All loans that were granted temporary payment relief due to the COVID-19 pandemic were current with payments in accordance with the terms of the CARES Act or bank regulatory guidance at the time of initial relief. At September 30, 2020, the payment status for loans that continued to operate under a payment deferral arrangement were reported based on payment status at the time the deferral was granted to the borrower.

22


The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates:
(In thousands)30-59 Days
Past Due
60-89 Days
Past Due
90 Days or Greater
Past Due
Total
Past Due
CurrentTotal Loans
Outstanding
Loans > 90
Days Past
Due and
Accruing
Non-Accrual
Loans
September 30, 2020        
Commercial real estate$671 $1,490 $246 $2,407 $1,331,326 $1,333,733 $$565 
Commercial1,315 605 1,920 358,709 360,629 605 
SBA PPP223,838 223,838 
HPFC233 228 304 765 14,154 14,919 509 
Residential real estate1,036 775 3,369 5,180 1,038,923 1,044,103 4,017 
Home equity367 109 2,102 2,578 272,165 274,743 2,499 
Consumer48 56 108 22,769 22,877 
Total$3,670 $2,658 $6,630 $12,958 $3,261,884 $3,274,842 $$8,199 
December 31, 2019        
Commercial real estate$267 $1,720 $544 $2,531 $1,240,866 $1,243,397 $$1,122 
Commercial548 417 965 420,143 421,108 420 
SBA PPP
HPFC243 288 531 21,062 21,593 364 
Residential real estate2,297 627 2,598 5,522 1,064,852 1,070,374 4,096 
Home equity681 238 1,459 2,378 310,401 312,779 — 2,130 
Consumer108 31 23 162 25,610 25,772 24 
Total$3,901 $2,859 $5,329 $12,089 $3,082,934 $3,095,023 $$8,156 

Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms is estimated to have been $85,000 and $106,000 for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the interest income that is estimated to have been recognized if loans on non-accrual status had been current in accordance with their original terms was $251,000 and $330,000, respectively.

TDRs:
The Company takes a conservative approach with credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDRs consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs typically involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will remain a TDR until paid in full, or until the loan is again restructured at current market rates and no concessions are granted.

The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate, or if the loan is currently collateral-dependent, using the net realizable value, which was obtained through independent appraisals and internal evaluations. The following is a summary of TDRs, by portfolio segment, and the associated specific reserve included within the ALL for the dates indicated:
Number of ContractsRecorded InvestmentSpecific Reserve
(In thousands, except number of contracts)September 30,
2020
December 31,
2019
September 30,
2020
December 31,
2019
September 30,
2020
December 31,
2019
Residential real estate21 22 $2,670 $2,869 $371 $364 
Commercial real estate331 338 36 30 
Commercial107 123 
Consumer and home equity297 299 87 69 
Total26 27 $3,405 $3,629 $494 $463 

At September 30, 2020, the Company had performing and non-performing TDRs with a recorded investment balance of $3.0 million and $454,000, respectively. At December 31, 2019, the Company had performing and non-performing TDRs with a recorded investment balance of $3.0 million and $636,000, respectively.

23


There were 0 loan modifications that qualify as TDRs that occurred for the three and nine months ended September 30, 2020 and 2019.

For the three and nine months ended September 30, 2020 and 2019, 0 loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.











































24


Impaired Loans:
Impaired loans consist of non-accrual loans and TDRs that are individually evaluated for impairment in accordance with the Company's policy. The following is a summary of impaired loan balances and the associated allowance by portfolio segment as of and for the periods indicated:
For the
Three Months Ended
For the
Nine Months Ended
(In thousands)Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
September 30, 2020:
With an allowance recorded:     
Commercial real estate$126 $126 $36 $127 $$127 $
Commercial— — — — 
SBA PPP— — — — 
HPFC— — — — 
Residential real estate2,394 2,394 371 2,349 33 2,328 79 
Home equity316 316 87 317 — 318 — 
Consumer— — — — 
Ending balance2,836 2,836 494 2,793 35 2,773 85 
Without an allowance recorded:     
Commercial real estate334 548 334 304 
Commercial171 233 175 242 
SBA PPP— — — — 
HPFC— — — — 
Residential real estate734 858 791 909 
Home equity49 187 50 — 52 — 
Consumer— — — — 
Ending balance1,288 1,826 1,350 1,507 17 
Total impaired loans$4,124 $4,662 $494 $4,143 $41 $4,280 $102 
September 30, 2019:
With an allowance recorded:     
Commercial real estate$130 $130 $29 $130 $$130 $
Commercial442 442 303 301 — 365 — 
SBA PPP— — — — 
HPFC— — — — 
Residential real estate2,337 2,337 337 3,026 28 3,137 84 
Home equity318 318 69 658 — 573 — 
Consumer— — — — 
Ending Balance3,227 3,227 738 4,115 31 4,205 93 
Without an allowance recorded:     
Commercial real estate276 435 278 408 10 
Commercial204 267 214 218 
SBA PPP— — — — 
HPFC— — — — 
Residential real estate1,543 2,007 1,337 11 1,325 28 
Home equity267 705 131 — 130 — 
Consumer— — — — 
Ending Balance2,290 3,414 1,960 15 2,081 43 
Total impaired loans$5,517 $6,641 $738 $6,075 $46 $6,286 $136 
25


For the
Year Ended
(In thousands)Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2019:
With an allowance recorded:    
Commercial real estate$128 $128 $30 $130 $11 
Commercial292 — 
SBA PPP— 
HPFC— 
Residential real estate2,395 2,395 364 2,989 110 
Home equity318 318 69 522 — 
Consumer— 
Ending Balance2,841 2,841 463 3,933 121 
Without an allowance recorded:          
Commercial real estate274 433 — 381 13 
Commercial319 685 — 238 
SBA PPP— 
HPFC— — 
Residential real estate989 1,116 — 1,258 21 
Home equity55 192 — 115 — 
Consumer— — 
Ending Balance1,637 2,426 — 1,993 41 
Total impaired loans$4,478 $5,267 $463 $5,926 $162 

Loan Sales:
For the three months ended September 30, 2020 and 2019, the Company sold $182.7 million and $86.9 million, respectively, of fixed rate residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $4.3 million and $1.9 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company sold $449.7 million and $164.5 million, respectively, of fixed rate residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $10.4 million and $3.9 million.

At September 30, 2020 and December 31, 2019, the Company had certain residential mortgage loans with a principal balance of $37.3 million and $11.9 million, respectively, designated as held for sale. The Company has elected the fair value option of accounting for its loans held for sale, and at September 30, 2020 and December 31, 2019, recorded an unrealized gain (loss) of $634,000 and ($61,000), respectively. For the three months ended September 30, 2020 and 2019, the Company recorded an unrealized loss on loans held for sale recorded within mortgage banking income, net, on the Company's consolidated statements of income of $47,000 and $205,000, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded an unrealized gain (loss) on loans held for sale recorded within mortgage banking income, net, on the Company's consolidated statements of income of $695,000 and ($269,000), respectively.

The Company has forward delivery commitments with a secondary market investor on each of its loans held for sale at September 30, 2020 and December 31, 2019. Refer to Note 8 for further discussion of the Company's forward delivery commitments.

In-Process Foreclosure Proceedings:
At September 30, 2020 and December 31, 2019, the Company had $1.7 million and $1.3 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process. Due to the COVID-19 pandemic, the Company has been abiding by state issued mandates requiring a temporary moratorium on foreclosures. The Company will continue to work these consumer mortgage loans through the foreclosure process once the moratorium is lifted, which typically takes 18 to 24 months.

26


FHLB Advances:
FHLB advances are those borrowings from the FHLBB greater than 90 days. FHLB advances are collateralized by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one- to four-family properties, certain commercial real estate loans, certain pledged investment securities and other qualified assets. The carrying value of residential real estate and commercial loans pledged as collateral was $1.3 billion and $1.4 billion at September 30, 2020 and December 31, 2019, respectively.

Refer to Notes 3 and 6 of the consolidated financial statements for discussion of securities pledged as collateral.

NOTE 5 – BORROWINGS

The following summarizes the Company's short-term and long-term borrowed funds as presented on the consolidated statements of condition for the dates indicated:
(In thousands)September 30,
2020
December 31,
2019
Short-Term Borrowings:    
Customer repurchase agreements$210,055 $237,984 
FHLBB borrowings25,000 
Overnight borrowings5,825 
Total short-term borrowings$210,055 $268,809 
Long-Term Borrowings:    
FHLBB borrowings$25,000 $10,000 
Total long-term borrowings$25,000 $10,000 

NOTE 6 – REPURCHASE AGREEMENTS

The Company can raise additional liquidity by entering into repurchase agreements at its discretion. In a security repurchase agreement transaction, the Company will generally sell a security, agreeing to repurchase either the same or a substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded within interest on borrowings on the consolidated statements of income. The securities underlying the agreements are delivered to counterparties as collateral for the repurchase obligations. Because the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transaction does not meet the criteria to be classified as a sale, and is therefore considered a secured borrowing transaction for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement, the Company is subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, the Company either deals with established firms when entering into these transactions or with customers whose agreements stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by the Company's safekeeping agents.

27


The table below sets forth information regarding the Company’s repurchase agreements accounted for as secured borrowings and types of collateral for the dates indicated:
(In thousands)September 30,
2020
December 31,
2019
Customer Repurchase Agreements(1)(2):
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises$79,813 $118,969 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises128,839 117,654 
Obligations of states and political subdivisions1,403 1,361 
Total$210,055 $237,984 
(1)    Presented within short-term borrowings on the consolidated statements of condition.
(2)    All customer repurchase agreements mature continuously or overnight for the dates indicated.

At September 30, 2020 and December 31, 2019, certain customers held CDs totaling $1.0 million, that were collateralized by CMO and MBS securities that were overnight repurchase agreements.

Certain counterparties monitor collateral, and may request additional collateral to be posted from time to time.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Commitments

In the normal course of business, the Company is a party to both on- and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated statements of condition.

The following is a summary of the Company's contractual off-balance sheet commitments for the dates indicated:
(In thousands)September 30,
2020
December 31,
2019
Commitments to extend credit$674,071 $734,649 
Standby letters of credit5,565 5,211 
Total$679,636 $739,860 

The Company’s commitments to extend credit from its lending activities do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These commitments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.

Standby letters of credit are conditional commitments issued to guarantee the performance of a borrower to a third party. In the event of nonperformance by the borrower, the Company would be required to fund the commitment and would be entitled to the underlying collateral, if applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate. The maximum potential future payments are limited to the contractual amount of the commitment.

Legal Contingencies

In the normal course of business, the Company and its subsidiaries are subject to pending and threatened litigation, claims investigations and legal and administrative cases and proceedings. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that, based on the information currently available, the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements.

28


Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. Assessments of litigation exposure are difficult because they involve inherently unpredictable factors including, but not limited to: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.

In the third quarter of 2020, the Company settled a lawsuit for $1.2 million to avoid the burden and expense of litigation. At September 30, 2020, the Company accrued for the settlement within accrued interest and other liabilities on the Company's consolidated statements of condition, and recorded the expense within other expenses on the Company's consolidated statements of income for the three and nine months ended September 30, 2020.

The Company did 0t have any material loss contingencies that were provided for and/or that are required to be disclosed as of September 30, 2020 and December 31, 2019.

NOTE 8 – DERIVATIVES AND HEDGING

The Company uses derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. The Company controls the credit risk associated with these derivative financial instruments through collateral, credit approvals and monitoring procedures.

Derivative financial instruments are carried at fair value on the consolidated statements of condition. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it has been designated as a hedge for accounting purposes, and, if so, the type of hedge it has been designated as. The changes in fair value of the Company's derivative instruments not designated as hedges are accounted for within the consolidated statements of income.

Quarterly, in conjunction with financial reporting, each cash flow hedge is assessed for ineffectiveness. To the extent ineffectiveness is identified, this amount is recorded within the consolidated statements of income. The gain or loss on the effective portion of the cash flow hedge is reclassified from AOCI into interest within the consolidated statements of income in the period the hedged transaction affects earnings.

Derivatives Not Designated as Hedges

Customer Loan Swaps
The Company will enter into interest rate swaps with its commercial customers to provide them with a means to lock into a long-term fixed rate, while simultaneously entering into an arrangement with a counterparty to swap the fixed rate to a variable rate to manage its interest rate exposure effectively. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company's interest rate risk or present any material exposure to its consolidated statements of income.     

29


The following table presents the total positions, notional and fair value of the Company's customer loans swaps with each party for the dates indicated:
(In thousands, except number of positions)September 30, 2020December 31, 2019
Presentation on Consolidated Statements of ConditionNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair Value
Receive fixed, pay variableAccrued interest and other liabilities$$10 $45,243 $(514)
Receive fixed, pay variableOther assets80 378,428 44,123 75 366,351 17,756 
Pay fixed, receive variableAccrued interest and other liabilities80 378,428 (44,123)85 411,594 (17,242)
Total160 $756,856 $170 $823,188 $

The Company seeks to mitigate its customer counterparty credit risk exposure through its loan policy and underwriting process, which includes credit approval limits, monitoring procedures, and obtaining collateral, where appropriate. The Company mitigates its institutional counterparty credit risk exposure by limiting the institutions for which it will enter into interest swap arrangements through an approved listing by its Board of Directors, as well as by posting cash or other financial assets from or to the counterparty.

The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Company's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its customer loan swap contracts in a net liability position based on their aggregate fair value and the Company's credit rating. The Company may also receive cash collateral for contracts in a net asset position as requested. At September 30, 2020 and December 31, 2019 the Company posted $47.7 million and $18.4 million, respectively, of cash to the counterparty as collateral on its customer loan swap contracts which was presented within other assets on the consolidated statements of condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

Fixed-Rate Mortgage Interest Rate Lock Commitments
As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company intends to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative. The Company's pipeline of mortgage loans with fixed-rate interest rate lock commitments for which it intends to sell the loan upon origination was as follows for the dates indicated:
September 30, 2020December 31, 2019
(In thousands)Presentation on Consolidated Statements of ConditionNotional AmountFair ValueNotional AmountFair Value
Fixed-rate mortgage interest rate locksOther assets$76,279 $977 $27,087 $480 
Fixed-rate mortgage interest rate locksAccrued interest and other liabilities42,915 (405)2,519 (18)
Total$119,194 $572 $29,606 $462 

For the three months ended September 30, 2020 and 2019, the net unrealized (loss) gain from the change in fair value on the Company's fixed-rate mortgage rate locks reported within mortgage banking income, net, on the consolidated statements of income was ($386,000) and $467,000, respectively. For the nine months ended September 30, 2020 and 2019, the net unrealized gain from the change in fair value on the Company's fixed-rate mortgage rate locks reported within mortgage banking income, net, on the consolidated statements of income was $110,000 and $871,000, respectively.

Forward Delivery Commitments
The Company typically enters into a forward delivery commitment with a secondary market investor, which has been approved by the Company within its normal governance process, at the onset of the loan origination process. The Company may enter into these arrangements with the secondary market investors on a "best effort" or "mandatory delivery" basis. The Company's normal practice is typically to enter into these arrangements on a "best effort" basis. The Company enters into these arrangements with the secondary market investors to manage its interest rate exposure. The Company accounts for the forward delivery commitment as a derivative upon origination of a loan identified as held for sale.

30


The Company's forward delivery commitments on loans held for sale for the dates indicated were as follows:
September 30, 2020December 31, 2019
(In thousands)Presentation on Consolidated Statements of ConditionNotional AmountFair ValueNotional AmountFair Value
Forward delivery commitments ("best effort")Other Assets$21,201 $505 $10,846 $312 
Forward delivery commitments ("best effort")Accrued interest and other liabilities16,100 (241)1,069 (15)
Total$37,301 $264 $11,915 $297 

For the three months ended September 30, 2020 and 2019, the net unrealized gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net, on the consolidated statements of income was $123,000 and $238,000, respectively. For the nine months ended September 30, 2020 and 2019, the net unrealized (loss) gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net, on the consolidated statements of income was ($33,000) and $480,000, respectively.

Derivatives Designated as Hedges

Interest Rate Swap on Loans
In 2019, the Company entered into a $100.0 million interest rate swap contract with a counterparty to manage interest rate risk associated with its variable rate loans. The Company has entered into a master netting arrangement with its institutional counterparty and settles payments monthly on a net basis.

The arrangement with the institutional counterparty requires it to post collateral for its interest rate swaps on loans and borrowings when they are in a net liability position based on their fair values. If the interest rate swaps are in a net asset position based on their fair values, the counterparty will post collateral to the Company as requested. At September 30, 2020, the institutional counterparty posted $4.1 million of cash as collateral on its interest rate swaps on loans and borrowings, which was presented within interest-bearing deposits in other banks as restricted cash with a matching liability within accrued interest and other liabilities on the consolidated statements of condition. At December 31, 2019, the counterparty posted $560,000 as collateral on its interest rate swap on loans. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

The details of the interest rate swap for the dates indicated were as follows:
(Dollars in thousands)September 30, 2020December 31, 2019
Trade
Date
Maturity
Date
Variable Index
Paid
Fixed Rate
Received
Presentation on Consolidated
Statements of Condition
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
6/12/20196/10/20241-Month
USD LIBOR
1.693%Other assets$100,000 $5,717 $100,000 $483 

For the three and nine months ended September 30, 2020, the Company did 0t record any ineffectiveness within the consolidated statements of income.

Net payments received from (paid to) the institutional counterparty for the nine months ended September 30, 2020 and 2019 were $610,000 and ($176,000), and were classified as cash flows from operating activities within the consolidated statements of cash flows.

Interest Rate Swaps on Borrowings
In March 2020, the Company entered into 2 $50.0 million interest rate swap arrangements with an institutional counterparty to mitigate interest rate risk. The Company entered into a master netting arrangement with the institutional counterparty and settles payments on a net basis, monthly for the Federal Funds Effective Rate swap and quarterly for the 3-Month USD LIBOR swap.

The arrangement with the institutional counterparty requires it to post collateral for its interest rate swaps on loans and borrowings when they are in a net liability position based on their fair values. If the interest rate swaps are in a net asset position based on their fair values, the counterparty will post collateral to the Company as requested. Collateral posted to the institutional counterparty or received is net settled with the interest rate swap on loans discussed above.
31



The details of the Company's interest rate swaps on borrowings for the dates indicated were as follows:
(Dollars in thousands)September 30, 2020
Trade
Date
Maturity
Date
Variable Index
Received
Fixed Rate
Paid
Presentation on Consolidated
Statements of Condition
Notional
Amount
Fair
Value
3/2/20203/1/2023Fed Funds Effective Rate0.705%Accrued interest and other liabilities$50,000 $(813)
3/26/20203/26/20303-Month
USD LIBOR
0.857%Accrued interest and other liabilities50,000 (901)
$100,000 $(1,714)

For the three and nine months ended September 30, 2020, the Company did 0t record any ineffectiveness within the consolidated statements of income.

Net payments to the institutional counterparty for the nine months ended September 30, 2020 were $48,000 and were classified as cash flows from operating activities within the consolidated statements of cash flows.

Junior Subordinated Debt Interest Rate Swaps
In July 2020, the Company entered into a $10.0 million forward-starting interest rate swap with an effective date of June 30, 2021, that will effectively replace its $10.0 million interest rate swap that is scheduled to mature on June 30, 2021. The Company has entered into this new interest rate swap agreement, as well as its existing interest rate swap agreements, with an institutional counterparty to manage interest rate risk associated with the Company's variable rate borrowings. The Company entered into a master netting arrangement with its institutional counterparty and settles payments quarterly on a net basis. The interest rate swap arrangements contain provisions that require the Company to post cash or other assets as collateral with the counterparty for contracts that are in a net liability position based on their aggregate fair value and the Company’s credit rating. If the interest rate swaps are in a net asset position based on their aggregate fair value, the institutional counterparty will post collateral to the Company as requested. At September 30, 2020 and December 31, 2019, the Company posted $13.3 million and $8.8 million, respectively, of cash as collateral to the institutional counterparty, which was presented within other assets on the consolidated statements of financial condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

The details of the junior subordinated debt interest rate swaps for the dates indicated were as follows: 
(Dollars in thousands)September 30, 2020December 31, 2019
Trade
Date
Maturity
Date
Variable Index
Received
Fixed Rate
Paid
Presentation on Consolidated
Statements of Condition
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
3/18/20096/30/20213-Month USD LIBOR3.69%Accrued interest and other liabilities$10,000 $(262)$10,000 $(299)
7/8/20096/30/20293-Month USD LIBOR4.44%Accrued interest and other liabilities10,000 (3,354)10,000 (2,318)
5/6/20106/30/20303-Month USD LIBOR4.31%Accrued interest and other liabilities10,000 (3,534)10,000 (2,384)
3/14/20113/30/20313-Month USD LIBOR4.35%Accrued interest and other liabilities5,000 (1,897)5,000 (1,279)
5/4/20117/7/20313-Month USD LIBOR4.14%Accrued interest and other liabilities8,000 (2,914)8,000 (1,907)
7/16/20206/30/20363-Month USD LIBOR0.83%Accrued interest and other liabilities10,000 214 
$53,000 $(11,747)$43,000 $(8,187)

For the three and nine months ended September 30, 2020 and 2019, the Company did 0t record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

Net payments to the counterparty for the nine months ended September 30, 2020 and 2019 were $942,000 and $518,000, respectively, and were classified as cash flows from operating activities in the Company's consolidated statements of cash flows.

32


The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:
For The
Three Months Ended
September 30,
For The
Nine Months Ended
September 30,
(In thousands)2020201920202019
Derivatives designated as cash flow hedges:
Effective portion of unrealized gains (losses) recognized within OCI during the period, net of tax$540 $(310)$(328)$(2,438)
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, gross$479 $342 $990 $662 
Net reclassification adjustment for effective portion of cash flow hedges included in interest income, gross$(311)$$(610)$

The Company expects approximately $1.4 million to be reclassified from AOCI, related to the Company’s cash flow hedges, in the next 12 months, decreasing net interest income on the consolidated statements of income. This reclassification is due to anticipated payments that will be made on the swaps based upon the forward curve as of September 30, 2020.

NOTE 9 – BALANCE SHEET OFFSETTING

The Company does not offset the carrying value for derivative instruments or repurchase agreements on the consolidated statements of condition. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be pledged or received is monitored and adjusted as necessary. Refer to Note 6 for further discussion of repurchase agreements and Note 8 for further discussion of derivative instruments.

33


The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its financial position, as of the dates indicated:
Gross Amount Not Offset in the Consolidated Statements of Condition
(In thousands)Gross Amount Recognized in the Consolidated Statements of ConditionGross Amount Offset in the Consolidated Statements of ConditionNet Amount Presented in the Consolidated Statements of Condition
Financial Instruments Pledged (Received)(1)
Cash Collateral Pledged (Received)(1)
Net Amount
September 30, 2020
Derivative assets:
Customer loan swaps - commercial customer(2)
$44,123 $$44,123 $$$44,123 
Interest rate swap on loans(3)
5,717 5,717 (5,717)
Total$49,840 $$49,840 $$(5,717)$44,123 
Derivative liabilities:
Customer loan swaps - dealer bank(3)
$44,123 $$44,123 $$44,123 
Junior subordinated debt interest rate swaps(3)
11,747 11,747 11,747 
Interest rate swaps on borrowings(3)
1,714 1,714 1,714 
Total$57,584 $$57,584 $$57,584 $
Customer repurchase agreements$210,055 $$210,055 $210,055 $$
December 31, 2019
Derivative assets:
Customer loan swaps - commercial customer(2)
17,756 17,756 17,756 
Interest rate swap on loans483 483 (483)
Total$18,239 $$18,239 $$(483)$17,756 
Derivative liabilities:
Customer loan swaps - dealer bank(3)
$17,242 $$17,242 $$17,242 $
Junior subordinated debt interest rate swaps(3)
$8,187 $$8,187 $$8,187 $
Customer loan swaps - commercial customer(2)
514 514 514 
Total$25,943 $$25,943 $$25,429 $514 
Customer repurchase agreements$237,984 $$237,984 $237,984 $$
(1)     The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.
(2)    The Company manages its net exposure on its commercial customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices.
(3)    Interest rate swap contracts were completed with the same dealer bank. The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis for all contracts.

NOTE 10 – REGULATORY CAPITAL REQUIREMENTS
 
The Company and Bank are subject to various regulatory capital requirements administered by the FRB and the OCC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

The Company and Bank are required to maintain certain levels of capital based on risk-adjusted assets. These capital requirements represent quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank's capital classification is also subject to qualitative judgments by our regulators about components, risk weightings and other factors. The quantitative measures established to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, or the leverage ratio. These guidelines apply to the Company on a consolidated basis.

34


Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank effectively to maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The Company and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses and to engage in share repurchases based on the amount of the shortfall and the institution's "eligible retained income" (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

The Company and Bank's risk-based capital ratios exceeded regulatory guidelines, including the capital conservation buffer, at September 30, 2020 and December 31, 2019, and the Bank's capital ratios met the requirements for it to be considered "well capitalized" under prompt corrective action provisions for each period. There were no changes to the Company or Bank's capital ratios that occurred subsequent to September 30, 2020 that would change the Company or Bank's regulatory capital categorization. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:
September 30,
2020
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation BufferMinimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action ProvisionsDecember 31,
2019
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation BufferMinimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
(Dollars in thousands)AmountRatioAmountRatio
Camden National Corporation:
Total risk-based capital ratio$486,289 15.15 %10.50 %N/A$455,702 14.44 %10.50 %N/A
Tier 1 risk-based capital ratio434,867 13.55 %8.50 %N/A415,511 13.16 %8.50 %N/A
Common equity Tier 1 risk-based capital ratio391,867 12.21 %7.00 %N/A372,511 11.80 %7.00 %N/A
Tier 1 leverage capital ratio434,867 8.96 %4.00 %N/A415,511 9.55 %4.00 %N/A
Camden National Bank:
Total risk-based capital ratio$457,137 14.29 %10.50 %10.00 %$423,540 13.45 %10.50 %10.00 %
Tier 1 risk-based capital ratio420,715 13.15 %8.50 %8.00 %398,349 12.65 %8.50 %8.00 %
Common equity Tier 1 risk-based capital ratio420,715 13.15 %7.00 %6.50 %398,349 12.65 %7.00 %6.50 %
Tier 1 leverage capital ratio420,715 8.70 %4.00 %5.00 %398,349 9.19 %4.00 %5.00 %

In 2015, the Company issued $15.0 million of subordinated debentures, and in 2006 and 2008, it issued $43.0 million of junior subordinated debentures in connection with the issuance of trust preferred securities. Although the subordinated debentures and the junior subordinated debentures are recorded as liabilities on the Company's consolidated statements of condition, the Company is permitted, in accordance with applicable regulation, to include, subject to certain limits, each within its calculation of risk-based capital. At September 30, 2020 and December 31, 2019, $15.0 million of subordinated debentures were included as Tier 2 capital and were included in the calculation of the Company's total risk-based capital, and, at September 30, 2020 and December 31, 2019, $43.0 million of the junior subordinated debentures were included in Tier 1 and total risk-based capital for the Company. The Company's $15.0 million of subordinated debentures are subject to phase-out of 20% annually after its five year anniversary, and 20% a year thereafter until it is fully phases out.

The Company and Bank's regulatory capital and risk-weighted assets fluctuate due to normal business, including profits and losses generated by the Company and Bank as well as changes to their asset mix. Of particular significance are changes within the Company and Bank's loan portfolio mix due to the differences in regulatory risk-weighting between retail and commercial loans. Furthermore, the Company and Bank's regulatory capital and risk-weighted assets are subject to change due to changes in GAAP and regulatory capital standards. The Company and Bank proactively monitor their regulatory capital and risk-weighted assets, and the impact of changes to their asset mix, and impact of proposed and pending changes as a result of new and/or amended GAAP standards and regulatory changes.

35


NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:
For The Three Months Ended
September 30, 2020September 30, 2019
(In thousands)Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
AFS Securities:
Unrealized holdings (losses) gains$(746)$160 $(586)$4,551 $(978)$3,573 
Less: reclassification adjustment for net realized losses(1)
Net unrealized (losses) gains(746)160 (586)4,550 (978)3,572 
Cash Flow Hedges:
Net increase (decrease) in fair value688 (148)540 (394)84 (310)
Less: effective portion reclassified into interest expense(2)
(479)103 (376)(342)73 (269)
Less: effective portion reclassified into interest income(3)
311 (67)244 
Net increase (decrease) in fair value856 (184)672 (52)11 (41)
Postretirement Plans:
Net actuarial gain(4)
175 (37)138 68 (14)54 
Less: Amortization of net prior service credits(4)
(1)(1)
Net gain on postretirement plans169 (36)133 62 (13)49 
Other comprehensive income$279 $(60)$219 $4,560 $(980)$3,580 
(1)    Reclassified into net gain on sale of securities on the consolidated statements of income.
(2)    Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income.
(3)    Reclassified into interest and fees on loans on the consolidated statements of income.
(4)    Reclassified into other expenses on the consolidated statements of income.
36


For The Nine Months Ended
September 30, 2020September 30, 2019
(In thousands)Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
AFS Securities:
Unrealized holdings gains$32,451 $(6,977)$25,474 $32,270 $(6,938)$25,332 
Less: reclassification adjustment for net realized gains(1)
28 (6)22 
Net unrealized gains32,451 (6,977)25,474 32,242 (6,932)25,310 
Cash Flow Hedges:
Net decrease in fair value(418)90 (328)(3,105)667 (2,438)
Less: effective portion reclassified into interest expense(2)
(990)213 (777)(662)142 (520)
Less: effective portion reclassified into interest income(3)
610 (131)479 
Net decrease in fair value(38)(30)(2,443)525 (1,918)
Postretirement Plans:
Net actuarial gain(4)
526 (113)413 202 (43)159 
Less: Amortization of net prior service credits(4)
18 (4)14 18 (4)14 
Net gain on postretirement plans508 (109)399 184 (39)145 
Other comprehensive income$32,921 $(7,078)$25,843 $29,983 $(6,446)$23,537 
(1)    Reclassified into net gain on sale of securities on the consolidated statements of income.
(2)    Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income.
(3)    Reclassified into interest and fees on loans on the consolidated statements of income.
(4)    Reclassified into other expenses on the consolidated statements of income.

The following table presents the changes in each component of AOCI for the periods indicated:
(In thousands)
Net Unrealized Gains (Losses) on AFS Securities(1)
Net Unrealized Losses on Cash Flow Hedges(1)
Defined Benefit Postretirement Plans(1)
AOCI(1)
Balance at December 31, 2018$(17,826)$(4,437)$(2,157)$(24,420)
Other comprehensive income (loss) before reclassifications25,332 (2,438)159 23,053 
Less: Amounts reclassified from AOCI22 (520)14 (484)
Other comprehensive income (loss)25,310 (1,918)145 23,537 
Balance at September 30, 2019$7,484 $(6,355)$(2,012)$(883)
Balance at December 31, 2019$3,250 $(6,048)$(3,470)$(6,268)
Other comprehensive income (loss) before reclassifications25,474 (328)413 25,559 
Less: Amounts reclassified from AOCI(298)14 (284)
Other comprehensive income (loss)25,474 (30)399 25,843 
Balance at September 30, 2020$28,724 $(6,078)$(3,071)$19,575 
(1)    All amounts are net of tax.

37


NOTE 12 – REVENUE FROM CONTRACTS WITH CUSTOMERS

A portion of the Company's non-interest income is derived from contracts with customers, and, as such, the revenue recognized depicts the transfer of promised goods or services to its customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company considers the terms of the contract and all relevant facts and circumstances when applying this guidance.

The Company has disaggregated its revenue from contracts with customers into categories based on the nature of the revenue. The categorization of revenues from contracts with customers that are within the scope of ASC 606 closely aligns with the presentation of revenue categories presented within non-interest income on the consolidated statements of income. The following table presents the revenue streams within the scope of ASC 606 for the periods indicated:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)Income Statement
Line Item
2020201920202019
Debit card interchange incomeDebit card income$2,627 $2,432 $7,159 $6,723 
Services charges on deposit accounts
Service charges on
deposit accounts
1,606 1,970 4,955 6,202 
Fiduciary services income
Income from
fiduciary services
1,504 1,444 4,609 4,381 
Investment program income
Brokerage and
insurance commissions
755 625 2,034 1,942 
Other non-interest incomeOther income467 491 1,275 1,289 
Total non-interest income within the scope of ASC 6066,959 6,962 20,032 20,537 
Total non-interest income not in scope of ASC 6065,737 3,777 16,127 9,628 
Total non-interest income$12,696 $10,739 $36,159 $30,165 
In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and services are generally explicitly identified in the associated contracts.

NOTE 13 – EMPLOYEE BENEFIT PLANS
 
The Company sponsors unfunded, non-qualified SERPs for certain officers and provides medical and life insurance to certain eligible retired employees. 
The components of net periodic pension and postretirement benefit cost for the periods ended September 30, 2020 and 2019, were as follows:

Supplemental Executive Retirement Plan:
(In thousands)Three Months Ended
September 30,
Nine Months Ended
September 30,
Net periodic pension costIncome Statement Presentation2020201920202019
Service costSalaries and employee benefits$116 $98 $348 $296 
Interest costOther expenses116 131 346 392 
Recognized net actuarial lossOther expenses155 61 467 183 
Total$387 $290 $1,161 $871 

38


Other Postretirement Benefit Plan:
(In thousands)Three Months Ended
September 30,
Nine Months Ended
September 30,
Net periodic postretirement benefit costIncome Statement Presentation2020201920202019
Service costSalaries and employee benefits$$12 $21 $36 
Interest costOther expenses31 37 92 111 
Recognized net actuarial lossOther expenses20 59 19 
Amortization of prior service creditOther expenses(6)(6)(18)(18)
Total$52 $50 $154 $148 

NOTE 14 – EPS
 
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands, except number of shares and per share data)2020201920202019
Net income$16,775 $14,488 $41,208 $41,965 
Dividends and undistributed earnings allocated to participating securities(1)
(47)(33)(101)(86)
Net income available to common shareholders$16,728 $14,455 $41,107 $41,879 
Weighted-average common shares outstanding for basic EPS14,961,465 15,339,093 15,008,004 15,482,765 
Dilutive effect of stock-based awards(2)
39,582 42,835 36,423 39,736 
Weighted-average common and potential common shares for diluted EPS15,001,047 15,381,928 15,044,427 15,522,501 
Earnings per common share:  
Basic EPS$1.12 $0.94 $2.74 $2.70 
Diluted EPS$1.11 $0.94 $2.73 $2.70 
Awards excluded from the calculation of diluted EPS(3):
Stock options8,206 3,206 
(1)    Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2)    Represents the assumed dilutive effect of unexercised and/or unvested stock options, restricted shares, restricted share units and contingently issuable performance-based awards utilizing the treasury stock method.
(3)    Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock, and, therefore, are considered anti-dilutive.

Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities. 
  
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards. Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

39


NOTE 15 – FAIR VALUE MEASUREMENT AND DISCLOSURE
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset.

The fair value hierarchy for valuation of an asset or liability is as follows:
 
Level 1:   Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
 
Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
 
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Financial Instruments Recorded at Fair Value on a Recurring Basis
Loans Held For Sale: The fair value of loans held for sale is determined on an individual loan basis using quoted secondary market prices and is classified as Level 2.

Debt Securities:  The fair value of investments in debt securities is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities is classified as Level 2.

Equity Securities: The fair value of equity securities in bank stock is reported utilizing market prices based on recent trading activity and dealer quotes. These equity securities are traded on inactive markets and are classified as Level 2.

Derivatives:  The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives as sufficient collateral exists, mitigating the credit risk.

The fair value of the Company's fixed-rate interest rate lock commitments were determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, adjusted for the Company's pull-through rate estimate (i.e. estimate of loans within its loan pipeline that will ultimately complete the origination process and be funded). The Company has classified its fixed-rate interest rate lock commitments as Level 2, as the quoted secondary market prices are the
40


more significant input, and, although the Company's internal pull-through rate estimate is a Level 3 estimate, it is less significant to the ultimate valuation.

The fair value of the Company's forward delivery commitments is determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, and the locked and agreed to price with the secondary market investor. The Company has classified its fixed-rate interest rate lock commitments as Level 2.

41


The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, for the dates indicated:
(In thousands)Fair
Value
Readily
Available
Market
Prices
(Level 1)
Observable
Market
Data
(Level 2)
Company
Determined
Fair Value
(Level 3)
September 30, 2020   
Financial assets:   
Loans held for sale$37,935 $$37,935 $
AFS investments:  
Obligations of states and political subdivisions127,613 — 127,613 — 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises568,102 — 568,102 — 
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises400,566 — 400,566 — 
Subordinated corporate bonds10,788 10,788 
Equity securities - bank stock1,674 1,674 
Customer loan swaps44,123 — 44,123 — 
Interest rate swap on loans5,717 — 5,717 — 
Fixed-rate mortgage interest rate lock commitments977 — 977 — 
Forward delivery commitments505 — 505 — 
Financial liabilities:  
Junior subordinated debt interest rate swaps11,747 — 11,747 — 
Customer loan swaps44,213 44,213 
Interest rate swap on borrowings1,714 — 1,714 — 
Fixed-rate mortgage interest rate lock commitments405 — 405 
Forward delivery commitments241 — 241 
December 31, 2019   
Financial assets:   
Loans held for sale$11,854 $$11,854 $
AFS investments:      
Obligations of states and political subdivisions118,083 — 118,083 — 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises463,386 — 463,386 — 
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises325,905 — 325,905 — 
Subordinated corporate bonds10,744 10,744 
Equity securities - bank stock1,674 1,674 
Customer loan swaps17,756 — 17,756 — 
Interest rate swap on loans483 — 483 — 
Fixed-rate mortgage interest rate lock commitments480 — 480 — 
Forward delivery commitments312 — 312 — 
Financial liabilities:    
Junior subordinated debt interest rate swaps8,187 — 8,187 — 
Customer loan swaps17,756 — 17,756 — 
Fixed-rate mortgage interest rate lock commitments18 — 18 
Forward delivery commitments15 — 15 — 

 The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2020. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.

42


Financial Instruments Recorded at Fair Value on a Nonrecurring Basis 
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Collateral-Dependent Impaired Loans:  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company's policy is to evaluate individually for impairment loans with a principal balance of $500,000 or more, that are classified as substandard or doubtful and are on non-accrual status. Once the population of loans is identified for individual impairment assessment, the Company measures these loans for impairment by comparing net realizable value, which is the fair value of the collateral, less estimated costs to sell, to the carrying value of the loan. If the net realizable value of the loan is less than the carrying value of the loan, then a loss is recognized as part of the ALL to adjust the loan's carrying value to net realizable value. Accordingly, certain collateral-dependent impaired loans are subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions.

Servicing Assets:  The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value of a tranche exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes two significant unobservable inputs, namely loan prepayment assumptions and the discount rate used, to calculate the fair value of each tranche, and, as such, the Company has classified the model within Level 3 of the fair value hierarchy.
 
Non-Financial Instruments Recorded at Fair Value on a Non-Recurring Basis
The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO, goodwill and core deposit intangible assets. 

OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at net realizable value, which is the fair value of the real estate, less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ALL upon transfer to OREO. Upon acquisition of a property, a current appraisal is used or an internal valuation is prepared to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and are classified as Level 3. As of September 30, 2020, the Company did 0t have any OREO properties. As of December 31, 2019, the Company had one OREO property with a net realizable value of $94,000.

Goodwill and Core Deposit Intangible Assets: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment occur, the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income. The Company conducts an annual impairment test of goodwill in the fourth quarter each year, or more frequently as necessary. In the second quarter of 2020, the Company determined that a triggering event had occurred and an interim goodwill impairment assessment was necessary. A quantitative assessment was performed using various valuation methodologies as of May 31, 2020. Through its assessment, the Company concluded that the indicated fair value of the reporting unit exceeded its book value, and, thus goodwill was not impaired as of May 31, 2020. As of June and September 30, 2020, the Company considered whether there were any new events or information that would materially change its quantitative analysis performed as of May 31, 2020, and there were none. Refer to Note 2 for further discussion.

The Company's core deposit intangible assets represent the estimated value of acquired customer relationships and are amortized over the estimated life of those relationships. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no events or changes in circumstances for the nine months ended September 30, 2020, that indicated the carrying amount may not be recoverable.
43



The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis for the dates indicated:
(In thousands)Fair
Value
Readily
Available
Market
Prices
(Level 1)
Observable
Market
Data
(Level 2)
Company
Determined
Fair Value
(Level 3)
September 30, 2020   
Financial assets:   
Collateral-dependent impaired loans$$$$
Servicing assets764 764 
December 31, 2019   
Non-financial assets:
OREO$94 $— $— $94 

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis for the dates indicated:
(Dollars in thousands)Fair ValueValuation MethodologyUnobservable InputDiscount
September 30, 2020    
Collateral-dependent impaired loans:    
Partially charged-off$Market approach appraisal of
collateral
Management adjustment of appraisal0%
Estimated selling costs10%
Servicing assets$764 Discounted cash flowWeighted-average constant prepayment rate19%
Weighted average discount rate10%
December 31, 2019
OREO$94 Market approach appraisal of
collateral
Management adjustment of appraisal18%
Estimated selling cost13%


44


The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated:
(In thousands)Carrying
Amount
Fair ValueReadily
Available
Market
Prices
(Level 1)
Observable
Market
Prices
(Level 2)
Company
Determined
Market
Prices
(Level 3)
September 30, 2020
Financial assets:     
HTM securities$1,298 $1,403 $$1,403 $
Commercial real estate loans(1)
1,314,204 $1,282,149 1,282,149 
Commercial loans(1)(2)
371,011 $364,655 364,655 
SBA PPP loans(1)
223,723 $229,137 229,137 
Residential real estate loans(1)
1,035,397 1,054,587 1,054,587 
Home equity loans(1)
271,720 271,416 271,416 
Consumer loans(1)
22,373 20,499 20,499 
Servicing assets1,143 1,411 1,411 
Financial liabilities:     
Time deposits$505,451 $508,785 $$508,785 $
Short-term borrowings210,055 210,030 210,030 
Long-term borrowings25,000 25,465 25,465 
Subordinated debentures59,306 46,032 46,032 
December 31, 2019
Financial assets:
HTM securities$1,302 $1,359 $$1,359 $
Commercial real estate loans(1)
1,230,983 1,196,297 1,196,297 
Commercial loans(1)(2)
438,716 431,892 431,892 
Residential real estate loans(1)
1,064,532 1,066,544 1,066,544 
Home equity loans(1)
310,356 293,565 293,565 
Consumer loans(1)
25,265 23,355 23,355 
Servicing assets877 1,496 1,496 
Financial liabilities:     
Time deposits$595,549 $594,881 $$594,881 $
Short-term borrowings268,809 268,631 268,631 
Long-term borrowings10,000 10,002 10,002 
Subordinated debentures59,080 50,171 50,171 
(1)    The presented carrying amount is net of the allocated ALL.
(2)    Includes the HPFC loan portfolio.

Excluded from the summary were financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.

The Company considers its financial instruments' current use to be the highest and best use of the instruments.

45


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS
 
The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, as amended, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan,” “target,” or “goal” or future or conditional verbs such as “will,” “may,” “might,” “should,” “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
 
The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:
 
weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for loan losses or a reduced demand for the Company’s credit or fee-based products and services;
changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
inflation, interest rate, market, and monetary fluctuations;
competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;
volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, the availability and terms of funding necessary to meet the Company’s liquidity needs, and which could lead to impairment in the value of securities in the Company's investment portfolio;
changes in information technology and other operational risks, including cybersecurity, that require increased capital spending;
changes in consumer spending and savings habits;
changes in tax, banking, securities and insurance laws and regulations; and
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board ("FASB"), and other accounting standard setters.

In addition, statements about the potential effects of the COVID-19 pandemic on the Company's businesses and results of operations and financial conditions may constitute forward-looking statements. Such statements may include, but are not limited to, statements concerning:

the continued effectiveness of our Pandemic Work Group;
the continuing ability of our employees to work remotely;
our continuing ability to staff our branches and keep our branches open;
the continuing strength of our capital and liquidity positions;
our continued ability to access sources of contingent liquidity;
the continuing strength of the asset quality in our lending portfolios; and
the potential effectiveness of relief measures and programs for customers affected by COVID-19.
46


These statements are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and the Company.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated by the Company's quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.
 
These forward-looking statements were based on information, plans and estimates at the date of this report, and we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except to the extent required by applicable law or regulation.  
47


NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP

In addition to evaluating the Company’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures, such as the return on average tangible equity, efficiency ratio; tax equivalent net interest income; pre-tax, pre-provision earnings; tangible book value per share; tangible common equity ratio; core deposits and average core deposits; and ALL to total loans, excluding SBA PPP loans. These non-GAAP financial measures are utilized for purposes of measuring performance against the Company's peer group and other financial institutions, as well as for analyzing its internal performance. The Company also believes these non-GAAP financial measures help investors better understand the Company's operating performance and trends and allows for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.

Return on Average Tangible Equity: Return on average tangible equity is the ratio of (i) net income, adjusted for (a) tax effected amortization of core deposit intangible assets and (b) goodwill impairment, as necessary, to (ii) average shareholders' equity, adjusted for average goodwill and core deposit intangible assets. This adjusted financial ratio reflects a shareholders' return on tangible capital deployed in our business and is a common measure within the financial services industry.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2020201920202019
Net income, as presented$16,775 $14,488 $41,208 $41,965 
Add: amortization of core deposit intangible assets, net of tax(1)
134 140 404 418 
Net income, adjusted for amortization of core deposit intangible assets$16,909 $14,628 $41,612 $42,383 
Average equity, as presented$512,902 $468,920 $497,564 $455,261 
Less: average goodwill and core deposit intangible assets(97,794)(98,484)(97,967)(98,659)
Average tangible equity$415,108 $370,436 $399,597 $356,602 
Return on average equity13.01 %12.26 %11.06 %12.32 %
Return on average tangible equity16.21 %15.67 %13.91 %15.89 %
(1)     Assumed a 21% tax rate.

Efficiency Ratio. The efficiency ratio represents an approximate measure of the cost required for the Company to generate a dollar of revenue. This is a common measure within the financial services industry and is a key ratio for evaluating Company performance. The efficiency ratio is calculated as the ratio of (i) total non-interest expense, adjusted for certain operating expenses, as necessary, to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)2020201920202019
Non-interest expense, as presented$25,221 $23,748 $73,291 $70,489 
Less: legal settlement(1,200)— (1,200)— 
Adjusted non-interest expense$24,021 $23,748 $72,091 $70,489 
Net interest income, as presented$34,481 $31,923 $100,846 $95,391 
Add: effect of tax-exempt income(1)
292 264 865 752 
Non-interest income, as presented12,696 10,739 36,159 30,165 
Less: net gain on sale of securities— (1)— (28)
Adjusted net interest income plus non-interest income$47,469 $42,925 $137,870 $126,280 
Ratio of non-interest expense to total revenues(2)
53.46 %55.67 %53.50 %56.14 %
Efficiency ratio50.60 %55.32 %52.29 %55.82 %
(1)     Assumed a 21% tax rate.
(2)    Revenue is the sum of net interest income and non-interest income.
48


Net Interest Income (Fully-Taxable Equivalent). Net interest income on a fully-taxable equivalent basis is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. This is a common measure within the financial services industry and is used within the calculation of net interest margin on a fully-taxable equivalent basis.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Net interest income, as presented$34,481 $31,923 $100,846 $95,391 
Add: effect of tax-exempt income(1)
292 264 865 752 
Net interest income (fully-taxable equivalent)$34,773 $32,187 $101,711 $96,143 
(1)     Assumed a 21% tax rate.

Pre-tax, Pre-provision Earnings. Pre-tax, pre-provision earnings is a supplemental measure of operating earnings and performance, and is calculated as net income before provision for credit losses and income tax expense. This supplemental measure is becoming more widely used by financial institutions as a measure of financial performance for comparability across financial institutions due to the impact of the COVID-19 pandemic on the provision for credit losses, as well as the differences in accounting methodology for the allowance for credit losses currently across financial institutions as the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provided financial institutions the option to delay adoption of the new accounting methodology, commonly referred to as "CECL," as further described in "– Critical Accounting Policies" and Note 2 of the consolidated financial statements.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Net income, as presented$16,775 $14,488 $41,208 $41,965 
Add: provision for credit losses987 730 12,160 2,647 
Add: income tax expense4,194 3,696 10,346 10,455 
Pre-tax, pre-provision earnings$21,956 $18,914 $63,714 $55,067 

Allowance for loan losses to total loans, excluding SBA PPP loans. ALL to total loans, excluding SBA PPP loans, is calculated as (i) allowance for loan losses, adjusted for the allowance for loan losses allocated to SBA PPP loans, to (ii) total loans, adjusted to exclude SBA PPP loans. SBA PPP loans were provided to qualifying businesses as part of the federal government stimulus package issued in response to the COVID-19 pandemic. These loans are fully-guaranteed by the SBA, and may even be forgiven in full or in part, and, thus, present little to no credit risk to the Company. By excluding the impact of the SBA PPP loans, the ratio attempts to be more comparable with prior periods and demonstrates the level of loan loss reserves established on the Company's loans originated as part of its core operations and credit underwriting standards.
(In thousands)September 30,
2020
December 31,
2019
Allowance for loan losses, as presented$36,414 $25,171 
Less: allowance for loan losses on SBA PPP loans(115)— 
Adjusted allowance for loan losses$36,299 $25,171 
Total loans, as presented$3,274,842 $3,095,023 
Less: SBA PPP loans(223,838)— 
Adjusted total loans$3,051,004 $3,095,023 
Allowance for loan losses to total loans1.11 %0.81 %
Allowance for loan losses to total loans, excluding SBA PPP loans1.19 %0.81 %
49


Tangible Book Value per Share. Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill and other intangibles to (ii) total common shares outstanding at period end. Tangible book value per share is a common measure within the financial services industry to assess the value of a company, as it removes goodwill and other intangible assets generated within purchase accounting upon a business combination.

Tangible Common Equity Ratio. Tangible common equity is the ratio of (i) shareholders’ equity less goodwill and other intangible assets to (ii) total assets less goodwill and other intangible assets. This ratio is a measure used within the financial services industry to assess whether or not a company is highly leveraged.
(In thousands, except number of shares, per share data and ratios)September 30,
2020
December 31,
2019
Tangible Book Value Per Share:
Shareholders’ equity, as presented$517,522 $473,415 
Less: goodwill and other intangible assets(97,711)(98,222)
Tangible shareholders’ equity$419,811 $375,193 
Shares outstanding at period end14,917,344 15,144,719 
Book value per share$34.69 $31.26 
Tangible book value per share$28.14 $24.77 
Tangible Common Equity Ratio:
Total assets$5,153,793 $4,429,521 
Less: goodwill and other intangible assets(97,711)(98,222)
Tangible assets$5,056,082 $4,331,299 
Common equity ratio10.04 %10.69 %
Tangible common equity ratio8.30 %8.66 %

Core Deposits. Core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and lower cost. The Company calculates core deposits as total deposits (as reported on the consolidated statements of condition) less certificates of deposit and brokered deposits. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.
(In thousands)September 30,
2020
December 31,
2019
Total deposits$4,224,044 $3,537,743 
Less: certificates of deposit(405,434)(521,752)
Less: brokered deposits(291,616)(191,005)
Core deposits$3,526,994 $2,824,986 

Average Core Deposits. Average core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and at a lower interest rate cost. The Company calculates average core deposits as total deposits (as disclosed on the Average Balance, Interest and Yield/Rate Analysis tables) less certificates of deposit. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Total average deposits$3,794,434 $3,300,599 $3,609,355 $3,187,023 
Less: average certificates of deposit(417,788)(533,110)(482,076)(498,059)
Average core deposits$3,376,646 $2,767,489 $3,127,279 $2,688,964 

50


CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues and expenses reported. Actual results could differ materially from the Company's current estimates, as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including (i) the ALL; (ii) accounting for acquisitions and the subsequent review of goodwill and core deposit intangible assets generated in an acquisition for impairment; (iii) OTTI of investments; (iv) income taxes; and (v) accounting for defined benefit and postretirement plans.

There have been no material changes to the Company's critical accounting policies as disclosed within its Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of updates noted below. Refer to the Annual Report on Form 10-K for the year ended December 31, 2019, for discussion of the Company's critical accounting policies.

ALL. On March 27, 2020, the CARES Act was signed into law in response to the COVID-19 pandemic. Under Section 4014 of the CARES Act, we were permitted to delay our compliance with ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), commonly referred to as "CECL," until the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic that the President of the United States declared on March 15, 2020 ("National Emergency") terminates, or (2) December 31, 2020. We opted to delay our compliance with CECL to devote our attention and resources to supporting our customers and communities during these unprecedented times. As the National Emergency did not terminate prior to the end of the third quarter of 2020, the Company will adopt CECL in the fourth quarter of 2020, using a modified-retrospective method effective January 1, 2020. The Company will record a one-time adjustment to shareholders' equity through retained earnings upon adoption, effective January 1, 2020, and will retrospectively restate interim period 2020 consolidated financial statements as appropriate, including net income, and basic and diluted EPS, as well as total assets, liabilities and shareholders' equity. Refer to Note 2 of the consolidated financial statements for further discussion.

Goodwill Impairment. Effective January 1, 2020, the Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminated "Step 2" of the goodwill impairment test. As such, upon completion of our annual (or more frequent should a trigger event be identified) assessment of goodwill for impairment, if the book value of a reporting unit exceeds its fair value, an impairment charge will be recorded, which will reduce goodwill. The carrying value of goodwill may not be less than zero. Although ASU 2017-04 simplifies the goodwill impairment test, it increases the likelihood of impairment because it no longer requires a two-step analysis. Refer to Note 2 of the consolidated financial statements for further discussion.

Refer to Note 2 of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

51


GENERAL OVERVIEW

Camden National Corporation (hereafter referred to as “we,” “our,” “us,” or the “Company”) is a publicly-held bank holding company, with approximately $5.2 billion in assets at September 30, 2020, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company, was founded in 1875. The Company was founded in 1984, went public in 1997 and is now registered with NASDAQ Global Market (“NASDAQ”) under the ticker symbol "CAC."

The primary business of the Company and the Bank is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company, through the Bank, provides a broad array of banking and other financial services, including wealth management and trust services, brokerage, investment advisory and insurance services, to consumer, business, non-profit and municipal customers.

The Company competes throughout Maine, and select areas of New Hampshire and Massachusetts. We operate in 13 of Maine's 16 counties, with our primary markets and presence being throughout coastal and central Maine. The Company and the Bank generally have effectively competed with other financial institutions by emphasizing customer service, highlighted by local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers.

EXECUTIVE OVERVIEW
 
Third Quarter 2020 Review. The challenges and uncertainty stemming from the COVID-19 pandemic persisted through the third quarter of 2020, and continue to affect global, national and local economies and markets. Although many measures used to monitor and assess the health of the U.S. economy improved throughout the third quarter of 2020, including national unemployment, national GDP, and several other metrics, we continue to be cautiously optimistic understanding markets and economies are still fragile, and that these times are truly unprecedented. The full health and economic effect of the pandemic is still unclear as waves of new information and data filter through almost daily. The Company continues to use its best efforts to respond to the pandemic, with the full support of its Board of Directors, and to support its employees and customers where possible, while also continuing to strengthen the Company's financial position and resiliency through our actions.

Operating Results. Net income for the three months and nine months ended September 30, 2020, was $16.8 million and $41.2 million, respectively, compared to $14.5 million and $42.0 million for the three and nine months ended September 30, 2019, respectively.

Key earnings drivers between quarters included:
Higher net interest income of $2.6 million, or 8%, was driven by SBA PPP lending in the second and third quarter of 2020 leading to average loan growth of 7% between quarters. Excluding SBA PPP loans (non-GAAP), average loans shrunk modestly between the second and third quarter of 2020 by $2.1 million as loan demand slowed after the COVID-19 pandemic took hold in mid-March 2020. Interest income earned on SBA PPP fees in the third quarter of 2020 totaled $2.4 million, including accretion of related origination fees.
Higher mortgage banking income of $2.0 million was driven by an increase in residential mortgage production of 54% between periods. Historically low interest rates drove significant refinance activity in the third quarter of 2020, highlighted by an average 10-year U.S. Treasury rate of 0.65% for the third quarter of 2020.
In the third quarter of 2020, the Company accrued $1.2 million for the settlement of a lawsuit. When excluding this settlement, our efficiency ratio (non-GAAP) for the third quarter of 2020 was 50.60%, compared to 55.32% for the same quarter last year.

Other key financial metrics between quarters included:
Diluted EPS for the third quarter of 2020 was $1.11, an increase of $0.17, or 18%, over the third quarter last year;
Net income and pre-tax, pre-provision earnings (non-GAAP) for the third quarter of 2020 each increased 16% over the third quarter last year.
Return on average assets for the third quarter of 2020 was 1.34%, compared to 1.29% for the third quarter last year.
Return on average equity for the third quarter of 2020 was 13.01%, compared to 12.26% for the third quarter last year.

52


Asset Quality. As of September 30, 2020, the Company's asset quality metrics continue to be stable and consistent with past quarters.
Non-performing assets were 0.22% of total assets at September 30, 2020, compared to 0.23% and 0.25% at June 30, 2020 and December 31, 2019, respectively.
Past due loans were 0.18% of total loans at September 30, 2020, compared to 0.19% and 0.17% at June 30, 2020 and December 31, 2019, respectively.
Net charge-offs (annualized) for the third quarter of 2020 were 0.01% of average loans, compared to 0.05% for the second quarter of 2020 and 0.16% for the third quarter of 2019.

COVID-19 Short-Term Deferment Program. In March 2020, we began offering temporary debt relief to business and retail customers impacted by the COVID-19 pandemic. for periods up to 180 days, including full and partial principal and/or interest payment relief. At September 30, 2020, loans operating under a short-term deferral arrangement totaled $181.2 million, or 5.5% of total loans at September 30, 2020, of which $67.7 million were retail loans that were provided an automatic 90-day deferment extension upon maturity of the initial 90-day deferment period. In comparison, at June 30, 2020, loans operating under a short-term deferral arrangement totaled $546.7 million, or 16.4% of total loans.

Allowance for Loan Losses. At September 30, 2020, the allowance for loan losses was 1.11% of total loans, and 3.3 times non-performing loans, compared to 0.81% of total loans and 2.3 times non-performing loans, respectively, at December 31, 2019.

CECL. We delayed the adoption of CECL as permitted under the CARES Act. The Company will adopt CECL in the fourth quarter 2020 and apply retroactively effective as of January 1, 2020.

We estimate that had we adopted CECL as of January 1, 2020, the Company's allowance for credit losses, which is comprised of allowance for loan losses and unfunded commitments, would have been $39.0 million to $43.0 million, or 1.19% to 1.31% of total loans, at September 30, 2020.

Capital Position. At September 30, 2020, the Company's capital position remained well in excess of regulatory requirements, including a Total risk-based capital ratio of 15.15% and a Tier 1 leverage ratio of 8.96%. Additionally, at September 30, 2020, the Company's tangible common equity ratio (non-GAAP) was 8.30%.

We maintained our cash dividend at $0.33 per share for the third quarter of 2020, resulting in an annualized dividend yield of 4.37% based on the Company's closing share price of $30.23, as reported by NASDAQ.

We temporarily suspended the Company's share repurchase program mid-March 2020 in response to the COVID-19 pandemic. In September 2020, we lifted the suspension and repurchased 47,915 shares. For the nine months ended September 30, 2020, we repurchased 264,946 shares of Company stock. We will continue to evaluate the use of the share repurchase program as the impact and our response to the COVID-19 pandemic continues to develop.
53


RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin
Net interest income is the interest earned on loans, securities, and other interest-earning assets, adjusted for net loan fees, origination costs, and accretion or amortization of fair value marks on loans and/or CDs created in purchase accounting, less the interest paid on interest-bearing deposits and borrowings. Net interest income is our largest source of revenue, which defined as the sum of net interest income and non-interest income. For the three months ended September 30, 2020 and 2019, net interest income was $34.5 million, or 73% of total revenues, and $31.9 million, or 75% of total revenues, respectively. For the nine months ended September 30, 2020 and 2019, net interest income was $100.8 million, or 74% of total revenues, and $95.4 million, or 76% of total revenues, respectively. Net interest income is affected by several factors including, but not limited to, changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and liabilities, and the level of non-performing assets.

Third Quarter 2020 vs. 2019. Net interest income on a fully-taxable equivalent (non-GAAP) basis for the third quarter of 2020, was $34.8 million, an increase of $2.6 million, or 8%, over the third quarter of 2019. The increase was due to an increase in average interest-earning assets of $465.8 million, or 11%, between periods to $4.6 billion for the third quarter of 2020. Over the same period, net interest margin on a fully-taxable equivalent basis decreased 9 basis points to 3.00% for the third quarter of 2020.
Interest income on a fully-taxable equivalent basis. Interest income on a fully-taxable equivalent basis for the third quarter decreased $3.8 million, or 9%, to $39.0 million, compared to the third quarter of 2019. Over this period, our yield on interest-earning assets decreased 74 basis points to 3.37% for the third quarter of 2020. The decrease in our yield on interest-earning assets was driven by: (i) a change in our average interest-earning asset mix as average cash and investment balances (lower yielding assets) were 27% of average interest-earnings assets for the third quarter of 2020, compared to 24% for the third quarter of 2019; as well as, (ii) a decrease in loan yields of 68 basis points, which was reflective of the change in interest rate environment. The average 10-year U.S. Treasury interest rate for the third quarter of 2020 was 0.65%, compared to 1.80% for the third quarter of 2019. The growth in average interest-earning assets partially offset the decrease in our yield on interest-earning assets between periods. Average loans grew $219.5 million, or 7%, between periods to $3.3 billion for the third quarter of 2020, and was primarily driven by SBA PPP loans funded in the second and third quarter of 2020 in response to the COVID-19 pandemic. For the third quarter of 2020, average SBA PPP loans were $221.7 million, for which we recognized $2.4 million of interest income (including accretion income on origination fees).
Interest expense. Interest expense for the third quarter of 2020 decreased $6.4 million, or 60%, to $4.2 million, compared to the third quarter of 2019. Cost of funds for the third quarter of 2020 decreased 70 basis points between periods to 0.38% for the third quarter of 2020 driven by: (i) a decrease in deposit costs of 56 basis points between periods to 0.29% for the third quarter of 2020; (ii) a decrease in borrowing costs of 126 basis points between periods to 1.01% for the third quarter of 2020; and (iii) a shift in funding mix as average deposits grew $493.8 million, or 15%, between periods to $3.8 billion for the third quarter of 2020, while average borrowings decreased $39.7 million, or 7%, between periods to $570.0 million for the third quarter of 2020. The Federal Funds rate through the third quarter of 2020 was 0.25%, compared to a range of 2.00% to 2.50% for the third quarter of 2019.

Nine Months Ended September 30, 2020 vs. 2019. Net interest income on a fully-taxable equivalent (non-GAAP) basis for the nine months ended September 30, 2020, was $101.7 million, an increase of $5.6 million, or 6%, over the same period of 2019. The increase was due to an increase in average interest-earning assets of $319.4 million, or 8%, between periods to $4.4 billion for the nine months ended September 30, 2020, but was partially offset by a lower net interest margin on a fully-taxable equivalent basis of 7 basis points between periods to 3.06% for the nine months ended September 30, 2020.
Interest income on a fully-taxable equivalent basis. Interest income on a fully-taxable equivalent basis for the nine months ended September 30, 2020 decreased $8.8 million, or 7%, to $118.9 million, compared to the same period of 2019. Our interest-earning asset yield decreased 57 basis points between periods to 3.59% for the nine months ended September 30, 2020. The decrease in our yield on interest-earning assets was driven by: (i) a change in our average interest-earning asset mix as average cash and investment balances (lower yielding assets) were 26% of average interest-earnings assets for the nine months ended September 30, 2020, compared to 24% for the same period of 2019; as well as, (ii) a decrease in loan yields of 60 basis points between periods, which was reflective of the change in interest rate environment. The average 10-year U.S. Treasury interest rate for the nine months ended September 30, 2020, was 0.90%, compared to 2.26% for the same period of 2019. The growth in average interest-earning assets was able to partially offset the decrease in our yield on interest-earning assets between periods. Average loans grew $187.1 million, or 6%, between periods to $3.3 billion for the nine months ended September 30, 2020, and was primarily
54


driven by average SBA PPP loans of $133.6 million, for which we recognized $4.1 million of interest income (including accretion income on origination fees).
Interest expense. Interest expense for the nine months ended September 30, 2020 decreased $14.4 million, or 45%, to $17.2 million, compared to the same period of 2019. Cost of funds for the nine months ended September 30, 2020, decreased 54 basis points between periods to 0.55% for the nine months ended September 30, 2020 driven by: (i) a decrease in deposit costs of 39 basis points between periods to 0.44% for the nine months ended September 30, 2020; (ii) a decrease in borrowing costs of 104 basis points between periods to 1.26% for the nine months ended September 30, 2020; and (iii) a shift in funding mix as average deposits grew $422.3 million, or 13%, between periods to $3.6 billion for the nine months ended September 30, 2020, while average borrowings decreased $111.8 million, or 16%, between periods to $571.0 million for the nine months ended September 30, 2020. The change in funding mix between periods is in large part due to the impact of federal stimulus issued to businesses and consumers in response to the COVID-19 pandemic, as well as a shift in consumer habits in response to the COVID-19 pandemic, highlighted by the national personal savings rate nearly doubling to 14.1% in August 2020 compared to December 2019.

The following table presents average balances, interest income, interest expense, and the corresponding average yields earned and cost of funds, as well as net interest income, net interest rate spread and net interest margin on a fully-taxable basis for the followings periods:
55


Quarterly Average Balance, Interest and Yield/Rate Analysis
For The Three Months Ended
September 30, 2020September 30, 2019
(Dollars in thousands)Average BalanceInterestYield/RateAverage BalanceInterestYield/Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other banks and other interest-earning assets$216,027 $48 0.09 %$92,352 $530 2.24 %
Investments - taxable906,374 4,771 2.11 %807,591 5,109 2.53 %
Investments - nontaxable(1)
122,204 1,042 3.41 %98,378 854 3.47 %
Loans(2):
Commercial real estate1,315,958 12,562 3.74 %1,255,417 14,626 4.56 %
Commercial(1)
372,416 3,547 3.73 %399,689 4,753 4.65 %
SBA PPP221,672 2,357 4.16 %— — — %
HPFC16,104 333 8.09 %25,973 558 8.40 %
Municipal(1)
19,072 169 3.52 %22,730 206 3.60 %
Residential real estate1,083,052 10,822 4.00 %1,062,728 11,440 4.31 %
Consumer and home equity305,194 3,308 4.31 %347,405 4,708 5.38 %
Total loans3,333,468 33,098 3.92 %3,113,942 36,291 4.60 %
Total interest-earning assets4,578,073 38,959 3.37 %4,112,263 42,784 4.11 %
Cash and due from banks52,499 47,845 
Other assets401,213 324,046 
Less: ALL(35,756)(26,273)
Total assets$4,996,029 $4,457,881 
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking$741,757 $— — %$540,542 $— — %
Interest checking1,339,389 881 0.26 %1,130,632 2,728 0.96 %
Savings557,718 79 0.06 %474,096 98 0.08 %
Money market737,782 652 0.35 %622,219 2,068 1.32 %
Certificates of deposit417,788 1,126 1.07 %533,110 2,210 1.64 %
Total deposits3,794,434 2,738 0.29 %3,300,599 7,104 0.85 %
Borrowings:
Brokered deposits242,390 161 0.26 %305,019 1,859 2.42 %
Customer repurchase agreements194,937 207 0.42 %234,362 745 1.26 %
Subordinated debentures59,269 893 6.00 %58,998 833 5.60 %
Other borrowings73,370 187 1.02 %11,273 56 1.96 %
Total borrowings569,966 1,448 1.01 %609,652 3,493 2.27 %
Total funding liabilities4,364,400 4,186 0.38 %3,910,251 10,597 1.08 %
Other liabilities118,727 78,710 
Shareholders' equity512,902 468,920 
Total liabilities & shareholders' equity$4,996,029 $4,457,881 
Net interest income (fully-taxable equivalent)34,773 32,187 
Less: fully-taxable equivalent adjustment(292)(264)
Net interest income$34,481 $31,923 
Net interest rate spread (fully-taxable equivalent)2.99 %3.03 %
Net interest margin (fully-taxable equivalent)3.00 %3.09 %
Net interest margin (fully-taxable equivalent), excluding fair value mark accretion and collection of previously charged-off acquired loans(3)
2.96 %3.05 %
(1)    Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.
(2)    Non-accrual loans and loans held for sale are included in total average loans.
(3)    Excludes the impact of the fair value mark accretion on loans and CDs generated in purchase accounting and collection of previously charged-off acquired loans for the three months ended September 30, 2020 and 2019, totaling $453,000 and $409,000, respectively.







56


Year-To-Date Average Balance, Interest and Yield/Rate Analysis
For The Nine Months Ended
September 30, 2020September 30, 2019
(Dollars in thousands)Average BalanceInterestYield/RateAverage BalanceInterestYield/Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other banks and other interest-earning assets$150,383 $282 0.25 %$63,146 $1,081 2.26 %
Investments - taxable850,970 15,148 2.37 %832,780 15,922 2.55 %
Investments - nontaxable(1)
121,284 3,086 3.39 %94,405 2,460 3.47 %
Loans(2):
Commercial real estate1,297,364 38,817 3.93 %1,263,934 44,634 4.66 %
Commercial(1)
397,754 11,847 3.91 %386,338 13,736 4.69 %
SBA PPP133,569 4,063 4.00 %— — — %
HPFC18,026 1,150 8.38 %29,183 1,777 8.03 %
Municipal(1)
18,545 500 3.60 %19,421 518 3.56 %
Residential real estate1,082,276 33,116 4.08 %1,034,609 33,479 4.31 %
Consumer and home equity320,273 10,914 4.55 %347,201 14,111 5.43 %
Total loans3,267,807 100,407 4.06 %3,080,686 108,255 4.66 %
Total interest-earning assets4,390,444 118,923 3.59 %4,071,017 127,718 4.16 %
Cash and due from banks48,397 43,041 
Other assets376,857 303,538 
Less: ALL(29,633)(25,519)
Total assets$4,786,065 $4,392,077 
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking$645,640 $— — %$505,733 $— — %
Interest checking1,261,831 3,775 0.40 %1,108,999 8,140 0.98 %
Savings517,936 241 0.06 %478,573 296 0.08 %
Money market701,872 2,897 0.55 %595,659 5,671 1.27 %
Certificates of deposit482,076 4,921 1.36 %498,059 5,739 1.54 %
Total deposits3,609,355 11,834 0.44 %3,187,023 19,846 0.83 %
Borrowings:
Brokered deposits228,483 1,119 0.65 %360,066 6,696 2.49 %
Customer repurchase agreements213,463 1,131 0.71 %239,917 2,273 1.27 %
Subordinated debentures59,195 2,668 6.02 %58,997 2,373 5.38 %
Other borrowings69,883 460 0.88 %23,847 387 2.17 %
Total borrowings571,024 5,378 1.26 %682,827 11,729 2.30 %
Total funding liabilities4,180,379 17,212 0.55 %3,869,850 31,575 1.09 %
Other liabilities108,122 66,966 
Shareholders' equity497,564 455,261 
Total liabilities & shareholders' equity$4,786,065 $4,392,077 
Net interest income (fully-taxable equivalent)101,711 96,143 
Less: fully-taxable equivalent adjustment(865)(752)
Net interest income$100,846 $95,391 
Net interest rate spread (fully-taxable equivalent)3.04 %3.07 %
Net interest margin (fully-taxable equivalent)3.06 %3.13 %
Net interest margin (fully-taxable equivalent), excluding fair value mark accretion and collection of previously charged-off acquired loans(3)
3.03 %3.09 %
(1)    Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.
(2)    Non-accrual loans and loans held for sale are included in total average loans.
(3)    Excludes the impact of the fair value mark accretion on loans and CDs generated in purchase accounting and collection of previously charged-off acquired loans for the nine months ended September 30, 2020 and 2019, totaling $1.1 million and $1.2 million, respectively.

57


The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume. The (a) changes in volume (change in volume multiplied by prior period's rate), (b) changes in rates (change in rate multiplied prior period's volume), and (c) changes in rate/volume (change in rate multiplied by the change in volume), which is allocated to the change due to rate column.
For The Three Months Ended
September 30, 2020 vs. September 30, 2019
For The Nine Months Ended
September 30, 2020 vs. September 30, 2019
Increase (Decrease) Due to:Net Increase (Decrease)Increase (Decrease) Due to:Net Increase (Decrease)
(In thousands)VolumeRateVolumeRate
Interest-earning assets:            
Interest-bearing deposits in other banks and other interest-earning assets$693 $(1,175)$(482)$1,479 $(2,278)$(799)
Investments – taxable625 (963)(338)348 (1,122)(774)
Investments – nontaxable207 (19)188 700 (74)626 
Commercial real estate706 (2,770)(2,064)1,181 (7,000)(5,819)
Commercial(324)(882)(1,206)406 (2,295)(1,889)
SBA PPP2,357 — 2,357 4,063 — 4,063 
HPFC(212)(13)(225)(679)52 (627)
Municipal(33)(4)(37)(23)(16)
Residential real estate219 (837)(618)1,541 (1,904)(363)
Consumer and home equity(572)(828)(1,400)(1,094)(2,103)(3,197)
Total interest income (fully-taxable equivalent)3,666 (7,491)(3,825)7,922 (16,717)(8,795)
Interest-bearing liabilities:
Interest checking505 (2,352)(1,847)1,120 (5,485)(4,365)
Savings17 (36)(19)24 (79)(55)
Money market384 (1,800)(1,416)1,009 (3,783)(2,774)
Certificates of deposit(477)(607)(1,084)(184)(634)(818)
Brokered deposits(382)(1,316)(1,698)(2,451)(3,126)(5,577)
Customer repurchase agreements(125)(413)(538)(251)(891)(1,142)
Subordinated debentures56 60 287 295 
Other borrowings307 (176)131 747 (674)73 
Total interest expense233 (6,644)(6,411)22 (14,385)(14,363)
Net interest income (fully-taxable equivalent)$3,433 $(847)$2,586 $7,900 $(2,332)$5,568 

Provision for Credit Losses
As further described in "—Critical Accounting Policies" and Note 2 of the consolidated financial statements, the Company opted to delay implementation of ASU 2016-13, commonly referred to as "CECL," under the terms provided for within the CARES Act, signed into law in March 2020. The Company will adopt CECL upon the earlier of (1) the National Emergency terminates, or (2) December 31, 2020. As the National Emergency did not terminate prior to the end of the third quarter of 2020, the Company will adopt CECL in the fourth quarter of 2020, using a modified-retrospective method effective January 1, 2020. As such, the Company's reported provision for credit losses for the three and nine months ended September 30, 2020 was determined using the policies and procedures described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

The provision for credit losses consists of the provision for loan losses and the provision for unfunded commitments.

The provision for loan losses is a recorded expense determined by management that adjusts the ALL to a level that, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan
58


losses reflects loan quality, including, among other factors, the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio. Accordingly, the amount of the provision for loan losses reflects the necessary increases in the ALL related to newly identified criticized loans, as well as the actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

For the third quarter of 2020, the provision for loan losses was $1.0 million, an increase of $267,000 over the third quarter of 2019. For the nine months ended September 30, 2020, the provision for loan losses was $12.2 million, an increase of $9.5 million over the same period of 2019. The increase in the provision for loan losses for both periods was driven by an increase in the ALL due to estimates relating to the potential effects of the COVID-19 pandemic on our borrowers. Although asset quality at September 30, 2020 remains strong and COVID-19 deferments have steadily decreased, there continues to be an elevated credit risk throughout the industry given current market conditions, as well as the level of economic, political, and medical uncertainty that remains.

Refer to "—Financial Condition—Asset Quality" for further discussion of the Company's asset quality, including its temporary debt relief provided to loan customers impacted by the COVID-19 pandemic.

The provision for unfunded commitments represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. Refer to Note 4 of the consolidated financial statements for further discussion.

Non-Interest Income
The following table presents the components of non-interest income for the periods indicated:
 Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
(Dollars in thousands)20202019$%20202019$%
Mortgage banking income, net(1)
$4,664 $2,668 1,996 75 %$12,889 $5,662 $7,227 128 %
Debit card income2,627 2,432 195 %7,159 6,723 436 %
Service charges on deposit accounts(2)
1,606 1,970 (364)(18)%4,955 6,202 (1,247)(20)%
Income from fiduciary services1,504 1,444 60 %4,609 4,381 228 %
Brokerage and insurance commissions755 625 130 21 %2,034 1,942 92 %
Bank-owned life insurance615 613 — %1,918 1,810 108 %
Customer loan swap fees(3)
51 109 (58)(53)%222 919 (697)(76)%
Net gain on sale of securities— (1)(100)%— 28 (28)(100)%
Other income874 877 (3)— %2,373 2,498 (125)(5)%
Total non-interest income$12,696 $10,739 $1,957 18 %$36,159 $30,165 $5,994 20 %
Non-interest income as a percentage of total revenues27 %25 %26 %24 %
(1) Mortgage banking income, net: For the third quarter of 2020, the net gain on sale of residential mortgages, including the fair value mark on the loan pipeline designated for sale, was $4.0 million, an increase of $1.5 million over the third quarter of 2019. The increase between periods was driven by strong residential mortgage activity due to the historically low interest rate environment. In the third quarter of 2020, the Company sold $182.7 million of residential mortgages to the secondary market, compared to $86.9 million for the third quarter of 2019. The Company maintained the servicing rights on certain mortgages sold, and, as a result, servicing income for the third quarter of 2020 increased $446,000 over the third quarter of 2019.
For the nine months ended September 30, 2020, the net gain on sale of residential mortgages, including the fair value mark on the loan pipeline designated for sale, was $11.2 million, an increase of $6.1 million over the same period of 2019. During the nine months ended September 30, 2020, the Company sold $449.7 million of residential mortgages to the secondary market, compared to $164.5 million for the nine months ended September 30, 2019. The Company maintained the servicing rights on certain mortgages sold, and, as a result, servicing income for the nine months ended September 30, 2020 increased $1.1 million over the same period of 2019.
59


(2) Service charges on deposit accounts: The decrease for the three and nine months ended September 30, 2020, compared to the same periods of 2019, was primarily due to lower utilization of the overdraft program which resulted in a decrease in overdraft fees of $312,000 and $1.2 million, respectively. In response to the COVID-19 pandemic, we saw a shift in customer behavior as there were less merchant transactions and higher deposit balances, in part, due to the federal stimulus provided to consumers and commercial customers, as well as an increase in the national personal savings rate, which nearly doubled to 14.1% in August 2020 compared to December 2019.
(3)     Customer loan swap fees: The decrease for the three and nine months ended September 30, 2020, compared to the same periods of 2019, was driven by a change in appetite by the Company for this loan product and structure as interest rates have decreased significantly to historically low levels.
Non-Interest Expense
The following table presents the components of non-interest expense for the periods indicated:
 Three Months Ended
September 30,
ChangeNine Months Ended
September 30,
Change
(Dollars in thousands)20202019$%20202019$%
Salaries and employee benefits(1)
$13,739 $13,604 $135 %$41,693 $40,043 $1,650 %
Furniture, equipment and data processing3,076 2,708 368 14 %8,576 8,111 465 %
Net occupancy costs1,785 1,710 75 %5,785 5,263 522 10 %
Consulting and professional fees913 892 21 %2,877 2,679 198 %
Debit card expense972 960 12 %2,784 2,666 118 %
Regulatory assessments(2)
510 182 328 180 %971 1,091 (120)(11)%
Amortization of core deposit intangible assets170 177 (7)(4)%511 529 (18)(3)%
Other real estate owned and collection costs, net71 251 (180)(72)%270 353 (83)(24)%
Other expenses(3)
3,985 3,264 721 22 %9,824 9,754 70 %
Total non-interest expense$25,221 $23,748 $1,473 %$73,291 $70,489 $2,802 %
GAAP efficiency ratio53.46 %55.67 %53.50 %56.14 %
Non-GAAP efficiency ratio50.60 %55.32 %52.29 %55.82 %
(1)    Salaries and employee benefits: The increase for the nine months ended September 30, 2020, over the same periods of 2019 was driven by normal annual merit increases and a temporary increase in wages of $238,000 for those employees that continued to service our customers as an essential business during the COVID-19 pandemic.
(2)    Furniture, equipment and data processing costs: The increase for the three and nine months ended September 30, 2020, over the same periods of 2019 was driven by $196,000 in one-time system conversion costs in the third quarter of 2020 and increased online banking costs of $54,000 and $113,000 for the three and nine months ended September 30, 2020, respectively, over the same periods last year driven by higher customer utilization due to the COVID-19 pandemic.
(3)    Net occupancy costs: The increase for the nine months ended September 30, 2020, over the same period of 2019 was driven by an increase in rent and related-expenses of $356,000 and office cleaning expenses of $237,000 due to the COVID-19 pandemic, partially offset by lower office utility costs of $207,000 as many of our employees worked remotely due to the COVID-19 pandemic.
(4)     Regulatory assessments: The increase for the three months ended September 30, 2020, compared to the same period of 2019, as well as the decrease for the nine months ended September 30, 2020, compared to the same period of 2019, was driven by the receipt of the Small Bank Assessment Credit from the FDIC beginning in the third quarter of 2019 through the second quarter of 2020. Effective for the third quarter of 2020, the Company has no remaining Small Bank Assessment Credits, and its regulatory assessment costs are now reverting back to historical levels.
(5) Other expenses: The increase for the three and nine months ended September 30, 2020, over the same periods of 2019 was primarily driven by a $1.2 million legal settlement in the third quarter of 2020 to avoid the burden and expense of litigation. This was partially offset by: (i) lower employee-related costs, including hiring, training and travel, of $285,000 and $753,000 for the three and nine months ended September 30, 2020, compared to the same periods last year, respectively, as employees transitioned to a remote work environment in the second quarter of 2020 and many continued operating in this fashion through the third quarter of 2020; and (ii) lower marketing costs of $239,000 and $370,000 for the three and nine months ended September 30, 2020, compared to the same periods last year, respectively, as certain programs
60


were put on hold in 2020 as we prioritized our response to the COVID-19 pandemic, including the health and safety of our employee and customers.

FINANCIAL CONDITION

Investments
The Company utilizes the investment portfolio to manage liquidity, interest rate risk, and regulatory capital, as well as to take advantage of market conditions to generate a favorable return on investments without undue risk. The Company’s investment portfolio consists of debt securities we have designated as AFS and HTM, as well as common stock of the FHLBB, FRB and certain banks. Investments increased $188.6 million, or 20%, at September 30, 2020 as compared to December 31, 2019, driven by the deployment of excess cash that has resulted from deposit growth. The following is the activity in our investment portfolio:
The purchase of $341.1 million of investments during the nine months ended September 30, 2020 with a weighted-average life of 4.9 years;
A net increase in the fair value of the AFS debt securities portfolio of $32.5 million driven by the change in general market conditions, specifically a decrease in long-term interest rates at September 30, 2020, compared to December 31, 2019;
Partially offset by paydowns and calls of $181.5 million.

Our investments in FHLBB and FRB common stock are carried at cost. These investments are presented within other investments on the consolidated statements of condition. We are required to maintain a level of investment in FHLBB stock based on our level of FHLBB advances, and maintain a level of investment in FRB common stock based on the Bank's capital levels. As of September 30, 2020 and December 31, 2019, our investment in FHLBB stock totaled $6.3 million and $6.6 million, respectively, and our investment in FRB stock was $5.4 million at each date.

As further described in "– Critical Accounting Policies" and Note 2 of the consolidated financial statements, the Company opted to delay implementation of ASU 2016-13, commonly referred to as "CECL," under the terms provided for within the CARES Act, signed into law in March 2020. The Company will adopt CECL upon the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic that the President of the United States declared on March 15, 2020 terminates, or (2) December 31, 2020. As of September 30, 2020, the national emergency for the COVID-19 pandemic has not yet been rescinded, and as such, the Company for the three and nine months ended September 30, 2020, assessed its investments for OTTI using the policies and procedures described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

The Company monitors its investments for the presence of OTTI. For debt securities the primary consideration in determining OTTI impairment is whether or not the Bank expects to collect all contractual cash flows. There was no OTTI recorded on investments as of September 30, 2020 or December 31, 2019.

We continuously monitor and evaluate our investment portfolio to identify and assess risks within our portfolio, including, but not limited to, the impact of the current interest rate environment and the related prepayment risk, and review credit ratings. The overall mix of debt securities at September 30, 2020, compared to December 31, 2019, remains relatively unchanged and well positioned to provide a stable source of cash flow. At September 30, 2020 and December 31, 2019, the duration of our debt investment securities portfolio, adjusting for calls when appropriate and consensus prepayment speeds, was 3.9 and 4.7 years, respectively. We are currently investing in longer duration debt securities, or those with call protection, to limit prepayment risk and to protect against a lower rate environment.

61


Loans
The Company provides loans primarily to customers located within our geographic market area. Our primary market continues to be Maine, making up 75% and 76% of the loan portfolio as of September 30, 2020 and December 31, 2019, respectively. Massachusetts and New Hampshire are our second and third largest markets that we serve, making up 13% and 7% and 13% and 6%, respectively, of our total loan portfolio as of September 30, 2020 and December 31, 2019. Our distribution channels include 57 branches within Maine, a residential mortgage lending office in Massachusetts, a branch and commercial loan production office in New Hampshire, and on-line residential mortgage and small commercial loan platforms.

The following table sets forth the composition of our loan portfolio as of the dates indicated:
Change
(Dollars in thousands)September 30,
2020
December 31,
2019
($)(%)
Commercial real estate$1,333,733 $1,243,397 $90,336 %
Commercial360,629 421,108 (60,479)(14)%
SBA PPP223,838 — 223,838 N.M.
HPFC14,919 21,593 (6,674)(31)%
Residential real estate1,044,103 1,070,374 (26,271)(2)%
Consumer and home equity297,620 338,551 (40,931)(12)%
Total loans$3,274,842 $3,095,023 $179,819 %
Commercial Loan Portfolio$1,933,119 $1,686,098 $247,021 15 %
Retail Loan Portfolio$1,341,723 $1,408,925 $(67,202)(5)%
Commercial Portfolio Mix59 %54 %
Retail Portfolio Mix41 %46 %

Beginning in April 2020, the Company started funding SBA PPP loans issued to qualifying small businesses as part of the federal stimulus package issued due to the COVID-19 pandemic. Under the terms of the SBA PPP, loans issued may be forgiven in part or in full should the borrower meet certain conditions. In this instance, the Company will seek payment for the forgivable portion of the loan from the SBA. Loans made under the SBA PPP may have terms of two or five years, are fully guaranteed by the SBA, and have a fixed rate of 1.0%. For originating the loans, the Company receives an origination fee, paid by the SBA, based on a tiered structure that is dependent on each individual loan size. These fees were capitalized as origination fees and earned over the life of the loan in accordance with the Company's policy.

In the second and third quarters of 2020, we originated 3,034 PPP loans with total funding of $244.8 million. As of September 30, 2020, there were 3,004 PPP loans outstanding with a total recorded investment of $223.8 million, which includes $5.4 million of unearned fees. We anticipate that over the coming months, as borrowers apply for forgiveness, the Company's PPP loans balance will decrease significantly, which will also expedite the recognition of the unearned fees.
62


Asset Quality
Non-Performing Assets.  Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, accruing TDRs, and property acquired through foreclosure or repossession. The following table sets forth the make-up and amount of our non-performing assets as of the dates indicated: 
(Dollars in thousands)September 30,
2020
December 31,
2019
Non-accrual loans:  
Commercial real estate$565 $1,122 
Commercial605 420 
SBA PPP— — 
HPFC509 364 
Residential real estate4,017 4,096 
Consumer and home equity2,503 2,154 
Total non-accrual loans8,199 8,156 
Accruing TDRs not included above2,952 2,993 
Total non-performing loans11,151 11,149 
Other real estate owned— 94 
Total non-performing assets$11,151 $11,243 
Non-accrual loans to total loans0.25 %0.26 %
Non-performing loans to total loans0.34 %0.36 %
ALL to non-performing loans326.55 %225.77 %
Non-performing assets to total assets0.22 %0.25 %
ALL to non-performing assets326.55 %223.88 %
 
Potential Problem Loans.  Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in a loss. These loans are not included in the above analysis of non-accrual loans. At September 30, 2020, potential problem loans amounted to $2.8 million, or 0.09% of total loans.

Past Due Loans.  Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table presents the recorded investment of past due loans as of the dates indicated:
(Dollars in thousands)September 30,
2020
December 31,
2019
Accruing loans 30-89 days past due:  
Commercial real estate$2,056 $1,582 
Commercial1,315 548 
SBA PPP— — 
HPFC323 243 
Residential real estate1,784 2,227 
Consumer and home equity434 750 
Total$5,912 $5,350 
Accruing loans 30-89 days past due to total loans0.18 %0.17 %

63


COVID-19 Payment Deferral. In response to the COVID-19 pandemic, we worked with businesses and consumers to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. All loans that were granted a short-term payment deferral were done so in accordance with the terms of the CARES Act or regulatory guidance. As such, none of the loans that were temporarily granted payment relief were assessed, designated or accounted for as TDRs. As of September 30, 2020, 5.5% of total loans were operating under a COVID-19 payment deferral arrangement, compared to 16.4% at June 30, 2020. We anticipate that the number of loans and loan balances operating under this arrangement will continue to decrease in coming months as the temporary debt relief provided to our loan customers matures. As the payment deferral period ends, these loans will return to payment status, and we will continue to monitor these loans closely and take any necessary actions swiftly should we see signs of payment risk or stress.

Loans that were granted temporary debt relief were not automatically downgraded into lower credit risk ratings. We continue to actively monitor these loans for indications of credit deterioration as the deferral period matures, which could result in future downgrades.

All loans that were granted temporary payment relief due to the COVID-19 pandemic were current with payments in accordance with the terms of the CARES Act or bank regulatory guidance at the time of initial relief. At September 30, 2020, the payment status for loans that continued to operate under a payment deferral arrangement were reported based on payment status at the time the deferral was granted to the borrower.

The Company continued to accrue and recognize interest on loans that were granted temporary debt relief throughout the payment deferral period. We instituted robust monitoring protocols on these loans, so that at the first sign of credit risk or collection of the contractual payment in full, the loan would be then designated as non-performing and any uncollected interest due to the Company would be written-off at that time, reducing interest income. As of September 30, 2020, we had not written-off any uncollected interest on these loans.

Allowance for Loan Losses.  We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient ALL. The ALL is management’s best estimate of the probable loan losses as of the balance sheet date. The ALL is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans.

64


The following table sets forth information concerning the activity in the ALL for the periods indicated:
At or For The
Three Months Ended
September 30,
At or For The
Nine Months Ended
September 30,
At or For The
Year Ended
December 31, 2019
(Dollars in thousands)2020201920202019
ALL at the beginning of the period$35,539 $26,163 $25,171 $24,712 $24,712 
Provision for loan losses1,000 733 12,172 2,658 2,862 
Charge-offs:  
Commercial real estate33 92 104 157 300 
Commercial184 183 857 636 1,167 
SBA PPP— — — — — 
HPFC— 11 — 11 71 
Residential real estate25 411 121 436 462 
Consumer and home equity65 606 199 670 713 
Total charge-offs307 1,303 1,281 1,910 2,713 
Recoveries:  
Commercial real estate34 10 41 49 
Commercial139 56 255 167 225 
SBA PPP— — — — — 
HPFC— — — — — 
Residential real estate27 16 
Consumer and home equity36 60 14 20 
Total recoveries182 95 352 228 310 
Net charge-offs125 1,208 929 1,682 2,403 
ALL at the end of the period$36,414 $25,688 $36,414 $25,688 $25,171 
Components of allowance for credit losses:  
Allowance for loan losses$36,414 $25,688 $36,414 $25,688 $25,171 
Liability for unfunded credit commitments11 11 21 
Balance of allowance for credit losses at end of the period$36,423 $25,699 $36,423 $25,699 $25,192 
Net charge-offs (annualized) to average loans0.01 %0.16 %0.04 %0.07 %0.08 %
Provision for loan losses (annualized) to average loans0.12 %0.09 %0.50 %0.12 %0.09 %
ALL to total loans1.11 %0.83 %1.11 %0.83 %0.81 %
ALL to net charge-offs (annualized)7,282.80 %531.62 %2,939.77 %1,145.42 %1,047.48 %

The determination of an appropriate level of ALL, and subsequent provision for loan losses which affects earnings, is based on our analysis of various economic factors, which included consideration of the COVID-19 pandemic, and review of the loan portfolio. During our analysis and review, many factors are considered including, but not limited to, loan growth, payoffs of lower quality loans, recoveries on previously charged-off loans, known changes in the financial condition of the borrowers, risk rating downgrades/upgrades and charge-offs. We utilize a comprehensive approach toward determining the ALL, which includes an expanded risk rating system to assist us in identifying the risks being undertaken.

We believe the ALL of $36.4 million, or 1.11% of total loans and 326.55% of total non-performing loans, at September 30, 2020 was appropriate given the current economic conditions in our markets, which included consideration of the COVID-19 pandemic and its impact on our customers, local economies, and the condition of the loan portfolio. The impact of the COVID-19 pandemic on a global, national and local level continues to be uncertain at this time, though we expect it will likely result in overall credit quality deterioration, particularly within certain industries more susceptible to the impact of COVID-19, which we believe to include lodging, senior living and care facilities, restaurants, and travel and recreation, which made up 12%
65


of total loans as of September 30, 2020. Should credit quality, or factors known to affect credit quality, deteriorate in future periods and/or the Company experience elevated net charge-offs, we would anticipate a corresponding increase in the ALL and provision for loan losses.

Goodwill
In the first quarter of 2020, we assessed whether the COVID-19 pandemic and its impact on the global, national and local markets and economy, including the Company's share price, created a triggering event that required assessment of the Company's goodwill for impairment in an interim period. As of March 31, 2020, we had determined that a triggering event had not yet occurred.

Given the sustained impact of the COVID-19 pandemic in the second quarter, including its impact on the economy and capital markets, including the Company's stock price, we concluded that a triggering event had occurred, and, thus, an interim goodwill impairment assessment was performed. A quantitative assessment was performed, using various valuation methodologies, as of May 31, 2020. Through the assessment we concluded that the indicated fair value of the reporting unit exceeded its book value, and, thus goodwill was not impaired as of May 31, 2020. As of June and September 30, 2020, we determined there were no new events or information that would materially change our quantitative analysis that was performed as of May 31, 2020.

Liabilities and Shareholders’ Equity.
Deposits. Total deposits increased $686.3 million, or 19%, since December 31, 2019, to $4.2 billion at September 30, 2020. For the nine months ended September 30, 2020, checking account balances grew $514.3 million, or 30%, and savings and money market balances grew $187.7 million, or 17%. The increase in deposits was driven by various factors in response to the COVID-19 pandemic, including the federal government stimulus programs and a shift in consumer habits as the national personal savings rate nearly doubled to 14.1% in August 2020 compared to December 31, 2019.

The Company's loan-to-deposit ratio was 78% at September 30, 2020, compared to 87% at December 31, 2019.

Borrowings. Total borrowings decreased $43.5 million, or 13%, since December 31, 2019 to $294.4 million at September 30, 2020. The Company continues to primarily use short-term borrowings to supplement funding in the current low interest rate environment. During the nine months ended September 30, 2020, we locked-in $135.0 million of long-term funding at interest rates below 1% through a five-year $25.0 million FHLBB borrowing, two $50.0 million interest rate swaps for three- and ten-year funding, and a $10.0 million forward-starting interest swap on 15-year funding, effective June 30, 2021. Refer to "—Contractual Obligations and Off-Balance Sheet Commitments" and Note 8 of the consolidated financial statements for further discussion.

Shareholders' Equity. In January 2020, the Company's Board of Directors authorized the purchase of up to 750,000 shares of our common stock, representing approximately 5.0% of our issued and outstanding shares as of December 31, 2019. In the first quarter of 2020, we repurchased 217,031 shares of the Company's common stock at a weighted average price of $36.74 per share, before temporarily suspending our repurchase program in mid-March 2020, as our strategy shifted from earnings generation to capital preservation during the COVID-19 pandemic. In the third quarter of 2020, we lifted our temporary suspension and repurchased 47,915 shares at a weighted average price of $29.26 for the three months ended September 30, 2020, bringing our total shares repurchased for the nine months ended September 30, 2020, to 264,946.

66


The following table presents certain information regarding shareholders’ equity as of or for the periods indicated:
At or For The
Three Months Ended
September 30,
At or For The
Nine Months Ended
September 30,
At or For The
Year Ended
December 31,
2019
2020201920202019
Financial Ratios
Average equity to average assets10.27 %10.52 %10.40 %10.37 %10.43 %
Common equity ratio10.04 %10.43 %10.04 %10.43 %10.69 %
Tangible common equity ratio(1)
8.30 %8.44 %8.30 %8.44 %8.66 %