AD Roberts
Related Articles
The First Bancorp, Inc. and Subsidiary Forward-Looking Statements This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with theSecurities and Exchange Commission ("SEC"), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, 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. Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in theU.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, uncertainties with respect to the duration, nature, and extent of the COVID-19 pandemic and its consequences, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC , may result in these differences, as well as the "Risk Factors" in Part II, Item 1A listed below. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business. Critical Accounting Policies Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with GAAP. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, the fair value of securities, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions. Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management regularly evaluates the allowance, typically monthly, to determine the appropriate level by taking into consideration factors such as the size and growth trajectory of the portfolio, quality trends as measured by key indicators, prior loan loss experience in major portfolio segments, local and national business and economic conditions, the results of any stress testing undertaken during the period, and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses.Goodwill . Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required underFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350 "Intangibles -Goodwill and Other." In addition, 47 -------------------------------------------------------------------------------- goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions. Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Fair Value of Securities. Determining a market price for securities carried at fair value is a critical accounting estimate in the Company's financial statements. Pricing of individual securities is subject to a number of factors including changes in market interest rates, changes in prepayment speeds and assumptions, changes in market tolerance for risk, and any changes in the risk profile of the security. The Company subscribes to a widely recognized, independent pricing service and updates carrying values no less frequently than monthly. It also validates the values provided by the pricing service no less frequently than quarterly by measuring against security prices provided by a secondary source. Results of the validation are reported to the Bank's Asset Liability Committee each quarter and any variances between the two sources above defined thresholds are investigated by management. Other-Than-Temporary Impairment on Securities. Another significant estimate related to investment securities is the evaluation of other-than-temporary impairment. The evaluation of securities for other-than-temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due. Derivative Financial Instruments Designated as Hedges. The Company recognizes all derivatives in the consolidated balance sheets at fair value. On the date the Company enters into the derivative contract, the Company designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), or a held for trading instrument ("trading instrument"). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Bank also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments include customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate. Risks and Uncertainties. As ofSeptember 30, 2021 , local and state governments in the US have eased most restrictions imposed to curtail the spread of the global pandemic, coronavirus disease (COVID-19), however limitations in some sectors 48 -------------------------------------------------------------------------------- remain in place and are expected to remain in place in some form subsequent toSeptember 30, 2021 . There continues to be uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any further government actions to mitigate them. Accordingly, while management has considered the effect of the pandemic on collectability of loans receivable and other business impacts, it is possible that this matter may have a further financial impact on the Company's financial position and results of future operations, such potential impact of which cannot be reasonably estimated. Use of Non-GAAP Financial Measures Certain information in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with GAAP. Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without 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 operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. In several places net interest income is presented on a fully taxable-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total which, as adjusted, increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices. The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. A Federal Income Tax rate of 21.0% was used in 2021 and 2020. For the nine months ended
For the quarter ended in September
September 30, 30,
Dollars in thousands 2021 2020 2021 2020
Net interest income as presented
17,011$ 14,745 Effect of tax-exempt income 1,762 1,741 574 586
Net interest income, tax equivalent
17,585
The Company presents its efficiency ratio using non-GAAP information which is
most commonly used by financial institutions. The GAAP-based efficiency ratio is
noninterest expenses divided by net interest income plus noninterest income from
the Consolidated Statements of Income and Comprehensive Income (Loss). The
non-GAAP efficiency ratio excludes securities losses and other-than-temporary
impairment charges from noninterest expenses, excludes securities gains from
noninterest income, and adds the tax-equivalent adjustment to net interest
income.
49
--------------------------------------------------------------------------------
The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:
For the nine months ended
2021 2020 2021 2020 Non-interest expense, as presented $ 29,302 $
29,236 $ 9,932 $ 9,276 Net interest income, as presented
48,607 44,154 17,011 14,745
Effect of tax-exempt interest income 1,762 1,741 574 586
Non-interest income, as presented 14,584 13,627 4,375 4,805
Effect of non-interest tax-exempt income 124 124 41 41
Net securities (gains) losses (22) (1,179) 142 -
Adjusted net interest income plus
non-interest income $ 65,055 $ 58,467 $ 22,143 $ 20,177
Non-GAAP efficiency ratio 45.04 % 50.00 % 44.85 % 45.97 %
GAAP efficiency ratio 46.37 % 50.60 % 46.44 % 47.45 %
The Company presents certain information based upon average tangible
shareholders' common equity instead of total average shareholders' equity. The
difference between these measures is the Company's intangible assets,
specifically goodwill from prior acquisitions. Management, banking regulators
and many stock analysts use the tangible common equity ratio and the tangible
book value per common share in conjunction with more traditional bank capital
ratios to compare the capital adequacy of banking organizations with significant
amounts of goodwill or other intangible assets, typically stemming from the use
of the purchase accounting method in accounting for mergers and acquisitions.
The following table provides a reconciliation of average tangible shareholders'
common equity to the Company's consolidated financial statements, which have
been prepared in accordance with GAAP:
For the nine months ended For the quarter ended
September 30, September 30,
Dollars in thousands 2021 2020 2021 2020
Average shareholders' equity as
presented $ 233,763 $ 218,603
Less average intangible assets (30,971) (29,920) (30,994) (29,934) Average tangible shareholders' common equity$ 202,792 $ 188,683 $ 208,678 $ 190,531 To provide period-to-period comparison of operating results prior to consideration of credit loss provision and income taxes, the non-GAAP measure of Pre-Tax, Pre-Provision Net Income is presented. The following table provides a reconciliation to Net Income: For the nine months ended
For the quarter ended in September
September 30, 30, Dollars in thousands 2021 2020 2021 2020 Net Income, as presented$ 26,723 $ 20,159 $ 9,014 $ 7,095 Add: provision for loan losses 1,575 4,550 525 1,800 Add: income taxes expense 5,591 3,836
1,915 1,379 Net income before tax and before provisions
50
-------------------------------------------------------------------------------- Executive Summary Net income for the nine months endedSeptember 30, 2021 was$26.7 million , up$6.6 million or 32.6% from the same period in 2020. Earnings per common share on a fully diluted basis were$2.43 for the nine months endedSeptember 30, 2021 , up$0.59 or 32.1% from the$1.84 posted for the same period in 2020. For the quarter endedSeptember 30, 2021 , net income was$9.0 million , up$1.9 million or 27.0% from the same period in 2020. Earnings per common share on a fully diluted basis were$0.82 for the quarter endedSeptember 30, 2021 , up$0.17 or 26.2% from the$0.65 posted for the same period in 2020. The Company posted very positive operating results during the first nine months of 2021. Net income of$26.7 million was achieved from a combination of increased net interest income before loan loss provision, continued strong non-interest revenue and controlled operating expenses. Asset quality is strong and stable. Based upon the strength of the Company's earnings, dividends totaling95 cents per share have been declared year-to-date, representing a payout to our shareholders of 38.78% of basic earnings per share for the period. Net interest income on a tax-equivalent basis was up$4.47 million or 9.7% in the nine months endedSeptember 30, 2021 compared to the same period in 2020. This increase is attributable primarily to growth in earning assets along with recognition of origination fees on Payroll Protection Plan ("PPP") loans. The tax equivalent net interest margin for the nine months endedSeptember 30, 2021 , was 2.94%, slightly up from 2.93% for the same period in 2020. For the quarter endedSeptember 30, 2021 , net interest income on a tax-equivalent basis increased$2.3 million or 14.7% compared to the same period in 2020, with the net interest margin at 2.96% compared to 2.82% for the same period in 2020. Non-interest income for the nine months endedSeptember 30, 2021 was$14.6 million , up$1.0 million or 7.0%, from the nine months endedSeptember 30, 2020 . Revenue at First National Wealth Management increased$640,000 or 23.6% over the same period, debit card revenue was up$834,000 or 27.4% and mortgage banking revenue increased$549,000 or 14.4%. Net gains on sales of securities for the nine months endedSeptember 30, 2021 were down$1.2 million , or 98.1% from the prior year period. Non-interest expense for the nine months endedSeptember 30, 2021 was$29.3 million , up$66,000 or 0.2% from the nine months endedSeptember 30, 2020 . Salaries and employee benefits increased while other operating expense decreased over the same period. Asset quality continues to be strong and stable. Non-performing assets stood at 0.25% of total assets as ofSeptember 30, 2021 , down from 0.43% of total assets as ofSeptember 30, 2020 and 0.32% as ofDecember 31, 2020 . Total past-due loans were 0.25% of total loans as ofSeptember 30, 2021 , down from 0.66% of total loans as ofDecember 31, 2020 and 0.89% as ofSeptember 30, 2020 . The provision for loan losses for the first nine months of 2021 was$1.6 million , down from the$4.6 million provisioned in the same period in 2020. The Company continues to view it prudent to consider the uncertainties brought about by COVID-19 and the potential impact to borrowers in its provision analysis. Net loan chargeoffs for the nine months endedSeptember 30, 2021 were$321,000 or 0.03% of average loans on an annualized basis. This was down from net chargeoffs of$818,000 for the nine months endedSeptember 30, 2020 . The allowance for loan losses increased$1.3 million betweenDecember 31, 2020 andSeptember 30, 2021 , and now stands at 1.08% of loans outstanding as ofSeptember 30, 2021 , down slightly from 1.10% atDecember 31, 2020 and up slightly from 1.07% of loans outstandingSeptember 30, 2020 . The Company's balance sheet continued to expand in the first nine months of 2021 as total assets increased$168.4 million or 7.1% year-to-date. The loan portfolio increased$140.5 million or 9.5% in the nine months endedSeptember 30, 2021 and$180.6 million or 12.6% from a year ago. Loan growth in the first nine months of 2021 was centered in commercial real estate and construction loans, up$124.7 million , and other commercial loans, up$3.1 million . Other commercial loans include PPP loan balances of$39.6 million , a decrease of$20.5 million sinceDecember 31, 2020 . The investment portfolio has increased$4.2 million year-to-date and increased$11.1 million or 1.6% from a year ago. On the liability side of the balance sheet, low-cost deposits have increased$253.0 million or 23.5% year-to-date; this growth is attributed to a combination of inflows from economic stimulus programs, new customer acquisition, and an anecdotally strong summer tourism season in the Bank's market area. Year-over-year, low-cost deposits have increased$312.0 million or 30.7%. Local certificates of deposit ("CDs") decreased$12.1 million and wholesale CDs decreased$78.9 million year-to-date. Remaining well capitalized is a top priority forThe First Bancorp, Inc. The Company's total risk-based capital ratio was 14.48% as ofSeptember 30, 2021 , solidly above the well-capitalized threshold of 10.0% set by theFederal Deposit Insurance Corporation , theFederal Reserve Board , and theOffice of the Comptroller of the Currency . The Company's operating ratios were strong in the first nine months of 2021, with a return on average tangible common equity of 17.62% for the nine months endedSeptember 30, 2021 compared to 14.27% for the same period in 2020. Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 45.04% for the nine months endedSeptember 30, 2021 compared to 50.00% for the same period in 2020. The Company's efficiency ratio was elevated in the first quarter of 2020 due to charges taken to restructure several interest rate swap positions. In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%. 51
-------------------------------------------------------------------------------- Net Interest Income Total interest income of$57.1 million for the nine months endedSeptember 30, 2021 was a decrease of$904,000 or 1.6% compared to total interest income of$58.0 million for the same period of 2020. Earning asset growth, along with increased fee recognition from PPP loans, mitigated a reduction in average earning asset yields of 0.38 percentage points. Total interest expense of$8.5 million for the nine months endedSeptember 30, 2021 was a decrease of$5.4 million or 38.7% compared to total interest expense for the nine months endedSeptember 30, 2020 , a function of a reduction in average cost of 0.43 percentage points. As a result, net interest income of$48.6 million for the nine months endedSeptember 30, 2021 was an increase of$4.5 million or 10.1% compared to net interest income of$44.2 million for the same period endedSeptember 30, 2020 . The Company's net interest margin on a tax-equivalent basis for the nine months endedSeptember 30, 2021 was 2.94%, up slightly from 2.93% for the first nine months of 2020. Tax-exempt interest income amounted to$6.6 million for the nine months endedSeptember 30, 2021 compared to$6.5 million for the nine months endedSeptember 30, 2020 . The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the nine months and quarters endedSeptember 30, 2021 and 2020. Tax-exempt income is calculated on a tax-equivalent basis, using a 21.0% Federal Income Tax rate.
For the nine months ended
September 30, 2021 September 30, 2020
Amount of Average Amount of Average
Dollars in thousands interest Yield/Rate interest Yield/Rate
Interest on earning assets
Interest-bearing deposits $ 45 0.11 % $ 87 0.46 %
Investments 12,714 2.45 % 15,277 3.07 %
Loans held for sale 22 1.16 % 25 1.24 %
Loans 46,063 3.99 % 44,338 4.23 %
Total interest income 58,844 3.43 % 59,727 3.81 %
Interest expense
Deposits 5,796 0.47 % 11,613 1.03 %
Other borrowings 2,679 1.54 % 2,219 1.15 %
Total interest expense 8,475 0.61 % 13,832 1.04 %
Net interest income $ 50,369 $ 45,895
Interest rate spread 2.82 % 2.77 %
Net interest margin 2.94 % 2.93 %
For the quarters ended
September 30, 2021 September 30, 2020
Amount of Average Amount of Average
Dollars in thousands interest Yield/Rate interest Yield/Rate
Interest on earning assets
Interest-bearing deposits $ 21 0.14 % $ 8 0.12 %
Investments 4,168 2.37 % 4,898 2.88 %
Loans held for sale 3 0.97 % 19 1.51 %
Loans 15,970 3.96 % 14,167 3.88 %
Total interest-earning assets 20,162 3.39 % 19,092 3.52 %
Interest expense
Deposits 1,650 0.40 % 2,866 0.75 %
Other borrowings 927 1.57 % 895 1.27 %
Total interest expense 2,577 0.54 % 3,761 0.83 %
Net interest income $ 17,585 $ 15,331
Interest rate spread 2.85 % 2.69 %
Net interest margin 2.96 % 2.82 %
52
-------------------------------------------------------------------------------- Interest income includes$2.9 million in net origination fees recognized during the first nine months of 2021, attributable to PPP loans; as ofSeptember 30, 2021 , net unrecognized PPP origination fees totaled$2.4 million . Interest income in the first nine months of 2020 (program commenced in the second quarter) included a net$788,000 in origination fees recognized on PPP loans; as ofSeptember 30, 2020 net unrecognized PPP origination fees totaled$2.7 million . The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the nine months and quarters ended endedSeptember 30, 2021 compared to 2020. Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate. For the nine months endedSeptember 30, 2021 compared to 2020 Dollars in thousands Volume Rate Rate/Volume1 Total Interest on earning assets Interest-bearing deposits$ 95 $ (66) $ (71)$ (42) Investment securities 679 (3,104) (138) (2,563) Loans held for sale (2) (2) 1 (3) Loans 4,549 (2,562) (262) 1,725 Change in interest income 5,321 (5,734) (470) (883) Interest expense Deposits 951 (6,256) (512) (5,817) Other borrowings (226) 763 (77) 460 Change in interest expense 725 (5,493) (589) (5,357) Change in net interest income$ 4,596 $
(241) $ 119
1 Represents the change attributable to a combination of change in rate and change in volume. For the quarter endedSeptember 30, 2021 compared to 2020 Dollars in thousands Volume Rate Rate/Volume1 Total Interest on earning assets Interest-bearing deposits$ 11 $ 1 $ 1$ 13 Investment securities 153 (856) (27) (730) Loans held for sale (14) (7) 5 (16) Loans 1,429 340 34 1,803 Change in interest income 1,579 (522) 13 1,070 Interest expense Deposits 249 (1,348) (117) (1,216) Other borrowings (151) 220 (37) 32 Change in interest expense 98 (1,128) (154) (1,184) Change in net interest income$ 1,481 $
$ 606,167
53 -------------------------------------------------------------------------------- Average Daily Balance Sheets The following table shows the Company's average daily balance sheets for the nine months and quarters endedSeptember 30, 2021 and 2020. For the nine months ended For the quarters ended September 30, September 30, September 30, September 30, Dollars in thousands 2021 2020 2021 2020 Assets Cash and cash equivalents$ 23,152 $
19 336
Interest-bearing deposits in other banks
53,251 25,386 59,939 25,558
Securities available for sale 306,007 321,834 311,212 318,080
Securities to be held to maturity 378,526 332,467 377,879 348,185
Restricted equity securities, at cost 9,539 10,252 8,839 10,545
Loans held for sale 2,530 2,701 1,228 4,998
Loans 1,543,142 1,399,539 1,599,728 1,453,139
Allowance for loan losses (16,788) (12,850) (17,180) (14,552)
Net loans 1,526,354 1,386,689 1,582,548 1,438,587
Accrued interest receivable 9,686 9,144 8,714 9,947
Premises and equipment 28,862 20,971 29,378 20,611
Other real estate owned 325 527 71 845
Goodwill 30,646 29,805 30,646 29,805
Other assets 46,040 51,482 45,463 53,131
Total Assets $ 2,414,918 $ 2,210,594 $ 2,481,112 $ 2,285,287
Liabilities & Shareholders' Equity
Demand deposits $ 291,641 $ 198,196 $ 331,546 $ 234,898
NOW deposits 544,789 419,334 566,574 452,758
Money market deposits 176,767 165,465 185,745 165,964
Savings deposits 328,648 253,110 342,501 271,035
Certificates of deposit 584,470 673,005 558,563 631,581
Total deposits 1,926,315 1,709,110 1,984,929 1,756,236
Borrowed funds - short term 177,110 203,385 178,422 225,897
Borrowed funds - long term 55,092 55,097 55,092 55,097
Dividends payable 796 813 615 848
Other liabilities 21,842 23,586 22,382 26,744
Total Liabilities 2,181,155 1,991,991 2,241,440 2,064,822
Shareholders' Equity:
Common stock 110 109 110 109
Additional paid-in capital 65,841 64,396 66,232 64,720
Retained earnings 168,593 151,752 174,123 155,087
Net unrealized gain on securities available
for sale 2,047 6,772 1,740 6,942
Net unrealized loss on securities transferred
from available for sale to held to maturity (120) (163) (108) (143)
Net unrealized loss on cash flow hedging
derivative instruments (2,736) (4,287) (2,453) (6,274)
Net unrealized gain on postretirement benefit
costs 28 24 28 24
Total Shareholders' Equity 233,763 218,603 239,672 220,465
Total liabilities and equity
54 -------------------------------------------------------------------------------- Non-Interest Income Non-interest income of$14.6 million for the nine months endedSeptember 30, 2021 is an increase of$1.0 million compared to the same period in 2020. Revenue at First National Wealth Management increased$640,000 or 23.6% over the same period, debit card revenue was up$834,000 or 27.4%, and mortgage banking revenue increased$549,000 , or 14.4%; net securities gains decreased$1.2 million year-over year. Non-interest income of$4.4 million for the quarter endedSeptember 30, 2021 is a decrease of$430,000 compared to the same period in 2020; wealth management revenue increased$226,000 or 24.9% from the prior year quarter and debit card income increased$268,000 , or 25.2%; the gains were offset by a decrease in mortgage banking revenue of$884,000 , or 46.2% year-over-year, and a decrease in net securities gains of$142,000 . The period-to-period decrease in mortgage banking revenue is a reflection of extraordinary results in the third quarter of 2020; quarterly mortgage banking revenue remains well above pre-pandemic norms. Non-Interest Expense Non-interest expense of$29.3 million for the nine months endedSeptember 30, 2021 is an increase of 0.2% or$66,000 compared to non-interest expense of$29.2 million for the same period in 2020. Salaries and employee benefits increased while other operating expense decreased over the same period. The Company's non-GAAP efficiency ratio stood at 45.04% for the nine months endedSeptember 30, 2021 , down from 50.00% for the same period in 2020. The Company's efficiency ratio was elevated in the first quarter of 2020 due to the charges taken to restructure interest rate swap positions. In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%. Income Taxes Income taxes on operating earnings were$5.6 million for the nine months endedSeptember 30, 2021 , up$1.8 million from the same period in 2020.
Investments
The Company's investment portfolio increased by$4.2 million betweenDecember 31, 2020 andSeptember 30, 2021 . As ofSeptember 30, 2021 , mortgage-backed securities had a carrying value of$311.9 million and a fair value of$310.6 million . Of this total, securities with a fair value of$65.6 million or 21.1% of the mortgage-backed portfolio were issued by theGovernment National Mortgage Association and securities with a fair value of$244.9 million or 78.9% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae"). The Company's investment securities are classified into two categories: securities available for sale and securities to be held to maturity. Securities available for sale consist primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Company's funds management strategy, and may be sold in response to changes in interest rates, prepayment risk and liquidity needs, to increase capital ratios, or for other similar reasons. Securities to be held to maturity consist primarily of debt securities that the Company has acquired solely for long-term investment purposes, rather than potential future sale. For securities to be categorized as held to maturity, Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates. The Company does not hold trading account securities. All investment securities are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company's general policy that investments for either portfolio be limited to government debt obligations, time deposits, and corporate bonds or commercial paper with one of the three highest ratings given by a nationally recognized rating agency. The portfolio is currently invested primarily inU.S. Government agency securities and tax-exempt obligations of states and political subdivisions. The individual securities have been selected to enhance the portfolio's overall yield while not materially adding to the Company's level of interest rate risk. During the third quarter of 2014, the Company transferred securities with a total amortized cost of$89,780,000 and a corresponding fair value of$89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was$15,000 . The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was$99,000 atSeptember 30, 2021 . This compares to$133,000 and$139,000 , net of taxes, atDecember 31, 2020 andSeptember 30, 2020 , respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies. 55 --------------------------------------------------------------------------------
The following table shows the Company’s investment securities at their book value as of
September 30, December 31, September 30, Dollars in thousands 2021 2020 2020 Securities available for sale U.S. Government-sponsored agencies$ 21,939 $ 22,730 $ 27,497 Mortgage-backed securities 247,253 243,406
276,424
State and political subdivisions 35,179 39,474 36,219
Asset-backed securities 4,853 7,766 -
$ 309,224 $ 313,376 $ 340,140
Securities to be held to maturity
U.S. Government-sponsored agencies $ 35,600 $ 44,149 $ 26,146
Mortgage-backed securities 64,651 53,594
43,414
State and political subdivisions 254,198 245,620 245,152
Corporate securities 21,250 22,250 17,250
$ 375,699 $ 365,613 $ 331,962
Restricted equity securities
Federal Home Loan Bank Stock $ 7,802 $ 9,508 $ 9,508
Federal Reserve Bank Stock 1,037 1,037 1,037
$ 8,839 $ 10,545 $ 10,545
Total securities $ 693,762 $ 689,534 $ 682,647
56
-------------------------------------------------------------------------------- The following table sets forth yields and contractual maturities of the Company's investment securities as ofSeptember 30, 2021 . Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 21%. Mortgage-backed securities are presented according to their final contractual maturity date, while the calculated yield takes into effect the intermediate cash flows from repayment of principal which results in a much shorter average life. Available For Sale Held to Maturity Fair Amortized Dollars in thousands Value Yield to maturity Cost Yield to maturity
Due in 1 year or less $ - 0.00 % $ - 0.00 % Due in 1 to 5 years - 0.00 % - 0.00 % Due in 5 to 10 years 9,579 1.17 % 17,650 1.65 % Due after 10 years 12,360 2.00 % 17,950 2.06 % Total 21,939 1.64 % 35,600 1.85 %Mortgage-Backed Securities Due in 1 year or less - 0.00 % 153 (24.09) % Due in 1 to 5 years 6,164 3.50 % 1,466 2.11 % Due in 5 to 10 years 16,054 2.88 % 4,896 2.81 % Due after 10 years 225,035 1.44 % 58,136 1.32 % Total 247,253 1.59 % 64,651 1.39 %
State and political subdivisions
Due in 1 year or less - 0.00 % 2,885 5.98 % Due in 1 to 5 years 365 6.15 % 11,150 4.89 % Due in 5 to 10 years 12,767 4.00 % 133,993 4.40 % Due after 10 years 22,047 3.74 % 106,170 3.70 % Total 35,179 3.86 % 254,198 4.15 % Asset-Backed Securities Due in 1 year or less - 0.00 % - 0.00 % Due in 1 to 5 years - 0.00 % - 0.00 % Due in 5 to 10 years - 0.00 % - 0.00 % Due after 10 years 4,853 0.89 % - 0.00 % Total 4,853 0.89 % - 0.00 %Corporate Securities Due in 1 year or less - 0.00 % 750 1.00 % Due in 1 to 5 years - 0.00 % 6,000 5.38 % Due in 5 to 10 years - 0.00 % 14,500 4.40 % Due after 10 years - 0.00 % - 0.00 % Total - 0.00 % 21,250 4.56 %$ 309,224 1.82 %$ 375,699 3.48 % Impaired Securities The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which atSeptember 30, 2021 amounted to$8.5 million , or 1.27% of the amortized cost of the total securities portfolio. AtDecember 31, 2020 , this amount was$1.2 million , or 0.18% of the amortized cost of total securities portfolio. As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. If a decline in the fair value of a debt security is judged to be other-than-temporary, the decline related to credit loss is recorded in net realized securities losses while the decline attributable to other factors is recorded in other comprehensive income or loss. The Company's evaluation of securities for impairment is a quantitative and qualitative process intended to determine whether declines in the fair value of investment securities should be recognized in current period earnings. The primary factors considered in evaluating whether a decline in the fair value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) 57 -------------------------------------------------------------------------------- the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred. The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty. The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the underlying collateral, loss severity ratios, and constant prepayment rates. If the Company does not expect to receive 100% of future contractual principal and interest, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. As ofSeptember 30, 2021 , the Company had temporarily impaired securities with a fair value of$332.0 million and unrealized losses of$8.5 million , as identified in the table below. Securities in a continuous unrealized loss position more than twelve months amounted to$33.5 million as ofSeptember 30, 2021 , compared with$3.9 million atDecember 31, 2020 . The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values atSeptember 30, 2021 : Less than 12 months 12 months or more Total Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized Dollars in thousands (Estimated) Losses (Estimated) Losses (Estimated) Losses U.S. Government-sponsored agencies$ 37,054 $
(1,396)
$ (2,267) Mortgage-backed securities 207,951 (4,207) 17,337 (598) 225,288 (4,805) State and political subdivisions 50,050 (1,348) - - 50,050 (1,348) Corporate Securities 3,465 (35) - - 3,465 (35)$ 298,520 $ (6,986) $ 33,511 $ (1,469) $ 332,031 $ (8,455) For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired: Securities issued byU.S. Government -sponsored agencies and enterprises. As ofSeptember 30, 2021 , there were$2.3 million unrealized losses on these securities compared to$333,000 unrealized losses as ofDecember 31, 2020 . All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued byU.S. Government -sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired atSeptember 30, 2021 . Mortgage-backed securities issued byU.S. Government agencies andU.S. Government -sponsored enterprises. As ofSeptember 30, 2021 , there were$4.8 million of unrealized losses on these securities compared with$812,000 atDecember 31, 2020 . All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued byU.S. Government agencies bear no credit risk because they are backed by the full faith and credit ofthe United States and that securities issued byU.S. Government -sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets. Management believes that the unrealized losses atSeptember 30, 2021 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired atSeptember 30, 2021 . The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity. Obligations of state and political subdivisions. As ofSeptember 30, 2021 , there were$1.3 million of unrealized losses on these securities compared to$3,000 atDecember 31, 2020 . Municipal securities are supported by the general taxing authority of the municipality or a dedicated revenue stream, and, in the case of school districts, are generally supported by state aid. AtSeptember 30, 2021 , all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses atSeptember 30, 2021 to changes in prevailing market yields and pricing spreads 58 -------------------------------------------------------------------------------- since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired atSeptember 30, 2021 . Corporate securities. As ofSeptember 30, 2021 , there were$35,000 of unrealized losses on these securities compared to$2,000 atDecember 31, 2020 . Corporate securities are dependent on the operating performance of the issuers. AtSeptember 30, 2021 , all corporate bond issuers were current on contractually obligated interest and principal payments. Federal Home LoanBank Stock The Bank is a member of theFederal Home Loan Bank ("FHLB") ofBoston , a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As ofSeptember 30, 2021 , the Bank's investment in FHLB stock totaled$7.8 million . This compares to$9.5 million as ofDecember 31, 2020 and$9.5 million as ofSeptember 30, 2020 . FHLB stock is a non-marketable equity security and therefore is reported at cost, subject to adjustments for any observable market transactions on the same or similar instruments of the investee. No impairment losses have been recorded throughSeptember 30, 2021 . The Company will continue to monitor its investment in FHLB stock. Loans Held for Sale Loans held for sale are carried at the lower of cost or market value. As ofSeptember 30, 2021 , the Bank had$1.4 million in loans held for sale. This compares to$5.9 million loans held for sale atDecember 31, 2020 and$6.4 million loans held for sale atSeptember 30, 2020 . The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse. The volume of loans sold to date through the MPF program is de minimis; therefore, there was minimum impact on the reserve. Loans The loan portfolio increased during the first nine months of 2021, with total loans at$1.62 billion atSeptember 30, 2021 , up$140.5 million or 9.5% from total loans of$1.48 billion atDecember 31, 2020 . Commercial loans increased$127.8 million or 16.3% betweenDecember 31, 2020 andSeptember 30, 2021 , municipal loans decreased$3.2 million or 7.2%, residential term loans increased$15.7 million , residential construction increased$7.8 million , and home equity lines of credit decreased$5.2 million . Loans made under theU.S. Small Business Administration's PPP accounted for$39.6 million of commercial loans as ofSeptember 30, 2021 . Commercial loans are comprised of three major classes: commercial real estate loans, commercial construction loans and other commercial loans. 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 and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. 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 construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have a construction phase of less than two years, followed by a repayment phase. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Other 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. Municipal loans are comprised of loans to municipalities inMaine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt. Residential loans are comprised of two classes: term loans and construction loans. 59 -------------------------------------------------------------------------------- Residential term loans consist of residential real estate loans held in the Company's loan portfolio 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 loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years. Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest 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. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, 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. Construction loans, both commercial and residential, at 45.4% of Bank capital are well under the regulatory guidance of 100.0% of capital atSeptember 30, 2021 . Construction loans and non-owner-occupied commercial real estate loans are at 191.7% of Bank total capital, well under the regulatory guidance of 300.0% of capital atSeptember 30, 2021 . The following table summarizes the loan portfolio, by class, atSeptember 30, 2021 and 2020 andDecember 31, 2020 . Dollars in thousands September 30, 2021 December 31, 2020 September 30, 2020 Commercial Real estate$ 550,077 34.0 %$ 442,121 29.9 %$ 407,128 28.3 % Construction 73,302 4.6 % 56,565 3.8 % 52,038 3.6 % Other 288,121 17.8 % 285,015 19.3 % 309,297 21.5 % Municipal 40,616 2.5 % 43,783 3.0 % 44,110 3.1 % Residential Term 537,811 33.3 % 522,070 35.3 % 497,667 34.6 % Construction 29,358 1.8 % 21,600 1.5 % 16,101 1.2 % Home equity line of credit 74,594 4.6 % 79,750 5.4 % 82,982 5.8 % Consumer 23,333 1.4 % 25,857 1.8 % 27,323 1.9 % Total loans$ 1,617,212 100.0 % $
1,476,761 100.0 %$ 1,436,646 100.0 % 60
-------------------------------------------------------------------------------- The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as ofSeptember 30, 2021 . Dollars in thousands < 1 Year 1 - 5 Years 5 - 10 Years > 10 Years Total Commercial Real estate$ 1,888 $ 37,644 $ 56,107 $ 454,438 $ 550,077 Construction - 6,254 10,892 56,156 73,302 Other 924 135,645 66,259 85,293 288,121 Municipal - 17,508 9,230 13,878 40,616 Residential Term 43 7,380 43,645 486,743 537,811 Construction 210 332 - 28,816 29,358 Home equity line of credit 1,579 537 292 72,186 74,594 Consumer 6,663 5,998 5,636 5,036 23,333 Total loans$ 11,307 $ 211,298 $ 192,061 $ 1,202,546 $ 1,617,212
The following table presents a list of loans by category, between variable rate and fixed rate at
Fixed-Rate Adjustable-Rate Total
Dollars in thousands Amount % of total Amount % of total Amount % of total
Commercial
Real estate $ 460,507 28.5 % $ 89,570 5.5 % $ 550,077 34.0 %
Construction 70,639 4.4 % 2,663 0.2 % 73,302 4.6 %
Other 260,856 16.1 % 27,265 1.7 % 288,121 17.8 %
Municipal 40,466 2.5 % 150 0.0 % 40,616 2.5 %
Residential
Term 476,388 29.5 % 61,423 3.8 % 537,811 33.3 %
Construction 29,358 1.8 % - 0.0 % 29,358 1.8 %
Home equity line of credit 2,063 0.1 % 72,531 4.5 % 74,594 4.6 %
Consumer 16,833 1.0 % 6,500 0.4 % 23,333 1.4 %
Total loans $ 1,357,110 83.9 % $ 260,102 16.1 % $ 1,617,212 100.0 %
Loan Concentrations
As of September 30, 2021 , the Bank had one concentration of loans in one
particular industry that exceeded 10% of its total loan portfolio. Loans to
hotels (except Casino hotels) and motels totaled $165.6 million , or 10.23% of
total loans.
Credit Risk Management and Allowance for Loan Losses
Credit risk is the risk of loss arising from the inability of a borrower to meet
its obligations. We manage credit risk by evaluating the risk profile of the
borrower, repayment sources, the nature of the underlying collateral, and other
support given current events, conditions, and expectations. We attempt to manage
the risk characteristics of our loan portfolio through various control
processes, such as credit evaluation of borrowers, establishment of lending
limits, and application of lending procedures, including the holding of adequate
collateral and the maintenance of compensating balances. However, we seek to
rely primarily on the cash flow of our borrowers as the principal source of
repayment. Although credit policies and evaluation processes are designed to
minimize our risk, Management recognizes that loan losses will occur and the
amount of these losses will fluctuate depending on the risk characteristics of
our loan portfolio, as well as general and regional economic conditions.
We provide for loan losses through the establishment of an allowance for loan
losses which represents an estimated reserve for existing losses in the loan
portfolio. We deploy a systematic methodology for determining our allowance that
includes a quarterly review process, risk rating, and adjustment to our
allowance. We classify our portfolios as either commercial or residential and
consumer and monitor credit risk separately as discussed below. We evaluate the
appropriateness of our allowance continually based on a review of all
significant loans, with a particular emphasis on nonaccruing, past due, and
other loans that we believe require special attention.
61
--------------------------------------------------------------------------------
The allowance consists of four elements: (1) specific reserves for loans
evaluated individually for impairment; (2) general reserves for types or
portfolios of loans based on historical loan loss experience; (3) qualitative
reserves judgmentally adjusted for local and national economic conditions,
concentrations, portfolio composition, volume and severity of delinquencies and
nonaccrual loans, trends of criticized and classified loans, changes in credit
policies, and underwriting standards, credit administration practices, and other
factors as applicable; and (4) unallocated reserves. All outstanding loans are
considered in evaluating the appropriateness of the allowance.
Appropriateness of the allowance for loan losses is determined using a
consistent, systematic methodology, which analyzes the risk inherent in the loan
portfolio. In addition to evaluating the collectibility of specific loans when
determining the appropriateness of the allowance for loan losses, Management
also takes into consideration other factors such as changes in the mix and size
of the loan portfolio, historic loss experience, the amount of delinquencies and
loans adversely classified, economic trends, changes in credit policies, and
experience, ability and depth of lending management. The appropriateness of the
allowance for loan losses is assessed by an allocation process whereby specific
reserve allocations are made against certain adversely classified loans, and
general reserve allocations are made against segments of the loan portfolio
which have similar attributes. The Company's historical loss experience,
industry trends, and the impact of the local and regional economy on the
Company's borrowers, are considered by Management in determining the
appropriateness of the allowance for loan losses.
The allowance for loan losses is increased by provisions charged against current
earnings. Loan losses are charged against the allowance when Management believes
that the collectibility of the loan principal is unlikely. Recoveries on loans
previously charged off are credited to the allowance. While Management uses
available information to assess possible losses on loans, future additions to
the allowance may be necessary based on increases in non-performing loans,
changes in economic conditions, growth in loan portfolios, or for other reasons.
Any future additions to the allowance would be recognized in the period in which
they were determined to be necessary. In addition, various regulatory agencies
periodically review the Company's allowance for loan losses as an integral part
of their examination process. Such agencies may require the Company to record
additions to the allowance based on judgments different from those of
Management.
Commercial
Our commercial portfolio includes all secured and unsecured loans to borrowers for commercial purposes, including commercial lines of credit and commercial real estate. Our process for evaluating commercial loans includes performing updates on loans that we have rated for credit risk. Our non-performing commercial loans are generally reviewed individually to determine impairment, accrual status, and the need for specific reserves. Our methodology incorporates a variety of risk considerations, both qualitative and quantitative. Quantitative factors include our historical loss experience by loan type, collateral values, financial condition of borrowers, and other factors. Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses. The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria. Approximately 60% of commercial loan outstanding balances, excluding SBA PPP loans, are subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to$500,000 are subject to review annually by the Company's internal credit review function. Our methodology employs Management's judgment as to the level of losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers' current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. We also evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors. Residential, Home Equity and Consumer Consumer, home equity and residential mortgage loans are generally segregated into homogeneous pools with similar risk characteristics. Trends and current conditions in these pools are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for the consumer, home equity and residential mortgage portfolios are consistent with those for the commercial portfolios. Certain loans in the consumer and residential portfolios identified as having the potential for further deterioration are analyzed individually to confirm the appropriate risk status and accrual status, and to determine the need for a specific reserve. Consumer loans that are greater than 120 days past due are generally charged off. Residential loans and home equity lines of credit that are greater than 90 days past due are evaluated for collateral adequacy and if deficient are placed on non-accrual status.
Unallocated
The unallocated portion of the allowance is intended to provide for losses that
are not identified when establishing the specific and general portions of the
allowance and is based upon Management's evaluation of various conditions that
are not directly
62
--------------------------------------------------------------------------------
measured in the determination of the portfolio and loan specific allowances.
Such conditions may include general economic and business conditions affecting
our lending area, credit quality trends (including trends in delinquencies and
nonperforming loans expected to result from existing conditions), loan volumes
and concentrations, duration of the current business cycle, bank regulatory
examination results, findings of external loan review examiners, and
Management's judgment with respect to various other conditions including loan
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. We have risk management practices
designed to ensure timely identification of changes in loan risk profiles;
however, undetected losses may exist inherently within the loan portfolio. In
response to the consequences of COVID-19, we have increased the rigor and
frequency of our loan portfolio monitoring and borrower contact, particularly
within those industry groups thought to be most vulnerable, including the
lodging, restaurant and hospitality sectors. As the economy has re-opened,
initial experience within these sectors has been generally favorable; our
Allowance for Loan Losses will be evaluated as additional information continues
to become available. The judgmental aspects involved in applying the risk
grading criteria, analyzing the quality of individual loans, and assessing
collateral values can also contribute to undetected, but probable, losses.
Consequently, there may be underlying credit risks that have not yet surfaced in
the loan-specific or qualitative metrics the Company uses to estimate its
allowance for loan losses.
The allowance for loan losses includes reserve amounts assigned to individual
loans on the basis of loan impairment. Certain loans are evaluated individually
and are judged to be impaired when Management believes it is probable that the
Company will not collect all of the contractual interest and principal payments
as scheduled in the loan agreement. Under this method, loans are selected for
evaluation based on non-accrual and/or troubled debt restructure status. A
specific reserve is allocated to an individual loan when that loan has been
deemed impaired and when the amount of a probable loss is estimable on the basis
of its collateral value, the present value of anticipated future cash flows, or
its net realizable value. At September 30, 2021 , impaired loans with specific
reserves totaled $3.8 million and the amount of such reserves was $682,000 . This
compares to impaired loans with specific reserves of $3.9 million at
December 31, 2020 and the amount of such reserves was $462,000 .
All of these analyses are reviewed and discussed by the Directors' Loan
Committee, and recommendations from these processes provide Management and the
Board of Directors with independent information on loan portfolio condition. Our
total allowance at September 30, 2021 is considered by Management to be
appropriate to address the credit losses inherent in the loan portfolio at that
date. However, our determination of the appropriate allowance level is based
upon a number of assumptions we make about future events, which we believe are
reasonable, but which may or may not prove valid. Thus, there can be no
assurance that our charge-offs in future periods will not exceed our allowance
for loan losses or that we will not need to make additional increases in our
allowance for loan losses.
The following table summarizes our allocation of allowance by loan class as of
September 30, 2021 and 2020 and December 31, 2020 . The percentages are the
portion of each loan class to total loans.
Dollars in thousands September 30, 2021 December 31, 2020 September 30, 2020
Commercial
Real estate $ 6,499 34.0 % $ 5,178 29.9 % $ 4,761 28.3 %
Construction 879 4.6 % 662 3.8 % $ 607 3.6 %
Other 3,727 17.8 % 3,438 19.3 % $ 3,642 21.5 %
Municipal 189 2.5 % 171 3.0 % $ 139 3.1 %
Residential
Term 2,761 33.3 % 2,579 35.3 % $ 2,516 34.6 %
Construction 142 1.8 % 102 1.5 % $ 81 1.2 %
Home equity line of credit 956 4.6 % 1,211 5.4 % $ 1,457 5.8 %
Consumer 867 1.4 % 778 1.8 % $ 592 1.9 %
Unallocated 1,487 - % 2,134 - % $ 1,576 - %
Total $ 17,507 100.0 % $ 16,253 100.0 % $ 15,371 100.0 %
The allowance for loan losses totaled $17.5 million at September 30, 2021 ,
compared to $16.3 million as of December 31, 2020 and $15.4 million as of
September 30, 2020 . Management's ongoing application of methodologies to
establish the allowance include an evaluation of impaired loans for specific
reserves. These specific reserves increased $220,000 in the first nine months of
2021 from $462,000 at December 31, 2020 to $682,000 at September 30, 2021 . The
specific loans that make up those categories change from period to period.
Impairment on those loans, which would be reflected in the allowance for loan
losses, might or might not exist, depending on the specific circumstances of
each loan. The portion of the reserve based upon homogeneous pools of loans
increased by $142,000 in the first nine months of 2021. The portion of the
reserve based on
63
--------------------------------------------------------------------------------
qualitative factors increased $1.5 million in the first nine months of 2021 due
to a mix of factors. These included changes in various macroeconomic measures
used in the qualitative model, updated analysis of the loan portfolio in
multiple stress scenarios, and performance of COVID-19 related loan
modifications. Unallocated reserves of $2.1 million , or 13.1% of the total
reserve at December 31, 2020 , decreased to $1.5 million , or 8.5% as of
September 30, 2021 . After consideration of the shifts in specific, pooled and
qualitative reserves, Management determined that the unallocated portion of the
reserve at September 30, 2021 adequately addresses general imprecision related
to loan portfolio growth, along with other underlying credit risks not yet
captured in loan specific or qualitative metrics the Company uses to estimate
its allowance.
A breakdown of the allowance for loan losses as of September 30, 2021 , by loan
class and allowance element, is presented in the following table:
General
Specific Reserves on
Reserves on Loans Based on
Loans Evaluated Historical Reserves for
Individually for Loss Qualitative Unallocated
Dollars in thousands Impairment Experience Factors Reserves Total Reserves
Commercial
Real estate $ 138 $ 864 $ 5,497 $ - $ 6,499
Construction 18 117 744 - 879
Other 397 452 2,878 - 3,727
Municipal - - 189 - 189
Residential
Term 129 189 2,443 - 2,761
Construction - 10 132 - 142
Home equity line of credit - 109 847 - 956
Consumer - 263 604 - 867
Unallocated - - - 1,487 1,487
$ 682 $ 2,004 $ 13,334 $ 1,487 $ 17,507
Based upon Management's evaluation, provisions are made to maintain the
allowance as a best estimate of inherent losses within the portfolio. The
provision for loan losses to maintain the allowance was $1.6 million for the
first nine months of 2021 and $4.6 million the first nine months of 2020. Net
charge-offs were $321,000 in the first nine months of 2021, down from $818,000
in the first nine months of 2020. Our allowance as a percentage of outstanding
loans was 1.08% as of September 30, 2021 , down slightly from 1.10% as of
December 31, 2020 , and up from 1.07% as of September 30, 2020 .
64
--------------------------------------------------------------------------------
The following table summarizes the activities in our allowance for loan losses
for the nine months ended September 30, 2021 and 2020 and for the year ended
December 31, 2020 :
Dollars in thousands September 30, 2021 December 31, 2020 September 30, 2020
Balance at the beginning of period $ 16,253 $ 11,639 $ 11,639
Loans charged off:
Commercial
Real estate 71 1,088 532
Construction - - -
Other 286 27 24
Municipal - - -
Residential
Term 41 66 46
Construction - - -
Home equity line of credit - 153 153
Consumer 239 327 238
Total 637 1,661 993
Recoveries on loans previously charged
off
Commercial
Real estate 95 - -
Construction - - -
Other 83 37 24
Municipal - - -
Residential
Term 12 34 31
Construction - - -
Home equity line of credit 60 22 20
Consumer 66 132 100
Total 316 225 175
Net loans charged off 321 1,436 818
Provision for loan losses 1,575 6,050 4,550
Balance at end of period $ 17,507 $ 16,253 $ 15,371
Ratio of net loans charged off to average
loans outstanding1 0.03 % 0.10 % 0.08 %
Ratio of allowance for loan losses to
total loans outstanding 1.08 % 1.10 % 1.07 %
1 Annualized using a 365-day basis for 2021 and a 366-day basis for 2020.
In Management's opinion, the level of the provision for loan losses is
directionally consistent with the overall credit quality of our loan portfolio
and corresponding levels of nonperforming loans, as well as with the performance
of the national and local economies, including effects of the COVID-19 pandemic.
COVID-19 Impact on Loan Portfolio
The Company continues to actively work with borrowers impacted by the COVID-19
outbreak. As of September 30, 2021 , a total of 1051 loan modification requests
for interest-only payments or deferred payments have been completed in
conformance with the Interagency Statement on Loan Modifications and Reporting
issued March 23, 2020 , Section 4013 of the Coronavirus Aid, Relief, Economic
Security ("CARES") Act, or H.R. 133 signed December 27, 2020 , which was extended
by the Supplemental Appropriations Act, representing $287.9 million in loan
balances, or approximately 18.3% of the overall loan portfolio. One of these
modifications of a de minimis amount has been classified as a Troubled Debt
Restructure since being
65
--------------------------------------------------------------------------------
modified. So long as modified terms are met, loans in an active modification are
not included in past due loan totals and continue to accrue interest.
As of September 30, 2021 , 59 loans totaling $6.6 million remained in their
original modification or had had a subsequent modification, representing 0.41%
of the overall portfolio. Refer to Note 3 of the financial statements for
further detail.
First National Bank is a designated SBA preferred lender and has participated in
both the 2020 (PPP1) and 2021 (PPP2) rounds of the Payroll Protection Program.
Under PPP1, 1,718 loans were granted totaling $97.8 million in funds disbursed
to qualified small businesses. The Bank has been actively working with these
borrowers to process applications for forgiveness per PPP guidelines; as of
September 30, 2021 , PPP1 balances had been reduced to $656,000 . Under PPP2,
1,263 loans totaling $52.1 million had been granted as of September 30, 2021 ,
and the outstanding balances had been reduced to $39.0 million .
The impact of the consequences of COVID-19 upon borrowers and ultimately the
Company's loan portfolio metrics remains difficult to estimate or ascertain. The
State of Maine , where most of the Bank's customers reside and/or operate
businesses has largely re-opened its economy; quarantines for out of state
visitors and limits on the size of public gatherings have been lifted. The
emergence of the Delta variant of the COVID-19 virus has not yet resulted in new
restrictions or curtailment of economic activity, but remains a threat to
economic normalization and could ultimately have a negative impact on the Bank's
borrowers.
Nonperforming Loans
Nonperforming loans are comprised of loans, for which based on current
information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement or when
principal and interest is 90 days or more past due unless the loan is both well
secured and in the process of collection (in which case the loan may continue to
accrue interest in spite of its past due status). A loan is "well secured" if it
is secured (1) by collateral in the form of liens on or pledges of real or
personal property, including securities, that have a realizable value sufficient
to discharge the debt including accrued interest) in full, or (2) by the
guarantee of a financially responsible party. A loan is "in the process of
collection" if collection of the loan is proceeding in due course either (1)
through legal action, including judgment enforcement procedures, or, (2) in
appropriate circumstances, through collection efforts not involving legal action
which are reasonably expected to result in repayment of the debt or in its
restoration to a current status in the near future.
Generally, when a loan becomes 90 days past due it is evaluated for collateral
dependency based upon the most recent appraisal or other evaluation method. If
the collateral value is lower than the outstanding loan balance plus accrued
interest and estimated selling costs, the loan is placed on non-accrual status,
all accrued interest is reversed from interest income, and a specific reserve is
established for the difference between the loan balance and the collateral value
less selling costs, or, in certain situations, the difference between the loan
balance and the collateral value less selling costs is written off.
Concurrently, a new appraisal or valuation may be ordered, depending on
collateral type, currency of the most recent valuation, the size of the loan,
and other factors appropriate to the loan. Upon receipt and acceptance of the
new valuation, the loan may have an additional specific reserve or write down
based on the updated collateral value. On an ongoing basis, appraisals or
valuations may be done periodically on collateral dependent nonperforming loans
and an additional specific reserve or write down will be made, if appropriate,
based on the new collateral value.
Once a loan is placed on nonaccrual, it remains in nonaccrual status until the
loan is current as to payment of both principal and interest and the borrower
demonstrates the ability to pay and remain current. All payments made on
nonaccrual loans are applied to the principal balance of the loan.
66
-------------------------------------------------------------------------------- Nonperforming loans, expressed as a percentage of total loans, totaled 0.39% atSeptember 30, 2021 compared to 0.46% atDecember 31, 2020 and 0.63% atSeptember 30, 2020 . The following table shows the distribution of nonperforming loans by class as ofSeptember 30, 2021 and 2020 andDecember 31, 2020 : September 30, December 31, September 30, Dollars in thousands 2021 2020 2020 Commercial Real estate $ 604 $ 543$ 1,771 Construction 23 89 307 Other 1,251 1,481 503 Municipal - - - Residential Term 3,785 3,593 4,467 Construction - - - Home equity line of credit 482 1,015 2,063 Consumer - - - Total nonperforming loans$ 6,145 $ 6,721 $ 9,111 The amounts shown for total nonperforming loans do not include loans 90 or more days past due and still accruing interest. These are loans for which we expect to collect all amounts due, including past-due interest. As ofSeptember 30, 2021 , loans 90 or more days past due and still accruing interest totaled$229,000 , compared to$1.5 million atDecember 31, 2020 and$1.5 million atSeptember 30, 2020 . Troubled Debt Restructured A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria: •The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and •The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments. As ofSeptember 30, 2021 , we had 64 loans with a balance of$10.1 million that have been restructured. This compares to 74 loans with a balance of$11.5 million and 78 loans with a balance of$13.4 million classified as TDRs as ofDecember 31, 2020 andSeptember 30, 2020 , respectively. The following table shows the activity in loans classified as TDRs betweenDecember 31, 2020 andSeptember 30, 2021 : Balance in Thousands of Dollars Number of Loans Aggregate Balance Total at December 31, 2020 74 $ 11,534 Added in 2021 3 345 Loans paid off in 2021 (13) (1,560) Repayments in 2021 - (268) Total at September 30, 2021 64 $ 10,051 As ofSeptember 30, 2021 , 42 loans with an aggregate balance of$8.1 million were performing under the modified terms, 19 loans with an aggregate balance of$1.6 million were on nonaccrual and three loans with an aggregate balance of$261,000 were more than 30 days past due and accruing. As a percentage of aggregate outstanding balance, 80.9% were performing under the modified terms, 16.4% were on nonaccrual and 2.7% were past due and still accruing. 67
--------------------------------------------------------------------------------
The performance status of all RDTs at
Performing 30+ Days Past Due On All In thousands of dollars As Modified and Accruing Nonaccrual TDRs Commercial Real estate$ 2,196 $ -$ 42 $ 2,238 Construction 681 - - 681 Other 242 261 380 883 Municipal - - - - Residential Term 4,994 4 1,226 6,224 Construction - - - - Home equity line of credit 21 - - 21 Consumer - 4 - 4$ 8,134 $ 269$ 1,648 $ 10,051 Percent of balance 80.9 % 2.7 % 16.4 % 100.0 % Number of loans 42 3 19 64 Associated specific reserve$ 227 $ 261$ 148 $ 636 Residential, HELOC and consumer TDRs as ofSeptember 30, 2021 included 47 loans with an aggregate balance of$6.2 million , and the modifications granted fell into five major categories. Loans totaling$4.4 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. Loans totaling$2.5 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan. Rate concessions were granted on loans totaling$1.2 million . Loans with an aggregate balance of$709,000 were involved in bankruptcy. Certain residential TDRs had more than one modification. Commercial TDRs as ofSeptember 30, 2021 were comprised of 17 loans with a balance of$3.8 million . Of this total, five loans with an aggregate balance of$1.2 million had an extended period of interest-only payments, deferring the start of principal repayment. Three loans with an aggregate balance of$303,000 had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. Three loans with an aggregate balance of$404,000 had a deferral of payment. The remaining six loans with an aggregate balance of$1.9 million had several different modifications. In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR it generally remains classified as such until the balance is fully repaid, whether or not the loan is performing under the modified terms. As ofSeptember 30, 2021 , Management is aware of eight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of$961,000 . There were also 19 loans with an outstanding balance of$1.6 million that were classified as TDRs and on non-accrual status, of which no loans were in the process of foreclosure. Impaired Loans Impaired loans include restructured loans and loans placed on non-accrual status. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral less estimated selling costs if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan, a specific reserve is established for the difference. Impaired loans totaled$14.5 million atSeptember 30, 2021 , and have decreased$1.5 million fromDecember 31, 2020 . There were 122 impaired loans atSeptember 30, 2021 down from 140 loans atDecember 31, 2020 . Impaired commercial loans decreased$318,000 betweenDecember 31, 2020 andSeptember 30, 2021 . The specific allowance for impaired commercial loans increased from$299,000 atDecember 31, 2020 to$553,000 as ofSeptember 30, 2021 , which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan. FromDecember 31, 2020 toSeptember 30, 2021 , impaired residential loans decreased$632,000 and impaired home equity lines of credit decreased$536,000 . 68 -------------------------------------------------------------------------------- The following table sets forth impaired loans as ofSeptember 30, 2021 and 2020 andDecember 31, 2020 : September 30, December 31, September 30, Dollars in thousands 2021 2020 2020 Commercial Real estate$ 2,800 $ 3,029 $ 4,753 Construction 705 770 1,009 Other 1,755 1,779 1,023 Municipal - - - Residential Term 8,782 9,414 10,182 Construction - - - Home equity line of credit 503 1,039 2,364 Consumer 4 8 10 Total$ 14,549 $ 16,039 $ 19,341 Past Due Loans The Bank's overall loan delinquency ratio was 0.25% atSeptember 30, 2021 compared to 0.66% atDecember 31, 2020 and 0.89% atSeptember 30, 2020 . Loans 90 days delinquent and accruing decreased from$1.5 million atDecember 31, 2020 to$229,000 as ofSeptember 30, 2021 . The following table sets forth loan delinquencies as ofSeptember 30, 2021 and 2020 andDecember 31, 2020 : September 30, December 31, September 30, Dollars in thousands 2021 2020 2020 Commercial Real estate $ 259 $ 555$ 2,909 Construction 28 93 80 Other 676 2,634 2,676 Municipal - - - Residential Term 2,453 3,955 4,509 Construction - - - Home equity line of credit 407 2,336 2,325 Consumer 295 149 277 Total$ 4,118 $ 9,722 $ 12,776 Loans 30-89 days past due to total loans 0.16 % 0.36 % 0.51 % Loans 90+ days past due and accruing to total loans 0.01 % 0.10 % 0.10 % Loans 90+ days past due on non-accrual to total loans 0.08 % 0.20 % 0.27 % Total past due loans to total loans 0.25 % 0.66 % 0.89 % Potential Problem Loans and Loans in Process of Foreclosure 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 improvements in the economy as well as changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss. AtSeptember 30, 2021 , there was one potential problem loan with a balance of$261,000 or 0.02% of total loans. This compares to five loans with a balance of$195,000 or 0.01% of total loans atDecember 31, 2020 . As ofSeptember 30, 2021 , there were 13 loans in the process of foreclosure with a total balance of$1,140,000 . The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to 69 -------------------------------------------------------------------------------- the borrower. If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and a complaint for foreclosure is then prepared. An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court. Once a Motion for Summary Judgment is granted, a Period of Redemption (POR) begins which gives the customer 90 days to cure the default. A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured. The Bank's commercial foreclosure process begins when a loan becomes 60 days past due, at which time a default letter is issued. At expiration of the period to cure default, which lasts 12 days after the issuing of the default letter, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review. A Notice ofStatutory Power of Sale is then prepared. This notice must be published for three consecutive weeks in a newspaper located in the county in which the property is located. A notice also must be issued to the mortgagor and all parties of interest 21 days prior to the sale. The foreclosure auction occurs and the Affidavit of Sale is recorded within the appropriate county within 30 days of the sale. The Bank's written policies and procedures for foreclosures, along with implementation of same, are subject to annual review by its internal audit provider. The scope of this review includes loans held in portfolio and loans serviced for others. There were no issues requiring management attention in the most recent review. Servicing for others includes loans sold to Freddie Mac, Fannie Mae, and theFederal Home Loan Bank of Boston through its MPF program. The Bank follows the published guidelines of each investor. Loans serviced for Freddie Mac and Fannie Mae have been sold without recourse, and the Bank has no liability for these loans in the event of foreclosure. A de minimis volume of loans has been sold to and serviced for MPF to date. The Bank retains a second loss layer credit enhancement obligation; no losses have been recorded on this credit enhancement obligation since the Bank started selling loans to MPF in 2013. Other Real Estate Owned Other real estate owned and repossessed assets ("OREO") are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure. Real estate acquired through foreclosure is carried at the lower of fair value less estimated cost to sell or the cost of the asset and is not included as part of the allowance for loan loss totals. AtSeptember 30, 2021 , there were no OREO properties, compared toDecember 31, 2020 when there were four properties owned with an OREO balance of$908,000 , net of an allowance for loan losses of$45,000 andSeptember 30, 2020 when there were five properties owned with an OREO balance of$777,000 , net of an allowance for loan losses of 45,000. 70 --------------------------------------------------------------------------------
The following table shows the composition of the other real estate held:
September 30, December 31, September 30, Dollars in thousands 2021 2020 2020 Carrying Value Commercial Real estate $ - $ 445 $ 222 Construction - - - Other - - - Municipal - - - Residential Term - 508 600 Construction - - - Home equity line of credit - - - Consumer - - - Total - 953 822 Related Allowance Commercial Real estate - 45 45 Construction - - - Other - - - Municipal - - - Residential Term - - - Construction - - - Home equity line of credit - - - Consumer - - - Total - 45 45 Net Value Commercial Real estate - 400 177 Construction - - - Other - - - Municipal - - - Residential Term - 508 600 Construction - - - Home equity line of credit - - - Consumer - - - Total $ 0 $ 908 $ 777 Liquidity Management As ofSeptember 30, 2021 , the Bank had primary sources of liquidity of$1.0 billion . It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios. The Bank has an additional$505.0 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent bank lines of credit. The Asset/Liability Committee ("ALCO") establishes guidelines for liquidity in its Asset/Liability policy and monitors internal liquidity measures to manage liquidity exposure. Based on its assessment of the liquidity considerations described above, Management believes the Company's sources of funding will meet anticipated funding needs. Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Bank's primary source of liquidity is deposits, which funded 79.8% of total average assets in the first nine months of 2021, up from 77.6% a year ago. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do 71 -------------------------------------------------------------------------------- so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although Management has no intention to do so at this time. The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated in two major categories: runoff of in-market deposit balances and the inability to renew wholesale sources of funding. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits. The Bank has established collateralized borrowing capacity with theFederal Reserve Bank ("FRB") ofBoston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the FRB Borrower in Custody program. In the second quarter of 2020, the Bank enrolled in the Paycheck Protection Program Liquidity Facility ("PPPLF") offered by the FRB ofBoston . PPPLF offered the ability to obtain advances dollar for dollar against the value of pledged PPP loans; per FRB rules, the facility terminated onJuly 30, 2021 . No PPP loans were pledged and no PPPLF advances were taken while the facility was open. Deposits During the first nine months of 2021, total deposits increased by$188.6 million or 10.2% fromDecember 31, 2020 levels. Low-cost deposits (demand, NOW, and savings accounts) increased by$253.0 million or 23.5% in the first nine months of 2021, money market deposits increased$26.6 million or 16.2%, and certificates of deposit decreased$91.0 million or 15.0%. BetweenSeptember 30, 2020 andSeptember 30, 2021 , total deposits increased by$270.2 million or 15.3%. Low-cost deposits increased by$312.0 million or 30.7%, money market accounts increased$33.5 million or 21.3%, and certificates of deposit decreased$75.4 million or 12.8%. The increase in low-cost deposits allowed for a decrease in higher cost certificates of deposit and Borrowed Funds. Borrowed Funds The Company uses funding from the FHLB, the FRB and repurchase agreements enabling it to grow its balance sheet and its revenues. This funding may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and may be used to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the nine months endedSeptember 30, 2021 , borrowed funds decreased$28.8 million or 11.0% fromDecember 31, 2020 ; the reduction is centered in the paydown to zero of funds advanced from FRB. BetweenSeptember 30, 2020 andSeptember 30, 2021 , borrowed funds decreased by$50.6 million or 17.8%, also centered in repayment of funds advanced from FRB. Shareholders' Equity Shareholders' equity as ofSeptember 30, 2021 was$238.7 million , compared to$223.7 million as ofDecember 31, 2020 and$219.4 million as ofSeptember 30, 2020 . The Company's earnings in the first nine months of 2021, net of dividends declared, added to shareholders' equity. The net unrealized loss on available-for-sale securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments - Debt and Equity Securities" stands at$627,000 as ofSeptember 30, 2021 compared to a gain of$5.0 million as ofDecember 31, 2020 . The net unrealized loss on cash flow hedging derivative instruments, net of tax, stands at$1.5 million , compared$4.9 million as ofDecember 31, 2020 . A cash dividend of$0.32 per share was declared in the third quarter of 2021 bringing the year-to-date total to$0.95 per share. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 38.78% for the first nine months of 2021 compared to 49.46% for the same period in 2020. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2021 is this year's net income plus$28.0 million . Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on available for sale securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. In order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios. 72 --------------------------------------------------------------------------------
The Company has complied with each of the guidelines for well-capitalized ratios at
Leverage Tier 1 Common Equity Tier 1 Total Risk-Based Bank 8.51 % 13.25 % 13.25 % 14.37 % Company 8.57 % 13.36 % 13.36 % 14.48 % Adequately capitalized ratio 4.00 % 6.00 % 4.50 % 8.00 % Adequately capitalized ratio plus 4.00 % 8.50 % 7.00 % 10.50 % capital conservation buffer Well capitalized ratio (Bank only) 5.00 % 8.00 % 6.50 % 10.00 % As of December 31, 2020 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based Bank 8.44 % 13.54 % 13.54 % 14.70 % Company 8.49 % 13.66 % 13.66 % 14.82 % Adequately capitalized ratio 4.00 % 6.00 % 4.50 % 8.00 % Adequately capitalized ratio plus 4.00 % 8.50 % 7.00 % 10.50 % capital conservation buffer Well capitalized ratio (Bank only) 5.00 % 8.00 % 6.50 % 10.00 % The Bank maintains and annually updates a capital plan over a five year horizon; the capital plan was last updated in the second quarter of 2021. Based upon reasonable assumptions of growth and operating performance, the base capital plan model projects that the Bank will be well capitalized throughout the five year period. The base model is also stress tested for interest rate risk from increasing and decreasing rates, credit risk in normal, elevated and severe loss scenarios, and combinations of interest rate and credit risk. In each stress scenario, the Bank maintained well capitalized status. To further validate its internal results, the Bank engaged a third party consultant during the third quarter of 2021 to conduct credit stress tests under six economic scenarios on itsJune 30, 2021 loan portfolio. Three of the scenarios emulated theFederal Reserve's Dodd Frank Act Stress Tests (DFAST), and three were developed by a leading forecasting firm. The consultant's report applied projected credit losses over a thirteen quarter horizon to the Bank's capital position with immediate effect. In each of the six scenarios the Bank remained well capitalized.
Off-Balance Sheet Financial Instruments and Contractual Obligations
Derivative Financial Instruments Designated as Hedges As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and/or liabilities so that change in interest rates does not have a significant adverse effect on net interest income. Derivative instruments that Management periodically uses as part of its interest rate risk management strategy may include interest rate swap agreements, interest rate floor agreements, and interest rate cap agreements. AtSeptember 30, 2021 , the Bank had nine outstanding off-balance sheet, derivative instruments designated as cash flow hedges. These derivative instruments were interest rate swap agreements, with notional principal amounts totaling$210.0 million and an unrealized loss of$1.5 million , net of taxes. The notional amounts and net unrealized gain (loss) of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that Management believes to be creditworthy and by limiting the amount of exposure to each counter-party. AtSeptember 30, 2021 , the Bank's derivative instrument counterparties were credit rated "A" by the major credit rating agencies. The interest rate swap agreements were entered into by the Bank to limit its exposure to rising interest rates. 73 -------------------------------------------------------------------------------- The Bank also enters into swap arrangements with qualified loan customers as a means to provide these customers with access to long-term fixed interest rates for borrowings, and simultaneously enters into a swap contract with an approved third- party financial institution. The terms of the contracts are designed to offset one another resulting in their being neither a net gain or a loss. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent that either counter-party defaults in its responsibility to pay interest under the terms of the agreements. Credit risk is mitigated by prudent underwriting of the loan customer and financial institution counterparties. As ofSeptember 30, 2021 , the Bank had six loan swap agreements in place with a total notional value of$81.3 million . Contractual Obligations The following table sets forth the contractual obligations of the Company as ofSeptember 30, 2021 : Less than 1 More than5 Dollars in thousands Total year 1-3 years 3-5 years years Borrowed funds$ 233,201 $ 178,109 $ 92 $ 55,000 $ - Operating leases 648 44 81 57 466 Certificates of deposit 514,567 354,403 137,033 23,131 - Total$ 748,416 $ 532,556 $ 137,206 $ 78,188 $ 466 Total loan commitments and unused lines of credit$ 333,697 $ 333,697 $ - $ - $ - 74
————————————————– ——————————
© Edgar online, source
