10-Q 1 bhb063018.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                  
Commission File Number: 001-13349
brbt3472935notag300dpia01.jpg
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter) 
Maine
 
01-0393663
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
PO Box 400
 
 
82 Main Street, Bar Harbor, ME
 
04609-0400
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (207) 288-3314
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definition of "large accelerated filer," "accelerated filer", "smaller reporting company", or "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one)
Large Accelerated Filer o        Accelerated Filer ý       Non-Accelerated Filer o      Smaller Reporting Company o        Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No ý
The Registrant had 15,503,628 shares of common stock, par value $2.00 per share, outstanding as of August 3, 2018.
 



BAR HARBOR BANKSHARES AND SUBSIDIARIES
FORM 10-Q
 
INDEX 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2





3


PART I.     FINANCIAL INFORMATION

ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
 
(in thousands, except share data)
 
June 30, 2018
 
December 31, 2017
 
Assets
 
 

 
 

 
Cash and due from banks
 
$
39,327

 
$
34,262

 
Interest-bearing deposit with the Federal Reserve Bank
 
22,066

 
56,423

 
Total cash and cash equivalents
 
61,393

 
90,685

 
Securities available for sale, at fair value
 
710,147

 
717,242

 
Federal Home Loan Bank stock
 
38,712

 
38,105

 
Total securities
 
748,859

 
755,347

 
Commercial real estate
 
838,546

 
826,746

 
Commercial and industrial
 
400,293

 
379,423

 
Residential real estate
 
1,127,895

 
1,155,682

 
Consumer
 
118,332

 
123,762

 
Total loans
 
2,485,066

 
2,485,613

 
Less: Allowance for loan losses
 
(13,090
)
 
(12,325
)
 
Net loans
 
2,471,976

 
2,473,288

 
Premises and equipment, net
 
48,038

 
47,708

 
Other real estate owned
 
129

 
122

 
Goodwill
 
100,085

 
100,085

 
Other intangible assets
 
7,921

 
8,383

 
Cash surrender value of bank-owned life insurance
 
58,811

 
57,997

 
Deferred tax assets, net
 
10,309

 
7,180

 
Other assets
 
33,534

 
24,389

 
Total assets
 
$
3,541,055

 
$
3,565,184

 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
Demand and other non-interest bearing deposits
 
$
341,773

 
$
349,055

 
NOW deposits
 
449,715

 
466,610

 
Savings deposits
 
350,339

 
364,799

 
Money market deposits
 
260,642

 
305,275

 
Time deposits
 
972,252

 
866,346

 
Total deposits
 
2,374,721

 
2,352,085

 
Senior borrowings
 
735,924

 
786,688

 
Subordinated borrowings
 
43,003

 
43,033

 
Total borrowings
 
778,927

 
829,721

 
Other liabilities
 
31,444

 
28,737

 
Total liabilities
 
3,185,092

 
3,210,543

 
(continued)
 
 
Shareholders’ equity
 
 

 
 

 
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at June 30, 2018 and December 31, 2017, respectively
 
32,857

 
32,857

 
Additional paid-in capital
 
187,198

 
186,702

 
Retained earnings
 
156,139

 
144,977

 
Accumulated other comprehensive loss
 
(15,347
)
 
(4,554
)
 
Less: cost of 932,044 and 985,532 shares of treasury stock at June 30, 2018 and December 31, 2017, respectively
 
(4,884
)
 
(5,341
)
 
Total shareholders’ equity
 
355,963

 
354,641

 
Total liabilities and shareholders’ equity
 
$
3,541,055

 
$
3,565,184


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

4


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
Interest and dividend income
 
 
 
 
 
 

 
 

Loans
 
$
25,934

 
$
24,226

 
$
51,060

 
$
45,420

Securities and other
 
5,784

 
5,439

 
11,435

 
10,430

Total interest and dividend income
 
31,718

 
29,665

 
62,495

 
55,850

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
4,405

 
2,539

 
8,390

 
4,749

Borrowings
 
4,321

 
3,317

 
7,955

 
5,920

Total interest expense
 
8,726

 
5,856

 
16,345

 
10,669

Net interest income
 
22,992

 
23,809

 
46,150

 
45,181

Provision for loan losses
 
770

 
736

 
1,565

 
1,531

Net interest income after provision for loan losses
 
22,222

 
23,073

 
44,585

 
43,650

Non-interest income
 
 

 
 

 
 

 
 

Trust and investment management fee income
 
3,122

 
3,324

 
6,084

 
6,188

Insurance brokerage service income
 

 
327

 

 
691

Customer service fees
 
2,347

 
1,991

 
4,571

 
3,764

Bank-owned life insurance income
 
377

 
386

 
823

 
785

Other income
 
1,275

 
530

 
1,881

 
1,076

Total non-interest income
 
7,121

 
6,558

 
13,359

 
12,504

Non-interest expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
10,375

 
10,127

 
21,364

 
20,448

Occupancy and equipment
 
2,925

 
2,829

 
5,998

 
5,495

Loss on premises and equipment, net
 

 

 

 
95

Outside services
 
581

 
716

 
1,141

 
1,313

Professional services
 
360

 
489

 
793

 
929

Communication
 
304

 
290

 
484

 
658

Amortization of intangible assets
 
207

 
211

 
414

 
391

Acquisition, conversion and other expenses
 
214

 
2,459

 
549

 
5,571

Other expenses
 
3,719

 
2,925

 
6,794

 
5,977

Total non-interest expense
 
18,685

 
20,046

 
37,537

 
40,877

 
 
 
 
 
 
 
 
 
Income before income taxes
 
10,658

 
9,585

 
20,407

 
15,277

Income tax expense
 
2,123

 
3,029

 
4,060

 
4,510

Net income
 
$
8,535

 
$
6,556

 
$
16,347

 
$
10,767

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.55

 
$
0.43

 
$
1.06

 
$
0.72

Diluted
 
$
0.55

 
$
0.42

 
$
1.05

 
$
0.72

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
15,482

 
15,393

 
15,465

 
14,935

Diluted
 
15,571

 
15,506

 
15,560

 
15,049


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

5


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
8,535

 
$
6,556

 
$
16,347

 
$
10,767

Other comprehensive (loss) income, before tax:
 
 

 
 

 
 

 
 

Changes in unrealized loss on securities available for sale
 
(3,087
)
 
3,485

 
(13,789
)
 
4,601

Changes in unrealized loss on derivative hedges
 
226

 
(481
)
 
880

 
(704
)
Changes in unrealized loss on pension
 

 
(15
)
 
41

 
42

Income taxes related to other comprehensive (loss) income :
 
 

 
 

 
 
 
 

Changes in unrealized loss on securities available for sale
 
731

 
(1,292
)
 
3,274

 
(1,640
)
Changes in unrealized loss on derivative hedges
 
(54
)
 
242

 
(209
)
 
325

Changes in unrealized loss on pension
 

 
18

 
(10
)
 
(3
)
Total other comprehensive (loss) income
 
(2,184
)
 
1,957

 
(9,813
)
 
2,621

Total comprehensive income
 
$
6,351

 
$
8,513

 
$
6,534

 
$
13,388


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

6


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except per share data)
 
Common stock amount
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income
 
Treasury stock
 
Total
Balance at December 31, 2016
 
$
13,577

 
$
23,027

 
$
130,489

 
$
(4,326
)
 
$
(6,027
)
 
$
156,740

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 
10,767

 

 

 
10,767

Other comprehensive income
 

 

 

 
2,621

 

 
2,621

Total comprehensive income
 

 

 
10,767

 
2,621

 

 
13,388

Cash dividends declared ($0.37 per share)
 

 

 
(5,744
)
 

 

 
(5,744
)
Acquisition of Lake Sunapee Bank Group
 
8,328

 
173,591

 

 

 

 
181,919

Treasury stock purchased (2,861 shares)
 

 

 

 

 
(86
)
 
(86
)
Net issuance (49,029 shares) to employee stock plans, including related tax effects
 

 
(68
)
 
(40
)
 

 
473

 
365

Three-for-two stock split
 
10,952

 
(10,952
)
 
(16
)
 

 

 
(16
)
Recognition of stock based compensation
 

 
556

 

 

 

 
556

Balance at June 30, 2017
 
$
32,857

 
$
186,154

 
$
135,456

 
$
(1,705
)
 
$
(5,640
)
 
$
347,122

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
32,857

 
$
186,702

 
$
144,977

 
$
(4,554
)
 
$
(5,341
)
 
$
354,641

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 
16,347

 

 

 
16,347

Other comprehensive loss
 

 

 

 
(9,813
)
 

 
(9,813
)
Total comprehensive income
 

 

 
16,347

 
(9,813
)
 

 
6,534

Cash dividends declared ($0.39 per share)
 

 

 
(5,981
)
 

 

 
(5,981
)
Treasury stock purchased (9,294 shares)
 

 

 

 

 
(278
)
 
(278
)
Net issuance (62,782 shares) to employee stock plans, including related tax effects
 

 
(131
)
 

 

 
735

 
604

Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606
 

 

 
(184
)
 

 

 
(184
)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02
 

 

 
980

 
(980
)
 
 
 

Recognition of stock based compensation
 

 
627

 

 

 

 
627

Balance at June 30, 2018
 
$
32,857

 
$
187,198

 
$
156,139

 
$
(15,347
)
 
$
(4,884
)
 
$
355,963


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


7


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 
 
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
16,347

 
$
10,767

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
1,565

 
1,531

Net amortization of securities
 
2,089

 
2,760

Deferred tax benefit
 

 
(237
)
Change in unamortized net loan costs and premiums
 
214

 
(148
)
Premises and equipment depreciation and amortization expense
 
1,676

 
1,827

Stock-based compensation expense
 
627

 
556

Accretion of purchase accounting entries, net
 
(1,240
)
 
(1,594
)
Amortization of other intangibles
 
414

 
391

Income from cash surrender value of bank-owned life insurance policies
 
(823
)
 
(785
)
Loss on premises and equipment, net
 

 
95

Net change in other assets and liabilities
 
(5,695
)
 
(4,919
)
Net cash provided by operating activities
 
15,174

 
10,244

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities, calls and prepayments of securities available for sale
 
48,942

 
61,299

Purchases of securities available for sale
 
(57,725
)
 
(104,833
)
Net change in loans
 
10,924

 
(20,056
)
Purchase of loans
 
(10,231
)
 
(18,621
)
Purchase of Federal Home Loan Bank stock
 
(848
)
 
(7,388
)
Proceeds from sale of Federal Home Loan Bank stock
 
241

 

Purchase of premises and equipment, net
 
(2,002
)
 
(2,413
)
Acquisitions, net of cash (paid) acquired
 

 
39,537

Proceeds from sale of other real estate
 
94

 
322

Net cash used in investing activities
 
(10,605
)
 
(52,153
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Net increase in deposits
 
22,558

 
12,419

Net change in short-term advances from the Federal Home Loan Bank
 
(47,467
)
 
228,833

Net change in long-term advances from the Federal Home Loan Bank
 
(3,297
)
 
(77,554
)
Net change in securities sold repurchase agreements
 

 
(5,754
)
Exercise of stock options
 
604

 
263

Purchase of treasury stock
 
(278
)
 

Common stock cash dividends paid
 
(5,981
)
 
(5,744
)
Net cash (used in) provided by financing activities
 
(33,861
)
 
152,463

 
 
 
 
 
Net change in cash and cash equivalents
 
(29,292
)
 
110,554

Cash and cash equivalents at beginning of year
 
90,685

 
8,439

Cash and cash equivalents at end of period
 
$
61,393

 
$
118,993

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
17,182

 
$
10,698

Income taxes paid, net
 
6,218

 
3,084

 
 
 
 
 
Acquisition of non-cash assets and liabilities:
 
 
 
 
Assets acquired
 

 
1,454,076

Liabilities assumed
 

 
1,406,672

 
 
 
 
 
Other non-cash changes:
 
 
 
 
Real estate owned acquired in settlement of loans
 
124

 
32


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


8


BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1.          BASIS OF PRESENTATION

The consolidated financial statements (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company” or “Bar Harbor”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Bar Harbor Bankshares is a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include the accounts of the Company, its wholly-owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Bank’s consolidated subsidiaries. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise.

In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, 2017 previously filed with the Securities and Exchange Commission (the "SEC").  In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

Reclassifications: Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation.  The reclassifications had no impact on net income in the Company’s consolidated income statement.  

Tax Cuts and Jobs Act

Public law No. 115-97, known as the Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Also on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, the Company estimated the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The provisional amount recorded in the fourth quarter of 2017 related to the remeasurement of the Company's deferred tax balance resulted in additional income tax expense of $4.0 million. The final impact of the Tax Act may differ from these estimates as a result of changes in management's interpretations and assumptions, as well as new guidance issued by the Internal Revenue Service.


9


Recent Accounting Pronouncements

The following table provides a brief description of recent accounting standards updates ("ASU") that could have a material impact to the Company’s consolidated financial statements upon adoption:
Standard
Description
Required Date of Adoption
Effect on financial statements
Standards Adopted in 2018
ASU 2014-09, Revenue from Contracts with Customers
This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry topics of the Codification. The core principle of the ASU is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU may be adopted either retrospectively or on a modified retrospective basis.
January 1, 2018
The Company adopted this ASU as of January 1, 2018, upon completion of an analysis to identify all revenue streams within the scope of this accounting guidance. After reviewing the related contracts as prescribed by the five steps within this ASU, one contract resulted in recognition of a $241,000 liability with a $184,000 impact to retained earnings net of tax. The remaining changes had no material impact on the consolidated financial statements. See Note 11 for more detail and transitional disclosures.
ASU 2015-14, Deferral of the Effective Date
ASU 2016-08, Principal versus Agent Considerations
ASU 2016-10, Identifying Performance Obligations and Licensing
ASU 2016-12, Narrow-Scope Improvements and Practical Expedience
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities
This ASU amends ASC Topic 825, Financial Instruments-Overall, and addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other minor amendments applicable to the Company, the main provisions require investments in equity securities to be measured at fair value with changes in fair value recognized through net income unless they qualify for a practicability exception (excludes investments accounted for under the equity method of accounting or those that result in consolidation of the investee). Except for disclosure requirements that will be adopted prospectively, the ASU must be adopted on a modified retrospective basis.
January 1, 2018
The Company adopted this ASU as of January 1, 2018, although it did not have any equity securities that would be in scope of this ASU. However, the Company is subject to the exit pricing notion required in fair value disclosures and after calculating the fair value, the Company had no material impact to its consolidated financial statements.
ASU-2018-03, Technical Corrections and Improvements to Financial Instruments
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
This ASU amends Topic 230, Statement of Cash Flows, and provides clarification with respect to classification within the statement of cash flows where current guidance is unclear or silent. The ASU should be adopted retrospectively. If it is impractical to apply the guidance retrospectively for an issue, the amendments related to the issue would be applied prospectively.
January 1, 2018
The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
ASU 2017-07, Compensation- Retirement Benefits
This ASU amends Topic 715, Retirement Benefits, and provides more prescriptive guidance around the presentation of net period pension and postretirement benefit cost in the income statement. The amendment requires the service cost component be disaggregated from other components of net periodic benefit cost in the income statement.
January 1, 2018
The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
Early adoption is permitted.

10


Standard
Description
Required Date of Adoption
Effect on financial statements
Standards Adopted in 2018 (continued)
ASU 2017-09, Stock Compensation: Scope of Modification Accounting
This ASU amends Topic 718, Compensation- Stock Compensation, and clarifies when modification accounting should be applied to changes in terms or conditions of share-based payment awards. The amendments narrow the scope of modification accounting by clarifying that modification accounting should be applied to awards if the change affects the fair value, vesting conditions, or classification of the award. The amendments do not impact current disclosure requirements for modifications, regardless of whether modification accounting is required under the new guidance.
January 1, 2018
The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The ASU amends Topic 220, Income Statement-Reporting Comprehensive Income, and is intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the recently enacted Tax Reform. The guidance allows entities to reclassify stranded tax effects in accumulated other comprehensive income to retained earnings.
January 1, 2019
The Company adopted this ASU as of March 31, 2018. The effect of the reclassification resulted in an increase to retained earnings and a decrease to accumulated other comprehensive income of $980,000 with zero net effect on total stockholders' equity.
ASU 2018-05, Income Taxes (Topic 740) SEC Amendments
Early adoption is permitted.
ASU 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending
Circular 202, issued on July 2, 1985, was rescinded by the Office of the Comptroller of the Currency. The circular limited the net deferred tax debits that could be carried on the bank's balance sheet for regulatory purposes to the amount that would be coverable by the net operating loss carrybacks. The language is no longer relevant and has been removed from the guidance.
May 2018
The adoption of this ASU had no impact on the Company's consolidated financial statements.
 
 
 
 
Standard
Description
Required Date of Adoption
Effect on financial statements
Standards Not Yet Adopted
ASU 2016-02, Leases
This ASU creates ASU Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year. There are not significant changes to lessor accounting; however, there are certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures. This ASU should be adopted on a modified retrospective basis.
January 1, 2019
The Company is currently evaluating its operating lease arrangement under this ASU. Early indications suggest the Company will need to recognize right-of-use assets and lease liabilities for most of its operating lease commitments.
ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842
ASU 2018-10, Codification Improvements to Topic 842, Leases
 

11


Standard
Description
Required Date of Adoption
Effect on financial statements
Standards Not Yet Adopted (continued)
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and debt securities. Additional quantitative and qualitative disclosures are required upon adoption.
January 1, 2020
Adoption of this ASU is expected to primarily change how the Company estimates credit losses with the application of the expected credit loss model. In addition, the Company expects the ASU to change the presentation of credit losses for AFS debt securities through an allowance method rather than as a direct write-off. The Company is in the process of evaluating loan loss estimation models to comply with the guidance under this ASU, which may result in a higher credit loss estimate.
While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities, rather than reduce the amortized cost of the securities by direct write-offs.
The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.
ASU 2017-04, Simplifying the Test for Goodwill Impairment
This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.
January 1, 2020
Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
Early adoption is permitted.
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities
This ASU amends ASC 815, Derivatives and Hedging to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.
January 1, 2019
Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
ASU 2018-07, Share Based Payment Accounting
This ASU expands the scope of Topic 718, Compensation- Stock Compensation to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Based Payments to Non-Employees.
January 1, 2019
The Company is currently evaluating this guidance to determine any impact on the Company's consolidated financial statements. The Company does not participate in these types of arrangements in the normal course of business, except for board director compensation.
ASU 2018-09, Codification Improvements
This ASU does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different areas based on comments and suggestions by various stakeholders. Topics that may be relevant to the company currently or in the future include (1) comprehensive income, (2) income tax for stock compensation and business combinations, (3) derivatives and hedging, and (4) fair value measurements.
January 1, 2019
The Company is currently evaluating this guidance to determine any impact on the Company's consolidated financial statements.



12


NOTE 2.    SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2018
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Obligations of US Government-sponsored enterprises
 
$
3,991

 
$

 
$
3

 
$
3,988

Mortgage-backed securities:
 
 
 
 
 
 
 


  US Government-sponsored enterprises
 
459,957

 
521

 
13,628

 
446,850

  US Government agency
 
88,545

 
195

 
2,486

 
86,254

  Private label
 
446

 
124

 
6

 
564

Obligations of states and political subdivisions thereof
 
135,374

 
1,053

 
2,041

 
134,386

Corporate bonds
 
38,364

 
182

 
441

 
38,105

Total securities available for sale
 
$
726,677

 
$
2,075

 
$
18,605

 
$
710,147

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Obligations of US Government-sponsored enterprises
 
$
6,967

 
$
5

 
$

 
$
6,972

Mortgage-backed securities:
 
 
 
 
 
 
 
 
  US Government-sponsored enterprises
 
447,081

 
1,738

 
5,816

 
443,003

  US Government agency
 
96,357

 
413

 
1,174

 
95,596

  Private label
 
529

 
150

 
5

 
674

Obligations of states and political subdivisions thereof
 
138,522

 
2,407

 
729

 
140,200

Corporate bonds
 
30,527

 
323

 
53

 
30,797

Total securities available for sale
 
$
719,983

 
$
5,036

 
$
7,777

 
$
717,242


The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at June 30, 2018 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.
 
 
Available for sale
(in thousands)
 
Amortized Cost
 
Fair Value
Within 1 year
 
$
4,021

 
$
4,018

Over 1 year to 5 years
 
15,681

 
15,541

Over 5 years to 10 years
 
46,469

 
46,445

Over 10 years
 
111,558

 
110,475

Total bonds and obligations
 
177,729

 
176,479

Mortgage-backed securities
 
548,948

 
533,668

Total securities available for sale
 
$
726,677

 
$
710,147



13


Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
 
 
Less Than Twelve Months
 
Over Twelve Months
 
Total
(In thousands)
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Obligations of US Government-sponsored enterprises
 
$
3

 
$
3,988

 
$

 
$

 
$
3

 
$
3,988

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 


  US Government-sponsored enterprises
 
7,001

 
294,523

 
6,627

 
115,694

 
13,628

 
410,217

  US Government agency
 
1,342

 
46,242

 
1,144

 
29,828

 
2,486

 
76,070

  Private label
 
1

 
115

 
5

 
51

 
6

 
166

Obligations of states and political subdivisions thereof
 
476

 
31,838

 
1,565

 
27,847

 
2,041

 
59,685

Corporate bonds
 
441

 
23,668

 

 

 
441

 
23,668

Total securities available for sale
 
$
9,264

 
$
400,374

 
$
9,341

 
$
173,420

 
$
18,605

 
$
573,794

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
  US Government-sponsored enterprises
 
$
1,895

 
$
189,486

 
$
3,921

 
$
117,156

 
$
5,816

 
$
306,642

  US Government agency
 
559

 
45,221

 
615

 
30,155

 
1,174

 
75,376

  Private label
 

 
8

 
5

 
130

 
5

 
138

Obligations of states and political subdivisions thereof
 
58

 
8,298

 
671

 
27,727

 
729

 
36,025

Corporate bonds
 
53

 
8,943

 

 

 
53

 
8,943

Total securities available for sale
 
$
2,565

 
$
251,956

 
$
5,212

 
$
175,168

 
$
7,777

 
$
427,124


Securities Impairment: 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.  For the three months ended June 30, 2018 and 2017 the Company did not record any other-than-temporary impairment (“OTTI”) losses.
 
Three Months Ended June 30,
 
2018
 
2017
Estimated credit losses as of prior year-end
$
1,697

 
$
1,697

Reductions for securities paid off during the period

 

Estimated credit losses at end of the period
$
1,697

 
$
1,697

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
Estimated credit losses as of prior year-end,
$
1,697

 
$
1,697

Reductions for securities paid off during the period

 

Estimated credit losses at end of the period
$
1,697

 
$
1,697



14


The Company expects to recover its amortized cost basis on all securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of June 30, 2018, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that securities in an unrealized loss position were not other-than-temporarily impaired at June 30, 2018:

Obligations of US Government-sponsored enterprises
At June 30, 2018, the one security in the Company’s portfolio of AFS US Government sponsored enterprises was in an unrealized loss position. Aggregate unrealized losses represented 0.1% of the amortized cost of securities in unrealized loss positions.The Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) guarantee the contractual cash flows of all of the Company’s US Government-sponsored enterprises. The security is investment grade rated and there were no material underlying credit downgrades during the quarter. The Security is performing.

US Government-sponsored enterprises
At June 30, 2018, 495 out of the total 777 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 3.2% of the amortized cost of securities in unrealized loss positions.The FNMA and FHLMC guarantee the contractual cash flows of all of the Company’s US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agency
At June 30, 2018, 120 out of the total 200 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 3.2% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Private label
At June 30, 2018, ten of the total 26 securities in the Company’s portfolio of AFS private-label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.3% of the amortized cost of securities in unrealized loss positions. Based upon the foregoing considerations, and the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.

Obligations of states and political subdivisions thereof
At June 30, 2018, 119 of the total 262 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.3% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds
At June 30, 2018, nine out of the total 17 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 1.8% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.



15


Visa Class B Common Shares
The Company was a member of the Visa USA payment network and was issued Class B shares in connection with the Visa Reorganization and the Visa Inc. initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of Visa stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its statements of condition at zero value for all reporting periods since 2008. At June 30, 2018, the Company owned 11,623 of Visa Class B shares with a then current conversion ratio to Visa Class A shares of 1.6298 (or 18,943 Visa Class A shares). Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.


16


NOTE 3.    LOANS

The Company’s loan portfolio is comprised of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans includes commercial construction and land development and other commercial real estate loans. Commercial and industrial loans includes loans to commercial businesses, agricultural, and tax exempt loans. Residential real estate loans consists of mortgages for 1-4 family housing. Consumer loans include home equity loans and other installment lending.

The Company’s lending activities are principally conducted in Maine, New Hampshire, and Vermont.

Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from Lake Sunapee Bank Group. The following is a summary of total loans:
 
 
June 30, 2018
 
December 31, 2017
(in thousands)
 
Business
Activities  Loans
 
Acquired
Loans
 
Total
 
Business
Activities  Loans
 
Acquired
Loans
 
Total
Commercial Real Estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
$
27,722

 
$
9,542

 
$
37,264

 
$
28,892

 
$
16,781

 
$
45,673

Other commercial real estate
 
540,580

 
260,702

 
801,282

 
505,119

 
275,954

 
781,073

Total Commercial Real Estate
 
568,302

 
270,244

 
838,546

 
534,011

 
292,735

 
826,746

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial:
 
 

 
 

 
 

 
 

 
 

 
 

Other Commercial
 
226,143

 
62,253

 
288,396

 
198,051

 
68,069

 
266,120

Agricultural
 
25,284

 

 
25,284

 
27,588

 

 
27,588

Tax exempt
 
45,400

 
41,213

 
86,613

 
42,365

 
43,350

 
85,715

Total Commercial and Industrial
 
296,827

 
103,466

 
400,293

 
268,004

 
111,419

 
379,423

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial Loans
 
865,129

 
373,710

 
1,238,839

 
802,015

 
404,154

 
1,206,169

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgages
 
606,128

 
521,767

 
1,127,895

 
591,411

 
564,271

 
1,155,682

Total Residential Real Estate
 
606,128

 
521,767

 
1,127,895

 
591,411

 
564,271

 
1,155,682

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 
 
 

 
 

 
 

 
 

Home equity
 
53,853

 
54,457

 
108,310

 
51,376

 
62,217

 
113,593

Other consumer
 
8,215

 
1,807

 
10,022

 
7,828

 
2,341

 
10,169

Total Consumer
 
62,068

 
56,264

 
118,332

 
59,204

 
64,558

 
123,762

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Loans
 
$
1,533,325

 
$
951,741

 
$
2,485,066

 
$
1,452,630

 
$
1,032,983

 
$
2,485,613


The carrying amount of the acquired loans at June 30, 2018 totaled $951.7 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $11.6 million (and total note balances of $15.9 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at acquisition date had a carrying amount of $940.1 million as of June 30, 2018.




17


The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer:
 
 
Three Months Ended June 30,
(in thousands)
 
2018
 
2017
Balance at beginning of period
 
$
3,347

 
$
3,194

Reclassification from nonaccretable difference for loans with (decreased) improved cash flows
 
(153
)
 
1,745

Accretion
 
(387
)
 
(372
)
Balance at end of period
 
$
2,807

 
$
4,567

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
Balance at beginning of period
 
$
3,509

 
$

Acquisitions
 

 
3,398

Reclassification from nonaccretable difference for loans with improved cash flows
 
46

 
1,745

Accretion
 
(748
)
 
(576
)
Balance at end of period
 
$
2,807

 
$
4,567


18


The following is a summary of past due loans at June 30, 2018 and December 31, 2017:

Business Activities Loans
(in thousands)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or Greater Past Due
 
Total Past
Due
 
Current
 
Total Loans
 
Past Due >
90 days and
Accruing
June 30, 2018
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial Real Estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
$

 
$

 
$
2

 
$
2

 
$
27,720

 
$
27,722

 
$

Other commercial real estate
 
483

 
954

 
6,636

 
8,073

 
532,507

 
540,580

 

Total Commercial Real Estate
 
483

 
954

 
6,638

 
8,075

 
560,227

 
568,302

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other commercial
 
79

 
8

 
604

 
691

 
225,452

 
226,143

 

Agricultural
 

 
37

 
130

 
167

 
25,117

 
25,284

 

Tax exempt
 

 

 

 

 
45,400

 
45,400

 

Total Commercial and Industrial
 
79

 
45

 
734

 
858

 
295,969

 
296,827

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial Loans
 
562

 
999

 
7,372

 
8,933

 
856,196

 
865,129

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgages
 
1,122

 
483

 
3,690

 
5,295

 
600,833

 
606,128

 

Total Residential Real Estate
 
1,122

 
483

 
3,690

 
5,295

 
600,833

 
606,128

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
49

 
85

 
241

 
375

 
53,478

 
53,853

 

Other consumer
 
4

 
8

 

 
12

 
8,203

 
8,215

 

Total Consumer
 
53

 
93

 
241

 
387

 
61,681