CAC 10-Q Quarterly Report Sept. 30, 2020

CAMDEN NATIONAL CORP

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cac-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-28190

CAMDEN NATIONAL CORP ORATION

(Exact name of registrant as specified in its charter)


Maine			01-0413282
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)

2 ELM STREET	CAMDEN	ME	04843
(Address of principal executive offices)			(Zip Code)

Registrant's telephone number, including area code: ( 207 ) 236-8821

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, without par value	CAC	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:

Outstanding at October 29, 2020: Common stock (no par value) 14,916,644 shares.

CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT


		PAGE
PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Consolidated Statements of Condition (unaudited) - September 30, 2020 and December 31, 2019	3

	Consolidated Statements of Income (unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	4

	Consolidated Statements of Comprehensive Income (unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	5

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	6

	Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2020 and 2019	7

	Notes to the Unaudited Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	46

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	73

ITEM 4.	CONTROLS AND PROCEDURES	74

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	75

ITEM 1A.	RISK FACTORS	75

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	76

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	76

ITEM 4.	MINE SAFETY DISCLOSURES	76

ITEM 5.	OTHER INFORMATION	76

ITEM 6.	EXHIBITS	76

SIGNATURES		78

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION

(unaudited)


(In thousands, except number of shares)	September 30, 2020		December 31, 2019
ASSETS
Cash and due from banks	$	42,119	$	39,586
Interest-bearing deposits in other banks (including restricted cash)	304,270		36,050
Total cash, cash equivalents and restricted cash	346,389		75,636
Investments:
Available-for-sale securities, at fair value (book value of $ 1,070,479 and $ 913,978 , respectively)	1,107,069		918,118
Held-to-maturity securities, at amortized cost (fair value of $ 1,403 and $ 1,359 , respectively)	1,298		1,302
Other investments	13,345		13,649
Total investments	1,121,712		933,069
Loans held for sale, at fair value (book value of $ 37,301 and $ 11,915 , respectively)	37,935		11,854
Loans	3,274,842		3,095,023
Less: allowance for loan losses	( 36,414 )		( 25,171 )
Net loans	3,238,428		3,069,852
Goodwill	94,697		94,697
Core deposit intangible assets	3,014		3,525
Bank-owned life insurance	94,262		92,344
Premises and equipment, net	40,517		41,836
Deferred tax assets	11,195		16,823
Other assets	165,644		89,885
Total assets	$	5,153,793	$	4,429,521
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest checking	$	800,582	$	552,590
Interest checking	1,419,544		1,153,203
Savings and money market	1,306,868		1,119,193
Certificates of deposit	405,434		521,752
Brokered deposits	291,616		191,005
Total deposits	4,224,044		3,537,743
Short-term borrowings	210,055		268,809
Long-term borrowings	25,000		10,000
Subordinated debentures	59,306		59,080
Accrued interest and other liabilities	117,866		80,474
Total liabilities	4,636,271		3,956,106
Commitments and Contingencies
Shareholders’ Equity
Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 14,917,344 and 15,144,719 shares on September 30, 2020 and December 31, 2019, respectively	130,988		139,103
Retained earnings	366,959		340,580
Accumulated other comprehensive income (loss):
Net unrealized gain on available-for-sale debt securities, net of tax	28,724		3,250
Net unrealized loss on cash flow hedging derivative instruments, net of tax	( 6,078 )		( 6,048 )
Net unrecognized loss on postretirement plans, net of tax	( 3,071 )		( 3,470 )
Total accumulated other comprehensive income (loss)	19,575		( 6,268 )
Total shareholders’ equity	517,522		473,415
Total liabilities and shareholders’ equity	$	5,153,793	$	4,429,521

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

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except number of shares and per share data)	2020		2019		2020		2019
Interest Income
Interest and fees on loans	$	33,025	$	36,207	$	100,190	$	108,020
Taxable interest on investments	4,480		4,794		14,241		14,729
Nontaxable interest on investments	823		675		2,438		1,943
Dividend income	163		158		498		562
Other interest income	176		686		691		1,712
Total interest income	38,667		42,520		118,058		126,966
Interest Expense
Interest on deposits	2,899		8,963		12,953		26,542
Interest on borrowings	394		801		1,591		2,660
Interest on subordinated debentures	893		833		2,668		2,373
Total interest expense	4,186		10,597		17,212		31,575
Net interest income	34,481		31,923		100,846		95,391
Provision for credit losses	987		730		12,160		2,647
Net interest income after provision for credit losses	33,494		31,193		88,686		92,744
Non-Interest Income
Mortgage banking income, net	4,664		2,668		12,889		5,662
Debit card income	2,627		2,432		7,159		6,723
Service charges on deposit accounts	1,606		1,970		4,955		6,202
Income from fiduciary services	1,504		1,444		4,609		4,381
Brokerage and insurance commissions	755		625		2,034		1,942
Bank-owned life insurance	615		613		1,918		1,810
Customer loan swap fees	51		109		222		919
Net gain on sale of securities	—		1		—		28
Other income	874		877		2,373		2,498
Total non-interest income	12,696		10,739		36,159		30,165
Non-Interest Expense
Salaries and employee benefits	13,739		13,604		41,693		40,043
Furniture, equipment and data processing	3,076		2,708		8,576		8,111
Net occupancy costs	1,785		1,710		5,785		5,263
Consulting and professional fees	913		892		2,877		2,679
Debit card expense	972		960		2,784		2,666
Regulatory assessments	510		182		971		1,091
Amortization of core deposit intangible assets	170		177		511		529
Other real estate owned and collection costs, net	71		251		270		353
Other expenses	3,985		3,264		9,824		9,754
Total non-interest expense	25,221		23,748		73,291		70,489
Income before income tax expense	20,969		18,184		51,554		52,420
Income Tax Expense	4,194		3,696		10,346		10,455
Net Income	$	16,775	$	14,488	$	41,208	$	41,965
Per Share Data
Basic earnings per share	$	1.12	$	0.94	$	2.74	$	2.70
Diluted earnings per share	$	1.11	$	0.94	$	2.73	$	2.70
Weighted average number of common shares outstanding	14,961,465		15,339,093		15,008,004		15,482,765
Diluted weighted average number of common shares outstanding	15,001,047		15,381,928		15,044,427		15,522,501
Cash dividends declared per share	$	0.33	$	0.30	$	0.99	$	0.90

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Net Income	$	16,775	$	14,488	$	41,208	$	41,965
Other comprehensive income:
Net change in unrealized gain on available-for-sale securities, net of tax	( 586 )		3,572		25,474		25,310
Net change in unrealized loss on cash flow hedging derivatives, net of tax	672		( 41 )		( 30 )		( 1,918 )
Net gain on postretirement plans, net of tax	133		49		399		145
Other comprehensive income	219		3,580		25,843		23,537
Comprehensive Income	$	16,994	$	18,068	$	67,051	$	65,502

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

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)


	Three Months Ended
	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
(In thousands, except number of shares and per share data)	Shares Outstanding	Amount
Balance at June 30, 2019	15,457,480	$	151,801	$	320,421	$	( 4,463 )	$	467,759
Net income	—	—		14,488		—		14,488
Other comprehensive income, net of tax	—	—		—		3,580		3,580
Stock-based compensation expense	—	429		—		—		429
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings	4,858	51		—		—		51
Common stock repurchased	( 237,435 )	( 10,066 )		—		—		( 10,066 )
Cash dividends declared ($ 0.30 per share)	—	—		( 4,569 )		—		( 4,569 )
Balance at September 30, 2019	15,224,903	$	142,215	$	330,340	$	( 883 )	$	471,672
Balance at June 30, 2020	14,963,041	$	131,981	$	355,130	$	19,356	$	506,467
Net income	—	—		16,775		—		16,775
Other comprehensive income, net of tax	—	—		—		219		219
Stock-based compensation expense	—	422		—		—		422
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings	2,218	( 13 )		—		—		( 13 )
Common stock repurchased	( 47,915 )	( 1,402 )		—		—		( 1,402 )

Cash dividends declared ($ 0.33 per share)	—	—		( 4,946 )		—		( 4,946 )
Balance at September 30, 2020	14,917,344	$	130,988	$	366,959	$	19,575	$	517,522


	Nine Months Ended
	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
(In thousands, except number of shares and per share data)	Shares Outstanding	Amount
Balance at December 31, 2018	15,591,914	$	158,215	$	302,030	$	( 24,420 )	$	435,825
Cumulative-effect adjustment upon adoption of ASU 2016-02 (1)	—	—		254		—		254
Net income	—	—		41,965		—		41,965
Other comprehensive income, net of tax	—	—		—		23,537		23,537
Stock-based compensation expense	—	1,364		—		—		1,364
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings	37,202	( 190 )		—		—		( 190 )
Common stock repurchased	( 404,213 )	( 17,174 )		—		—		( 17,174 )
Cash dividends declared ($ 0.90 per share)	—	—		( 13,909 )		—		( 13,909 )
Balance at September 30, 2019	15,224,903	$	142,215	$	330,340	$	( 883 )	$	471,672
Balance at December 31, 2019	15,144,719	$	139,103	$	340,580	$	( 6,268 )	$	473,415
Net income	—	—		41,208		—		41,208
Other comprehensive income, net of tax	—	—		—		25,843		25,843
Stock-based compensation expense	—	1,373		—		—		1,373
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings	37,571	( 113 )		—		—		( 113 )
Common stock repurchased	( 264,946 )	( 9,375 )		—		—		( 9,375 )
Cash dividends declared ($ 0.99 per share)	—	—		( 14,829 )		—		( 14,829 )
Balance at September 30, 2020	14,917,344	$	130,988	$	366,959	$	19,575	$	517,522

(1) Effective January 1, 2019, the Company adopted ASU 2016-02, Leases , on a modified-retrospective basis.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,
(In thousands)	2020		2019
Operating Activities
Net Income	$	41,208	$	41,965
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Originations of mortgage loans held for sale	( 475,131 )		( 176,782 )
Proceeds from the sale of mortgage loans	460,130		168,394
Gain on sale of mortgage loans, net of origination costs	( 10,385 )		( 3,928 )
Provision for credit losses	12,160		2,647
Depreciation and amortization expense	2,850		2,889
Investment securities amortization and accretion, net	3,115		2,148
Stock-based compensation expense	1,373		1,364
Amortization of core deposit intangible assets	511		529
Purchase accounting accretion, net	( 924 )		( 1,180 )



Net increase in derivative collateral posted	( 30,250 )		( 26,630 )
Increase in other assets	( 10,088 )		( 1,799 )
Decrease in other liabilities	( 501 )		( 6,767 )
Net cash (used in) provided by operating activities	( 5,932 )		2,850
Investing Activities
Proceeds from sales and maturities of available-for-sale securities	181,489		247,991
Purchase of available-for-sale securities	( 341,100 )		( 220,696 )


Net increase in loans	( 180,174 )		( 85,817 )

Purchase of Federal Home Loan Bank stock	( 9,231 )		( 4,340 )
Proceeds from sale of Federal Home Loan Bank stock	9,535		7,463
Purchase of premises and equipment	( 2,591 )		( 2,378 )


Recoveries of previously charged-off loans	352		228
Proceeds from the sale of other real estate owned	110		554
Net cash used in investing activities	( 341,610 )		( 56,995 )
Financing Activities
Net increase in deposits	686,314		153,539
Net (repayments of) proceeds from borrowings less than 90 days	( 58,754 )		2,586
Proceeds from Federal Home Loan Bank long-term advances	25,000		—
Repayments of Federal Home Loan Bank long-term advances	( 10,000 )		—


Common stock repurchases	( 9,140 )		( 17,174 )
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings	( 113 )		( 190 )
Cash dividends paid on common stock	( 14,907 )		( 14,004 )
Finance lease payments	( 105 )		( 79 )
Net cash provided by financing activities	618,295		124,678
Net increase in cash, cash equivalents and restricted cash	270,753		70,533
Cash, cash equivalents, and restricted cash at beginning of period	75,636		66,999
Cash, cash equivalents and restricted cash at end of period	$	346,389	$	137,532
Supplemental information
Interest paid	$	17,778	$	31,402
Income taxes paid	10,689		9,785

Transfer from loans and premises to other real estate owned	24		543
Unsettled common stock repurchase	235		—

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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

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

The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.

AFS:

Available-for-sale

HTM:

Held-to-maturity

ALCO:

Asset/Liability Committee

IRS:

Internal Revenue Service

ALL:

Allowance for loan losses

LIBOR:

London Interbank Offered Rate

AOCI:

Accumulated other comprehensive income (loss)

LTIP:

Long-Term Performance Share Plan

ASC:

Accounting Standards Codification

Management ALCO:

Management Asset/Liability Committee

ASU:

Accounting Standards Update

MBS:

Mortgage-backed security

Bank:

Camden National Bank, a wholly-owned subsidiary of Camden National Corporation

MSPP:

Management Stock Purchase Plan

BOLI:

Bank-owned life insurance

N/A:

Not applicable

Board ALCO:

Board of Directors' Asset/Liability Committee

N.M.:

Not meaningful

CCTA:

Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation

OCC:

Office of the Comptroller of the Currency

CDs:

Certificate of deposits

OCI:

Other comprehensive income (loss)

Company:

Camden National Corporation

OREO:

Other real estate owned

CMO:

Collateralized mortgage obligation

OTTI:

Other-than-temporary impairment

DCRP:

Defined Contribution Retirement Plan

SBA:

U.S. Small Business Administration

EPS:

Earnings per share

SBA PPP

U.S. Small Business Administration Paycheck Protection Program

FASB:

Financial Accounting Standards Board

SERP:

Supplemental executive retirement plans

FDIC:

Federal Deposit Insurance Corporation

Tax Act:

Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017

FHLB:

Federal Home Loan Bank

TDR:

Troubled-debt restructured loan

FHLBB:

Federal Home Loan Bank of Boston

UBCT:

Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation

FRB:

Federal Reserve System Board of Governors

U.S.:

United States of America

FRBB:

Federal Reserve Bank of Boston

2003 Plan:

2003 Stock Option and Incentive Plan

GAAP:

Generally accepted accounting principles in the United States

2012 Plan:

2012 Equity and Incentive Plan

HPFC:

Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2020

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

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

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

Accounting Standards Issued

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

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

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

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

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

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

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

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

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

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

NOTE 3 – INVESTMENTS

AFS and HTM Investments

The following table summarizes the amortized cost and estimated fair values of AFS and HTM investments, as of the dates indicated:


(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
September 30, 2020
AFS Investments (carried at fair value):
Obligations of states and political subdivisions	$	120,636	$	7,055	$	( 78 )	$	127,613
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	549,930		19,036		( 864 )		568,102
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	389,382		11,313		( 129 )		400,566
Subordinated corporate bonds	10,531		313		( 56 )		10,788
Total AFS investments	$	1,070,479	$	37,717	$	( 1,127 )	$	1,107,069
HTM Investments (carried at amortized cost):
Obligations of states and political subdivisions	$	1,298	$	105	$	—	$	1,403
Total HTM investments	$	1,298	$	105	$	—	$	1,403
December 31, 2019
AFS Investments (carried at fair value):
Obligations of states and political subdivisions	$	115,632	$	2,779	$	( 328 )	$	118,083
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	462,593		3,398		( 2,605 )		463,386
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	325,200		3,183		( 2,478 )		325,905
Subordinated corporate bonds	10,553		191		—		10,744
Total AFS investments	$	913,978	$	9,551	$	( 5,411 )	$	918,118
HTM Investments (carried at amortized cost):
Obligations of states and political subdivisions	$	1,302	$	57	$	—	$	1,359
Total HTM investments	$	1,302	$	57	$	—	$	1,359

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

Impaired AFS and HTM Investments:

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

The following table presents the estimated fair values and gross unrealized losses on AFS and HTM investments that were in a continuous loss position that was considered temporary, by length of time that an individual security in each category has been in a continuous loss position as of the dates indicated:


		Less Than 12 Months				12 Months or More				Total
(In thousands, except number of holdings)	Number of Holdings	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2020
AFS Investments:
Obligations of states and political subdivisions	1	$	2,441	$	( 78 )	$	—	$	—	2,441		$	( 78 )
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	14	59,434		( 858 )		1,004		( 6 )		$	60,438	( 864 )
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	8	33,046		( 129 )		—		—		33,046		( 129 )
Subordinated corporate bonds	3	2,944		( 56 )		—		—		$	2,944	( 56 )
Total AFS investments	26	$	97,865	$	( 1,121 )	$	1,004	$	( 6 )	$	98,869	$	( 1,127 )



December 31, 2019
AFS Investments:
Obligations of states and political subdivisions	11	$	30,459	$	( 328 )	$	—	$	—	$	30,459	$	( 328 )
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	59	162,964		( 1,850 )		63,633		( 755 )		226,597		( 2,605 )
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	35	66,549		( 733 )		68,614		( 1,745 )		135,163		( 2,478 )

Total AFS investments	105	$	259,972	$	( 2,911 )	$	132,247	$	( 2,500 )	$	392,219	$	( 5,411 )

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

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

Sale of AFS Investments:

The following table details the Company's sales of AFS investments for the periods indicated below:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Proceeds from sales of investments (1)	$	—	$	97,042	$	—	$	142,868
Gross realized gains	—		1,015		—		1,386
Gross realized losses	—		( 1,014 )		—		( 1,358 )

(1) The Company had no t previously recorded any OTTI on these investments sold.

AFS and HTM Investments Pledged:

At September 30, 2020 and December 31, 2019, AFS and HTM investments with an amortized cost of $ 597.7 million and $ 709.0 million and estimated fair values of $ 622.6 million and $ 712.4 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.

Contractual Maturities:

The amortized cost and estimated fair values of the Company's AFS and HTM investments by contractual maturity at September 30, 2020, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In thousands)	Amortized Cost		Fair Value
AFS Investments
Due in one year or less	$	4,415	$	4,448
Due after one year through five years	64,310		66,551
Due after five years through ten years	229,933		244,118
Due after ten years	771,821		791,952
Total	$	1,070,479	$	1,107,069
HTM Investments
Due in one year or less	$	—	$	—
Due after one year through five years	510		547
Due after five years through ten years	788		856
Due after ten years	—		—
Total	$	1,298	$	1,403

Other Investments

The following table summarizes the cost and estimated fair values of the Company's investment in equity securities, FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated:


(In thousands)	Cost		Unrealized Gains		Unrealized Losses		Fair Value / Carrying Value
September 30, 2020
Equity securities - bank stock (carried at fair value)	$	544	$	1,130	$	—	$	1,674
FHLBB (carried at cost)	6,297		—		—		6,297
FRB (carried at cost)	5,374		—		—		5,374
Total other investments	$	12,215	$	1,130	$	—	$	13,345
December 31, 2019
Equity securities - bank stock (carried at fair value)	$	544	$	1,130	$	—	$	1,674
FHLBB (carried at cost)	6,601		—		—		6,601
FRB (carried at cost)	5,374		—		—		5,374
Total other investments	$	12,519	$	1,130	$	—	$	13,649

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

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

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:


(In thousands)	September 30, 2020		December 31, 2019
Commercial Loans:
Commercial real estate	$	1,333,733	$	1,243,397
Commercial	360,629		421,108
SBA PPP	223,838		—
HPFC	14,919		21,593
Total commercial loans	1,933,119		1,686,098
Retail Loans:
Residential real estate	1,044,103		1,070,374
Home equity	274,743		312,779
Consumer	22,877		25,772
Total retail loans	1,341,723		1,408,925
Total loans	$	3,274,842	$	3,095,023

The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination costs for the dates indicated:


(In thousands)	September 30, 2020		December 31, 2019
Net unamortized fair value mark discount on acquired loans	$	( 1,667 )	$	( 2,593 )
Net unamortized loan (fees) origination costs (1)	( 2,439 )		3,111
Total	$	( 4,106 )	$	518

(1) The change in net unamortized loan (fees) origination costs from December 31, 2019 to September 30, 2020, was primarily driven by origination fees capitalized upon origination of SBA PPP loans during the second and third quarters of 2020. As of September 30, 2020, unamortized loan fees on originated SBA PPP loans were $ 5.4 million.

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

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

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

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

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

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

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

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

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

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

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

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

SBA PPP. SBA PPP loans are unsecured, fully-guaranteed commercial loans backed by the SBA, issued to qualifying small businesses as part of federal stimulus issued in response to the COVID-19 pandemic. Loans made under the PPP have terms of two or five years and are to be used by the borrower to offset certain payroll and other operating costs, such as rent and utilities. The loan and accrued interest, or a portion thereof, is eligible for forgiveness by the SBA should the qualifying small business meet certain conditions. PPP loans were originated under the guidance of the SBA, which has been subject to change.

HPFC. Prior to the Company's closing of HPFC's operations in 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral consists of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower.

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

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

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

The following tables present the activity in the ALL and select loan information by portfolio segment for the periods indicated:


(In thousands)	Commercial Real Estate		Commercial		SBA PPP		HPFC		Residential Real Estate		Home Equity		Consumer		Total
At or For The Three and Nine Months Ended September 30, 2020
ALL for the three months ended:
Beginning balance	$	18,386	$	4,679	$	113	$	170	$	8,603	$	3,084	$	504	$	35,539
Loans charged off	( 33 )		( 184 )		—		—		( 25 )		( 10 )		( 55 )		( 307 )
Recoveries	3		139		—		—		4		—		36		182
Provision (credit) (1)	1,173		( 246 )		2		( 21 )		124		( 51 )		19		1,000
Ending balance	$	19,529	$	4,388	$	115	$	149	$	8,706	$	3,023	$	504	$	36,414
ALL for the nine months ended:
Beginning balance	$	12,414	$	3,769	$	—	$	216	$	5,842	$	2,423	$	507	$	25,171
Loans charged off	( 104 )		( 857 )		—		—		( 121 )		( 61 )		( 138 )		( 1,281 )
Recoveries	10		255		—		—		27		4		56		352
Provision (credit) (1)	7,209		1,221		115		( 67 )		2,958		657		79		12,172
Ending balance	$	19,529	$	4,388	$	115	$	149	$	8,706	$	3,023	$	504	$	36,414
ALL balance attributable to loans:
Individually evaluated for impairment	$	36	$	—	$	—	$	—	$	371	$	87	$	—	$	494
Collectively evaluated for impairment	19,493		4,388		115		149		8,335		2,936		504		35,920
Total ending ALL	$	19,529	$	4,388	$	115	$	149	$	8,706	$	3,023	$	504	$	36,414
Loans:
Individually evaluated for impairment	$	460	$	171	$	—	$	—	$	3,128	$	365	$	—	$	4,124
Collectively evaluated for impairment	1,333,273		360,458		223,838		14,919		1,040,975		274,378		22,877		3,270,718
Total ending loans balance	$	1,333,733	$	360,629	$	223,838	$	14,919	$	1,044,103	$	274,743	$	22,877	$	3,274,842
At or For The Three and Nine Months Ended September 30, 2019
ALL for the three months ended:
Beginning balance	$	12,152	$	4,107	$	—	$	280	$	6,249	$	2,992	$	383	$	26,163
Loans charged off	( 92 )		( 183 )		—		( 11 )		( 411 )		( 348 )		( 258 )		( 1,303 )
Recoveries	34		56		—		—		2		—		3		95
Provision (credit) (1)	( 18 )		124		—		( 32 )		382		132		145		733
Ending balance	$	12,076	$	4,104	$	—	$	237	$	6,222	$	2,776	$	273	$	25,688
ALL for the nine months ended:
Beginning balance	$	11,654	$	3,620	$	—	$	337	$	6,071	$	2,796	$	234	$	24,712
Loans charged off	( 157 )		( 636 )		—		( 11 )		( 436 )		( 392 )		( 278 )		( 1,910 )
Recoveries	41		167		—		—		6		—		14		228
Provision (credit) (1)	538		953		—		( 89 )		581		372		303		2,658
Ending balance	$	12,076	$	4,104	$	—	$	237	$	6,222	$	2,776	$	273	$	25,688
ALL balance attributable to loans:
Individually evaluated for impairment	$	29	$	303	$	—	$	—	$	337	$	69	$	—	$	738
Collectively evaluated for impairment	12,047		3,801		—		237		5,885		2,707		273		24,950
Total ending ALL	$	12,076	$	4,104	$	—	$	237	$	6,222	$	2,776	$	273	$	25,688
Loans:
Individually evaluated for impairment	$	406	$	646	$	—	$	—	$	3,880	$	585	$	—	$	5,517
Collectively evaluated for impairment	1,255,113		421,108		—		23,712		1,058,018		322,979		24,187		3,105,117
Total ending loans balance	$	1,255,519	$	421,754	$	—	$	23,712	$	1,061,898	$	323,564	$	24,187	$	3,110,634


(In thousands)	Commercial Real Estate		Commercial		SBA PPP		HPFC		Residential Real Estate		Home Equity		Consumer		Total
At or For The Year Ended December 31, 2019
ALL:
Beginning balance	$	11,654	$	3,620	$	—	$	337	$	6,071	$	2,796	$	234	$	24,712
Loans charged off	( 300 )		( 1,167 )		—		( 71 )		( 462 )		( 412 )		( 301 )		( 2,713 )
Recoveries	49		225		—		—		16		1		19		310
Provision (credit) (1)	1,011		1,091		—		( 50 )		217		38		555		2,862
Ending balance	$	12,414	$	3,769	$	—	$	216	$	5,842	$	2,423	$	507	$	25,171
ALL balance attributable to loans:
Individually evaluated for impairment	$	30	$	—	$	—	$	—	$	364	$	69	$	—	$	463
Collectively evaluated for impairment	12,384		3,769		—		216		5,478		2,354		507		24,708
Total ending ALL	$	12,414	$	3,769	$	—	$	216	$	5,842	$	2,423	$	507	$	25,171
Loans:
Individually evaluated for impairment	$	402	$	319	$	—	$	—	$	3,384	$	373	$	—	$	4,478
Collectively evaluated for impairment	1,242,995		420,789		—		21,593		1,066,990		312,406		25,772		3,090,545
Total ending loans balance	$	1,243,397	$	421,108	$	—	$	21,593	$	1,070,374	$	312,779	$	25,772	$	3,095,023

(1) The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. At September 30, 2020 and 2019, and December 31, 2019, the reserve for unfunded commitments was $ 9,000 , $ 11,000 and $ 21,000 , respectively.

The following reconciles the provision for loan losses to the provision for credit losses as presented on the consolidated statements of income for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,				Year Ended December 31, 2019
(In thousands)	2020		2019		2020		2019
Provision for loan losses	$	1,000	$	733	$	12,172	$	2,658	$	2,862
Change in reserve for unfunded commitments	( 13 )		( 3 )		( 12 )		( 11 )		( 1 )
Provision for credit losses	$	987	$	730	$	12,160	$	2,647	$	2,861

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored. As of September 30, 2020, the Company's total exposure to the lessors of nonresidential buildings' industry was 13 % of total loans and 32 % of total commercial real estate loans. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of September 30, 2020.

COVID-19 Loan Deferral Program:

In response to the COVID-19 pandemic, the Company worked with businesses and consumers to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. For loans temporarily modified due to the COVID-19 pandemic, under the CARES Act and regulatory guidance, the Company may apply the following accounting treatment in this order:

1. The Company may account for a loan modification in accordance with Section 4013 of the CARES Act if the loan modification (i) meets the criteria set forth in Section 4013 of the CARES Act and (ii) the Company elects to apply Section 4013 of the CARES Act. Section 4013 of the CARES Act suspended TDR designation for loan modifications related to the COVID-19 pandemic. In order for the loan modification to qualify under Section 4013 of the CARES Act, the loan must not have been more than 30 days past due as of December 31, 2019. This guidance is applicable for loan modifications beginning on March 1, 2020 and ending on the earlier of (i) December 31, 2020, or (ii) the date that is 60 days after the date the national emergency concerning the COVID-19 pandemic declared by the President on March 13, 2020 under the National Emergencies Act terminates.

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

3. Should a loan modification (i) not meet the criteria set forth in Section 4013 of the CARES Act or the interagency guidance described above, or (ii) the Company elects not to apply the guidance, then the Company would assess the loan modification under its existing accounting policies (GAAP).

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

For the dates indicated, the Company's loans impacted by the COVID-19 pandemic and operating under temporary short-term payment deferral arrangements for a period of 180 days or less were as follows:


	September 30, 2020					June 30, 2020
(In thousands, except number of units)	Units	Recorded Investment		% of Total Loans		Units	Recorded Investment		% of Total Loans
Commercial	210	$	105,879	3.2	%	1,023	$	415,606	12.5	%
Retail	502	75,337		2.3	%	740	131,116		3.9	%
Total	712	$	181,216	5.5	%	1,763	$	546,722	16.4	%

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

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

• Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

• Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.

• Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.

• Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

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

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

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

The following summarizes credit risk exposure indicators by portfolio segment as of the following dates:


(In thousands)	Commercial Real Estate		Commercial		SBA PPP		HPFC		Residential Real Estate		Home Equity		Consumer		Total
September 30, 2020
Pass (Grades 1-6)	$	1,273,616	$	354,160	$	223,838	$	14,100	$	1,037,649	$	—	$	—	$	2,903,363
Performing	—		—		—		—		—		272,246		22,873		295,119
Special Mention (Grade 7)	23,899		2,762		—		—		405		—		—		27,066
Substandard (Grade 8)	36,218		3,707		—		819		6,049		—		—		46,793

Non-performing	—		—		—		—		—		2,497		4		2,501
Total	$	1,333,733	$	360,629	$	223,838	$	14,919	$	1,044,103	$	274,743	$	22,877	$	3,274,842
December 31, 2019
Pass (Grades 1-6)	$	1,196,683	$	415,870	$	—	$	20,667	$	1,062,825	$	—	$	—	$	2,696,045
Performing	—		—		—		—		—		310,653		25,748		336,401
Special Mention (Grade 7)	31,753		2,544		—		89		473		—		—		34,859
Substandard (Grade 8)	14,961		2,694		—		837		7,076		—		—		25,568

Non-performing	—		—		—		—		—		2,126		24		2,150
Total	$	1,243,397	$	421,108	$	—	$	21,593	$	1,070,374	$	312,779	$	25,772	$	3,095,023

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

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

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

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates:


(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans Outstanding		Loans > 90 Days Past Due and Accruing		Non-Accrual Loans
September 30, 2020
Commercial real estate	$	671	$	1,490	$	246	$	2,407	$	1,331,326	$	1,333,733	$	—	$	565
Commercial	1,315		—		605		1,920		358,709		360,629		—		605
SBA PPP	—		—		—		—		223,838		223,838		—		—
HPFC	233		228		304		765		14,154		14,919		—		509
Residential real estate	1,036		775		3,369		5,180		1,038,923		1,044,103		—		4,017
Home equity	367		109		2,102		2,578		272,165		274,743		—		2,499
Consumer	48		56		4		108		22,769		22,877		—		4
Total	$	3,670	$	2,658	$	6,630	$	12,958	$	3,261,884	$	3,274,842	$	—	$	8,199
December 31, 2019
Commercial real estate	$	267	$	1,720	$	544	$	2,531	$	1,240,866	$	1,243,397	$	—	$	1,122
Commercial	548		—		417		965		420,143		421,108		—		420
SBA PPP	—		—		—		—		—		—		—		—
HPFC	—		243		288		531		21,062		21,593		—		364
Residential real estate	2,297		627		2,598		5,522		1,064,852		1,070,374		—		4,096
Home equity	681		238		1,459		2,378		310,401		312,779		—		2,130
Consumer	108		31		23		162		25,610		25,772		—		24
Total	$	3,901	$	2,859	$	5,329	$	12,089	$	3,082,934	$	3,095,023	$	—	$	8,156

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

TDRs:

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

The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate, or if the loan is currently collateral-dependent, using the net realizable value, which was obtained through independent appraisals and internal evaluations. The following is a summary of TDRs, by portfolio segment, and the associated specific reserve included within the ALL for the dates indicated:


	Number of Contracts		Recorded Investment				Specific Reserve
(In thousands, except number of contracts)	September 30, 2020	December 31, 2019	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Residential real estate	21	22	$	2,670	$	2,869	$	371	$	364
Commercial real estate	2	2	331		338		36		30
Commercial	2	2	107		123		—		—
Consumer and home equity	1	1	297		299		87		69
Total	26	27	$	3,405	$	3,629	$	494	$	463

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

There were no loan modifications that qualify as TDRs that occurred for the three and nine months ended September 30, 2020 and 2019.

For the three and nine months ended September 30, 2020 and 2019, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.

Impaired Loans:

Impaired loans consist of non-accrual loans and TDRs that are individually evaluated for impairment in accordance with the Company's policy. The following is a summary of impaired loan balances and the associated allowance by portfolio segment as of and for the periods indicated:


							For the Three Months Ended				For the Nine Months Ended
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2020:
With an allowance recorded:
Commercial real estate	$	126	$	126	$	36	$	127	$	2	$	127	$	6
Commercial	—		—		—		—		—		—		—
SBA PPP	—		—		—		—		—		—		—
HPFC	—		—		—		—		—		—		—
Residential real estate	2,394		2,394		371		2,349		33		2,328		79
Home equity	316		316		87		317		—		318		—
Consumer	—		—		—		—		—		—		—
Ending balance	2,836		2,836		494		2,793		35		2,773		85
Without an allowance recorded:
Commercial real estate	334		548		—		334		3		304		9
Commercial	171		233		—		175		1		242		4
SBA PPP	—		—		—		—		—		—		—
HPFC	—		—		—		—		—		—		—
Residential real estate	734		858		—		791		2		909		4
Home equity	49		187		—		50		—		52		—
Consumer	—		—		—		—		—		—		—
Ending balance	1,288		1,826		—		1,350		6		1,507		17
Total impaired loans	$	4,124	$	4,662	$	494	$	4,143	$	41	$	4,280	$	102
September 30, 2019:
With an allowance recorded:
Commercial real estate	$	130	$	130	$	29	$	130	$	3	$	130	$	9
Commercial	442		442		303		301		—		365		—
SBA PPP	—		—		—		—		—		—		—
HPFC	—		—		—		—		—		—		—
Residential real estate	2,337		2,337		337		3,026		28		3,137		84
Home equity	318		318		69		658		—		573		—
Consumer	—		—		—		—		—		—		—
Ending Balance	3,227		3,227		738		4,115		31		4,205		93
Without an allowance recorded:
Commercial real estate	276		435		—		278		3		408		10
Commercial	204		267		—		214		1		218		5
SBA PPP	—		—		—		—		—		—		—
HPFC	—		—		—		—		—		—		—
Residential real estate	1,543		2,007		—		1,337		11		1,325		28
Home equity	267		705		—		131		—		130		—
Consumer	—		—		—		—		—		—		—
Ending Balance	2,290		3,414		—		1,960		15		2,081		43
Total impaired loans	$	5,517	$	6,641	$	738	$	6,075	$	46	$	6,286	$	136


							For the Year Ended
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2019:
With an allowance recorded:
Commercial real estate	$	128	$	128	$	30	$	130	$	11
Commercial	—		—		—		292		—
SBA PPP	—		—		—		—		—
HPFC	—		—		—		—		—
Residential real estate	2,395		2,395		364		2,989		110
Home equity	318		318		69		522		—
Consumer	—		—		—		—		—
Ending Balance	2,841		2,841		463		3,933		121
Without an allowance recorded:
Commercial real estate	274		433		—		381		13
Commercial	319		685		—		238		7
SBA PPP	—		—		—		—		—
HPFC	—		—		—		—		—
Residential real estate	989		1,116		—		1,258		21
Home equity	55		192		—		115		—
Consumer	—		—		—		1		—
Ending Balance	1,637		2,426		—		1,993		41
Total impaired loans	$	4,478	$	5,267	$	463	$	5,926	$	162

Loan Sales:

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

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

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

In-Process Foreclosure Proceedings:

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

FHLB Advances:

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

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

NOTE 5 – BORROWINGS

The following summarizes the Company's short-term and long-term borrowed funds as presented on the consolidated statements of condition for the dates indicated:


(In thousands)	September 30, 2020		December 31, 2019
Short-Term Borrowings:
Customer repurchase agreements	$	210,055	$	237,984
FHLBB borrowings	—		25,000
Overnight borrowings	—		5,825

Total short-term borrowings	$	210,055	$	268,809
Long-Term Borrowings:
FHLBB borrowings	$	25,000	$	10,000
Total long-term borrowings	$	25,000	$	10,000

NOTE 6 – REPURCHASE AGREEMENTS

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

The table below sets forth information regarding the Company’s repurchase agreements accounted for as secured borrowings and types of collateral for the dates indicated:


(In thousands)	September 30, 2020		December 31, 2019
Customer Repurchase Agreements (1)(2) :
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	$	79,813	$	118,969
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	128,839		117,654
Obligations of states and political subdivisions	1,403		1,361
Total	$	210,055	$	237,984

(1) Presented within short-term borrowings on the consolidated statements of condition.

(2) All customer repurchase agreements mature continuously or overnight for the dates indicated.

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

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

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Commitments

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

The following is a summary of the Company's contractual off-balance sheet commitments for the dates indicated:


(In thousands)	September 30, 2020		December 31, 2019
Commitments to extend credit	$	674,071	$	734,649
Standby letters of credit	5,565		5,211
Total	$	679,636	$	739,860

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

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

Legal Contingencies

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

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

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

The Company did no t have any material loss contingencies that were provided for and/or that are required to be disclosed as of September 30, 2020 and December 31, 2019.

NOTE 8 – DERIVATIVES AND HEDGING

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

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

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

Derivatives Not Designated as Hedges

Customer Loan Swaps

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

The following table presents the total positions, notional and fair value of the Company's customer loans swaps with each party for the dates indicated:


(In thousands, except number of positions)		September 30, 2020					December 31, 2019
	Presentation on Consolidated Statements of Condition	Number of Positions	Notional Amount		Fair Value		Number of Positions	Notional Amount		Fair Value
Receive fixed, pay variable	Accrued interest and other liabilities	—	$	—	$	—	10	$	45,243	$	( 514 )
Receive fixed, pay variable	Other assets	80	378,428		44,123		75	366,351		17,756
Pay fixed, receive variable	Accrued interest and other liabilities	80	378,428		( 44,123 )		85	411,594		( 17,242 )
Total		160	$	756,856	$	—	170	$	823,188	$	—

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

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

Fixed-Rate Mortgage Interest Rate Lock Commitments

As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company intends to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative. The Company's pipeline of mortgage loans with fixed-rate interest rate lock commitments for which it intends to sell the loan upon origination was as follows for the dates indicated:


		September 30, 2020				December 31, 2019
(In thousands)	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value		Notional Amount		Fair Value
Fixed-rate mortgage interest rate locks	Other assets	$	76,279	$	977	$	27,087	$	480
Fixed-rate mortgage interest rate locks	Accrued interest and other liabilities	42,915		( 405 )		2,519		( 18 )
Total		$	119,194	$	572	$	29,606	$	462

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

Forward Delivery Commitments

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

The Company's forward delivery commitments on loans held for sale for the dates indicated were as follows:


		September 30, 2020				December 31, 2019
(In thousands)	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value		Notional Amount		Fair Value
Forward delivery commitments ("best effort")	Other Assets	$	21,201	$	505	$	10,846	$	312
Forward delivery commitments ("best effort")	Accrued interest and other liabilities	16,100		( 241 )		1,069		( 15 )
Total		$	37,301	$	264	$	11,915	$	297

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

Derivatives Designated as Hedges

Interest Rate Swap on Loans

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

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

The details of the interest rate swap for the dates indicated were as follows:

(Dollars in thousands)

September 30, 2020

December 31, 2019

Trade
Date

Maturity
Date

Variable Index
Paid

Fixed Rate
Received

Presentation on Consolidated
Statements of Condition

Notional
Amount

Fair
Value

Notional
Amount

Fair
Value

6/12/2019

6/10/2024

1-Month
USD LIBOR

1.693 %

Other assets

100,000

5,717

100,000

483

For the three and nine months ended September 30, 2020, the Company did no t record any ineffectiveness within the consolidated statements of income.

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

Interest Rate Swaps on Borrowings

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

The details of the Company's interest rate swaps on borrowings for the dates indicated were as follows:


(Dollars in thousands)					September 30, 2020
Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value
3/2/2020	3/1/2023	Fed Funds Effective Rate	0.705 %	Accrued interest and other liabilities	$	50,000	$	( 813 )
3/26/2020	3/26/2030	3-Month USD LIBOR	0.857 %	Accrued interest and other liabilities	50,000		( 901 )
					$	100,000	$	( 1,714 )

For the three and nine months ended September 30, 2020, the Company did no t record any ineffectiveness within the consolidated statements of income.

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

Junior Subordinated Debt Interest Rate Swaps

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

The details of the junior subordinated debt interest rate swaps for the dates indicated were as follows:


(Dollars in thousands)					September 30, 2020				December 31, 2019
Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value		Notional Amount		Fair Value
3/18/2009	6/30/2021	3 -Month USD LIBOR	3.69 %	Accrued interest and other liabilities	$	10,000	$	( 262 )	$	10,000	$	( 299 )
7/8/2009	6/30/2029	3 -Month USD LIBOR	4.44 %	Accrued interest and other liabilities	10,000		( 3,354 )		10,000		( 2,318 )
5/6/2010	6/30/2030	3 -Month USD LIBOR	4.31 %	Accrued interest and other liabilities	10,000		( 3,534 )		10,000		( 2,384 )
3/14/2011	3/30/2031	3 -Month USD LIBOR	4.35 %	Accrued interest and other liabilities	5,000		( 1,897 )		5,000		( 1,279 )
5/4/2011	7/7/2031	3 -Month USD LIBOR	4.14 %	Accrued interest and other liabilities	8,000		( 2,914 )		8,000		( 1,907 )
7/16/2020	6/30/2036	3 -Month USD LIBOR	0.83 %	Accrued interest and other liabilities	10,000		214		—		—
					$	53,000	$	( 11,747 )	$	43,000	$	( 8,187 )

For the three and nine months ended September 30, 2020 and 2019, the Company did no t record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

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

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Derivatives designated as cash flow hedges:
Effective portion of unrealized gains (losses) recognized within OCI during the period, net of tax	$	540	$	( 310 )	$	( 328 )	$	( 2,438 )
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, gross	$	479	$	342	$	990	$	662
Net reclassification adjustment for effective portion of cash flow hedges included in interest income, gross	$	( 311 )	$	—	$	( 610 )	$	—

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

NOTE 9 – BALANCE SHEET OFFSETTING

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

The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its financial position, as of the dates indicated:


							Gross Amount Not Offset in the Consolidated Statements of Condition
(In thousands)	Gross Amount Recognized in the Consolidated Statements of Condition		Gross Amount Offset in the Consolidated Statements of Condition		Net Amount Presented in the Consolidated Statements of Condition		Financial Instruments Pledged (Received) (1)		Cash Collateral Pledged (Received) (1)		Net Amount
September 30, 2020
Derivative assets:
Customer loan swaps - commercial customer (2)	$	44,123	$	—	$	44,123	$	—	$	—	$	44,123
Interest rate swap on loans (3)	5,717		—		5,717		—		( 5,717 )		—
Total	$	49,840	$	—	$	49,840	$	—	$	( 5,717 )	$	44,123
Derivative liabilities:
Customer loan swaps - dealer bank (3)	$	44,123	$	—	$	44,123	$	—	$	44,123	—
Junior subordinated debt interest rate swaps (3)	11,747		—		11,747		—		11,747		—
Interest rate swaps on borrowings (3)	1,714		—		1,714		—		1,714		—
Total	$	57,584	$	—	$	57,584	$	—	$	57,584	$	—
Customer repurchase agreements	$	210,055	$	—	$	210,055	$	210,055	$	—	$	—
December 31, 2019
Derivative assets:
Customer loan swaps - commercial customer (2)	17,756		—		17,756		—		—		17,756
Interest rate swap on loans	483		—		483		—		( 483 )		—
Total	$	18,239	$	—	$	18,239	$	—	$	( 483 )	$	17,756
Derivative liabilities:
Customer loan swaps - dealer bank (3)	$	17,242	$	—	$	17,242	$	—	$	17,242	$	—
Junior subordinated debt interest rate swaps (3)	$	8,187	$	—	$	8,187	$	—	$	8,187	$	—
Customer loan swaps - commercial customer (2)	514		—		514		—		—		514
Total	$	25,943	$	—	$	25,943	$	—	$	25,429	$	514
Customer repurchase agreements	$	237,984	$	—	$	237,984	$	237,984	$	—	$	—

(1) The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.

(2) The Company manages its net exposure on its commercial customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices.

(3) Interest rate swap contracts were completed with the same dealer bank. The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis for all contracts.

NOTE 10 – REGULATORY CAPITAL REQUIREMENTS

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

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

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

The Company and Bank's risk-based capital ratios exceeded regulatory guidelines, including the capital conservation buffer, at September 30, 2020 and December 31, 2019, and the Bank's capital ratios met the requirements for it to be considered "well capitalized" under prompt corrective action provisions for each period. There were no changes to the Company or Bank's capital ratios that occurred subsequent to September 30, 2020 that would change the Company or Bank's regulatory capital categorization. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:


	September 30, 2020				Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer		Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions		December 31, 2019				Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer		Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio						Amount		Ratio
Camden National Corporation:
Total risk-based capital ratio	$	486,289	15.15	%	10.50	%	N/A		$	455,702	14.44	%	10.50	%	N/A
Tier 1 risk-based capital ratio	434,867		13.55	%	8.50	%	N/A		415,511		13.16	%	8.50	%	N/A
Common equity Tier 1 risk-based capital ratio	391,867		12.21	%	7.00	%	N/A		372,511		11.80	%	7.00	%	N/A
Tier 1 leverage capital ratio	434,867		8.96	%	4.00	%	N/A		415,511		9.55	%	4.00	%	N/A
Camden National Bank:
Total risk-based capital ratio	$	457,137	14.29	%	10.50	%	10.00	%	$	423,540	13.45	%	10.50	%	10.00	%
Tier 1 risk-based capital ratio	420,715		13.15	%	8.50	%	8.00	%	398,349		12.65	%	8.50	%	8.00	%
Common equity Tier 1 risk-based capital ratio	420,715		13.15	%	7.00	%	6.50	%	398,349		12.65	%	7.00	%	6.50	%
Tier 1 leverage capital ratio	420,715		8.70	%	4.00	%	5.00	%	398,349		9.19	%	4.00	%	5.00	%

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

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

NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:


	For The Three Months Ended
	September 30, 2020						September 30, 2019
(In thousands)	Pre-Tax Amount		Tax (Expense) Benefit		After-Tax Amount		Pre-Tax Amount		Tax (Expense) Benefit		After-Tax Amount
AFS Securities:
Unrealized holdings (losses) gains	$	( 746 )	$	160	$	( 586 )	$	4,551	$	( 978 )	$	3,573
Less: reclassification adjustment for net realized losses (1)	—		—		—		1		—		1
Net unrealized (losses) gains	( 746 )		160		( 586 )		4,550		( 978 )		3,572
Cash Flow Hedges:
Net increase (decrease) in fair value	688		( 148 )		540		( 394 )		84		( 310 )
Less: effective portion reclassified into interest expense (2)	( 479 )		103		( 376 )		( 342 )		73		( 269 )
Less: effective portion reclassified into interest income (3)	311		( 67 )		244		—		—		—
Net increase (decrease) in fair value	856		( 184 )		672		( 52 )		11		( 41 )
Postretirement Plans:
Net actuarial gain (4)	175		( 37 )		138		68		( 14 )		54

Less: Amortization of net prior service credits (4)	6		( 1 )		5		6		( 1 )		5
Net gain on postretirement plans	169		( 36 )		133		62		( 13 )		49
Other comprehensive income	$	279	$	( 60 )	$	219	$	4,560	$	( 980 )	$	3,580

(1) Reclassified into net gain on sale of securities on the consolidated statements of income.

(2) Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income.

(3) Reclassified into interest and fees on loans on the consolidated statements of income.

(4) Reclassified into other expenses on the consolidated statements of income.


	For The Nine Months Ended
	September 30, 2020						September 30, 2019
(In thousands)	Pre-Tax Amount		Tax (Expense) Benefit		After-Tax Amount		Pre-Tax Amount		Tax (Expense) Benefit		After-Tax Amount
AFS Securities:
Unrealized holdings gains	$	32,451	$	( 6,977 )	$	25,474	$	32,270	$	( 6,938 )	$	25,332
Less: reclassification adjustment for net realized gains (1)	—		—		—		28		( 6 )		22
Net unrealized gains	32,451		( 6,977 )		25,474		32,242		( 6,932 )		25,310
Cash Flow Hedges:
Net decrease in fair value	( 418 )		90		( 328 )		( 3,105 )		667		( 2,438 )
Less: effective portion reclassified into interest expense (2)	( 990 )		213		( 777 )		( 662 )		142		( 520 )
Less: effective portion reclassified into interest income (3)	610		( 131 )		479		—		—		—
Net decrease in fair value	( 38 )		8		( 30 )		( 2,443 )		525		( 1,918 )
Postretirement Plans:
Net actuarial gain (4)	526		( 113 )		413		202		( 43 )		159

Less: Amortization of net prior service credits (4)	18		( 4 )		14		18		( 4 )		14
Net gain on postretirement plans	508		( 109 )		399		184		( 39 )		145
Other comprehensive income	$	32,921	$	( 7,078 )	$	25,843	$	29,983	$	( 6,446 )	$	23,537

(1) Reclassified into net gain on sale of securities on the consolidated statements of income.

(2) Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income.

(3) Reclassified into interest and fees on loans on the consolidated statements of income.

(4) Reclassified into other expenses on the consolidated statements of income.

The following table presents the changes in each component of AOCI for the periods indicated:


(In thousands)	Net Unrealized Gains (Losses) on AFS Securities (1)		Net Unrealized Losses on Cash Flow Hedges (1)		Defined Benefit Postretirement Plans (1)		AOCI (1)
Balance at December 31, 2018	$	( 17,826 )	$	( 4,437 )	$	( 2,157 )	$	( 24,420 )
Other comprehensive income (loss) before reclassifications	25,332		( 2,438 )		159		23,053
Less: Amounts reclassified from AOCI	22		( 520 )		14		( 484 )
Other comprehensive income (loss)	25,310		( 1,918 )		145		23,537
Balance at September 30, 2019	$	7,484	$	( 6,355 )	$	( 2,012 )	$	( 883 )

Balance at December 31, 2019	$	3,250	$	( 6,048 )	$	( 3,470 )	$	( 6,268 )
Other comprehensive income (loss) before reclassifications	25,474		( 328 )		413		25,559
Less: Amounts reclassified from AOCI	—		( 298 )		14		( 284 )
Other comprehensive income (loss)	25,474		( 30 )		399		25,843
Balance at September 30, 2020	$	28,724	$	( 6,078 )	$	( 3,071 )	$	19,575

(1) All amounts are net of tax.

NOTE 12 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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

The Company has disaggregated its revenue from contracts with customers into categories based on the nature of the revenue. The categorization of revenues from contracts with customers that are within the scope of ASC 606 closely aligns with the presentation of revenue categories presented within non-interest income on the consolidated statements of income. The following table presents the revenue streams within the scope of ASC 606 for the periods indicated:


		Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	Income Statement Line Item	2020		2019		2020		2019
Debit card interchange income	Debit card income	$	2,627	$	2,432	$	7,159	$	6,723
Services charges on deposit accounts	Service charges on deposit accounts	1,606		1,970		4,955		6,202
Fiduciary services income	Income from fiduciary services	1,504		1,444		4,609		4,381
Investment program income	Brokerage and insurance commissions	755		625		2,034		1,942
Other non-interest income	Other income	467		491		1,275		1,289
Total non-interest income within the scope of ASC 606		6,959		6,962		20,032		20,537
Total non-interest income not in scope of ASC 606		5,737		3,777		16,127		9,628
Total non-interest income		$	12,696	$	10,739	$	36,159	$	30,165

In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and services are generally explicitly identified in the associated contracts.

NOTE 13 – EMPLOYEE BENEFIT PLANS

The Company sponsors unfunded, non-qualified SERPs for certain officers and provides medical and life insurance to certain eligible retired employees.

The components of net periodic pension and postretirement benefit cost for the periods ended September 30, 2020 and 2019, were as follows:

Supplemental Executive Retirement Plan:


(In thousands)		Three Months Ended September 30,				Nine Months Ended September 30,
Net periodic pension cost	Income Statement Presentation	2020		2019		2020		2019
Service cost	Salaries and employee benefits	$	116	$	98	$	348	$	296
Interest cost	Other expenses	116		131		346		392
Recognized net actuarial loss	Other expenses	155		61		467		183
Total		$	387	$	290	$	1,161	$	871

Other Postretirement Benefit Plan:


(In thousands)		Three Months Ended September 30,				Nine Months Ended September 30,
Net periodic postretirement benefit cost	Income Statement Presentation	2020		2019		2020		2019
Service cost	Salaries and employee benefits	$	7	$	12	$	21	$	36
Interest cost	Other expenses	31		37		92		111
Recognized net actuarial loss	Other expenses	20		7		59		19
Amortization of prior service credit	Other expenses	( 6 )		( 6 )		( 18 )		( 18 )
Total		$	52	$	50	$	154	$	148

NOTE 14 – EPS

The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except number of shares and per share data)	2020		2019		2020		2019
Net income	$	16,775	$	14,488	$	41,208	$	41,965
Dividends and undistributed earnings allocated to participating securities (1)	( 47 )		( 33 )		( 101 )		( 86 )
Net income available to common shareholders	$	16,728	$	14,455	$	41,107	$	41,879
Weighted-average common shares outstanding for basic EPS	14,961,465		15,339,093		15,008,004		15,482,765
Dilutive effect of stock-based awards (2)	39,582		42,835		36,423		39,736
Weighted-average common and potential common shares for diluted EPS	15,001,047		15,381,928		15,044,427		15,522,501
Earnings per common share:
Basic EPS	$	1.12	$	0.94	$	2.74	$	2.70
Diluted EPS	$	1.11	$	0.94	$	2.73	$	2.70
Awards excluded from the calculation of diluted EPS (3) :
Stock options	8,206		—		3,206		—

(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.

(2) Represents the assumed dilutive effect of unexercised and/or unvested stock options, restricted shares, restricted share units and contingently issuable performance-based awards utilizing the treasury stock method.

(3) Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock, and, therefore, are considered anti-dilutive.

Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities.

Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards. Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

NOTE 15 – FAIR VALUE MEASUREMENT AND DISCLOSURE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset.

The fair value hierarchy for valuation of an asset or liability is as follows:

Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.

Level 2: Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

Level 3: Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Loans Held For Sale: The fair value of loans held for sale is determined on an individual loan basis using quoted secondary market prices and is classified as Level 2.

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

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

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

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

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

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

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, for the dates indicated:


(In thousands)	Fair Value		Readily Available Market Prices (Level 1)		Observable Market Data (Level 2)		Company Determined Fair Value (Level 3)
September 30, 2020
Financial assets:
Loans held for sale	$	37,935	$	—	$	37,935	$	—
AFS investments:
Obligations of states and political subdivisions	127,613		—		127,613		—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	568,102		—		568,102		—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	400,566		—		400,566		—
Subordinated corporate bonds	10,788		—		10,788		—
Equity securities - bank stock	1,674		—		1,674		—
Customer loan swaps	44,123		—		44,123		—
Interest rate swap on loans	5,717		—		5,717		—
Fixed-rate mortgage interest rate lock commitments	977		—		977		—
Forward delivery commitments	505		—		505		—
Financial liabilities:
Junior subordinated debt interest rate swaps	11,747		—		11,747		—
Customer loan swaps	44,213		—		44,213		—
Interest rate swap on borrowings	1,714		—		1,714		—
Fixed-rate mortgage interest rate lock commitments	405		—		405		—
Forward delivery commitments	241		—		241		—
December 31, 2019
Financial assets:
Loans held for sale	$	11,854	$	—	$	11,854	$	—
AFS investments:
Obligations of states and political subdivisions	118,083		—		118,083		—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	463,386		—		463,386		—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	325,905		—		325,905		—
Subordinated corporate bonds	10,744		—		10,744		—
Equity securities - bank stock	1,674		—		1,674		—
Customer loan swaps	17,756		—		17,756		—
Interest rate swap on loans	483		—		483		—
Fixed-rate mortgage interest rate lock commitments	480		—		480		—
Forward delivery commitments	312		—		312		—
Financial liabilities:
Junior subordinated debt interest rate swaps	8,187		—		8,187		—
Customer loan swaps	17,756		—		17,756		—
Fixed-rate mortgage interest rate lock commitments	18		—		18		—
Forward delivery commitments	15		—		15		—

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

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

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

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

Servicing Assets : The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value of a tranche exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes two significant unobservable inputs, namely loan prepayment assumptions and the discount rate used, to calculate the fair value of each tranche, and, as such, the Company has classified the model within Level 3 of the fair value hierarchy.

Non-Financial Instruments Recorded at Fair Value on a Non-Recurring Basis

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO, goodwill and core deposit intangible assets.

OREO : OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at net realizable value, which is the fair value of the real estate, less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ALL upon transfer to OREO. Upon acquisition of a property, a current appraisal is used or an internal valuation is prepared to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and are classified as Level 3. As of September 30, 2020, the Company did no t have any OREO properties. As of December 31, 2019, the Company had one OREO property with a net realizable value of $ 94,000 .

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

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

The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis for the dates indicated:


(In thousands)	Fair Value		Readily Available Market Prices (Level 1)		Observable Market Data (Level 2)		Company Determined Fair Value (Level 3)
September 30, 2020
Financial assets:
Collateral-dependent impaired loans	$	3	$	—	$	—	$	3
Servicing assets	764		—		—		764


December 31, 2019


Non-financial assets:
OREO	$	94	$	—	$	—	$	94

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis for the dates indicated:

(Dollars in thousands)

Fair Value

Valuation Methodology

Unobservable Input

Discount

September 30, 2020

Collateral-dependent impaired loans:

Partially charged-off

Market approach appraisal of
collateral

Management adjustment of appraisal

— %

Estimated selling costs

10 %

Servicing assets

764

Discounted cash flow

Weighted-average constant prepayment rate

19 %

Weighted average discount rate

10 %

December 31, 2019

OREO

Market approach appraisal of
collateral

Management adjustment of appraisal

18 %

Estimated selling cost

13 %

The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated:


(In thousands)	Carrying Amount		Fair Value		Readily Available Market Prices (Level 1)		Observable Market Prices (Level 2)		Company Determined Market Prices (Level 3)
September 30, 2020
Financial assets:
HTM securities	$	1,298	$	1,403	$	—	$	1,403	$	—
Commercial real estate loans (1)	1,314,204		$	1,282,149	—		—		1,282,149
Commercial loans (1)(2)	371,011		$	364,655	—		—		364,655
SBA PPP loans (1)	223,723		$	229,137	—		—		229,137
Residential real estate loans (1)	1,035,397		1,054,587		—		—		1,054,587
Home equity loans (1)	271,720		271,416		—		—		271,416
Consumer loans (1)	22,373		20,499		—		—		20,499
Servicing assets	1,143		1,411		—		—		1,411
Financial liabilities:
Time deposits	$	505,451	$	508,785	$	—	$	508,785	$	—
Short-term borrowings	210,055		210,030		—		210,030		—
Long-term borrowings	25,000		25,465		—		25,465		—
Subordinated debentures	59,306		46,032		—		46,032		—
December 31, 2019
Financial assets:
HTM securities	$	1,302	$	1,359	$	—	$	1,359	$	—
Commercial real estate loans (1)	1,230,983		1,196,297		—		—		1,196,297
Commercial loans (1)(2)	438,716		431,892		—		—		431,892
Residential real estate loans (1)	1,064,532		1,066,544		—		—		1,066,544
Home equity loans (1)	310,356		293,565		—		—		293,565
Consumer loans (1)	25,265		23,355		—		—		23,355
Servicing assets	877		1,496		—		—		1,496
Financial liabilities:
Time deposits	$	595,549	$	594,881	$	—	$	594,881	$	—
Short-term borrowings	268,809		268,631		—		268,631		—
Long-term borrowings	10,000		10,002		—		10,002		—
Subordinated debentures	59,080		50,171		—		50,171		—

(1) The presented carrying amount is net of the allocated ALL.

(2) Includes the HPFC loan portfolio.

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

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

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

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, as amended, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan,” “target,” or “goal” or future or conditional verbs such as “will,” “may,” “might,” “should,” “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:

• weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for loan losses or a reduced demand for the Company’s credit or fee-based products and services;

• changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

• inflation, interest rate, market, and monetary fluctuations;

• competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;

• volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, the availability and terms of funding necessary to meet the Company’s liquidity needs, and which could lead to impairment in the value of securities in the Company's investment portfolio;

• changes in information technology and other operational risks, including cybersecurity, that require increased capital spending;

• changes in consumer spending and savings habits;

• changes in tax, banking, securities and insurance laws and regulations; and

• changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board ("FASB"), and other accounting standard setters.

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

• the continued effectiveness of our Pandemic Work Group;

• the continuing ability of our employees to work remotely;

• our continuing ability to staff our branches and keep our branches open;

• the continuing strength of our capital and liquidity positions;

• our continued ability to access sources of contingent liquidity;

• the continuing strength of the asset quality in our lending portfolios; and

• the potential effectiveness of relief measures and programs for customers affected by COVID-19.

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

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated by the Company's quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except to the extent required by applicable law or regulation.

NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP

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

Return on Average Tangible Equity: Return on average tangible equity is the ratio of (i) net income, adjusted for (a) tax effected amortization of core deposit intangible assets and (b) goodwill impairment, as necessary, to (ii) average shareholders' equity, adjusted for average goodwill and core deposit intangible assets. This adjusted financial ratio reflects a shareholders' return on tangible capital deployed in our business and is a common measure within the financial services industry.


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2020			2019			2020			2019
Net income, as presented	$	16,775		$	14,488		$	41,208		$	41,965
Add: amortization of core deposit intangible assets, net of tax (1)	134			140			404			418
Net income, adjusted for amortization of core deposit intangible assets	$	16,909		$	14,628		$	41,612		$	42,383
Average equity, as presented	$	512,902		$	468,920		$	497,564		$	455,261
Less: average goodwill and core deposit intangible assets	(97,794)			(98,484)			(97,967)			(98,659)
Average tangible equity	$	415,108		$	370,436		$	399,597		$	356,602
Return on average equity	13.01		%	12.26		%	11.06		%	12.32		%
Return on average tangible equity	16.21		%	15.67		%	13.91		%	15.89		%

(1) Assumed a 21% tax rate.

Efficiency Ratio . The efficiency ratio represents an approximate measure of the cost required for the Company to generate a dollar of revenue. This is a common measure within the financial services industry and is a key ratio for evaluating Company performance. The efficiency ratio is calculated as the ratio of (i) total non-interest expense, adjusted for certain operating expenses, as necessary, to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2020			2019			2020			2019
Non-interest expense, as presented	$	25,221		$	23,748		$	73,291		$	70,489
Less: legal settlement	(1,200)			—			(1,200)			—
Adjusted non-interest expense	$	24,021		$	23,748		$	72,091		$	70,489
Net interest income, as presented	$	34,481		$	31,923		$	100,846		$	95,391
Add: effect of tax-exempt income (1)	292			264			865			752
Non-interest income, as presented	12,696			10,739			36,159			30,165
Less: net gain on sale of securities	—			(1)			—			(28)


Adjusted net interest income plus non-interest income	$	47,469		$	42,925		$	137,870		$	126,280
Ratio of non-interest expense to total revenues (2)	53.46		%	55.67		%	53.50		%	56.14		%
Efficiency ratio	50.60		%	55.32		%	52.29		%	55.82		%

(1) Assumed a 21% tax rate.

(2) Revenue is the sum of net interest income and non-interest income.

Net Interest Income (Fully-Taxable Equivalent). Net interest income on a fully-taxable equivalent basis is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. This is a common measure within the financial services industry and is used within the calculation of net interest margin on a fully-taxable equivalent basis.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Net interest income, as presented	$	34,481	$	31,923	$	100,846	$	95,391
Add: effect of tax-exempt income (1)	292		264		865		752
Net interest income (fully-taxable equivalent)	$	34,773	$	32,187	$	101,711	$	96,143

(1) Assumed a 21% tax rate.

Pre-tax, Pre-provision Earnings. Pre-tax, pre-provision earnings is a supplemental measure of operating earnings and performance, and is calculated as net income before provision for credit losses and income tax expense. This supplemental measure is becoming more widely used by financial institutions as a measure of financial performance for comparability across financial institutions due to the impact of the COVID-19 pandemic on the provision for credit losses, as well as the differences in accounting methodology for the allowance for credit losses currently across financial institutions as the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provided financial institutions the option to delay adoption of the new accounting methodology, commonly referred to as "CECL," as further described in "– Critical Accounting Policies" and Note 2 of the consolidated financial statements.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Net income, as presented	$	16,775	$	14,488	$	41,208	$	41,965
Add: provision for credit losses	987		730		12,160		2,647
Add: income tax expense	4,194		3,696		10,346		10,455
Pre-tax, pre-provision earnings	$	21,956	$	18,914	$	63,714	$	55,067

Allowance for loan losses to total loans, excluding SBA PPP loans. ALL to total loans, excluding SBA PPP loans, is calculated as (i) allowance for loan losses, adjusted for the allowance for loan losses allocated to SBA PPP loans, to (ii) total loans, adjusted to exclude SBA PPP loans. SBA PPP loans were provided to qualifying businesses as part of the federal government stimulus package issued in response to the COVID-19 pandemic. These loans are fully-guaranteed by the SBA, and may even be forgiven in full or in part, and, thus, present little to no credit risk to the Company. By excluding the impact of the SBA PPP loans, the ratio attempts to be more comparable with prior periods and demonstrates the level of loan loss reserves established on the Company's loans originated as part of its core operations and credit underwriting standards.


(In thousands)	September 30, 2020			December 31, 2019
Allowance for loan losses, as presented	$	36,414		$	25,171
Less: allowance for loan losses on SBA PPP loans	(115)			—
Adjusted allowance for loan losses	$	36,299		$	25,171
Total loans, as presented	$	3,274,842		$	3,095,023
Less: SBA PPP loans	(223,838)			—
Adjusted total loans	$	3,051,004		$	3,095,023
Allowance for loan losses to total loans	1.11		%	0.81		%
Allowance for loan losses to total loans, excluding SBA PPP loans	1.19		%	0.81		%

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

Tangible Common Equity Ratio. Tangible common equity is the ratio of (i) shareholders’ equity less goodwill and other intangible assets to (ii) total assets less goodwill and other intangible assets. This ratio is a measure used within the financial services industry to assess whether or not a company is highly leveraged.


(In thousands, except number of shares, per share data and ratios)	September 30, 2020			December 31, 2019
Tangible Book Value Per Share:
Shareholders’ equity, as presented	$	517,522		$	473,415
Less: goodwill and other intangible assets	(97,711)			(98,222)
Tangible shareholders’ equity	$	419,811		$	375,193
Shares outstanding at period end	14,917,344			15,144,719
Book value per share	$	34.69		$	31.26
Tangible book value per share	$	28.14		$	24.77
Tangible Common Equity Ratio:
Total assets	$	5,153,793		$	4,429,521
Less: goodwill and other intangible assets	(97,711)			(98,222)
Tangible assets	$	5,056,082		$	4,331,299
Common equity ratio	10.04		%	10.69		%
Tangible common equity ratio	8.30		%	8.66		%

Core Deposits. Core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and lower cost. The Company calculates core deposits as total deposits (as reported on the consolidated statements of condition) less certificates of deposit and brokered deposits. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.


(In thousands)	September 30, 2020		December 31, 2019
Total deposits	$	4,224,044	$	3,537,743
Less: certificates of deposit	(405,434)		(521,752)
Less: brokered deposits	(291,616)		(191,005)
Core deposits	$	3,526,994	$	2,824,986

Average Core Deposits. Average core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and at a lower interest rate cost. The Company calculates average core deposits as total deposits (as disclosed on the Average Balance, Interest and Yield/Rate Analysis tables) less certificates of deposit. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Total average deposits	$	3,794,434	$	3,300,599	$	3,609,355	$	3,187,023
Less: average certificates of deposit	(417,788)		(533,110)		(482,076)		(498,059)
Average core deposits	$	3,376,646	$	2,767,489	$	3,127,279	$	2,688,964

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

GENERAL OVERVIEW

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

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

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

EXECUTIVE OVERVIEW

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

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

Key earnings drivers between quarters included:

• Higher net interest income of $2.6 million, or 8%, was driven by SBA PPP lending in the second and third quarter of 2020 leading to average loan growth of 7% between quarters. Excluding SBA PPP loans (non-GAAP), average loans shrunk modestly between the second and third quarter of 2020 by $2.1 million as loan demand slowed after the COVID-19 pandemic took hold in mid-March 2020. Interest income earned on SBA PPP fees in the third quarter of 2020 totaled $2.4 million, including accretion of related origination fees.

• Higher mortgage banking income of $2.0 million was driven by an increase in residential mortgage production of 54% between periods. Historically low interest rates drove significant refinance activity in the third quarter of 2020, highlighted by an average 10-year U.S. Treasury rate of 0.65% for the third quarter of 2020.

• In the third quarter of 2020, the Company accrued $1.2 million for the settlement of a lawsuit. When excluding this settlement, our efficiency ratio (non-GAAP) for the third quarter of 2020 was 50.60%, compared to 55.32% for the same quarter last year.

Other key financial metrics between quarters included:

• Diluted EPS for the third quarter of 2020 was $1.11, an increase of $0.17, or 18%, over the third quarter last year;

• Net income and pre-tax, pre-provision earnings (non-GAAP) for the third quarter of 2020 each increased 16% over the third quarter last year.

• Return on average assets for the third quarter of 2020 was 1.34%, compared to 1.29% for the third quarter last year.

• Return on average equity for the third quarter of 2020 was 13.01%, compared to 12.26% for the third quarter last year.

Asset Quality. As of September 30, 2020, the Company's asset quality metrics continue to be stable and consistent with past quarters.

• Non-performing assets were 0.22% of total assets at September 30, 2020, compared to 0.23% and 0.25% at June 30, 2020 and December 31, 2019, respectively.

• Past due loans were 0.18% of total loans at September 30, 2020, compared to 0.19% and 0.17% at June 30, 2020 and December 31, 2019, respectively.

• Net charge-offs (annualized) for the third quarter of 2020 were 0.01% of average loans, compared to 0.05% for the second quarter of 2020 and 0.16% for the third quarter of 2019.

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

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

Third Quarter 2020 vs. 2019. Net interest income on a fully-taxable equivalent (non-GAAP) basis for the third quarter of 2020, was $34.8 million, an increase of $2.6 million, or 8%, over the third quarter of 2019. The increase was due to an increase in average interest-earning assets of $465.8 million, or 11%, between periods to $4.6 billion for the third quarter of 2020. Over the same period, net interest margin on a fully-taxable equivalent basis decreased 9 basis points to 3.00% for the third quarter of 2020.

• Interest income on a fully-taxable equivalent basis. Interest income on a fully-taxable equivalent basis for the third quarter decreased $3.8 million, or 9%, to $39.0 million, compared to the third quarter of 2019. Over this period, our yield on interest-earning assets decreased 74 basis points to 3.37% for the third quarter of 2020. The decrease in our yield on interest-earning assets was driven by: (i) a change in our average interest-earning asset mix as average cash and investment balances (lower yielding assets) were 27% of average interest-earnings assets for the third quarter of 2020, compared to 24% for the third quarter of 2019; as well as, (ii) a decrease in loan yields of 68 basis points, which was reflective of the change in interest rate environment. The average 10-year U.S. Treasury interest rate for the third quarter of 2020 was 0.65%, compared to 1.80% for the third quarter of 2019. The growth in average interest-earning assets partially offset the decrease in our yield on interest-earning assets between periods. Average loans grew $219.5 million, or 7%, between periods to $3.3 billion for the third quarter of 2020, and was primarily driven by SBA PPP loans funded in the second and third quarter of 2020 in response to the COVID-19 pandemic. For the third quarter of 2020, average SBA PPP loans were $221.7 million, for which we recognized $2.4 million of interest income (including accretion income on origination fees).

• Interest expense. Interest expense for the third quarter of 2020 decreased $6.4 million, or 60%, to $4.2 million, compared to the third quarter of 2019. Cost of funds for the third quarter of 2020 decreased 70 basis points between periods to 0.38% for the third quarter of 2020 driven by: (i) a decrease in deposit costs of 56 basis points between periods to 0.29% for the third quarter of 2020; (ii) a decrease in borrowing costs of 126 basis points between periods to 1.01% for the third quarter of 2020; and (iii) a shift in funding mix as average deposits grew $493.8 million, or 15%, between periods to $3.8 billion for the third quarter of 2020, while average borrowings decreased $39.7 million, or 7%, between periods to $570.0 million for the third quarter of 2020. The Federal Funds rate through the third quarter of 2020 was 0.25%, compared to a range of 2.00% to 2.50% for the third quarter of 2019.

Nine Months Ended September 30, 2020 vs. 2019. Net interest income on a fully-taxable equivalent (non-GAAP) basis for the nine months ended September 30, 2020, was $101.7 million, an increase of $5.6 million, or 6%, over the same period of 2019. The increase was due to an increase in average interest-earning assets of $319.4 million, or 8%, between periods to $4.4 billion for the nine months ended September 30, 2020, but was partially offset by a lower net interest margin on a fully-taxable equivalent basis of 7 basis points between periods to 3.06% for the nine months ended September 30, 2020.

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

driven by average SBA PPP loans of $133.6 million, for which we recognized $4.1 million of interest income (including accretion income on origination fees).

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

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

Quarterly Average Balance, Interest and Yield/Rate Analysis


	For The Three Months Ended
	September 30, 2020						September 30, 2019
(Dollars in thousands)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other banks and other interest-earning assets	$	216,027	$	48	0.09	%	$	92,352	$	530	2.24	%
Investments - taxable	906,374		4,771		2.11	%	807,591		5,109		2.53	%
Investments - nontaxable (1)	122,204		1,042		3.41	%	98,378		854		3.47	%
Loans (2) :
Commercial real estate	1,315,958		12,562		3.74	%	1,255,417		14,626		4.56	%
Commercial (1)	372,416		3,547		3.73	%	399,689		4,753		4.65	%
SBA PPP	221,672		2,357		4.16	%	—		—		—	%
HPFC	16,104		333		8.09	%	25,973		558		8.40	%
Municipal (1)	19,072		169		3.52	%	22,730		206		3.60	%
Residential real estate	1,083,052		10,822		4.00	%	1,062,728		11,440		4.31	%
Consumer and home equity	305,194		3,308		4.31	%	347,405		4,708		5.38	%
Total loans	3,333,468		33,098		3.92	%	3,113,942		36,291		4.60	%
Total interest-earning assets	4,578,073		38,959		3.37	%	4,112,263		42,784		4.11	%
Cash and due from banks	52,499						47,845
Other assets	401,213						324,046
Less: ALL	(35,756)						(26,273)
Total assets	$	4,996,029					$	4,457,881
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking	$	741,757	$	—	—	%	$	540,542	$	—	—	%
Interest checking	1,339,389		881		0.26	%	1,130,632		2,728		0.96	%
Savings	557,718		79		0.06	%	474,096		98		0.08	%
Money market	737,782		652		0.35	%	622,219		2,068		1.32	%
Certificates of deposit	417,788		1,126		1.07	%	533,110		2,210		1.64	%
Total deposits	3,794,434		2,738		0.29	%	3,300,599		7,104		0.85	%
Borrowings:
Brokered deposits	242,390		161		0.26	%	305,019		1,859		2.42	%
Customer repurchase agreements	194,937		207		0.42	%	234,362		745		1.26	%
Subordinated debentures	59,269		893		6.00	%	58,998		833		5.60	%
Other borrowings	73,370		187		1.02	%	11,273		56		1.96	%
Total borrowings	569,966		1,448		1.01	%	609,652		3,493		2.27	%
Total funding liabilities	4,364,400		4,186		0.38	%	3,910,251		10,597		1.08	%
Other liabilities	118,727						78,710
Shareholders' equity	512,902						468,920
Total liabilities & shareholders' equity	$	4,996,029					$	4,457,881
Net interest income (fully-taxable equivalent)			34,773						32,187
Less: fully-taxable equivalent adjustment			(292)						(264)
Net interest income			$	34,481					$	31,923
Net interest rate spread (fully-taxable equivalent)					2.99	%					3.03	%
Net interest margin (fully-taxable equivalent)					3.00	%					3.09	%
Net interest margin (fully-taxable equivalent), excluding fair value mark accretion and collection of previously charged-off acquired loans (3)					2.96	%					3.05	%

(1) Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.

(2) Non-accrual loans and loans held for sale are included in total average loans.

(3) Excludes the impact of the fair value mark accretion on loans and CDs generated in purchase accounting and collection of previously charged-off acquired loans for the three months ended September 30, 2020 and 2019, totaling $453,000 and $409,000, respectively.

Year-To-Date Average Balance, Interest and Yield/Rate Analysis


	For The Nine Months Ended
	September 30, 2020						September 30, 2019
(Dollars in thousands)	Average Balance		Interest		Yield/Rate		Average Balance		Interest		Yield/Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other banks and other interest-earning assets	$	150,383	$	282	0.25	%	$	63,146	$	1,081	2.26	%
Investments - taxable	850,970		15,148		2.37	%	832,780		15,922		2.55	%
Investments - nontaxable (1)	121,284		3,086		3.39	%	94,405		2,460		3.47	%
Loans (2) :
Commercial real estate	1,297,364		38,817		3.93	%	1,263,934		44,634		4.66	%
Commercial (1)	397,754		11,847		3.91	%	386,338		13,736		4.69	%
SBA PPP	133,569		4,063		4.00	%	—		—		—	%
HPFC	18,026		1,150		8.38	%	29,183		1,777		8.03	%
Municipal (1)	18,545		500		3.60	%	19,421		518		3.56	%
Residential real estate	1,082,276		33,116		4.08	%	1,034,609		33,479		4.31	%
Consumer and home equity	320,273		10,914		4.55	%	347,201		14,111		5.43	%
Total loans	3,267,807		100,407		4.06	%	3,080,686		108,255		4.66	%
Total interest-earning assets	4,390,444		118,923		3.59	%	4,071,017		127,718		4.16	%
Cash and due from banks	48,397						43,041
Other assets	376,857						303,538
Less: ALL	(29,633)						(25,519)
Total assets	$	4,786,065					$	4,392,077
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking	$	645,640	$	—	—	%	$	505,733	$	—	—	%
Interest checking	1,261,831		3,775		0.40	%	1,108,999		8,140		0.98	%
Savings	517,936		241		0.06	%	478,573		296		0.08	%
Money market	701,872		2,897		0.55	%	595,659		5,671		1.27	%
Certificates of deposit	482,076		4,921		1.36	%	498,059		5,739		1.54	%
Total deposits	3,609,355		11,834		0.44	%	3,187,023		19,846		0.83	%
Borrowings:
Brokered deposits	228,483		1,119		0.65	%	360,066		6,696		2.49	%
Customer repurchase agreements	213,463		1,131		0.71	%	239,917		2,273		1.27	%
Subordinated debentures	59,195		2,668		6.02	%	58,997		2,373		5.38	%
Other borrowings	69,883		460		0.88	%	23,847		387		2.17	%
Total borrowings	571,024		5,378		1.26	%	682,827		11,729		2.30	%
Total funding liabilities	4,180,379		17,212		0.55	%	3,869,850		31,575		1.09	%
Other liabilities	108,122						66,966
Shareholders' equity	497,564						455,261
Total liabilities & shareholders' equity	$	4,786,065					$	4,392,077
Net interest income (fully-taxable equivalent)			101,711						96,143
Less: fully-taxable equivalent adjustment			(865)						(752)
Net interest income			$	100,846					$	95,391
Net interest rate spread (fully-taxable equivalent)					3.04	%					3.07	%
Net interest margin (fully-taxable equivalent)					3.06	%					3.13	%
Net interest margin (fully-taxable equivalent), excluding fair value mark accretion and collection of previously charged-off acquired loans (3)					3.03	%					3.09	%

(1) Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.

(2) Non-accrual loans and loans held for sale are included in total average loans.

(3) Excludes the impact of the fair value mark accretion on loans and CDs generated in purchase accounting and collection of previously charged-off acquired loans for the nine months ended September 30, 2020 and 2019, totaling $1.1 million and $1.2 million, respectively.

The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume. The (a) changes in volume (change in volume multiplied by prior period's rate), (b) changes in rates (change in rate multiplied prior period's volume), and (c) changes in rate/volume (change in rate multiplied by the change in volume), which is allocated to the change due to rate column.


	For The Three Months Ended September 30, 2020 vs. September 30, 2019						For The Nine Months Ended September 30, 2020 vs. September 30, 2019
	Increase (Decrease) Due to:				Net Increase (Decrease)		Increase (Decrease) Due to:				Net Increase (Decrease)
(In thousands)	Volume		Rate				Volume		Rate
Interest-earning assets:
Interest-bearing deposits in other banks and other interest-earning assets	$	693	$	(1,175)	$	(482)	$	1,479	$	(2,278)	$	(799)
Investments – taxable	625		(963)		(338)		348		(1,122)		(774)
Investments – nontaxable	207		(19)		188		700		(74)		626

Commercial real estate	706		(2,770)		(2,064)		1,181		(7,000)		(5,819)
Commercial	(324)		(882)		(1,206)		406		(2,295)		(1,889)
SBA PPP	2,357		—		2,357		4,063		—		4,063
HPFC	(212)		(13)		(225)		(679)		52		(627)
Municipal	(33)		(4)		(37)		(23)		7		(16)
Residential real estate	219		(837)		(618)		1,541		(1,904)		(363)
Consumer and home equity	(572)		(828)		(1,400)		(1,094)		(2,103)		(3,197)
Total interest income (fully-taxable equivalent)	3,666		(7,491)		(3,825)		7,922		(16,717)		(8,795)
Interest-bearing liabilities:
Interest checking	505		(2,352)		(1,847)		1,120		(5,485)		(4,365)
Savings	17		(36)		(19)		24		(79)		(55)
Money market	384		(1,800)		(1,416)		1,009		(3,783)		(2,774)
Certificates of deposit	(477)		(607)		(1,084)		(184)		(634)		(818)
Brokered deposits	(382)		(1,316)		(1,698)		(2,451)		(3,126)		(5,577)
Customer repurchase agreements	(125)		(413)		(538)		(251)		(891)		(1,142)
Subordinated debentures	4		56		60		8		287		295
Other borrowings	307		(176)		131		747		(674)		73
Total interest expense	233		(6,644)		(6,411)		22		(14,385)		(14,363)
Net interest income (fully-taxable equivalent)	$	3,433	$	(847)	$	2,586	$	7,900	$	(2,332)	$	5,568

Provision for Credit Losses

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

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

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

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

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

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

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

Non-Interest Income

The following table presents the components of non-interest income for the periods indicated:


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
(Dollars in thousands)	2020			2019			$		%		2020			2019			$		%
Mortgage banking income, net (1)	$	4,664		$	2,668		1,996		75	%	$	12,889		$	5,662		$	7,227	128	%
Debit card income	2,627			2,432			195		8	%	7,159			6,723			436		6	%
Service charges on deposit accounts (2)	1,606			1,970			(364)		(18)	%	4,955			6,202			(1,247)		(20)	%
Income from fiduciary services	1,504			1,444			60		4	%	4,609			4,381			228		5	%
Brokerage and insurance commissions	755			625			130		21	%	2,034			1,942			92		5	%
Bank-owned life insurance	615			613			2		—	%	1,918			1,810			108		6	%
Customer loan swap fees (3)	51			109			(58)		(53)	%	222			919			(697)		(76)	%
Net gain on sale of securities	—			1			(1)		(100)	%	—			28			(28)		(100)	%
Other income	874			877			(3)		—	%	2,373			2,498			(125)		(5)	%
Total non-interest income	$	12,696		$	10,739		$	1,957	18	%	$	36,159		$	30,165		$	5,994	20	%
Non-interest income as a percentage of total revenues	27		%	25		%					26		%	24		%

(1) Mortgage banking income, net: For the third quarter of 2020, the net gain on sale of residential mortgages, including the fair value mark on the loan pipeline designated for sale, was $4.0 million, an increase of $1.5 million over the third quarter of 2019. The increase between periods was driven by strong residential mortgage activity due to the historically low interest rate environment. In the third quarter of 2020, the Company sold $182.7 million of residential mortgages to the secondary market, compared to $86.9 million for the third quarter of 2019. The Company maintained the servicing rights on certain mortgages sold, and, as a result, servicing income for the third quarter of 2020 increased $446,000 over the third quarter of 2019.

For the nine months ended September 30, 2020, the net gain on sale of residential mortgages, including the fair value mark on the loan pipeline designated for sale, was $11.2 million, an increase of $6.1 million over the same period of 2019. During the nine months ended September 30, 2020, the Company sold $449.7 million of residential mortgages to the secondary market, compared to $164.5 million for the nine months ended September 30, 2019. The Company maintained the servicing rights on certain mortgages sold, and, as a result, servicing income for the nine months ended September 30, 2020 increased $1.1 million over the same period of 2019.

(2) Service charges on deposit accounts: The decrease for the three and nine months ended September 30, 2020, compared to the same periods of 2019, was primarily due to lower utilization of the overdraft program which resulted in a decrease in overdraft fees of $312,000 and $1.2 million, respectively. In response to the COVID-19 pandemic, we saw a shift in customer behavior as there were less merchant transactions and higher deposit balances, in part, due to the federal stimulus provided to consumers and commercial customers, as well as an increase in the national personal savings rate, which nearly doubled to 14.1% in August 2020 compared to December 2019.

(3) Customer loan swap fees: The decrease for the three and nine months ended September 30, 2020, compared to the same periods of 2019, was driven by a change in appetite by the Company for this loan product and structure as interest rates have decreased significantly to historically low levels.

Non-Interest Expense

The following table presents the components of non-interest expense for the periods indicated:


	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
(Dollars in thousands)	2020			2019			$		%		2020			2019			$		%
Salaries and employee benefits (1)	$	13,739		$	13,604		$	135	1	%	$	41,693		$	40,043		$	1,650	4	%
Furniture, equipment and data processing	3,076			2,708			368		14	%	8,576			8,111			465		6	%
Net occupancy costs	1,785			1,710			75		4	%	5,785			5,263			522		10	%
Consulting and professional fees	913			892			21		2	%	2,877			2,679			198		7	%
Debit card expense	972			960			12		1	%	2,784			2,666			118		4	%
Regulatory assessments (2)	510			182			328		180	%	971			1,091			(120)		(11)	%
Amortization of core deposit intangible assets	170			177			(7)		(4)	%	511			529			(18)		(3)	%
Other real estate owned and collection costs, net	71			251			(180)		(72)	%	270			353			(83)		(24)	%

Other expenses (3)	3,985			3,264			721		22	%	9,824			9,754			70		1	%
Total non-interest expense	$	25,221		$	23,748		$	1,473	6	%	$	73,291		$	70,489		$	2,802	4	%
GAAP efficiency ratio	53.46		%	55.67		%					53.50		%	56.14		%
Non-GAAP efficiency ratio	50.60		%	55.32		%					52.29		%	55.82		%

(1) Salaries and employee benefits: The increase for the nine months ended September 30, 2020, over the same periods of 2019 was driven by normal annual merit increases and a temporary increase in wages of $238,000 for those employees that continued to service our customers as an essential business during the COVID-19 pandemic.

(2) Furniture, equipment and data processing costs: The increase for the three and nine months ended September 30, 2020, over the same periods of 2019 was driven by $196,000 in one-time system conversion costs in the third quarter of 2020 and increased online banking costs of $54,000 and $113,000 for the three and nine months ended September 30, 2020, respectively, over the same periods last year driven by higher customer utilization due to the COVID-19 pandemic.

(3) Net occupancy costs: The increase for the nine months ended September 30, 2020, over the same period of 2019 was driven by an increase in rent and related-expenses of $356,000 and office cleaning expenses of $237,000 due to the COVID-19 pandemic, partially offset by lower office utility costs of $207,000 as many of our employees worked remotely due to the COVID-19 pandemic.

(4) Regulatory assessments: The increase for the three months ended September 30, 2020, compared to the same period of 2019, as well as the decrease for the nine months ended September 30, 2020, compared to the same period of 2019, was driven by the receipt of the Small Bank Assessment Credit from the FDIC beginning in the third quarter of 2019 through the second quarter of 2020. Effective for the third quarter of 2020, the Company has no remaining Small Bank Assessment Credits, and its regulatory assessment costs are now reverting back to historical levels.

(5) Other expenses: The increase for the three and nine months ended September 30, 2020, over the same periods of 2019 was primarily driven by a $1.2 million legal settlement in the third quarter of 2020 to avoid the burden and expense of litigation. This was partially offset by: (i) lower employee-related costs, including hiring, training and travel, of $285,000 and $753,000 for the three and nine months ended September 30, 2020, compared to the same periods last year, respectively, as employees transitioned to a remote work environment in the second quarter of 2020 and many continued operating in this fashion through the third quarter of 2020; and (ii) lower marketing costs of $239,000 and $370,000 for the three and nine months ended September 30, 2020, compared to the same periods last year, respectively, as certain programs

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

FINANCIAL CONDITION

Investments

The Company utilizes the investment portfolio to manage liquidity, interest rate risk, and regulatory capital, as well as to take advantage of market conditions to generate a favorable return on investments without undue risk. The Company’s investment portfolio consists of debt securities we have designated as AFS and HTM, as well as common stock of the FHLBB, FRB and certain banks. Investments increased $188.6 million, or 20%, at September 30, 2020 as compared to December 31, 2019, driven by the deployment of excess cash that has resulted from deposit growth. The following is the activity in our investment portfolio:

• The purchase of $341.1 million of investments during the nine months ended September 30, 2020 with a weighted-average life of 4.9 years;

• A net increase in the fair value of the AFS debt securities portfolio of $32.5 million driven by the change in general market conditions, specifically a decrease in long-term interest rates at September 30, 2020, compared to December 31, 2019;

• Partially offset by paydowns and calls of $181.5 million.

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

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

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

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

Loans

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

The following table sets forth the composition of our loan portfolio as of the dates indicated:


							Change
(Dollars in thousands)	September 30, 2020			December 31, 2019			($)		(%)
Commercial real estate	$	1,333,733		$	1,243,397		$	90,336	7	%
Commercial	360,629			421,108			(60,479)		(14)	%
SBA PPP	223,838			—			223,838		N.M.
HPFC	14,919			21,593			(6,674)		(31)	%
Residential real estate	1,044,103			1,070,374			(26,271)		(2)	%
Consumer and home equity	297,620			338,551			(40,931)		(12)	%
Total loans	$	3,274,842		$	3,095,023		$	179,819	6	%
Commercial Loan Portfolio	$	1,933,119		$	1,686,098		$	247,021	15	%
Retail Loan Portfolio	$	1,341,723		$	1,408,925		$	(67,202)	(5)	%
Commercial Portfolio Mix	59		%	54		%
Retail Portfolio Mix	41		%	46		%

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

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

Asset Quality

Non-Performing Assets . Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, accruing TDRs, and property acquired through foreclosure or repossession. The following table sets forth the make-up and amount of our non-performing assets as of the dates indicated:


(Dollars in thousands)	September 30, 2020			December 31, 2019
Non-accrual loans:
Commercial real estate	$	565		$	1,122
Commercial	605			420
SBA PPP	—			—
HPFC	509			364
Residential real estate	4,017			4,096
Consumer and home equity	2,503			2,154
Total non-accrual loans	8,199			8,156

Accruing TDRs not included above	2,952			2,993
Total non-performing loans	11,151			11,149
Other real estate owned	—			94
Total non-performing assets	$	11,151		$	11,243
Non-accrual loans to total loans	0.25		%	0.26		%
Non-performing loans to total loans	0.34		%	0.36		%
ALL to non-performing loans	326.55		%	225.77		%
Non-performing assets to total assets	0.22		%	0.25		%
ALL to non-performing assets	326.55		%	223.88		%

Potential Problem Loans . Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in a loss. These loans are not included in the above analysis of non-accrual loans. At September 30, 2020, potential problem loans amounted to $2.8 million, or 0.09% of total loans.

Past Due Loans . Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table presents the recorded investment of past due loans as of the dates indicated:


(Dollars in thousands)	September 30, 2020			December 31, 2019
Accruing loans 30-89 days past due:
Commercial real estate	$	2,056		$	1,582
Commercial	1,315			548
SBA PPP	—			—
HPFC	323			243
Residential real estate	1,784			2,227
Consumer and home equity	434			750
Total	$	5,912		$	5,350
Accruing loans 30-89 days past due to total loans	0.18		%	0.17		%

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

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

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

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

The following table sets forth information concerning the activity in the ALL for the periods indicated:


	At or For The Three Months Ended September 30,						At or For The Nine Months Ended September 30,						At or For The Year Ended December 31, 2019
(Dollars in thousands)	2020			2019			2020			2019
ALL at the beginning of the period	$	35,539		$	26,163		$	25,171		$	24,712		$	24,712
Provision for loan losses	1,000			733			12,172			2,658			2,862
Charge-offs:
Commercial real estate	33			92			104			157			300
Commercial	184			183			857			636			1,167
SBA PPP	—			—			—			—			—
HPFC	—			11			—			11			71
Residential real estate	25			411			121			436			462
Consumer and home equity	65			606			199			670			713
Total charge-offs	307			1,303			1,281			1,910			2,713
Recoveries:
Commercial real estate	3			34			10			41			49
Commercial	139			56			255			167			225
SBA PPP	—			—			—			—			—
HPFC	—			—			—			—			—
Residential real estate	4			2			27			6			16
Consumer and home equity	36			3			60			14			20
Total recoveries	182			95			352			228			310
Net charge-offs	125			1,208			929			1,682			2,403
ALL at the end of the period	$	36,414		$	25,688		$	36,414		$	25,688		$	25,171
Components of allowance for credit losses:
Allowance for loan losses	$	36,414		$	25,688		$	36,414		$	25,688		$	25,171
Liability for unfunded credit commitments	9			11			9			11			21
Balance of allowance for credit losses at end of the period	$	36,423		$	25,699		$	36,423		$	25,699		$	25,192
Net charge-offs (annualized) to average loans	0.01		%	0.16		%	0.04		%	0.07		%	0.08		%
Provision for loan losses (annualized) to average loans	0.12		%	0.09		%	0.50		%	0.12		%	0.09		%
ALL to total loans	1.11		%	0.83		%	1.11		%	0.83		%	0.81		%

ALL to net charge-offs (annualized)	7,282.80		%	531.62		%	2,939.77		%	1,145.42		%	1,047.48		%

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

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

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

Goodwill

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

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

Liabilities and Shareholders’ Equity .

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

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

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

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

The following table presents certain information regarding shareholders’ equity as of or for the periods indicated:


	At or For The Three Months Ended September 30,						At or For The Nine Months Ended September 30,						At or For The Year Ended December 31, 2019
	2020			2019			2020			2019
Financial Ratios
Average equity to average assets	10.27		%	10.52		%	10.40		%	10.37		%	10.43		%
Common equity ratio	10.04		%	10.43		%	10.04		%	10.43		%	10.69		%
Tangible common equity ratio (1)	8.30		%	8.44		%	8.30		%	8.44		%	8.66		%
Dividend payout ratio	29.46		%	31.91		%	36.13		%	33.33		%	33.24		%
Per Share Data
Book value per share	$	34.69		$	30.98		$	34.69		$	30.98		$	31.26
Tangible book value per share (1)	28.14			24.52			28.14			24.52			24.77
Dividends declared per share	0.33			0.30			0.99			0.90			1.23

(1) Please refer to "Non-GAAP Financial Measures and Reconciliation to GAAP" for further details.

Refer to "—Capital Resources" and Note 10 of the consolidated financial statements for further discussion of the Company and Bank's capital resources and regulatory capital requirements.

LIQUIDITY

Our liquidity needs require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as our ability to maintain availability of funds to meet customer needs, as well as to support our asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of liquidity is necessary. We maintain various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy their varied liquidity demands. We monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. As of September 30, 2020 and December 31, 2019, our level of liquidity exceeded target levels. We believe that we currently have appropriate liquidity available to respond to liquidity demands. Sources of funds that we utilize consist of deposits, borrowings from the FHLBB and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities and the sale of mortgage loans.

Deposits continue to represent our primary source of funds. For the nine months ended September 30, 2020, average deposits (excluding brokered deposits) of $3.6 billion increased $422.3 million, or 13%, compared to the same period last year. Average core deposits (non-GAAP) of $3.1 billion for the nine months ended September 30, 2020, increased $438.3 million, or 16%, compared to the same period a year ago. Included within our average money market deposits for the nine months ended September 30, 2020 and 2019, were $85.3 million and $70.2 million, respectively, of deposits from the Bank's wealth management department, Camden National Wealth Management, which represent client funds. These deposits fluctuate with changes in the portfolios of the clients of Camden National Wealth Management.

Borrowings are used to supplement deposits as a source of liquidity. In addition to borrowings and advances from the FHLBB, we utilize brokered deposits, purchase federal funds, and sell securities under agreements to repurchase. For the nine months ended September 30, 2020, average total borrowings (including brokered deposits) decreased $111.8 million, or 16%, to $571.0 million compared to the same period last year. We secure borrowings from the FHLBB with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. Customer repurchase agreements are secured by mortgage-backed securities and government-sponsored enterprises. Through the Bank, we have available lines of credit with the FHLBB of $9.9 million, with a correspondent bank of $50.0 million, and with the FRB Discount Window of $58.8 million as of September 30, 2020. The Company also has a $10.0 million line of credit with a correspondent bank that matures on December 18, 2020.

We believe our investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also believe that we have additional untapped access to the brokered deposit market, the wholesale reverse repurchase transaction market and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. We believe that our current level

of liquidity is sufficient to meet current and future funding requirements; however, changes in economic conditions, including consumer saving habits and the availability or access to the national brokered deposit and wholesale repurchase markets, whether as a result of the COVID-19 pandemic or otherwise, could significantly impact our liquidity position.

CAPITAL RESOURCES

As part of our goal to operate a safe, sound and profitable financial organization, we are committed to maintaining a strong capital base. Shareholders’ equity totaled $517.5 million and $473.4 million at September 30, 2020 and December 31, 2019, respectively, which amounted to 10% and 11% of total assets as of the respective dates. Refer to " — Financial Condition — Liabilities and Shareholders' Equity " for discussion regarding changes in shareholders' equity for the nine months ended September 30, 2020.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Company's Board of Directors. We declared dividends to shareholders in the aggregate amount of $14.8 million and $13.9 million for the nine months ended September 30, 2020 and 2019, respectively. The Company's Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including the following: (i) capital position relative to total assets, (ii) risk-based assets, (iii) total classified assets, (iv) economic conditions, (v) growth rates for total assets and total liabilities, (vi) earnings performance and projections and (vii) strategic initiatives and related capital requirements. All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.

We are primarily dependent upon the payment of cash dividends by the Bank, our wholly-owned subsidiary, to service our commitments. We, as the sole shareholder of the Bank, are entitled to dividends, when and as declared by the Bank's Board of Directors from legally available funds. For the nine months ended September 30, 2020 and 2019, the Bank declared dividends payable to the Company in the amount of $22.4 million and $29.4 million, respectively. Under regulations prescribed by the OCC, the Bank may not declare dividends in excess of the Bank’s net income for the current year plus its retained net income for the prior two years without prior approval from the OCC. If we are required to use dividends from the Bank to service unforeseen commitments in the future, we may be required to reduce the dividends paid to our shareholders going forward.

Please refer to Note 10 of the consolidated financial statements for discussion and details of the Company and Bank's regulatory capital requirements. At September 30, 2020 and December 31, 2019, the Company and Bank exceeded all regulatory capital requirements, and the Bank continues to meet the capital requirements to be classified as "well capitalized" under applicable prompt corrective action provisions.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS

Off-Balance Sheet Financial Instruments

Credit Commitments and Standby Letters of Credit. In the normal course of business, we are a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the consolidated statements of condition. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of condition. We follow the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. Our exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Many of the commitments will expire without being drawn upon, and thus, the total amount does not necessarily represent future cash requirements. In the event of nonperformance by the borrower, we are entitled to underlying collateral, as applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate.

Derivatives. We use derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. We control the credit risk of these instruments through collateral, credit approvals and monitoring procedures. Additionally, as part of our normal mortgage origination process, we provide the borrower with the option to lock their interest rate based on current market prices. During the period from commitment date to the loan closing date, we are subject to the risk of interest rate change. In an effort to mitigate such risk, we may enter into forward delivery sales commitments, typically on a best-efforts basis, with certain approved investors. We account for interest rate lock commitments on loans that will be held for sale as derivative instruments. Furthermore, we record a derivative for our best-effort forward delivery commitments upon origination of a loan identified as held for sale. Should we enter into a forward

delivery commitment on a mandatory delivery arrangement with an investor, we account for the forward delivery commitment as a derivative upon execution of the mandatory delivery contract.

Hedge Instruments. From time to time, we may enter into derivative instruments as partial hedges against large fluctuations in interest rates. We may also enter into fixed-rate interest rate swaps and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If interest rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instrument. We may also enter into interest rate swaps and cap instruments to partially hedge against increases in short-term borrowing rates. If interest rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the interest rate swaps and cap instruments. These financial instruments are factored into our overall interest rate risk position. We regularly review the credit quality of the counterparty from which the instruments have been purchased.

Refer to Notes 7 and 8 of the consolidated financial statements for additional details.

At September 30, 2020, we had the following levels of off-balance sheet financial instruments:


(In thousands)	Total Amount		Commitment Expires in:
Off-Balance Sheet Financial Instruments	Committed		<1 Year		1 – 3 Years		3 – 5 Years		>5 Years
Commitments to extend credit	$	674,071	$	327,286	$	44,256	$	29,958	$	272,571
Standby letters of credit	5,565		3,562		1,870		—		133
Customer loan swaps - notional value	756,856		2,220		53,778		96,517		604,341
Interest rate swap on loans - notional value	100,000		—		—		100,000		—
Interest rate swaps on borrowings - notional value	100,000		—		50,000		—		50,000
Fixed-rate mortgage interest rate lock commitments - notional value	119,194		119,194		—		—		—
Junior subordinated debt interest rate swaps - notional value	53,000		10,000				—		43,000
Forward delivery commitments - notional value	37,301		37,301		—		—		—
Total	$	1,845,987	$	499,563	$	149,904	$	226,475	$	970,045

Contractual Obligations and Commitments

We are a party to several contractual obligations through lease agreements on a number of branches. Renewal options within our various lease contracts, as applicable, are considered to determine the lease term and estimate the contractual obligation and commitment for the Company's operating and finance leases. Furthermore, certain lease contracts of the Company contain language that subject its rent payment to variability, such as those tied to an index or change in an index. As a result, the future contractual obligation and commitment may materially differ from that estimated and disclosed within the table below.

We enter into agreements routinely as part of our normal business to manage deposits and borrowings.

At September 30, 2020, we had an obligation and commitment to make future payments under each of these contracts as follows:


(In thousands)	Total Amount		Payments Due per Period
Contractual obligations and commitments	Committed		<1 Year		1 – 3 Years		3 – 5 Years		>5 Years
Operating leases	$	15,854	$	1,373	$	2,634	$	2,255	$	9,592
Finance leases	7,813		305		619		630		6,259



FHLBB advances - other	25,000		—		—		25,000		—
Retail repurchase agreements	210,055		210,055		—		—		—
Junior subordinated debentures	44,331		—		—		—		44,331
Subordinated debentures	14,975		—		—		—		14,975
Other contractual obligations	1,236		1,236		—		—		—
Total	$	319,264	$	212,969	$	3,253	$	27,885	$	75,157

Borrowings from the FHLBB consist of short- and long-term fixed and variable rate borrowings that are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to four-family properties, certain pledged investment securities and other qualified assets.

We have an obligation and commitment to repay all short- and long-term borrowings. These commitments and borrowings and the related payments are made during the normal course of business.

RISK MANAGEMENT

The Company’s Board of Directors and management have identified significant risk categories which affect the Company. The risk categories include: credit; liquidity; market; interest rate; capital; operational and technology, including cybersecurity; vendor and third party; people and compensation; compliance and legal; and strategic alignment and reputation. The Board of Directors has approved an Enterprise Risk Management ("ERM") Policy that addresses each category of risk. The direct oversight and responsibility for the Company's risk management program has been delegated to the Company's Executive Vice President of Risk Management, who is a member of the Executive Committee and reports directly to the Chief Executive Officer.

The spread of the COVID-19 pandemic has increased many of the risks we face, including our credit, operational, vendor and third party, and technology risks. In response to the COVID-19 pandemic, the Company formed the Pandemic Work Group to develop and oversee the Company’s response. The Pandemic Work Group has: (i) developed employee practices, policies and playbooks to address pandemic related issues; (ii) implemented monitoring of all federal, state and local actions (e.g., stay-at-home orders) so that the Company can comply with all legal requirements; (iii) completed risk assessments and proactive monitoring over critical vendors, along with enhanced cybersecurity monitoring and reporting; (iv) created ongoing assessment and monitoring over employee availability, safety, workloads and access to tools (including technology needed to work from home effectively); (v) initiated temporary loan relief programs; (vi) rolled out the SBA PPP; (vii) developed our branch network plan, including determinations of which branches should be closed in order to best allocate resources; and (viii) developed a plan for, and oversaw the re-opening of branches throughout June 2020, which included ensuring health and safety protocols and practices were in place for our employees and customers. In addition, the Pandemic Work Group is currently formulating the Company's short- and long-term strategy for returning its employees that continue to work remotely back to its locations safely in compliance with health officials' guidelines.

The Pandemic Work Group continues to oversee areas of the Company’s response such as employee practices and assessment of employee availability, safety and workload. Members of the Pandemic Work Group include the Company’s executive team and other members of senior management. The Pandemic Work Group, through the Company's executive team, regularly reports to the Board of Directors to assist the Board of Directors with both its ongoing oversight of the Company’s response to COVID-19 as well as its management of all areas of risks the Company faces, which have been affected by the COVID-19 pandemic.

Please refer to "– Executive Overview" and "– Financial Condition" above for additional discussion of specific actions the Company has taken in response to the COVID‑19 pandemic. Please also refer to Item 1A, "Risk Factors" for additional information on the Company’s risks relating to the COVID-19 pandemic.

Other than as described above, for the three and nine months ended September 30, 2020, there have been no material changes to the Company's risk categories and risk management policies as described in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Please refer to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for further details regarding the Company's risk management.

Interest rate risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. Board ALCO and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While Board ALCO and Management ALCO routinely monitor simulated net interest income sensitivity over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated statements of condition, as well as for derivative financial instruments. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one- and two-year horizon, assuming no balance sheet growth, given a 200 basis point upward and downward shift in interest rates. Although our policy specifies a downward shift of 200 basis points, this would result in negative rates as many deposit and funding rates are below 2.00%. During the last few years, our downward shift has been 100 basis points. A parallel and pro rata shift in rates over a 12-month period is assumed. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual change of rates and a “rate shock” have on earnings expectations. In the down 100 basis points scenario, Federal Funds and Treasury yields are floored at 0.01% while Prime is floored at 3.00%. All other market rates are floored at the lesser of current levels or 0.25%.

As of September 30, 2020 and 2019, our net interest income sensitivity analysis reflected the following changes to net interest income assuming no balance sheet growth and a parallel shift in interest rates. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the ALCO simulation horizon.


	Estimated Changes In Net Interest Income
Rate Change from Year 1 — Base	September 30, 2020		September 30, 2019
Year 1
+200 basis points	1.57	%	(0.51)	%
-100 basis points	0.32	%	(0.51)	%

Year 2
+200 basis points	8.66	%	4.54	%
-100 basis points	(5.46)	%	(4.33)	%

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. Furthermore, this sensitivity analysis may not represent the full magnitude of interest rate shocks, because Federal Funds and Treasury yields are floored at 0.01%, and Prime is floored at 3.00%. The COVID-19 pandemic has driven significant economic and interest rate contraction over recent months, and the future state of the economy remains highly uncertain at this time. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and non-performing asset levels. Although assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

If rates remain at or near current levels, net interest income is projected to decrease. Asset cash flows reprice and replace into the low rate environment, and are more than offset by the positive impact of funding cost reductions, causing balance sheet spread to tighten. If rates decrease 100 basis points, net interest income is projected to trend slightly above current levels as funding cost reductions mitigate asset yield pressure. In the second year, net interest income is projected to continue to decrease as loans and investment cash flow reprice into lower yields as prepayments increase while reduction in the cost of funds is exhausted. If rates increase 200 basis points, net interest income is projected to increase slightly in the first year due to asset yields outpacing funding cost increases. In the second year, net interest income is projected to continue to increase as loan and investment yields continue to reprice/reset into higher yields and funding cost increases subside.

Periodically, if deemed appropriate, we use back-to-back loan swaps, interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate risk position. The Board of Directors has approved hedging policy statements governing the use of these instruments. The Board and Management ALCO monitor derivative activities relative to their expectations and our hedging policies. Refer to " —Contractual Obligations and Off-Balance Sheet Commitments " and Note 8 of the consolidated financial statements for further discussion of these derivative instruments.

LIBOR is a benchmark interest rate for certain floating rate loans, deposits and borrowings, and off-balance sheet exposures of the Company. In 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will not compel panel banks to contribute to LIBOR after 2021. As such, we have an internal project team that is focused on an orderly transition from LIBOR to alternative reference rates. The markets for alternative rates are developing. We will continue to assess the use of alternative rates, and expect to transition to alternative rates as the markets and best practices develop. Refer to Note 2 of the consolidated financial statements for additional details.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information required by this Item 3 is included in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management." and such information is incorporated into this Item 3 by reference.

ITEM 4. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer), regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter covered by this report. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer) concluded that they believe the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Although a significant number of our employees began working from home in mid-March 2020 as a result of the COVID-19 pandemic, we have concluded that these changes in work arrangements did not have a material effect on our internal controls over financial reporting during the third quarter. There was no change in the internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. We cannot predict at this time the extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations. The extent of any continued or future adverse effects of the COVID-19 pandemic will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, customers, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic. Although our Pandemic Work Group continues to monitor the COVID-19 pandemic and to take action in response to ongoing developments, there can be no guarantee this or any other aspect of our business continuity planning will be effective in addressing some or all of the effects of the COVID-19 pandemic.

Although economies began to re-open in the second quarter of 2020, many of the circumstances to which the COVID-19 pandemic contributed persisted at the end of the third quarter, including (i) significant volatility in financial markets; (ii) heightened credit risks and increased instances of defaults in many industries, including hospitality, transportation and commercial real estate; (iii) significant reductions in the targeted Federal Funds rate (which was reduced to a target rate of between zero and 0.25% in the first quarter of 2020, and may be reduced to below zero if the Federal Reserve determines economic conditions warrant); and (iv) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements. Many of our counterparties and third-party service providers have been, and may further be, affected by “stay-at-home” orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides. In addition, our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, or if we are unable to keep our branches open because of, or risk of, infection. Although we have re-opened our branches with modified operating hours, the resurgence of COVID-19 cases in parts of the U.S. has resulted in stricter lock-down measures being re-imposed in affected areas. A resurgence of COVID-19 cases in Maine could result in us being required to close our branches or restrict our branch operations. In addition, depending on the duration and severity of the pandemic going forward, and the effects of the pandemic on our customers, these conditions could continue for an extended period and other adverse developments may occur.

In response to the COVID-19 pandemic, we worked with businesses and loan customers to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. As of September 30, 2020, 5.5% of total loans were operating under a COVID-19 payment deferral arrangement, compared to 16.4% at June 30, 2020. We anticipate that the number of loans and loan balances operating under this arrangement will continue to decrease in coming months as the temporary debt relief provided to our loan customers matures. As the payment deferral period ends, these loans will return to payment status, and we will continue to monitor these loans closely and take any necessary actions swiftly should we see signs of payment risk or stress. Payment deferrals under these programs may adversely affect our revenue and results of operations. In addition, if such measures are not effective in mitigating the effects of COVID-19 on borrowers, we may experience higher rates of default and increased credit losses in future periods.

Certain industries to which the Company has credit exposure, including lodging, senior living and care facilities, restaurants, and travel and recreation, have experienced, and may continue to experience, significant operational challenges as a result of COVID-19. While we have not yet experienced higher credit line draws from our customers to support their liquidity and working capital needs, the operation challenges stemming from COVID-19 may result in a number of our customers making higher than usual credit line draws in the future, which could negatively affect our liquidity if current economic conditions persist. Also, while we have not yet experienced elevated levels of non-performing assets, the negative effects of

COVID-19 may cause our business and consumer customers to be unable to pay their loans as they come due or may decrease the value of collateral, which we expect would cause significant increases in our credit losses.

Until the pandemic subsides, we may experience reduced revenues from our lending businesses, and increased credit losses in our lending portfolios, as well as recognize the possibility for an increase in credit line utilization. Even after the pandemic subsides, it is possible that the U.S. and other major economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.

Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. The continued success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.

Other negative effects of COVID-19 that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that our business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides and the U.S. economy begins to recover. Further, the COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit No.						Definition
3.1						Camden National Corporation Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K filed with the Commission on May 4, 2020).
31.1 *						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 *						Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1 **						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 **						Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*						iXBRL (Inline eXtensible Business Reporting Language). The following materials from Camden National Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2020, formatted in iXBRL: (i) Consolidated Statements of Condition - September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income - Three and Nine Months Ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three and Nine Months Ended September 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2020 and 2019; and (vi) Notes to the Unaudited Consolidated Financial Statements.
104*						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
*						Filed herewith.
**						Furnished herewith.
+						Management contract or a compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


CAMDEN NATIONAL CORPORATION
(Registrant)

/s/ Gregory A. Dufour						November 5, 2020
Gregory A. Dufour						Date
President and Chief Executive Officer (Principal Executive Officer)

/s/ Gregory A. White						November 5, 2020
Gregory A. White						Date
Chief Financial Officer and Principal Financial & Accounting Officer

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Note 1 Basis Of Presentation Note 2 Recent Accounting Pronouncements Note 3 Investments Note 4 Loans and Allowance For Loan Losses Note 5 Borrowings Note 6 Repurchase Agreements Note 7 Commitments and Contingencies Note 8 Derivatives and Hedging Note 9 Balance Sheet Offsetting Note 10 Regulatory Capital Requirements Note 11 Other Comprehensive Income (loss)Note 12 Revenue From Contracts with Customers Note 13 Employee Benefit Plans Note 14 Eps Note 15 Fair Value Measurement and Disclosure Item 2. Management's Discussion and Analysis Of Financial Condition Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

3.1 Camden National Corporation Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K filed with the Commission on May 4, 2020). 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2* Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

CAC 10-Q Quarter ended Sept. 30, 2020

Exhibits