☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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.
Yesx 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).
Yesx 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 28, 2022: Common stock (no par value) 14,565,409 shares.
CAMDEN NATIONAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Consolidated Statements of Condition (unaudited) - September 30, 2022 and December 31, 2021
Interest-bearing deposits in other banks (including restricted cash)
26,939
181,723
Total cash, cash equivalents and restricted cash
82,012
220,625
Investments:
Trading securities
3,727
4,428
Available-for-sale securities, at fair value (amortized cost of $833,888 and $1,508,981, respectively)
723,618
1,507,486
Held-to-maturity securities, at amortized cost (fair value of $491,759 and $1,380, respectively)
534,309
1,291
Other investments
15,108
10,280
Total investments
1,276,762
1,523,485
Loans held for sale, at fair value (book value of $4,863 and $5,786, respectively)
4,629
5,815
Loans
3,860,680
3,431,474
Less: allowance for credit losses on loans
(36,542)
(33,256)
Net loans
3,824,138
3,398,218
Goodwill
94,697
94,697
Core deposit intangible assets
1,719
2,188
Bank-owned life insurance
98,760
97,241
Premises and equipment, net
36,179
37,775
Deferred tax assets
53,693
19,210
Other assets
79,135
101,102
Total assets
$
5,551,724
$
5,500,356
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest checking
$
1,245,137
$
1,279,565
Interest checking
1,460,571
1,351,736
Savings and money market
1,493,518
1,459,472
Certificates of deposit
279,603
309,648
Brokered deposits
89,775
208,468
Total deposits
4,568,604
4,608,889
Short-term borrowings
421,101
211,608
Subordinated debentures
44,331
44,331
Accrued interest and other liabilities
86,681
94,234
Total liabilities
5,120,717
4,959,062
Commitments and Contingencies
Shareholders’ Equity
Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 14,563,828 and 14,739,956 shares on September 30, 2022 and December 31, 2021, respectively
114,536
123,111
Retained earnings
452,927
424,412
Accumulated other comprehensive loss
(136,456)
(6,229)
Total shareholders’ equity
431,007
541,294
Total liabilities and shareholders’ equity
$
5,551,724
$
5,500,356
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands, except number of shares and per share data)
2022
2021
2022
2021
Interest Income
Interest and fees on loans
$
37,568
$
31,185
$
102,724
$
92,610
Taxable interest on investments
5,756
5,157
17,395
13,362
Nontaxable interest on investments
790
756
2,324
2,247
Dividend income
137
99
349
306
Other interest income
330
182
677
508
Total interest income
44,581
37,379
123,469
109,033
Interest Expense
Interest on deposits
5,442
1,973
9,785
5,957
Interest on borrowings
787
122
1,372
454
Interest on subordinated debentures
539
538
1,600
1,983
Total interest expense
6,768
2,633
12,757
8,394
Net interest income
37,813
34,746
110,712
100,639
Provision (credit) for credit losses
2,764
939
4,034
(4,420)
Net interest income after provision (credit) for credit losses
35,049
33,807
106,678
105,059
Non-Interest Income
Debit card income
3,234
3,278
9,371
9,126
Service charges on deposit accounts
1,941
1,744
5,705
4,800
Income from fiduciary services
1,535
1,627
4,847
4,860
Brokerage and insurance commissions
1,003
993
3,269
2,885
Mortgage banking income, net
635
1,913
3,186
11,620
Bank-owned life insurance
374
589
1,519
1,774
Net loss on sale of securities
—
—
(9)
—
Other income
1,232
955
3,032
2,569
Total non-interest income
9,954
11,099
30,920
37,634
Non-Interest Expense
Salaries and employee benefits
15,849
15,902
46,757
45,742
Furniture, equipment and data processing
3,305
2,980
9,639
8,954
Net occupancy costs
1,765
1,813
5,715
5,569
Debit card expense
1,210
1,106
3,410
3,166
Consulting and professional fees
814
792
3,114
2,652
Regulatory assessments
575
522
1,745
1,512
Amortization of core deposit intangible assets
156
163
469
491
Other real estate owned and collection costs (recoveries), net
56
60
9
(156)
Other expenses
3,361
2,925
8,998
8,822
Total non-interest expense
27,091
26,263
79,856
76,752
Income before income tax expense
17,912
18,643
57,742
65,941
Income Tax Expense
3,645
4,003
11,654
13,418
Net Income
$
14,267
$
14,640
$
46,088
$
52,523
Per Share Data
Basic earnings per share
$
0.97
$
0.98
$
3.13
$
3.51
Diluted earnings per share
$
0.97
$
0.97
$
3.12
$
3.49
Cash dividends declared per share
$
0.40
$
0.36
$
1.20
$
1.08
Weighted average number of common shares outstanding
14,619,460
14,931,056
14,670,450
14,930,387
Diluted weighted average number of common shares outstanding
14,675,332
14,999,013
14,728,349
14,996,541
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2022
2021
2022
2021
Net Income
$
14,267
$
14,640
$
46,088
$
52,523
Other comprehensive loss:
Net change in unrealized loss on debt securities, net of tax
(24,231)
(5,139)
(139,095)
(20,352)
Net change in unrealized gain (loss) on cash flow hedging derivatives, net of tax
2,560
467
8,324
3,267
Net change in other comprehensive income for supplemental executive retirement plan and other postretirement benefit plan, net of tax
181
171
544
512
Other comprehensive loss
(21,490)
(4,501)
(130,227)
(16,573)
Comprehensive (Loss) Income
$
(7,223)
$
10,139
$
(84,139)
$
35,950
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended
Common 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, 2021
14,951,067
$
132,278
$
404,602
$
8,668
$
545,548
Net income
—
—
14,640
—
14,640
Other comprehensive loss, net of tax
—
—
—
(4,501)
(4,501)
Stock-based compensation expense
—
493
—
—
493
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
4,762
67
—
—
67
Common stock repurchased
(106,502)
(4,913)
—
—
(4,913)
Cash dividends declared ($0.36 per share)
—
—
(5,350)
—
(5,350)
Balance at September 30, 2021
14,849,327
$
127,925
$
413,892
$
4,167
$
545,984
Balance at June 30, 2022
14,625,041
$
116,825
$
444,522
$
(114,966)
446,381
Net income
—
—
14,267
—
14,267
Other comprehensive loss, net of tax
—
—
—
(21,490)
(21,490)
Stock-based compensation expense
—
522
—
—
522
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
2,476
16
—
—
16
Common stock repurchased
(63,689)
(2,827)
—
—
(2,827)
Cash dividends declared ($0.40 per share)
—
—
(5,862)
—
(5,862)
Balance at September 30, 2022
14,563,828
$
114,536
$
452,927
$
(136,456)
$
431,007
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, 2020
14,909,097
$
131,072
$
377,502
$
20,740
$
529,314
Net income
—
—
52,523
—
52,523
Other comprehensive loss, net of tax
—
—
—
(16,573)
(16,573)
Stock-based compensation expense
—
2,007
—
—
2,007
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
46,732
(241)
—
—
(241)
Common stock repurchased
(106,502)
(4,913)
—
—
(4,913)
Cash dividends declared ($1.08 per share)
—
—
(16,133)
—
(16,133)
Balance at September 30, 2021
14,849,327
$
127,925
$
413,892
$
4,167
$
545,984
Balance at December 31, 2021
14,739,956
$
123,111
$
424,412
$
(6,229)
$
541,294
Net income
—
—
46,088
—
46,088
Other comprehensive loss, net of tax
—
—
—
(130,227)
(130,227)
Stock-based compensation expense
—
2,039
—
—
2,039
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
49,117
(374)
—
—
(374)
Common stock repurchased
(225,245)
(10,240)
—
—
(10,240)
Cash dividends declared ($1.20 per share)
—
—
(17,573)
—
(17,573)
Balance at September 30, 2022
14,563,828
$
114,536
$
452,927
$
(136,456)
$
431,007
The accompanying notes are an integral part of these consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
(In thousands)
2022
2021
Operating Activities
Net Income
$
46,088
$
52,523
Adjustments to reconcile net income to net cash provided by operating activities:
Originations of mortgage loans held for sale
(130,725)
(359,842)
Proceeds from the sale of mortgage loans
134,597
400,812
Gain on sale of mortgage loans, net of origination costs
(2,948)
(11,260)
Provision (credit) for credit losses
4,034
(4,420)
Depreciation and amortization expense
2,638
2,779
Investment securities amortization and accretion, net
3,118
5,238
Stock-based compensation expense
2,039
2,007
Amortization of core deposit intangible assets
469
491
Purchase accounting accretion, net
(197)
(589)
Net gain on sale of premises and equipment
(204)
—
Net decrease in derivative collateral posted
30,470
25,090
(Increase) decrease in other assets
(765)
2,827
Decrease in other liabilities
(3,899)
(3,994)
Net cash provided by operating activities
84,715
111,662
Investing Activities
Proceeds from available-for-sale debt securities
160,708
248,186
Purchase of available-for-sale debt securities
(80,868)
(618,744)
Proceeds from paydowns of held-to-maturity securities
15,192
—
Purchase of held-to-maturity securities
(24,502)
—
Net increase in loans
(429,948)
(95,720)
Purchase of Federal Home Loan Bank stock
(29,104)
(68)
Proceeds from sale of Federal Home Loan Bank stock
24,276
1,329
Purchase of premises and equipment
(1,348)
(1,549)
Proceeds from the sale of premises and equipment
466
—
Recoveries of previously charged-off loans
437
272
Proceeds from the sale of other real estate owned
287
465
Net cash used in investing activities
(364,404)
(465,829)
Financing Activities
Net (decrease) increase in deposits
(40,285)
599,936
Net proceeds from borrowings less than 90 days
209,493
49,113
Repayments of Federal Home Loan Bank long-term advances
—
(25,000)
Repayment of subordinated debt
—
(15,000)
Common stock repurchases
(9,968)
(4,924)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings
(374)
(241)
Cash dividends paid on common stock
(17,671)
(15,721)
Finance lease payments
(119)
(114)
Net cash provided by financing activities
141,076
588,049
Net (decrease) increase in cash, cash equivalents and restricted cash
(138,613)
233,882
Cash, cash equivalents, and restricted cash at beginning of period
220,625
145,774
Cash, cash equivalents and restricted cash at end of period
$
82,012
$
379,656
Supplemental information
Transfer from available-for-sale securities to held-to-maturity securities1
$
592,438
$
—
Interest paid
12,565
8,523
Income taxes paid
9,761
14,277
Cash dividends declared, not paid
5,861
5,348
Unsettled common stock repurchase
272
—
Transfer from premises to other real estate owned
—
204
(1) As of the date of transfer, the amortized cost basis of the debt securities was $592.4 million, fair value was $520.3 million and the net pre-tax unrealized losses included in AOCI was $72.1 million. Refer to Note 3 for further details.
The accompanying notes are an integral part of these consolidated financial statements.
7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the "Company") as of September 30, 2022 and December 31, 2021, the consolidated statements of income for the three and nine months ended September 30, 2022 and 2021, the consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2022 and 2021, the consolidated statements of changes in shareholders' equity for the three and nine months ended September 30, 2022 and 2021, and the consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021. 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") and Property A, Inc. as of and for the three and nine months ended September 30, 2022 and 2021). 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 may have been made to prior period amounts to conform to the current period presentation. Any 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, 2022, 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, 2021.
8
The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.
Acronym
Description
Acronym
Description
AFS:
Available-for-sale
FRBB:
Federal Reserve Bank of Boston
ALCO:
Asset/Liability Committee
GAAP:
Generally accepted accounting principles in the United States
ACL:
Allowance for credit losses
GDP:
Gross domestic product
AOCI:
Accumulated other comprehensive income (loss)
HPFC:
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
ASC:
Accounting Standards Codification
HTM:
Held-to-maturity
ASU:
Accounting Standards Update
IRS:
Internal Revenue Service
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
LGD:
Loss given default
BOLI:
Bank-owned life insurance
LIBOR:
London Interbank Offered Rate
Board ALCO:
Board of Directors' Asset/Liability Committee
LTIP:
Long-Term Performance Share Plan
CARES Act:
Coronavirus Aid, Relief, and Economic Security Act, signed into law in March 2020 in response to COVID-19
Management ALCO:
Management Asset/Liability Committee
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
MBS:
Mortgage-backed security
CDs:
Certificate of deposits
MSPP:
Management Stock Purchase Plan
CECL:
Current Expected Credit Losses
N/A:
Not applicable
Company:
Camden National Corporation
N.M.:
Not meaningful
CMO:
Collateralized mortgage obligation
OCC:
Office of the Comptroller of the Currency
CUSIP:
Committee on Uniform Securities Identification Procedures
OCI:
Other comprehensive income (loss)
DCRP:
Defined Contribution Retirement Plan
OREO:
Other real estate owned
EPS:
Earnings per share
OTTI:
Other-than-temporary impairment
FASB:
Financial Accounting Standards Board
PD:
Probability of default
FDIC:
Federal Deposit Insurance Corporation
SBA:
U.S. Small Business Administration
FHLB:
Federal Home Loan Bank
SBA PPP:
U.S. Small Business Administration Paycheck Protection Program
FHLBB:
Federal Home Loan Bank of Boston
SERP:
Supplemental executive retirement plans
FHLMC:
Federal Home Loan Mortgage Corporation
SOFR:
Secured Overnight Financing Rate
FNMA:
Federal National Mortgage Association
TDR:
Troubled-debt restructured loan
FOMC:
Federal Open Market Committee
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
9
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
The following provides a brief description of recently issued accounting pronouncements that have yet to be adopted by the Company:
ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02").The FASB issuedASU 2022-02 to provide new guidance on TDRs and write-offs for entities that have adopted ASU 2016-13. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the effect of ASU 2022-02 on its consolidated financial statements and does not anticipate a material impact upon adoption.
ASU No. 2022-01, Derivatives and Hedging (Topic 815):Fair Value Hedging - Portfolio Layer Method ("ASU 2022-01"). The FASB issued ASU 2022-01 to amend ASU 2017-12, which was adopted by the Company in 2018. This amendment renames the "last-of-layer" method to the "portfolio layer" method, permits non-repayable financial assets to be included in a closed portfolio hedged using the portfolio layer method, and provides additional guidance for entities that apply the portfolio layer method of hedge accounting in accordance with Topic 815. The amendment is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the amendment and does not anticipate a material impact on its consolidated financial statements upon adoption of this guidance.
NOTE 3 – INVESTMENTS
Trading Securities
Trading securities are reported on the Company's consolidated statements of condition at fair value. As of September 30, 2022 and December 31, 2021, the fair value of the Company's trading securities were $3.7 million and $4.4 million, respectively. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company's deferred compensation plan for eligible employees and directors.
AFS Debt Securities
AFS debt securities are reported on the Company's consolidated statements of condition at fair value. The following table summarizes the amortized cost, estimated fair value, and unrealized gains (losses) of AFS debt securities, as of the dates indicated:
(In thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
September 30, 2022
Obligations of states and political subdivisions
$
53,247
$
1
$
(1,774)
$
51,474
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
622,660
65
(92,937)
529,788
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
134,872
—
(13,061)
121,811
Subordinated corporate bonds
23,109
—
(2,564)
20,545
Total AFS debt securities
$
833,888
$
66
$
(110,336)
$
723,618
December 31, 2021
Obligations of U.S. government-sponsored enterprises
$
8,585
$
—
$
(241)
$
8,344
Obligations of states and political subdivisions
112,086
5,392
—
117,478
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
1,003,869
7,856
(11,468)
1,000,257
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
361,781
2,835
(5,767)
358,849
Subordinated corporate bonds
22,660
152
(254)
22,558
Total AFS debt securities
$
1,508,981
$
16,235
$
(17,730)
$
1,507,486
As of September 30, 2022 and December 31, 2021, there was no allowance carried on AFS debt securities.
10
In June of 2022, the Company transferred securities with a fair value of $520.3 million from AFS to HTM. The unrealized losses on the AFS debt securities at the time of transfer were $72.1 million, pre-tax, and were reported within AOCI. These unrealized losses are being amortized over the remaining life of the securities from AOCI into interest income on the consolidated statements of income. At September 30, 2022, the net unrealized losses on the transferred securities reported within AOCI were $53.7 million, net of a deferred tax asset of $14.7 million.
The net unrealized losses on AFS debt securities reported within AOCI (excluding the aforementioned securities transferred from AFS to HTM) at September 30, 2022, were $86.6 million, net of a deferred tax asset of $23.7 million and at December 31, 2021 were $1.2 million, net of a deferred tax asset of $321,000.
The following table details the Company's sales of AFS debt securities for the periods indicated below:
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2022
2021
2022
2021
Proceeds from sales of investments
$
—
$
—
$
8,723
$
—
Gross realized gains
—
—
13
—
Gross realized losses
—
—
(22)
—
The following table presents the Company's AFS debt securities with gross unrealized losses, for which an ACL has not been recorded, segregated by the length of time the securities have 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, 2022
Obligations of states and political subdivisions
101
$
51,026
$
(1,774)
$
—
$
—
$
51,026
$
(1,774)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
172
203,082
(24,432)
322,251
(68,505)
525,333
(92,937)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
76
83,532
(7,433)
38,279
(5,628)
121,811
(13,061)
Subordinated corporate bonds
13
9,071
(910)
11,474
(1,654)
20,545
(2,564)
Total AFS debt securities
362
$
346,711
$
(34,549)
$
372,004
$
(75,787)
$
718,715
$
(110,336)
December 31, 2021
Obligations of U.S. government-sponsored enterprises
4
$
8,344
$
(241)
$
—
$
—
$
8,344
$
(241)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
113
659,851
(8,999)
61,978
(2,469)
721,829
(11,468)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
56
191,456
(4,602)
38,117
(1,165)
229,573
(5,767)
Subordinated corporate bonds
7
11,932
(232)
979
(22)
12,911
(254)
Total AFS debt securities
180
$
871,583
$
(14,074)
$
101,074
$
(3,656)
$
972,657
$
(17,730)
For the three and nine months ended September 30, 2022 and 2021, the unrealized losses on the Company's AFS debt securities have not been recognized into income because management does not intend to sell and it is not more-likely-than-not it
11
will be required to sell any of the AFS debt securities before recovery of its amortized cost basis. Furthermore, the unrealized losses were due to changes in interest rates and other market conditions and were not reflective of credit events, the issuers continue to make timely principal and interest payments on the bonds. Agency-backed and government-sponsored enterprise securities have a long 40 year history with no credit losses, including during times of severe stress like the 2007-2008 financial crisis. The principal and interest payments on agency guaranteed debt is backed by the U.S. government. Government-sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit losses.
At September 30, 2022 and December 31, 2021, total accrued interest receivable on AFS debt securities, which has been excluded from reported amortized cost basis on AFS debt securities, was $2.0 million and $3.4 million, respectively, and was reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
The amortized cost and estimated fair values of the Company's AFS debt securities by contractual maturity at September 30, 2022, 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. Mortgage-related securities are shown in total, as their maturities are highly variable.
(In thousands)
Amortized Cost
Fair Value
Due in one year or less
$
501
$
500
Due after one year through five years
15,785
14,033
Due after five years through ten years
60,070
57,486
Due after ten years
—
—
Subtotal
76,356
72,019
Mortgage-related securities
757,532
651,599
Total
$
833,888
$
723,618
HTM Debt Securities
HTM debt securities are reported on the Company's consolidated statements of condition at amortized cost. The following table summarizes the amortized cost, estimated fair value and unrealized gains (losses) of HTM debt securities as of the dates indicated:
(In thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
September 30, 2022
Obligations of U.S. government-sponsored enterprises
$
7,422
$
—
$
(664)
$
6,758
Obligations of states and political subdivisions
55,908
—
(3,595)
52,313
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
320,850
—
(27,067)
293,783
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
147,753
—
(10,990)
136,763
Subordinated corporate bonds
2,376
—
(234)
2,142
Total HTM debt securities
$
534,309
$
—
$
(42,550)
$
491,759
December 31, 2021
Obligations of states and political subdivisions
$
1,291
$
89
$
—
$
1,380
Total HTM debt securities
$
1,291
$
89
$
—
$
1,380
In June of 2022, the Company transferred securities with a fair value of $520.3 million from AFS to HTM. See discussion above for details.
As of September 30, 2022, the Company's HTM debt securities portfolio was primarily comprised of holdings issued or guaranteed by U.S. government sponsored enterprises and municipal debt. Agency-backed and government-sponsored
12
enterprise securities have a long 40 year history with no credit losses, including during times of severe stress like the 2007-2008 financial crisis. The principal and interest payments on agency guaranteed debt is backed by the U.S. government. Government-sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit losses. HTM municipal debt holdings are comprised solely of high credit quality (rated A- or higher) state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-zero credit loss. As of December 31, 2021, the Company’s HTM debt securities portfolio was made up of three investment grade municipal debt securities, of which two securities also carried credit enhancements. Accordingly, the Company determined that the expected credit loss on its HTM portfolio was immaterial, and therefore it did not carry an allowance on its HTM debt securities at September 30, 2022 or December 31, 2021.
As of September 30, 2022 and December 31, 2021, none of the Company's HTM debt securities were past due or on non-accrual status. For the three and nine months ended September 30, 2022 and 2021, the Company did not recognize any interest income on non-accrual HTM debt securities. At September 30, 2022 and December 31, 2021, total accrued interest receivable on HTM debt securities, which has been excluded from reported amortized cost basis on HTM debt securities, was $1.4 million and $10,000, respectively, and was reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
The amortized cost and estimated fair values of HTM debt securities by contractual maturity at September 30, 2022 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
Due in one year or less
$
—
$
—
Due after one year through five years
864
845
Due after five years through ten years
14,562
13,538
Due after ten years
50,280
46,830
Subtotal
65,706
61,213
Mortgage-related securities
468,603
430,546
Total
$
534,309
$
491,759
AFS and HTM Debt Securities Pledged
At September 30, 2022 and December 31, 2021, AFS and HTM debt securities with an amortized cost of $765.8 million and $640.1 million and estimated fair values of $673.6 million and $641.2 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.
Other Investments
The Company's FHLBB and FRB common stock are reported at cost within other investments on the consolidated statements of condition. The Company evaluates these investments for impairment based on the ultimate recoverability of the par value. The Company did not record any impairment on its FHLBB and FRB stock for the three and nine months ended September 30, 2022 and 2021.
The following table summarizes the Company's investment in FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated:
(In thousands)
September 30, 2022
December 31, 2021
FHLBB
$
9,734
$
4,906
FRB
5,374
5,374
Total other investments
$
15,108
$
10,280
13
NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS
Loans
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, 2022
December 31, 2021
Commercial Loans:
Commercial real estate - non-owner-occupied
$
1,229,102
$
1,178,185
Commercial real estate - owner-occupied
333,785
317,275
Commercial
423,325
363,695
SBA PPP
685
35,953
Total commercial loans
1,986,897
1,895,108
Retail Loans:
Residential real estate
1,619,409
1,306,447
Home equity
233,367
210,403
Consumer
21,007
19,516
Total retail loans
1,873,783
1,536,366
Total loans
$
3,860,680
$
3,431,474
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, 2022
December 31, 2021
Net unamortized fair value mark discount on acquired loans
$
(396)
$
(593)
Net unamortized loan origination costs(1)
6,429
3,110
Total
$
6,033
$
2,517
(1) Net unamortized loan origination costs includes unrecognized origination fees for SBA PPP loans of $20,000 and $1.2 million as of September 30, 2022 and December 31, 2021, respectively.
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.
SBA PPP Loans. Beginning in April 2020, the Company originated SBA PPP loans issued to qualifying businesses as part of the federal stimulus packages issued due to the COVID-19 pandemic. This program provided qualifying businesses a specialized, low-interest-rate loan by the U.S. Treasury Department and was administered by the SBA. SBA PPP loans provided borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilized the loan proceeds to cover employee compensation-related business operating costs, as well as certain other costs up to pre-established limits. Effective May 31, 2021, the SBA PPP loan program ended and the Company ceased originating loans under this program.
For the year ended December 31, 2021, the Company originated 1,620 SBA PPP loans totaling $102.2 million to qualifying businesses across our markets in need of financial support due to the COVID-19 pandemic. Of these SBA PPP loans originated during the year ended December 31, 2021, 6 loans totaling $685,000 remained outstanding as of September 30, 2022.
14
Related Party Loans. 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, 2022 and December 31, 2021, outstanding loans to certain officers, directors and their associated companies were less than 5% of the Company's shareholders' equity.
Loan Sales
For the three months ended September 30, 2022 and 2021, the Company sold $37.9 million and $86.2 million, respectively, of residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $783,000 and $2.2 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company sold $131.6 million and $389.6 million, respectively, of residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $2.9 million and $11.3 million, respectively.
At September 30, 2022 and December 31, 2021, the Company had certain residential mortgage loans with a principal balance of $4.9 million and $5.8 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, 2022 and December 31, 2021, recorded an unrealized (loss) gain of ($233,000) and $29,000, respectively. For the three months ended September 30, 2022 and 2021, 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 $193,000 and $216,000, respectively. For the nine months ended September 30, 2022 and 2021, 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 $262,000 and $1.0 million respectively.
The Company has forward delivery commitments with a secondary market investor on each of its loans held for sale at September 30, 2022 and December 31, 2021. Refer to Note 8 for further discussion of the Company's forward delivery commitments.
ACL on Loans
The Company manages its loan portfolio proactively to effectively identify problem credits and assess trends early, 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. The Company monitors and manages credit risk through the following governance structure:
•The Credit Risk and Special Assets team and the Credit Risk Policy Committee, which is an internal management committee comprised of various executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Credit Risk and Special Assets, Compliance, and Commercial and Retail Banking, 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.
•The adequacy of the ACL 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 Underwriting, Credit Risk and Special Assets, Compliance, and Commercial and Retail Banking. The Management Provision Committee supports the oversight efforts of the Audit Committee of the Board of Directors.
•The Directors' Credit Committee of the Board of Directors reviews large credit exposures, monitors 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, and concentration levels.
•The Audit Committee of the Board of Directors has approval authority and oversight responsibility for the ACL adequacy and methodology.
Segmentation. For purposes of determining the ACL on loans, the Company disaggregates its loans into portfolio segments. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. As of September 30, 2022 and December 31, 2021, the Company's loan portfolio segments, as determined based on the unique risk characteristics of each, include the following:
15
Commercial Real Estate - Non-Owner-Occupied. Non-owner-occupied commercial real estate loans are, in substance, all commercial real estate loans that are not categorized by the Company as owner-occupied commercial real estate loans. Non-owner-occupied commercial estate loans are investment properties in which the primary source for repayment of the loan by the borrower is derived from rental income associated with the property or the proceeds of the sale, refinancing, or permanent refinancing of the property. Non-owner-occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family residential, commercial/retail office space, industrial/warehouse space, hotels, assisted living facilities and other specific use properties. Also included within the non-owner-occupied commercial real estate loan segment are construction projects until they are completed. 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. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.
Commercial Real Estate - Owner-Occupied. Generally, owner-occupied commercial real estate loans are properties that are owned and operated by the borrower, and the primary source for repayment is the cash flow from the ongoing operations and activities conducted by the borrower's business. Owner-occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, commercial/retail office space, restaurants, educational and medical practice 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. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.
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 program 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, are eligible for forgiveness by the SBA should the qualifying small business meet certain conditions. SBA PPP loans were originated under the guidance of the SBA, which has been subject to change. Effective May 31, 2021, the SBA PPP loan program ended and the Company ceased originating loans under this program.
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 residences, including for investment purposes.
Home Equity.Home equity loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. Each home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. Each 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, as applicable. Consumer loans may be secured or unsecured.
16
The following table presents the activity in the ACL on loans, as reported under CECL, for the periods indicated:
Commercial Real Estate
(In thousands)
Non-Owner-Occupied
Owner- Occupied
Commercial
SBA PPP
Residential Real Estate
Home Equity
Consumer
Total
At or For The Three Months Ended September 30, 2022
Beginning balance, June 30, 2022
$
16,210
$
2,501
$
5,145
$
1
$
8,438
$
1,796
$
153
$
34,244
Loans charged off
—
—
(183)
—
(49)
—
(46)
(278)
Recoveries
1
—
61
—
—
1
—
63
Provision for loan losses
922
146
192
—
696
63
494
2,513
Ending balance, September 30, 2022
$
17,133
$
2,647
$
5,215
$
1
$
9,085
$
1,860
$
601
$
36,542
At or For The Nine Months Ended September 30, 2022
Beginning balance, December 31, 2021
$
18,834
$
2,539
$
4,183
$
19
$
6,133
$
1,469
$
79
$
33,256
Loans charged off
—
—
(744)
—
(65)
—
(130)
(939)
Recoveries
2
2
341
—
—
87
5
437
(Credit) provision for loan losses
(1,703)
106
1,435
(18)
3,017
304
647
3,788
Ending balance, September 30, 2022
$
17,133
$
2,647
$
5,215
$
1
$
9,085
$
1,860
$
601
$
36,542
At or For The Three Months Ended September 30, 2021
Beginning balance, June 30, 2021
$
19,577
$
2,516
$
4,342
$
66
$
3,205
$
2,065
$
289
$
32,060
Loans charged off
—
—
(97)
—
(4)
—
(20)
(121)
Recoveries
—
2
49
—
2
4
7
64
Provision (credit) for loan losses
157
(214)
295
(23)
450
(231)
(165)
269
Ending balance, September 30, 2021
$
19,734
$
2,304
$
4,589
$
43
$
3,653
$
1,838
$
111
$
32,272
At or For The Nine Months Ended September 30, 2021
Beginning balance, December 31, 2020
$
21,778
$
2,832
$
6,703
$
69
$
3,474
$
2,616
$
393
$
37,865
Loans charged off
—
—
(503)
—
(92)
(145)
(88)
(828)
Recoveries
—
7
159
—
72
4
30
272
(Credit) provision for loan losses
(2,044)
(535)
(1,770)
(26)
199
(637)
(224)
(5,037)
Ending balance, September 30, 2021
$
19,734
$
2,304
$
4,589
$
43
$
3,653
$
1,838
$
111
$
32,272
At or For The Year Ended December 31, 2021
Beginning balance, December 31, 2020
$
21,778
$
2,832
$
6,703
$
69
$
3,474
$
2,616
$
393
$
37,865
Loans charged off
—
—
(799)
—
(92)
(162)
(111)
(1,164)
Recoveries
—
9
220
—
107
4
32
372
(Credit) provision for loan losses
(2,944)
(302)
(1,941)
(50)
2,644
(989)
(235)
(3,817)
Ending balance, December 31, 2021
$
18,834
$
2,539
$
4,183
$
19
$
6,133
$
1,469
$
79
$
33,256
The ACL on loans increased $3.3 million during the nine months ended September 30, 2022, to $36.5 million. The net increase was driven by: (1) a softening overall economy and the increasing likelihood of a recession and (2) 13% loan growth during this period, which was driven by residential real estate, commercial and commercial real estate - non-owner-occupied, that offset (3) the release of $5.0 million of reserves established for certain hospitality-related loans within the commercial real estate-non-owner occupied loan segment in response to the COVID-19 pandemic and the identified elevated credit risk the pandemic presented to these loans at that time. As of September 30, 2022 and December 31, 2021, the ACL on loans for these previously modified hospitality-related loans was $0 and $5.0 million, respectively.
17
Credit Concentrations
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, 2022, 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, 2022.
Credit Quality Indicators
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 commercial real estate - non-owner-occupied and owner-occupied, commercial and residential real estate 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 ACL on loans:
•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.
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.
18
Based on the most recent analysis performed, the risk category of loans by portfolio segment by vintage was as follows as of the dates indicated:
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
Total
As of September 30, 2022
Commercial real estate - non-owner-occupied
Risk rating
Pass (Grades 1-6)
$
261,937
$
275,295
$
164,434
$
126,764
$
111,150
$
259,205
$
—
$
—
$
1,198,785
Special mention (Grade 7)
—
168
368
266
78
327
—
—
1,207
Substandard (Grade 8)
—
131
1,356
207
7,998
19,418
—
—
29,110
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total commercial real estate - non-owner-occupied
261,937
275,594
166,158
127,237
119,226
278,950
—
—
1,229,102
Commercial real estate - owner-occupied
Risk rating
Pass (Grades 1-6)
52,250
82,599
28,982
24,000
40,311
75,807
—
—
303,949
Special mention (Grade 7)
—
2,076
—
19,991
—
422
—
—
22,489
Substandard (Grade 8)
26
—
—
—
3,299
4,022
—
—
7,347
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total commercial real estate - owner occupied
52,276
84,675
28,982
43,991
43,610
80,251
—
—
333,785
Commercial
Risk rating
Pass (Grades 1-6)
57,184
73,885
35,048
35,969
23,346
28,931
132,833
29,911
417,107
Special mention (Grade 7)
—
—
99
154
83
200
1,089
14
1,639
Substandard (Grade 8)
17
19
139
238
725
1,598
1,211
632
4,579
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total commercial
57,201
73,904
35,286
36,361
24,154
30,729
135,133
30,557
423,325
SBA PPP
Risk rating
Pass (Grades 1-6)
—
685
—
—
—
—
—
—
685
Special mention (Grade 7)
—
—
—
—
—
—
—
—
—
Substandard (Grade 8)
—
—
—
—
—
—
—
—
—
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total SBA PPP
—
685
—
—
—
—
—
—
685
Residential Real Estate
Risk rating
Pass (Grades 1-6)
429,072
584,538
248,329
81,522
52,447
220,335
334
—
1,616,577
Special mention (Grade 7)
—
—
—
—
170
2,662
—
—
2,832
Substandard (Grade 8)
—
—
—
—
—
—
—
—
—
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total residential real estate
429,072
584,538
248,329
81,522
52,617
222,997
334
—
1,619,409
Home equity
Risk rating
Performing
22,801
698
346
5,003
8,193
9,403
174,615
11,720
232,779
Non-performing
—
—
—
—
—
59
441
88
588
Total home equity
22,801
698
346
5,003
8,193
9,462
175,056
11,808
233,367
Consumer
Risk rating
Performing
6,797
4,510
2,017
1,522
434
2,447
3,279
—
21,006
Non-performing
—
—
—
—
—
1
—
—
1
Total consumer
6,797
4,510
2,017
1,522
434
2,448
3,279
—
21,007
Total Loans
$
830,084
$
1,024,604
$
481,118
$
295,636
$
248,234
$
624,837
$
313,802
$
42,365
$
3,860,680
19
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
Total
As of December 31, 2021
Commercial real estate - non-owner-occupied
Risk rating
Pass (Grades 1-6)
$
286,428
$
179,565
$
161,695
$
118,196
$
96,169
$
274,731
$
—
$
—
$
1,116,784
Special mention (Grade 7)
171
7,266
286
119
4,294
10,590
—
—
22,726
Substandard (Grade 8)
350
1,518
217
9,942
391
26,257
—
—
38,675
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total commercial real estate - non-owner-occupied
286,949
188,349
162,198
128,257
100,854
311,578
—
—
1,178,185
Commercial real estate - owner-occupied
Risk rating
Pass (Grades 1-6)
91,328
39,082
31,409
43,786
46,466
56,682
—
—
308,753
Special mention (Grade 7)
—
—
—
3,396
362
1,708
—
—
5,466
Substandard (Grade 8)
—
—
54
—
1,785
1,217
—
—
3,056
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total commercial real estate - owner occupied
91,328
39,082
31,463
47,182
48,613
59,607
—
—
317,275
Commercial
Risk rating
Pass (Grades 1-6)
91,102
43,757
44,925
23,895
13,818
27,743
80,775
31,586
357,601
Special mention (Grade 7)
145
117
590
115
383
222
967
244
2,783
Substandard (Grade 8)
—
339
320
492
293
1,209
360
298
3,311
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total commercial
91,247
44,213
45,835
24,502
14,494
29,174
82,102
32,128
363,695
SBA PPP
Risk rating
Pass (Grades 1-6)
35,164
319
—
—
—
—
—
—
35,483
Special mention (Grade 7)
470
—
—
—
—
—
—
—
470
Substandard (Grade 8)
—
—
—
—
—
—
—
—
—
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total SBA PPP
35,634
319
—
—
—
—
—
—
35,953
Residential Real Estate
Risk rating
Pass (Grades 1-6)
586,637
281,804
103,228
63,403
46,696
219,983
903
—
1,302,654
Special mention (Grade 7)
—
—
—
—
—
230
—
—
230
Substandard (Grade 8)
—
—
—
—
—
3,563
—
—
3,563
Doubtful (Grade 9)
—
—
—
—
—
—
—
—
—
Total residential real estate
586,637
281,804
103,228
63,403
46,696
223,776
903
—
1,306,447
Home equity
Risk rating
Performing
760
554
6,179
10,995
2,464
10,792
165,189
12,295
209,228
Non-performing
—
—
—
41
—
174
847
113
1,175
Total home equity
760
554
6,179
11,036
2,464
10,966
166,036
12,408
210,403
Consumer
Risk rating
Performing
6,860
3,523
3,089
1,051
548
2,014
2,399
—
19,484
Non-performing
—
9
21
—
—
2
—
—
32
Total consumer
6,860
3,532
3,110
1,051
548
2,016
2,399
—
19,516
Total Loans
$
1,099,415
$
557,853
$
352,013
$
275,431
$
213,669
$
637,117
$
251,440
$
44,536
$
3,431,474
20
Past Due and Non-Accrual Loans
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 will 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 generally charged-off once their collectability is in doubt.
The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) 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
September 30, 2022
Commercial real estate - non-owner-occupied
$
195
$
—
$
11
$
206
$
1,228,896
$
1,229,102
$
—
Commercial real estate - owner-occupied
—
—
47
47
333,738
333,785
Commercial
1,323
14
470
1,807
421,518
423,325
—
SBA PPP
—
—
—
—
685
685
—
Residential real estate
2,179
500
843
3,522
1,615,887
1,619,409
—
Home equity
620
210
327
1,157
232,210
233,367
—
Consumer
41
2
1
44
20,963
21,007
—
Total
$
4,358
$
726
$
1,699
$
6,783
$
3,853,897
$
3,860,680
$
—
December 31, 2021
Commercial real estate - non-owner-occupied
$
—
$
—
$
51
$
51
$
1,178,134
$
1,178,185
$
—
Commercial real estate - owner-occupied
47
—
133
180
317,095
317,275
—
Commercial
282
174
787
1,243
362,452
363,695
—
SBA PPP
—
68
—
68
35,885
35,953
—
Residential real estate
379
475
1,210
2,064
1,304,383
1,306,447
—
Home equity
456
50
445
951
209,452
210,403
—
Consumer
95
1
32
128
19,388
19,516
—
Total
$
1,259
$
768
$
2,658
$
4,685
$
3,426,789
$
3,431,474
$
—
The following table presents the amortized cost basis of loans on non-accrual status (including non-accruing TDRs) by portfolio segment as of the dates indicated:
September 30, 2022
December 31, 2021
(In thousands)
Non-Accrual Loans With an Allowance
Non-Accrual Loans Without an Allowance
Total Non-Accrual Loans
Non-Accrual Loans With an Allowance
Non-Accrual Loans Without an Allowance
Total Non-Accrual Loans
Commercial real estate - non-owner-occupied
$
15
$
11
$
26
$
38
$
13
$
51
Commercial real estate - owner-occupied
—
47
47
86
47
133
Commercial
201
340
541
785
44
829
Residential real estate
1,203
359
1,562
1,780
327
2,107
Home equity
522
66
588
1,064
111
1,175
Consumer
1
—
1
32
—
32
Total
$
1,942
$
823
$
2,765
$
3,785
$
542
$
4,327
21
The following table presents the amortized cost basis of collateral-dependent non-accrual loans (including non-accruing TDRs) by portfolio segment and collateral type, as of the dates indicated:
September 30, 2022
December 31, 2021
Collateral Type
Total Collateral -Dependent Non-Accrual Loans
Collateral Type
Total Collateral -Dependent Non-Accrual Loans
(In thousands)
Real Estate
General Business Assets
Real Estate
General Business Assets
Residential real estate
$
321
$
—
$
321
$
268
$
—
$
268
Home equity
—
—
—
111
—
111
Total
$
321
$
—
$
321
$
379
$
—
$
379
Collateral-dependent loans are loans for which repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.
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 $30,000 and $59,000 for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, 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 $115,000 and $202,000, respectively.
The Company's policy is to reverse previously recorded interest income when a loan is placed on non-accrual. As a result, the Company did not record any interest income on its non-accruals for the three or nine months ended September 30, 2022 and 2021. An immaterial amount of accrued interest on non-accrual loans was written-off during the three and nine months ended September 30, 2022 and 2021, by reversing interest income. At September 30, 2022 and December 31, 2021, total accrued interest receivable on loans, which has been excluded from reported amortized cost basis on loans, was $8.9 million and $7.8 million, respectively, and reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
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 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 ACL for the dates indicated:
Number of Contracts
Recorded Investment
Specific Reserve
(In thousands, except number of contracts)
September 30, 2022
December 31, 2021
September 30, 2022
December 31, 2021
September 30, 2022
December 31, 2021
Commercial real estate - owner-occupied
1
1
$
114
$
118
$
48
$
43
Commercial
1
2
58
74
—
—
Residential real estate
18
19
2,254
2,341
321
$
348
Consumer and home equity
3
3
246
253
7
6
Total
23
25
$
2,672
$
2,786
$
376
$
397
22
At September 30, 2022, the Company had performing and non-performing TDRs with a recorded investment balance of $2.3 million and $387,000, respectively. At December 31, 2021, the Company had performing and non-performing TDRs with a recorded investment balance of $2.4 million and $394,000, respectively.
The following represents loan modifications that qualify as TDRs that occurred during the periods indicated:
Number of Contracts
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Specific Reserve
(In thousands, except number of contracts)
2022
2021
2022
2021
2022
2021
2022
2021
For the Three Months Ended September 30:
Home equity:
Maturity concession
—
1
$
—
$
144
$
—
$
143
$
—
$
6
Total
—
1
$
—
$
144
$
—
$
143
$
—
$
6
For the Nine Months Ended September 30:
Home equity:
Interest rate concession and payment deferral
—
1
$
—
$
159
$
—
$
170
$
—
$
56
Maturity concession
—
1
—
144
—
143
—
6
Total
—
2
$
—
$
303
$
—
$
313
$
—
$
62
As of September 30, 2022 and December 31, 2021, the Company did not have any material commitments to lend additional funds to borrowers with loans classified as TDRs.
For the three and nine months ended September 30, 2022 and 2021, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.
In-Process Foreclosure Proceedings
At September 30, 2022 and December 31, 2021, the Company had $542,000 and $888,000, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process.
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 $1.7 billion and $1.4 billion at September 30, 2022 and December 31, 2021, 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 borrowed funds as presented on the consolidated statements of condition as of the dates indicated. The Company did not have any long-term borrowings as of the dates indicated.
(In thousands)
September 30, 2022
December 31, 2021
Short-Term Borrowings:
Customer repurchase agreements
$
268,876
$
211,608
Overnight borrowings
102,225
—
FHLBB borrowings
50,000
—
Total short-term borrowings
$
421,101
$
211,608
23
The Company's subordinated debentures were $44.3 million at both September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, the Company's subordinated debentures were comprised of two tranches of junior subordinated debentures. Refer to Note 10 of the consolidated financial statements for further details.
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 transactions do not meet the criteria to be classified as sales, and are therefore considered secured borrowing
transactions 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 as of the dates indicated:
(In thousands)
September 30, 2022
December 31, 2021
Customer Repurchase Agreements(1)(2):
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
$
224,819
$
88,749
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
41,057
120,846
Obligations of states and political subdivisions
3,000
2,013
Total
$
268,876
$
211,608
(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, 2022 and December 31, 2021, certain customers held CDs totaling $616,000 and $728,000, respectively, 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 as of the dates indicated:
(In thousands)
September 30, 2022
December 31, 2021
Commitments to extend credit
$
876,757
$
834,533
Standby letters of credit
4,689
7,952
Total
$
881,446
$
842,485
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.
24
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.
The Company establishes an ACL on off-balance sheet credit exposures on its contractual off-balance sheet commitments, except those that are unconditionally cancellable by the Company. As of September 30, 2022 and December 31, 2021, the ACL on off-balance sheet credit exposures was $3.4 million and $3.2 million, respectively. The ACL on off-balance sheet credit exposure was presented within accrued interest and other liabilities on the consolidated statements of condition.
For the three months ended September 30, 2022 and 2021, the provision for credit losses on off-balance sheet credit exposures was $251,000 and $670,000, respectively. For the nine months ended September 30, 2022 and 2021, the provision for credit losses on off-balance sheet credit exposure was $246,000 and $617,000.
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.
The Company did not have any material loss contingencies that were provided for and/or that are required to be disclosed as of September 30, 2022 and December 31, 2021, respectively.
NOTE 8 – DERIVATIVES AND HEDGING
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s credit derivatives result from loan participation arrangements, and therefore are not used to manage interest rate risk in the Company’s assets or liabilities.
25
Derivatives Designated as Hedging Instruments - Cash Flow Hedges of Interest Rate Risk
Interest Rate Contracts.The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed rate payments or the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. For the three and nine months ended September 30, 2022 and 2021, such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets or liabilities or forecasted issuances of debt.
For derivatives designated, and that qualify as, cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently is reclassified into interest expense or interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense or interest income as interest payments are made or received on the Company’s variable-rate liabilities or assets. The Company estimates that an additional $2.8 million will be reclassified as a decrease to interest expense and an additional $2.6 million will be reclassified as a decrease to interest income over the next 12 months.
Derivatives not Designated as Hedges
Customer Loan Swaps.Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
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.
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.
Risk Participation Agreements. The Company’s existing credit derivatives result from participations in or out of interest rate swaps provided by or to external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.
26
The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated statements of condition as of the dates indicated:
Derivative Assets
Derivative Liabilities
(In thousands)
Notional Amount
Location
Fair Value
Notional Amount
Location
Fair Value
September 30, 2022
Derivatives designated as hedging instruments:
Interest rate contracts(1)
$
110,000
Other assets
$
13,806
$
133,000
Accrued interest and other liabilities
$
5,459
Total derivatives designated as hedging instruments
$
13,806
$
5,459
Derivatives not designated as hedging instruments:
Total derivatives not designated as hedging instruments
$
19,754
$
19,582
(1) Reported fair values include accrued interest receivable and payable.
27
The table below presents the effect of cash flow hedge accounting, before tax, on AOCI for the periods indicated:
(Dollars in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative
Amount of Gain (Loss) Recognized in OCI Included Component
Amount of Gain (Loss) Recognized in OCI Excluded Component
Location of Gain (Loss) Recognized from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income Included Component
Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component
Derivatives in Cash Flow Hedge Relationships:
For the Three Months Ended September 30, 2022
Interest rate contracts
$
(1,798)
$
(1,798)
$
—
Interest and fees on loans
$
(121)
$
(121)
$
—
Interest rate contracts
146
146
—
Interest on deposits
189
189
—
Interest rate contracts
2,544
2,544
—
Interest on borrowings
185
185
—
Interest rate contracts
2,489
2,489
—
Interest on subordinated debentures
(133)
(133)
—
Total
$
3,381
$
3,381
$
—
$
120
$
120
$
—
For the Nine Months Ended September 30, 2022
Interest rate contracts
$
(5,713)
$
(5,713)
$
—
Interest and fees on loans
$
498
$
498
$
—
Interest rate contracts
5,867
5,867
—
Interest on deposits
72
72
—
Interest rate contracts
2,544
2,544
—
Interest on borrowings
185
185
—
Interest rate contracts
7,906
7,906
—
Interest on subordinated debentures
(755)
(755)
—
Total
$
10,604
$
10,604
$
—
$
—
$
—
$
—
For the Three Months Ended September 30, 2021
Interest rate contracts
$
48
$
48
$
—
Interest and fees on loans
$
410
$
410
$
—
Interest rate contracts
190
190
—
Interest on deposits
(170)
(170)
—
Interest rate contracts
228
228
Interest on subordinated debentures
(369)
(369)
Total
$
466
$
466
$
—
$
(129)
$
(129)
$
—
For the Nine Months Ended September 30, 2021
Interest rate contracts
$
(688)
$
(688)
$
—
Interest and fees on loans
$
1,205
$
1,205
$
—
Interest rate contracts
2,142
2,142
—
Interest on deposits
(490)
(490)
—
Interest rate contracts
2,201
2,201
—
Interest on subordinated debentures
(1,222)
(1,222)
—
Total
$
3,655
$
3,655
$
—
$
(507)
$
(507)
$
—
28
The table below presents the effect of cash flow hedge accounting on the consolidated statements of income for the periods indicated:
Location and Amount of Gain (Loss) Recognized in Income
Three Months Ended
September 30,
2022
2021
(Dollars in thousands)
Interest and fees on loans
Interest on deposits
Interest on borrowings
Interest on subordinated debentures
Interest and fees on loans
Interest on deposits
Interest on borrowings
Interest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded
$
37,568
$
5,442
$
787
$
539
$
31,185
$
1,973
$
122
$
538
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income
$
(121)
$
189
$
185
$
(133)
$
410
$
(170)
$
—
$
(369)
Amount of gain (loss) reclassified from AOCI into income - included component
$
(121)
$
189
$
185
$
(133)
$
410
$
(170)
$
—
$
(369)
Amount of gain (loss) reclassified from AOCI into income - excluded component
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Location and Amount of Gain (Loss) Recognized in Income
Nine Months Ended September 30,
2022
2021
(Dollars in thousands)
Interest and fees on loans
Interest on deposits
Interest on borrowings
Interest on subordinated debentures
Interest and fees on loans
Interest on deposits
Interest on borrowings
Interest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded
$
102,724
$
9,785
$
1,372
$
1,600
$
92,610
$
5,957
$
454
$
1,983
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income
$
498
$
72
$
185
$
(755)
$
1,205
$
(490)
$
—
$
(1,222)
Amount of gain (loss) reclassified from AOCI into income - included component
$
498
$
72
$
185
$
(755)
$
1,205
$
(490)
$
—
$
(1,222)
Amount of gain (loss) reclassified from AOCI into income - excluded component
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
29
The table below presents the effect of the Company's derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the periods indicated:
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well- capitalized institution, then the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.
As of September 30, 2022 and December 31, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $16.1 million and $26.1 million, respectively. As of September 30, 2022 and December 31, 2021, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $0 and $30.7 million, respectively. If the Company had breached any of these provisions at September 30, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at their termination value of $16.1 million and $26.1 million, respectively.
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 nets 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.
30
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, 2022
Derivative assets:
Customer loan swaps - dealer bank(2)
$
16,112
$
—
$
16,112
$
—
$
—
$
16,112
Interest rate contracts(3)
13,806
—
13,806
—
(11,459)
2,347
Total
$
29,918
$
—
$
29,918
$
—
$
(11,459)
$
18,459
Derivative liabilities:
Customer loan swaps - commercial customer(3)
$
16,134
$
—
$
16,134
$
—
$
—
$
16,134
Interest rate contracts(3)
5,459
—
5,459
—
5,459
—
Total
$
21,593
$
—
$
21,593
$
—
$
5,459
$
16,134
Customer repurchase agreements
$
268,876
$
—
$
268,876
$
268,876
$
—
$
—
December 31, 2021
Derivative assets:
Customer loan swaps - commercial customer(2)
$
19,297
$
—
$
19,297
$
—
$
—
$
19,297
Interest rate contracts(3)
5,589
—
5,589
—
(5,529)
60
Total
$
24,886
$
—
$
24,886
$
—
$
(5,529)
$
19,357
Derivative liabilities:
Customer loan swaps - dealer bank(3)
$
19,485
$
—
19,485
$
—
$
19,485
$
—
Interest rate contracts(3)
7,872
—
7,872
—
6,603
1,269
Total
$
27,357
$
—
$
27,357
$
—
$
26,088
$
1,269
Customer repurchase agreements
$
211,608
$
—
$
211,608
$
211,608
$
—
$
—
(1) The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.
(2) Interest rate swap contracts were completed with the same dealer bank. The Company maintains a master netting arrangement with each counterparty and settles collateral on a net basis for all contracts.
(3) 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.
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 requirements apply to the Company on a consolidated basis.
Under the current requirements, 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
31
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 requirements, including the capital conservation buffer, at September 30, 2022 and December 31, 2021, 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, 2022 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, 2022
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer
Minimum Regulatory Provision to Be "Well Capitalized"
December 31, 2021
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer
Minimum Regulatory Provision to Be "Well Capitalized"
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Camden National Corporation:
Total risk-based capital ratio
$
547,244
13.81
%
10.50
%
10.00
%
$
522,714
14.71
%
10.50
%
10.00
%
Tier 1 risk-based capital ratio
507,262
12.81
%
8.50
%
6.00
%
486,263
13.68
%
8.50
%
6.00
%
Common equity Tier 1 risk-based capital ratio(1)
464,262
11.72
%
7.00
%
N/A
443,263
12.47
%
7.00
%
N/A
Tier 1 leverage capital ratio(1)
507,262
9.24
%
4.00
%
N/A
486,263
8.92
%
4.00
%
N/A
Camden National Bank:
Total risk-based capital ratio
$
516,673
13.07
%
10.50
%
10.00
%
$
488,070
13.78
%
10.50
%
10.00
%
Tier 1 risk-based capital ratio
476,691
12.06
%
8.50
%
8.00
%
451,620
12.75
%
8.50
%
8.00
%
Common equity Tier 1 risk-based capital ratio
476,691
12.06
%
7.00
%
6.50
%
451,620
12.75
%
7.00
%
6.50
%
Tier 1 leverage capital ratio
476,691
8.69
%
4.00
%
5.00
%
451,620
8.31
%
4.00
%
5.00
%
(1) “Minimum Regulatory Provisions to Be ‘Well Capitalized’” are not formally defined under applicable banking regulations for bank holding companies.
In 2006 and 2008, the Company issued $43.0 million of junior subordinated debentures in connection with the issuance of trust preferred securities. Although 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 the debentures within its calculation of risk-based capital, subject to certain limits. At September 30, 2022 and December 31, 2021, $43.0 million of the junior subordinated debentures were included in Tier 1 and Tier 2 capital for the Company.
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 the impact of proposed and pending changes as a result of new and/or amended GAAP standards and regulatory changes.
32
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, 2022
September 30, 2021
(In thousands)
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Debt Securities:
Change in fair value
$
(28,432)
$
6,113
$
(22,319)
$
(6,546)
$
1,407
$
(5,139)
Less: reclassification adjustment for amortization of securities transferred from AFS to HTM(1)
2,436
(524)
1,912
—
—
—
Net change in fair value
(30,868)
6,637
(24,231)
(6,546)
1,407
(5,139)
Cash Flow Hedges:
Change in fair value
3,381
(727)
2,654
466
(100)
366
Less: reclassified AOCI loss into interest expense(2)
241
(52)
189
(539)
116
(423)
Less: reclassified AOCI gain into interest income(3)
(121)
26
(95)
410
(88)
322
Net change in fair value
3,261
(701)
2,560
595
(128)
467
Postretirement Plans:
Amortization of settlement recognition of net loss and prior service credit(4)
230
(49)
181
217
(46)
171
Other comprehensive loss
$
(27,377)
$
5,887
$
(21,490)
$
(5,734)
$
1,233
$
(4,501)
(1) Reclassified into taxable interest on investments and/or nontaxable interest on investments in the consolidated statements of income. Refer to Note 3 of the consolidated financial statements for further details.
(2) Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(3) Reclassified into interest and fees on loans on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(4) Reclassified into other expenses on the consolidated statements of income. Refer to Note 13 of the consolidated financial statements for further details.
33
For the Nine Months Ended
September 30, 2022
September 30, 2021
(In thousands)
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Debt Securities:
Change in fair value
$
(173,421)
$
37,286
$
(136,135)
$
(25,926)
$
5,574
$
(20,352)
Less: reclassification adjustment for amortization of securities transferred from AFS to HTM(1)
3,780
(813)
2,967
—
—
—
Less: reclassification adjustment for net realized losses(2)
(9)
2
(7)
—
—
—
Net change in fair value
(177,192)
38,097
(139,095)
(25,926)
5,574
(20,352)
Cash Flow Hedges:
Change in fair value
10,604
(2,280)
8,324
3,655
(785)
2,870
Less: reclassified AOCI loss into interest expense(3)
(498)
107
(391)
(1,712)
368
(1,344)
Less: reclassified AOCI gain into interest income(4)
498
(107)
391
1,205
(258)
947
Net change in fair value
10,604
(2,280)
8,324
4,162
(895)
3,267
Postretirement Plans:
Amortization of settlement recognition of net loss and prior service credit(5)
693
(149)
544
652
(140)
512
Other comprehensive loss
$
(165,895)
$
35,668
$
(130,227)
$
(21,112)
$
4,539
$
(16,573)
(1) Reclassified into taxable interest on investments and/or nontaxable interest on investments in the consolidated statements of income. Refer to Note 3 of the consolidated financial statements for further details.
(2) Reclassified into net loss on sale of securities in the consolidated statements of income. Refer to Note 3 of the consolidated financial statements for further details.
(3) Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(4) Reclassified into interest and fees on loans on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(5) Reclassified into other expenses on the consolidated statements of income. Refer to Note 13 of the consolidated financial statements for further details.
34
The following table presents the changes in each component of AOCI, after tax, for the periods indicated:
(In thousands)
Net Unrealized Gains (Losses) on Debt Securities
Net Unrealized Losses (Gains) on Cash Flow Hedges
Defined Benefit Postretirement Plans
AOCI
At or For the Three Months Ended September 30, 2022
Balance at June 30, 2022
$
(116,037)
$
3,985
$
(2,914)
$
(114,966)
Other comprehensive (loss) income before reclassifications
(22,319)
2,654
—
(19,665)
Less: Amounts reclassified from AOCI
1,912
94
(181)
1,825
Other comprehensive (loss) income
(24,231)
2,560
181
(21,490)
Balance at September 30, 2022
$
(140,268)
$
6,545
$
(2,733)
$
(136,456)
At or For the Nine Months Ended September 30, 2022
Balance at December 31, 2021
$
(1,173)
$
(1,779)
$
(3,277)
$
(6,229)
Other comprehensive (loss) income before reclassifications
(136,135)
8,324
—
(127,811)
Less: Amounts reclassified from AOCI
2,960
—
(544)
2,416
Other comprehensive (loss) income
(139,095)
8,324
544
(130,227)
Balance at September 30, 2022
$
(140,268)
$
6,545
$
(2,733)
$
(136,456)
At or For the Three Months Ended September 30, 2021
Balance at June 30, 2021
$
14,097
$
(1,826)
$
(3,603)
$
8,668
Other comprehensive (loss) income before reclassifications
(5,139)
366
—
(4,773)
Less: Amounts reclassified from AOCI
—
(101)
(171)
(272)
Other comprehensive (loss) income
(5,139)
467
171
(4,501)
Balance at September 30, 2021
$
8,958
$
(1,359)
$
(3,432)
$
4,167
At or For the Nine Months Ended September 30, 2021
Balance at December 31, 2020
$
29,310
$
(4,626)
$
(3,944)
$
20,740
Other comprehensive (loss) income before reclassifications
(20,352)
2,870
—
(17,482)
Less: Amounts reclassified from AOCI
—
(397)
(512)
(909)
Other comprehensive (loss) income
(20,352)
3,267
512
(16,573)
Balance at September 30, 2021
$
8,958
$
(1,359)
$
(3,432)
$
4,167
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.
35
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:
Location on Consolidated Statements of Income
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2022
2021
2022
2021
Debit card interchange income
Debit card income
$
3,234
$
3,278
$
9,371
$
9,126
Services charges on deposit accounts
Service charges on deposit accounts
1,941
1,744
5,705
4,800
Fiduciary services income
Income from fiduciary services
1,535
1,627
4,847
4,860
Investment program income
Brokerage and insurance commissions
1,003
993
3,269
2,885
Other non-interest income
Other income
509
521
1,360
1,368
Total non-interest income within the scope of ASC 606
8,222
8,163
24,552
23,039
Total non-interest income not in scope of ASC 606
1,732
2,936
6,368
14,595
Total non-interest income
$
9,954
$
11,099
$
30,920
$
37,634
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 were as follow for the following periods:
Supplemental Executive Retirement Plan:
(In thousands)
Location on Consolidated Statements of Income
Three Months Ended September 30,
Nine Months Ended September 30,
Net periodic pension cost
2022
2021
2022
2021
Service cost
Salaries and employee benefits
$
133
$
126
$
400
$
378
Interest cost
Other expenses
115
97
345
292
Recognized net actuarial loss
Other expenses
214
194
645
583
Total
$
462
$
417
$
1,390
$
1,253
Other Postretirement Benefit Plan:
(In thousands)
Location on Consolidated Statements of Income
Three Months Ended September 30,
Nine Months Ended September 30,
Net periodic postretirement benefit cost
2022
2021
2022
2021
Service cost
Salaries and employee benefits
$
5
$
7
$
15
$
20
Interest cost
Other expenses
28
26
84
77
Recognized net actuarial loss
Other expenses
22
29
66
87
Amortization of prior service credit
Other expenses
(6)
(6)
(18)
(18)
Total
$
49
$
56
$
147
$
166
36
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)
2022
2021
2022
2021
Net income
$
14,267
$
14,640
$
46,088
$
52,523
Dividends and undistributed earnings allocated to participating securities(1)
(39)
(40)
(121)
(145)
Net income available to common shareholders
$
14,228
$
14,600
$
45,967
$
52,378
Weighted-average common shares outstanding for basic EPS
14,619,460
14,931,056
14,670,450
14,930,387
Dilutive effect of stock-based awards(2)
55,872
67,957
57,899
66,154
Weighted-average common and potential common shares for diluted EPS
14,675,332
14,999,013
14,728,349
14,996,541
Earnings per common share:
Basic EPS
$
0.97
$
0.98
$
3.13
$
3.51
Diluted EPS
$
0.97
$
0.97
$
3.12
$
3.49
Awards excluded from the calculation of diluted EPS(3):
Performance-based awards
3,903
3,382
—
—
(1) Represents dividends paid and undistributed earnings allocated to non-vested 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.
Non-vested 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 non-vested 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 non-vested 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 align more clearly with the economic value of the actively traded asset.
The fair value hierarchy for valuation of an asset or liability is as follows:
37
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
Trading Securities and Deferred Compensation: The fair value of trading securities and deferred compensation is reported using market quoted prices and has been classified as Level 1 as such securities and underlying securities are actively traded and no valuation adjustments have been applied.
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.
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.
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. As of September 30, 2022 and December 31, 2021, the credit valuation adjustment on the overall valuation of its derivative positions and was not significant to the overall valuation of its derivatives, and, thus, the Company's interest rate swaps were classified as Level 2.
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.
38
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, 2022
Financial assets:
Trading securities
$
3,727
$
3,727
$
—
$
—
AFS debt securities:
Obligations of states and political subdivisions
51,474
—
51,474
—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
529,788
—
529,788
—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
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, 2022. 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.
39
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 Loans: Expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell. Management estimates 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 ACL 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 credit 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. At September 30, 2022 and December 31, 2021, the Company did not have any OREO properties.
Goodwill: 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. There have been no indications or triggering events during the nine months ended September 30, 2022, for which management believes it is more likely than not that goodwill is impaired.
Core Deposit Intangible Assets: 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, 2022, that indicated the carrying amount may not be recoverable.
40
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, 2022
Financial assets:
Collateral-dependent loans
$
69
$
—
$
—
$
69
December 31, 2021
Financial assets:
Collateral-dependent loans
$
73
$
—
$
—
$
73
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, 2022
Collateral-dependent loans:
Partially charged-off
$
69
Market approach appraisal of collateral
Estimated selling costs
18%
December 31, 2021
Collateral-dependent loans
Specifically reserved
$
73
Market approach appraisal of collateral
Estimated selling costs
11%
41
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:
Carrying Amount
Fair Value
Readily Available Market Prices (Level 1)
Observable Market Prices (Level 2)
Company Determined Market Prices (Level 3)
September 30, 2022
Financial assets:
HTM debt securities
$
534,309
$
491,759
$
—
$
491,759
$
—
Commercial real estate loans(1)(2)
1,543,107
1,517,911
—
—
1,517,911
Commercial loans(2)
418,110
412,670
—
—
412,670
SBA PPP loans(2)
684
704
—
—
704
Residential real estate loans(2)
1,610,324
1,424,504
—
—
1,424,504
Home equity loans(2)
231,507
238,723
—
—
238,723
Consumer loans(2)
20,406
18,277
—
—
18,277
Servicing assets
2,470
4,466
—
—
4,466
Financial liabilities:
Time deposits
$
279,603
$
270,794
$
—
$
270,794
$
—
Short-term borrowings
421,101
420,608
—
420,608
—
Subordinated debentures
44,331
31,918
—
31,918
—
December 31, 2021
Financial assets:
HTM debt securities
$
1,291
$
1,380
$
—
$
1,380
$
—
Commercial real estate loans(1)(2)
1,474,087
1,435,794
—
—
1,435,794
Commercial loans(2)
359,512
356,463
—
—
356,463
SBA PPP loans(2)
35,934
37,133
—
—
37,133
Residential real estate loans(2)
1,300,314
1,297,592
—
—
1,297,592
Home equity loans(2)
208,934
205,920
—
—
208,934
Consumer loans(2)
19,437
17,551
—
—
17,551
Servicing assets
2,471
3,310
—
—
3,310
Financial liabilities:
Time deposits
$
409,668
$
409,264
$
—
$
409,264
$
—
Short-term borrowings
211,608
211,586
—
211,586
—
Subordinated debentures
44,331
33,248
—
33,248
—
(1) Commercial real estate loan includes non-owner-occupied and owner-occupied properties.
(2) The presented carrying amount is net of the allocated ACL on loans.
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.
42
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 forward-looking statements within the meaning of 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,” “potential” 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 are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult for the Company to predict. The actual results, performance or achievements of the Company may differ materially from what is reflected in such forward-looking statements
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:
•the impact of the COVID-19 pandemic;
•the impact of the war in Ukraine;
•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 credit 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;
•ongoing competition in the labor markets and increased employee turnover;
•competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;
•the effects of climate change on the Company and its customers, borrowers or service providers;
•the effects of civil unrest, international hostilities or other geopolitical events;
•deterioration in the value of the Company's investment securities;
•volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, or the availability and terms of funding necessary to meet the Company’s liquidity needs;
•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;
•the outcome of pending and future litigation and governmental proceedings, including tax-related examinations and other matters; 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 regarding the potential effects of the war in Ukraine, the COVID-19 pandemic and other notable national and global current events on the Company’s business, financial condition, liquidity and results of operations may constitute forward-looking statements and 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
43
and in many cases beyond the Company's control.
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, 2021, 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.
44
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, return on average tangible equity; the efficiency ratio; net interest income (fully-taxable equivalent); earnings before income taxes and provision; earnings before income taxes, provision, and SBA PPP loan income; total loans, excluding SBA PPP loans; adjusted yield on interest-earning assets and adjusted net interest margin (fully-taxable equivalent); tangible book value per share; tangible common equity ratio; and core deposits and average core deposits. We utilize these non-GAAP financial measures 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 shareholder's 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)
2022
2021
2022
2021
Net income, as presented
$
14,267
$
14,640
$
46,088
$
52,523
Add: amortization of core deposit intangible assets, net of tax(1)
123
129
371
388
Net income, adjusted for amortization of core deposit intangible assets
$
14,390
$
14,769
$
46,459
$
52,911
Average equity, as presented
$
452,815
$
552,721
$
478,420
$
541,841
Less: average goodwill and core deposit intangible assets
(96,493)
(97,128)
(96,651)
(97,293)
Average tangible equity
$
356,322
$
455,593
$
381,769
$
444,548
Return on average equity
12.50
%
10.51
%
12.88
%
12.96
%
Return on average tangible equity
16.02
%
12.86
%
16.27
%
15.91
%
(1) Assumed a 21% tax rate.
45
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)
2022
2021
2022
2021
Non-interest expense, as presented
$
27,091
$
26,263
$
79,856
$
76,752
Less: prepayment penalty on borrowings
—
—
—
(514)
Adjusted non-interest expense
$
27,091
$
26,263
$
79,856
$
76,238
Net interest income, as presented
$
37,813
$
34,746
$
110,712
$
100,639
Add: effect of tax-exempt income(1)
242
228
700
764
Non-interest income, as presented
9,954
11,099
30,920
37,634
Add: net loss on sale of securities
—
—
9
—
Adjusted net interest income plus non-interest income
$
48,009
$
46,073
$
142,341
$
139,037
Ratio of non-interest expense to total revenues(2)
56.71
%
57.29
%
56.38
%
55.51
%
Efficiency ratio
56.43
%
57.00
%
56.10
%
54.83
%
(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)
2022
2021
2022
2021
Net interest income, as presented
$
37,813
$
34,746
$
110,712
$
100,639
Add: effect of tax-exempt income(1)
242
228
700
764
Net interest income (fully-taxable equivalent)
$
38,055
$
34,974
$
111,412
$
101,403
(1) Assumed a 21% tax rate.
46
Earnings before Income Taxes and Provision, and Earnings before Income Taxes, Provision and SBA PPP Loan Income. Earnings before income taxes and provision, and earnings before income taxes, provision and SBA PPP loan income are each a supplemental measure of operating earnings and performance. Earnings before income taxes and provision is calculated as net income before provision for credit losses and income tax expense, and earnings before income taxes, provision and SBA PPP loan income is calculated as net income before provision for credit losses, income tax expense and SBA PPP loan income. These supplemental measures have become 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 origination of SBA PPP loans in response to the COVID-19 pandemic that are not a recurring and sustainable source of revenues for financial institutions.
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2022
2021
2022
2021
Net income, as presented
$
14,267
$
14,640
$
46,088
$
52,523
Add: income tax expense, as presented
3,645
4,003
11,654
13,418
Add: provision (credit) for credit losses, as presented
2,764
939
4,034
(4,420)
Earnings before income taxes and provision for credit losses
$
20,676
$
19,582
$
61,776
$
61,521
Less: SBA PPP loan income
(50)
(1,951)
(1,248)
(5,487)
Earnings before income taxes, provision for credit losses and SBA PPP Loan income
$
20,626
$
17,631
$
60,528
$
56,034
Adjusted Yield on Interest-Earning Assets. Adjusted yield on interest-earning assets normalizes the Company's reported yield on interest-earning assets for certain unusual, non-recurring items, including: (i) the impact of SBA PPP loans and (ii) excess cash/liquidity held by the Company, primarily due to Federal stimulus programs and changes in the FRB cash holding requirements for financial institutions both in response to COVID-19.
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Yield on interest-earning assets, as presented
3.40
%
2.97
%
3.19
%
3.06
%
Add: effect of excess liquidity on yield on interest-earning assets
—
%
0.16
%
0.03
%
0.12
%
Less: effect of SBA PPP loans on yield on interest-earning assets
(0.01)
%
(0.09)
%
(0.02)
%
(0.06)
%
Adjusted yield on interest-earning assets
3.39
%
3.04
%
3.20
%
3.12
%
Adjusted Net Interest Margin (Fully-Taxable Equivalent). Adjusted net interest margin on a fully-taxable equivalent basis normalizes the Company's reported net interest margin on a fully-taxable equivalent basis for certain unusual, non-recurring items, including: (i) the impact of SBA PPP loans and (ii) excess cash/liquidity held by the Company, primarily due to Federal stimulus programs and changes in the FRB cash holding requirements for financial institutions both in response to COVID-19.
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net interest margin (fully-taxable equivalent), as presented
2.88
%
2.76
%
2.86
%
2.82
%
Add: effect of excess liquidity on net interest margin (fully-taxable equivalent)
—
%
0.15
%
0.02
%
0.12
%
Less: effect of SBA PPP loans on net interest margin (fully-taxable equivalent)
—
%
(0.09)
%
(0.02)
%
(0.07)
%
Adjusted net interest margin (fully-taxable equivalent)
2.88
%
2.82
%
2.86
%
2.87
%
47
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 a company's capital adequacy.
(In thousands, except number of shares, per share data and ratios)
September 30, 2022
December 31, 2021
Tangible Book Value Per Share:
Shareholders’ equity, as presented
$
431,007
$
541,294
Less: goodwill and other intangible assets
(96,416)
(96,885)
Tangible shareholders’ equity
$
334,591
$
444,409
Shares outstanding at period end
14,563,828
14,739,956
Book value per share
$
29.59
$
36.72
Tangible book value per share
$
22.97
$
30.15
Tangible Common Equity Ratio:
Total assets
$
5,551,724
$
5,500,356
Less: goodwill and other intangible assets
(96,416)
(96,885)
Tangible assets
$
5,455,308
$
5,403,471
Common equity ratio
7.76
%
9.84
%
Tangible common equity ratio
6.13
%
8.22
%
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 at a lower interest rate 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, 2022
December 31, 2021
Total deposits
$
4,568,604
$
4,608,889
Less: certificates of deposit
(279,603)
(309,648)
Less: brokered deposits
(89,775)
(208,468)
Core deposits
$
4,199,226
$
4,090,773
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)
2022
2021
2022
2021
Total average deposits
$
4,531,019
$
4,223,964
$
4,431,837
$
3,994,457
Less: average certificates of deposit
(290,043)
(327,802)
(297,646)
(339,230)
Average core deposits
$
4,240,976
$
3,896,162
$
4,134,191
$
3,655,227
48
Total Loans, Excluding SBA PPP loans. Total loans, excluding SBA PPP loans is used by management to measure the Company's core loan portfolio. The Company calculates total loans, excluding SBA PPP loans as total loans (as reported on the consolidated statements of condition) less SBA PPP loans.
(In thousands)
September 30, 2022
December 31, 2021
Total loans, as presented
$
3,860,680
$
3,431,474
Less: SBA PPP loans
(685)
(35,953)
Total loans, excluding SBA PPP loans
$
3,859,995
$
3,395,521
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 our 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 ACL, including the ACL on loans, off-balance sheet credit exposures and investments; (ii) accounting for acquisitions and the subsequent review of goodwill and intangible assets generated in an acquisition for impairment; (iii) income taxes; and (iv) accounting for defined benefit and postretirement plans.
There have been no material changes to the Company's critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, 2021. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021, for discussion of the Company's critical accounting policies.
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 $5.6 billion in assets at September 30, 2022, 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 operates throughout Maine, with its primary markets and presence being throughout coastal and central Maine, and select areas of New Hampshire and Massachusetts. 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 Update. Throughout the third quarter of 2022, global and national markets were, again, challenged by the dynamic and rapid shift in the operating environment, continuing the trend from the beginning of the year. During the third quarter of 2022, the FOMC raised the Federal Funds Rate a total of 1.50% through two 0.75% interest rate increases in July and September, which brought the Federal Funds Rate target interest rate range to 3.00% - 3.25%. Through the first nine months of 2022, the Federal Funds Rate has increased in total 3.00% as it works to slow national inflation. Current expectations are for the FOMC to continue to increase interest through the end of 2022 and into 2023.
Through the first nine months of 2022, the Company has seen the impact of the change in the interest rate environment and stock market directly within its own operations and financial results, not unlike other banks, including:
49
•The change in the interest rate environment through the nine months ended September 30, 2022, compared to the same period last year can been seen in the Company's net interest income and net interest margin. Should interest rates continue to drive higher, we anticipate this will likely impact overall growth nationally and within our markets and lead to slowing loan demand in coming periods.
•The effects of the change in the interest rate environment across the same periods can also be seen on the Company's stockholders' equity (or capital). The sharp rise in interest rates through the nine months ended September 30, 2022, has led to a sharp decrease in the valuation of the Company's bond investments portfolio. Those bonds designated and accounted for as AFS are carried at fair value and the change in fair value between periods is accounted for in AOCI within shareholders' equity. As a result, the Company's stockholders' equity to total assets ratio has decreased from 9.84% at December 31, 2021 to 7.76% at September 30, 2022, and its tangible common equity ratio (non-GAAP) has decreased from 8.22% at December 31, 2021 to 6.13% at September 30, 2022. The Company's regulatory capital ratios, as described in Note 10 of the consolidated financial statements, continue to be strong and well in excess of regulatory capital requirements.
•The growing risk of a near-term recession has been factored into the Company's ACL calculation through the first nine months of 2022 and has resulted in an increase to the ACL the last two quarters, including the third quarter of 2022, despite excellent credit quality across the Company's loan portfolio.
•Lower market-related revenues for the three and nine months ended September 30, 2022, compared to the same periods of 2021, including income from fiduciary services and BOLI.
Discussed below is further information on the Company's financial performance for the third quarter and first nine months of 2022, and its current financial position.
Operating Results. Net income for the third quarter of 2022 was $14.3 million, a decrease of $373,000 or 3%, compared to the third quarter of 2021, and diluted EPS remained consistent at $0.97 for the third quarter of 2022 and 2021. Earnings before income taxes and provision expense (non-GAAP) for the third quarter of 2022 were $20.7 million, an increase of $1.1 million, or 6%, between periods, and earnings before income taxes, provision expense and SBA PPP loan income (non-GAAP) increased $3.0 million, or 17%, between periods.
Revenues (defined as the sum of net interest income and non-interest income) for the third quarter of 2022 totaled $47.8 million, an increase of $1.9 million, or 4%, compared to the third quarter of 2021.
•Net interest income increased $3.1 million, or 9%, between periods driven by strong average interest-earning assets between periods of $221.6 million, or 4%, and net interest margin expansion of 12 basis points to 2.88% for the third quarter of 2022 due to the sharp rise in interest rates and change in mix of interest-earnings assets as lower yielding excess cash and investment cash flows were deployed to fund higher yielding loan growth.
•Non-interest income decreased $1.1 million or 10%, between periods primarily led by lower mortgage banking income of $1.3 million. The decrease in mortgage banking income reflects the change in the markets between periods, highlighted by the increase in interest rates and slowing demand. Residential mortgage production decreased 30% between periods, and the Company sold 21% of mortgage production in the third quarter of 2022, compared to 33% for the third quarter of 2021.
A provision for credit losses of $2.8 million was reported for the third quarter of 2022, compared to $939,000 reported for the third quarter of 2021. This increase was driven by the change in forecasted economic outlook for a softening overall economy and 16% loan growth over the last twelve months.
Non-interest expense for the third quarter of 2022 was $27.1 million, an increase of $828,000, or 3%, over the third quarter of 2021. The Company's GAAP efficiency ratio and non-GAAP efficiency ratio for the third quarter of 2022 was 56.71% and 56.43%, respectively, compared to 57.29% and 57.00% for the third quarter of 2021, respectively.
Net income for the nine months ended September 30, 2022 was $46.1 million, a decrease of $6.4 million, or 12%, over the nine months ended September 30, 2021, and diluted EPS was $3.12 for the nine months ended September 30, 2022, a decrease of $0.37, or 11%, compared to the same period last year. Earnings before income taxes and provision expense (non-GAAP) for the nine months ended September 30, 2022 were $61.8 million, an increase of $255,000 over the same period of 2021, and earnings before income taxes and provision expense and SBA PPA loan income (non-GAAP) for the nine months ended September 30, 2022 increased $4.5 million, or 8%, between periods.
50
Net interest income for the first nine months of 2022 was $110.7 million, an increase of $10.1 million, or 10%, compared to the first nine months of 2021. This increase was driven by average interest-earning assets growth of $394.4 million, or 8%, along with the net interest margin expansion of 4 basis points to 2.86% for the nine months ended September 30, 2022.
Non-interest income for the first nine months of 2022 was $30.9 million, a decrease of $6.7 million, or 18%, compared to the same period in 2021. Mortgage banking income was the primary reason for the decrease between periods as revenues decreased $8.4 million, or 73%, as residential mortgage production decreased 25% between periods, and the Company sold 21% of its production through the first nine months of 2022, compared to 47% for the same period last year. Increases in other business lines partially offset the decrease in mortgage banking, including service charge fees, brokerage and insurance commissions, debit card income and other income due to the sale of property.
A provision for credit losses of $4.0 million was recorded for the first nine months of 2022, compared to a release of $4.4 million for the same period 2021. This increase was the result of a change in our economic outlook between periods as the risk of an economic slowdown has grown, as well as strong loan growth between periods of 16%. During the first nine months of 2021, reserves were released as expected credit losses during the onset of the COVID-19 pandemic in 2020 did not manifest and market conditions stabilized.
Non-interest expense for the first nine month of 2022 was $79.9 million, an increase of $3.1 million, or 4%, over the first nine months of 2021. The Company's GAAP efficiency ratio and non-GAAP efficiency ratio for the nine months ended September, 30 2022 was 56.38% and 56.10%, respectively, compared to 55.51% and 54.83% for the same period last year, respectively.
Other key financial metrics for the periods indicated were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Return on average assets (annualized)
1.03
%
1.08
%
1.13
%
1.36
%
Return on average equity (annualized)
12.50
%
10.51
%
12.88
%
12.96
%
Return on average tangible equity (annualized) (non-GAAP)
16.02
%
12.86
%
16.27
%
15.91
%
Overhead ratio (non-interest expense divided by average assets) (annualized)
1.96
%
1.95
%
1.95
%
1.99
%
Asset Quality. As of September 30, 2022, the Company's asset quality metrics remained very strong with non-performing assets strengthening to 0.09% of total assets, compared to 0.13%, at December 31, 2021. As of September 30, 2022, loans 30-89 days past due increased to 0.12% of total loans, compared to 0.04% at December 31, 2021. The increase in past due loans during the third quarter of 2022 was primarily within the residential mortgage loans portfolio and commercial real estate loans portfolio and was the result of a few large loans becoming delinquent. The Company does not view the increase in past due loans during the quarter as indicative of a larger trend.
Shareholders' Equity. As of September 30, 2022, the Company's regulatory capital ratios were each well in excess of regulatory capital requirements. Despite the Company's regulatory capital ratios remaining strong, the continued decreases in the market value of the AFS investment portfolio due to the sharp rise in interest rates through the nine months ended September 30, 2022, caused decreases across the common equity ratio and tangible common equity ratio (non-GAAP), as well as book value per share and tangible book value per share (non-GAAP) over this period. The Company expects these decreases to be temporary and not reflective of underlying credit risk within the investment portfolio. The Company's non-regulatory capital ratios and book value as of the dates indicated were as follows:
•As of September 30, 2022, the Company's common equity ratio was 7.76% and its tangible common equity ratio (non-GAAP) was 6.13%, compared to 9.84% and 8.22% as of December 31, 2021, respectively.
•As of September 30, 2022, the Company's book value per share was $29.59 and its tangible book value per share (non-GAAP) was $22.97, compared to $36.72 and $30.15 as of December 31, 2021, respectively.
In the first quarter of 2022, the Company initiated a new share repurchase program for up to 750,000 shares of its common stock, or approximately 5% of the Company's shares outstanding. This share repurchase program replaces the program that terminated in January 2022. The Company repurchased 225,245 shares of its outstanding common stock through the first nine months of 2022 at a weighted-average price of $45.46 per share, which included the repurchase of 63,689 shares at an average price of $44.38 per share in the third quarter of 2022.
51
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 ("revenue" is defined as the sum of net interest income and non-interest income). For the quarter ended September 30, 2022, net interest income was 79% of total revenues, compared to 76% for the quarter ended September 30, 2021. 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.
For the quarter ended September 30, 2022, net interest income was $37.8 million, an increase of $3.1 million, or 9%, over the quarter ended September 30, 2021, and on a fully-taxable equivalent basis (non-GAAP), net interest income was $38.1 million, an increase of $3.1 million, or 9%, over the same period. Interest income on a fully-taxable equivalent basis increased $7.2 million, or 19%, over this period to $44.8 million for the quarter ended September 30, 2022, while interest expense increased $4.1 million, or 157%, to $6.8 million for the quarter ended September 30, 2022.
The increase in interest income on a fully-taxable equivalent basis for the quarter ended September 30, 2022 over the same quarter last year was driven by: (1) average interest-earning asset growth of $221.6 million, or 4%, between periods, which included average loan growth of $497.1 million, or 15%, net of a decrease in interest-earning cash balances of $274.5 million, or 90%, (2) the increase in the interest rate environment between periods driving a higher yield of 43 basis points between periods, partially offset by (3) lower SBA PPP loan income of $1.9 million.
•Our average loan growth between periods was attributable to the growth of: (1) residential real estate, which grew $396.9 million, or 34%, reflecting our strategy to hold more residential mortgage production within our loan portfolio, (2) commercial real estate, which grew $136.4 million, or 10%, and (3) commercial loans, which grew $53.5 million, or 15%, offsetting (4) decreasing average SBA PPP loan balances of $104.5 million as the majority of borrowers took advantage of loan forgiveness.
•For the quarter ended September 30, 2022, our interest-earning asset yield increased to 3.40%, compared to 2.97% for the quarter ended September 30, 2021. This increase in our interest-earning asset yield was the result of: (1) the shift in asset mix between periods with excess cash being deployed to fund strong loan growth of 16% between periods, primarily in residential mortgages, and (2) the change in the interest rate environment through the first nine months of 2022 as the FOMC has sharply raised interest rates in an effort to curb high levels of inflation. For the quarter ended September 30, 2022, the average interest rate for 10-year U.S. Treasury was 3.10%, compared to 1.32% for the quarter ended September 30, 2021.
The increase in interest expense for the quarter ended September 30, 2022, over the same period last year was driven by an increase in the cost of funds as total funding liabilities increased 32 basis points between periods to 0.54% for the quarter ended September 30, 2022. Between periods, cost of deposits increased 30 basis points and cost of borrowings increased 62 basis points bringing each to 0.45% and 0.54% for the quarter ended September 30, 2022, respectively. The increase in the cost of deposits and borrowings between period was, too, driven by the sharp increase in interest rates between periods. Our growth in average deposits over the past twelve months of $307.1 million, or 7%, enabled the Company to fund its 5% interest-earning asset growth, or $221.6 million, between periods through lower cost deposits. Average deposit growth between periods was driven by average interest checking and savings balances increasing $255.8 million, or 21%, and $86.4 million, or 13%, respectively, which offset lower average CD balances of $37.8 million, or 12%, between periods. Average total borrowings decreased $54.2 million, or 11%, between periods due to the strong aforementioned average deposit growth. Within average total borrowings, average brokered deposit balances decreased $208.7 million, or 72%, and average other borrowings, which consisted of FHLBB overnight and short-term advances, increased $108.1 million between periods.
52
For the quarter ended September 30, 2022, net interest margin was 2.88%, an increase of 12 basis points over the quarter ended September 30, 2021.
For the nine months ended September 30, 2022, net interest income was $110.7 million, an increase of $10.1 million, or 10%, over the same period for 2021, and on a fully-taxable equivalent basis (non-GAAP) was $111.4 million, an increase of $10.0 million, or 10%, over the same period. Interest income on a fully-taxable equivalent basis increased $14.4 million, or 13%, over this period to $124.2 million for the nine months ended September 30, 2022, while interest expense increased $4.4 million, or 52%, over this period to $12.7 million for the nine months ended September 30, 2022.
The increase in interest income on a fully-taxable equivalent basis for the nine months ended September 30, 2022, over the same period last year was driven by: (1) average interest-earning asset growth of $394.4 million, or 8%, between periods, which included average loan growth of $355.5 million, or 11%, average investments growth of $229.5 million, or 19%, offset by the decrease in average interest-earning cash balances of $190.6 million, or 76%, partially offset by (2) lower SBA PPP loan income of $4.2 million. Our average loan growth between periods was concentrated in: (1) residential real estate, which grew $342.3 million, or 31%, as, we continue the strategy to hold more residential mortgage loan production in our loan portfolio, (2) commercial real estate, which grew $112.1 million, or 8%, and (3) commercial loans, which grew $50.0 million, or 15%, offsetting (4) decreasing average SBA PPP loan balances of $130.3 million as the majority of borrowers took advantage of loan forgiveness programs, and (5) decrease average consumer loans of $15.0 million, or 6%. Our investment growth between periods was driven by our increased investment activity in 2021 as we deployed our low interest earning excess liquidity to drive net interest income growth through higher yielding assets available at that time.
For the nine months ended September 30, 2022, our interest-earning asset yield was 3.19%, compared to 3.06% for the same period last year. This increase in our interest-earning asset yield was driven by the increase in our average investment yield of 11 basis points between periods to 1.92% for the nine months ended September 30, 2022. The average loan yield remained flat at 3.75% for the nine months ended September 30, 2022 and 2021. This was driven by the by the decrease in average loan yield for residential mortgages of 21 basis points. Throughout 2021, customers actively refinanced residential loans to take advantage of the lower interest rate environment driving lower yielding new loan originations and compressing the average yield in the mortgage loan segments. This decrease in mortgage yield was offset by the increase in commercial real estate of 22 basis points with more variable rate loans that broke through the floor in 2022 as interest rates continued to rise in the nine months ended September 30, 2022.
The increase in interest expense for the nine months ended September 30, 2022, over the same period last year was driven by an increase in the cost of funds as total funding liabilities increased 10 basis points between periods to 0.35% for the nine months ended September 30, 2022. Between periods, the cost of deposits increased 10 basis points and the cost of borrowings increased 19 basis points bringing each to 0.27% and 0.35% for the nine months ended September 30, 2022, respectively. The increase in the cost of deposits and borrowings between period was driven by the sharp increase in interest rates between periods. Our growth in average deposits between periods of $437.4 million, or 11%, enabled the Company to fund its 8% interest-earning asset growth, or $394.4 million, between periods through lower cost deposits. Average deposit growth between periods was driven by average core deposits (non-GAAP) growth of $479.0 million, or 13%, which offset lower average CD balances of $41.6 million, or 12%, between periods. Average total borrowings decreased $54.6 million, or 11%, between periods due to the strong aforementioned average deposit growth. Within average total borrowings, average brokered deposit balances decreased $152.2 million, or 53%, and average other borrowings, which consisted of FHLBB overnight and short-term advances, increased $60.8 million between periods.
For the nine months ended September 30, 2022 net interest margin increased 4 basis points to 2.86% over the nine months ended September 30, 2021.
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:
53
Quarterly Average Balance, Interest and Yield/Rate Analysis
Three Months Ended
September 30, 2022
September 30, 2021
(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
$
30,063
$
172
2.24
%
$
304,594
$
96
0.12
%
Investments - taxable
1,288,172
6,051
1.88
%
1,284,851
5,341
1.66
%
Investments - nontaxable(1)
109,661
1,001
3.65
%
114,033
958
3.36
%
Loans(2):
Commercial real estate
1,546,638
15,973
4.04
%
1,410,201
12,934
3.59
%
Commercial(1)
402,152
4,380
4.26
%
348,619
3,201
3.59
%
SBA PPP
1,254
50
15.67
%
105,742
1,950
7.22
%
Municipal(1)
22,574
171
3.01
%
17,021
146
3.41
%
Residential real estate
1,571,449
13,712
3.49
%
1,174,559
10,368
3.53
%
Consumer and home equity
252,145
3,313
5.21
%
242,921
2,613
4.27
%
Total loans
3,796,212
37,599
3.91
%
3,299,063
31,212
3.73
%
Total interest-earning assets
5,224,108
44,823
3.40
%
5,002,541
37,607
2.97
%
Cash and due from banks
52,693
53,095
Other assets
274,978
363,704
Less: ACL
(34,698)
(32,033)
Total assets
$
5,517,081
$
5,387,307
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking
$
1,243,174
$
—
—
%
$
1,251,492
$
—
—
%
Interest checking
1,502,436
3,213
0.85
%
1,246,634
643
0.20
%
Savings
774,725
86
0.04
%
688,331
71
0.04
%
Money market
720,641
1,532
0.84
%
709,705
520
0.29
%
Certificates of deposit
290,043
326
0.45
%
327,802
408
0.49
%
Total deposits
4,531,019
5,157
0.45
%
4,223,964
1,642
0.15
%
Borrowings:
Brokered deposits
80,701
285
1.40
%
289,374
331
0.45
%
Customer repurchase agreements
228,495
328
0.57
%
182,114
122
0.26
%
Subordinated debentures
44,331
539
4.83
%
44,331
538
4.81
%
Other borrowings
108,084
459
1.68
%
—
—
—
%
Total borrowings
461,611
1,611
1.38
%
515,819
991
0.76
%
Total funding liabilities
4,992,630
6,768
0.54
%
4,739,783
2,633
0.22
%
Other liabilities
71,636
94,803
Shareholders' equity
452,815
552,721
Total liabilities & shareholders' equity
$
5,517,081
$
5,387,307
Net interest income (fully-taxable equivalent)
38,055
34,974
Less: fully-taxable equivalent adjustment
(242)
(228)
Net interest income
$
37,813
$
34,746
Net interest rate spread (fully-taxable equivalent)
2.86
%
2.75
%
Net interest margin (fully-taxable equivalent)
2.88
%
2.76
%
Adjusted net interest margin (fully-taxable equivalent) (non-GAAP)
2.88
%
2.82
%
(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.
54
Year-to-Date Average Balance, Interest and Yield/Rate Analysis
Nine Months Ended
September 30, 2022
September 30, 2021
(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
$
60,105
$
260
0.57
%
$
250,715
$
198
0.10
%
Investments - taxable
1,354,339
18,161
1.79
%
1,121,569
13,977
1.66
%
Investments - nontaxable(1)
112,526
2,942
3.49
%
115,755
2,845
3.28
%
Loans(2):
Commercial real estate
1,512,285
43,675
3.81
%
1,400,224
38,099
3.59
%
Commercial(1)
391,540
11,357
3.82
%
341,510
9,862
3.81
%
SBA PPP
9,138
1,248
18.01
%
139,453
5,487
5.19
%
Municipal(1)
18,837
446
3.17
%
22,404
557
3.32
%
Residential real estate
1,459,659
37,825
3.46
%
1,117,389
30,756
3.67
%
Consumer and home equity
240,041
8,255
4.60
%
255,058
8,016
4.20
%
Total loans
3,631,500
102,806
3.75
%
3,276,038
92,777
3.75
%
Total interest-earning assets
5,158,470
124,169
3.19
%
4,764,077
109,797
3.06
%
Cash and due from banks
50,100
52,571
Other assets
275,074
372,012
Less: ALL
(33,353)
(35,174)
Total assets
$
5,450,291
$
5,153,486
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking
$
1,214,263
$
—
—
%
$
1,014,778
$
—
—
%
Interest checking
1,448,146
5,024
0.46
%
1,282,358
1,843
0.19
%
Savings
759,053
239
0.04
%
658,497
201
0.04
%
Money market
712,729
2,796
0.52
%
699,594
1,548
0.30
%
Certificates of deposit
297,646
988
0.44
%
339,230
1,407
0.55
%
Total deposits
4,431,837
9,047
0.27
%
3,994,457
4,999
0.17
%
Borrowings:
Brokered deposits
133,928
738
0.74
%
286,080
958
0.45
%
Customer repurchase agreements
220,026
682
0.41
%
177,559
419
0.31
%
Subordinated debentures
44,331
1,600
4.83
%
50,045
1,983
5.30
%
Other borrowings
65,595
690
1.41
%
4,762
35
0.99
%
Total borrowings
463,880
3,710
1.07
%
518,446
3,395
0.88
%
Total funding liabilities
4,895,717
12,757
0.35
%
4,512,903
8,394
0.25
%
Other liabilities
76,154
98,742
Shareholders' equity
478,420
541,841
Total liabilities & shareholders' equity
$
5,450,291
$
5,153,486
Net interest income (fully-taxable equivalent)
111,412
101,403
Less: fully-taxable equivalent adjustment
(700)
(764)
Net interest income
$
110,712
$
100,639
Net interest rate spread (fully-taxable equivalent)
2.84
%
2.81
%
Net interest margin (fully-taxable equivalent)
2.86
%
2.82
%
Adjusted net interest margin (fully-taxable equivalent) (non-GAAP)
2.86
%
2.87
%
(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.
55
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.
Three Months Ended September 30, 2022 vs. September 30, 2021
Nine Months Ended September 30, 2022 vs. September 30, 2021
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
$
(82)
$
158
$
76
$
(143)
$
205
$
62
Investments – taxable
14
696
710
2,898
1,286
4,184
Investments – nontaxable
(37)
80
43
(79)
176
97
Commercial real estate
1,252
1,787
3,039
3,051
2,525
5,576
Commercial
491
688
1,179
1,445
50
1,495
SBA PPP
(1,928)
28
(1,900)
(5,129)
890
(4,239)
Municipal
48
(23)
25
(89)
(22)
(111)
Residential real estate
3,503
(159)
3,344
9,421
(2,352)
7,069
Consumer and home equity
99
601
700
(472)
711
239
Total interest income (fully-taxable equivalent)
3,360
3,856
7,216
10,903
3,469
14,372
Interest-bearing liabilities:
Interest checking
129
2,441
2,570
236
2,945
3,181
Savings
9
6
15
30
8
38
Money market
8
1,004
1,012
29
1,219
1,248
Certificates of deposit
(47)
(35)
(82)
(171)
(248)
(419)
Brokered deposits
(237)
191
(46)
(512)
292
(220)
Customer repurchase agreements
31
175
206
100
163
263
Subordinated debentures
—
1
1
(227)
(156)
(383)
Other borrowings
459
—
459
450
205
655
Total interest expense
352
3,783
4,135
(65)
4,428
4,363
Net interest income (fully-taxable equivalent)
$
3,008
$
73
$
3,081
$
10,968
$
(959)
$
10,009
Net interest income on a fully-taxable equivalent basis included the following for the periods indicated:
Income Statement Location
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2022
2021
2022
2021
Loan (cost) fees
Interest income
$
(297)
$
1,744
$
1,006
$
4,437
Net fair value mark accretion from purchase accounting
Interest income and Interest expense
71
154
197
579
Recoveries on previously charged-off acquired loans
Interest income
20
24
189
157
Total
$
(206)
$
1,922
$
1,392
$
5,173
56
Provision (Credit) for Credit Losses
The provision (credit) for credit losses was made up of the following components for the periods indicated:
Three Months Ended September 30,
Change
Nine Months Ended September 30,
Change
(Dollars in thousands)
2022
2021
$
%
2022
2021
$
%
Provision (credit) for loan losses
$
2,513
$
269
$
2,244
834
%
$
3,788
$
(5,037)
$
8,825
175
%
Provision for credit losses on off-balance sheet credit exposures
251
670
(419)
(63)
%
246
617
(371)
(60)
%
Provision (credit) for credit losses
$
2,764
$
939
$
1,825
194
%
$
4,034
$
(4,420)
$
8,454
(191)
%
For the three and nine months ended September 30, 2022, a provision for credit losses on loans was recorded of $2.5 million and $3.8 million, respectively, and was driven by: (1) a softening overall economy and the continued increasing likelihood of an economic slowdown in the future, and (2) 4% loan growth for the quarter ended September 30, 2022 and 13% loan growth for the nine months of 2022, that offset (3) the release of $768,000 and $5.0 million for the three and nine months ended September 30, 2022, respectively, of additional reserves provided for certain commercial real estate loans at the onset of the COVID-19 pandemic due to the heightened credit risk at that time. For these loans, the Company established certain credit metrics that would need to be met by the borrower prior to releasing the reserve, including a debt service coverage ratio and consistent timely payments of full principal and interest as agreed. As of September 30, 2022, there were no remaining commercial real estate loans carrying additional reserves due to COVID-19-related risks as they all were paid-off or met these criteria and are performing at or above pre-pandemic levels.
For the three months ended September 30, 2021, a provision for credit losses on loans of $269,000 was recorded primarily due to loan growth in the third quarter 2021. For the nine months ended September 30 ,2021 the improvement in the Company's macroeconomic outlook and the continued strength of the Company's credit quality more than offset the loan growth that resulted in the credit for credit losses on loans of $5.0 million recorded during this period.
Net charge-offs for the three and nine months ended September 30, 2022 were $216,000 and $503,000, respectively, compared to $58,000 and $557,000 for the three and nine months ended September 30, 2021.
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)
2022
2021
$
%
2022
2021
$
%
Debit card income
$
3,234
$
3,278
$
(44)
(1)
%
$
9,371
$
9,126
$
245
3
%
Service charges on deposit accounts(1)
1,941
1,744
197
11
%
5,705
4,800
905
19
%
Income from fiduciary services
1,535
1,627
(92)
(6)
%
4,847
4,860
(13)
—
%
Brokerage and insurance commissions
1,003
993
10
1
%
3,269
2,885
384
13
%
Mortgage banking income, net(2)
635
1,913
(1,278)
(67)
%
3,186
11,620
(8,434)
(73)
%
Bank-owned life insurance(3)
374
589
(215)
(37)
%
1,519
1,774
(255)
(14)
%
Net loss on sale of securities
—
—
—
—
%
(9)
—
(9)
N.M.
Other income(4)
1,232
955
277
29
%
3,032
2,569
463
18
%
Total non-interest income
$
9,954
$
11,099
$
(1,145)
(10)
%
$
30,920
$
37,634
$
(6,714)
(18)
%
Non-interest income as a percentage of total revenues
21
%
24
%
22
%
27
%
(1) Service charges on deposit accounts: The increase for the three and nine months ended September 30, 2022, compared to the same periods of 2021, was driven by a decrease in overdraft fees in 2021 due to stimulus funds received by customers and an increase in deposit account fees due to program and product changes. In September 2022, the Company made certain non-sufficient funds and overdraft program changes to assist our customers and support their financial well-being. The changes are not expected to materially decrease revenues.
57
(2) Mortgage banking income, net: The decrease for the three months ended September 30, 2022, compared to the same period of 2021, was driven by the change in the housing market between periods, highlighted by the change in interest rates between periods. During the third quarter of 2022, the Company sold $38.0 million, or 21%, of its residential mortgage loan production compared to $86.2 million, or 33%, of its residential mortgage loan production for the third quarter of 2021. Our markets saw elevated housing demand through 2020 and 2021 largely in response to the COVID-19 pandemic. This activity, coupled with the low interest rate environment, drove record residential mortgage production in 2021. The continued increase in interest rates through the first nine months of 2022, together with higher housing prices and operating in highly competitive markets, has slowed residential mortgage production through the first nine months of 2022 and decreased the amount of salable production to the secondary market. As of September 30, 2022, the Company's residential mortgage loan pipeline stood at $113.4 million, compared to the $194.9 million at September 30, 2021, a decrease of 42%.
The decrease for the nine months ended September 30, 2022, compared to the same period of 2021, was due to the decrease in residential mortgage loan sales, compared to September 30, 2021. For the nine months ended September 30, 2022, the Company sold $131.6 million, or 21%, of its residential mortgages, compared to $389.6 million, or 47%, for the nine months ended September 30, 2021. This decrease was driven by the decrease in residential mortgage production through the first nine months of 2022 (for the reasons outlined above), which have slowed commensurate with the overall industry.
(3) Bank-owned life insurance: The decrease for the three and nine months ended September 30, 2022, compared to the same periods of 2021, was the result of underlying investments in one of the Company's BOLI contracts dropping below its stable value wrapper and, thus, a write down was recognized in the third quarter of 2022. A further decrease in the market value of these underlying investments within this contract may result in lower BOLI income in future periods.
(4) Other income: The increase in other income for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was driven by the sale of a property in 2022. The increase for the nine months ended September 30, 2022, compared to the same period in 2021, was primarily driven by the sale of the property, along with increased foreign exchange fees and credit card interchange fees during the first nine months of the year.
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)
2022
2021
$
%
2022
2021
$
%
Salaries and employee benefits
$
15,849
$
15,902
$
(53)
—
%
$
46,757
$
45,742
$
1,015
2
%
Furniture, equipment and data processing(1)
3,305
2,980
325
11
%
9,639
8,954
685
8
%
Net occupancy costs
1,765
1,813
(48)
(3)
%
5,715
5,569
146
3
%
Debit card expense
1,210
1,106
104
9
%
3,410
3,166
244
8
%
Consulting and professional fees(2)
814
792
22
3
%
3,114
2,652
462
17
%
Regulatory assessments(3)
575
522
53
10
%
1,745
1,512
233
15
%
Amortization of core deposit intangible assets
156
163
(7)
(4)
%
469
491
(22)
(4)
%
Other real estate owned and collection costs (recoveries), net
56
60
(4)
(7)
%
9
(156)
165
(106)
%
Other expenses(4)
3,361
2,925
436
15
%
8,998
8,822
176
2
%
Total non-interest expense
$
27,091
$
26,263
$
828
3
%
$
79,856
$
76,752
$
3,104
4
%
Ratio of non-interest expense to total revenues
56.71
%
57.29
%
56.38
%
55.51
%
Efficiency ratio (non-GAAP)
56.43
%
57.00
%
56.10
%
54.83
%
(1) Furniture, equipment and data processing costs: The increase for the three and nine months ended September 30, 2022, compared to the same periods of 2021, was driven by increased demand for online banking and bill pay products along with our continued investment in technology and data processing.
58
(2) Consulting and professional fees: The increase for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was driven by an increase in consulting and compliance-related costs of $270,000 and director fees, including annual equity awards, of $207,000.
(3) Regulatory assessments: The increase for the three and nine months ended September 30. 2022, compared to the same periods of 2021, was driven by the increase in quarterly FDIC assessments primarily due to asset growth. The FDIC has approved increased assessment rates effective January 1, 2023 that will drive increases to the Company's assessment expenses in 2023.
(4) Other expenses: The increase for the three months ended September 30, 2022, compared to the three months ended 2021, was driven by the increases in business travel costs due to limited travel in 2021 from the pandemic, as well as increases in marketing costs to promote new initiatives and employee appreciation costs for in person events that were done virtually in 2021.
FINANCIAL CONDITION
Cash and Cash Equivalents
Total cash and cash equivalents at September 30, 2022, were $82.0 million, compared to $220.6 million at December 31, 2021. This decrease was due to the deployment of cash and cash equivalents' balances to support strong loan growth of 13% during the first nine months of 2022. We continually monitor our cash levels as part of our liquidity risk management practices.
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 returns without undue risk. At September 30, 2022 and December 31, 2021, the Company’s investment portfolio generally consisted of MBS, CMO, municipal and corporate debt securities, FHLBB and FRB common stock, and mutual funds held in a rabbi trust for its executive and director nonqualified retirement plans. We designate our debt securities as AFS or HTM based on our intent and investment strategy and they are carried at fair value or amortized cost, respectively. Our FHLBB and FRB common stock is carried at cost, and our mutual funds are designated as trading securities and are carried at fair value.
During the quarter ended June 30, 2022, we transferred 141 securities with a fair value of $520.3 million from AFS to HTM to help manage our capital position in a rising interest rate environment. The securities were reclassified at fair value at the time of the transfer, a non-cash transaction. The unrealized losses on the AFS debt securities at the time of the transfer were $72.1 million, pre-tax, and were reported within AOCI. The weighted average life of the transferred securities as of the date of transfer was 8.8 years and the unrealized losses will be amortized over the remaining lives. At September 30, 2022, the net unrealized losses on the transferred securities reported within AOCI were $53.7 million, net of a deferred tax asset of $14.7 million and the weighted-average life on these securities was 8.8 years.
At September 30, 2022, the Company's investments portfolio totaled $1.3 billion, a decrease of $246.7 million, or 16%, since December 31, 2021. This was driven by changes within our debt securities portfolio, including:
•Paydowns, calls and maturities of $167.2 million and sales of $8.7 million;
•A net decrease in the fair value of the AFS debt securities portfolio of $108.7 million as interest rates rose sharply during the first nine months of 2022 in anticipation of a tightening economic policy to curb inflationary pressures. As a result, the 2-year U.S. Treasury increased 349 basis points and the 10-year U.S. Treasury increased 231 basis points during the first nine months of 2022 to 4.22% and 3.83%, respectively, at September 30, 2022, causing bond prices to fall. The change in market interest rates was the primary driver of the increase in the weighted average life of our debt securities portfolio from 5.9 years at December 31, 2021 to 7.0 years at September 30, 2022;
•A decrease of $68.4 million due to the unamortized unrealized losses on the AFS securities that were transferred to HTM in June of 2022;
•Partially offset by purchases of $105.4 million of debt securities during the first nine months of 2022. The weighted-average life of investments purchased during this period 6.1 years.
59
Our debt securities designated as AFS, which comprised 58% and 99% of our investment portfolio at September 30, 2022 and December 31, 2021, respectively, were carried at fair value using level 2 valuation techniques. Refer to Note 15 of the consolidated financial statements for further details on fair value. At September 30, 2022 and December 31, 2021, investments were 23% and 28% of total assets, respectively. Our debt securities designated as HTM, comprised 40% at September 30, 2022 and were less than 1% at December 31, 2021. Our HTM debt securities were carried at amortized cost on the consolidated statements of condition.
The AFS and HTM debt securities portfolio has limited credit risk due to its composition, which includes debt securities that are highly rated by nationally recognized rating agencies, and securities backed by the U.S. government and government-sponsored agencies. At September 30, 2022 and December 31, 2021, these investments represented 90% of the investment portfolio. The majority of the municipal bonds, which represented 9% of the investment portfolio at September 30, 2022 and December 31, 2021, had a credit rating of "AA" or higher.
Other investments on the consolidated statements of condition consist of FHLBB and FRB common stock. These investments are carried at cost. We are required to maintain a certain level of investment in FHLBB stock based on our level of FHLBB advances, and maintain a certain level of investment in FRB common stock based on the Bank's capital levels. As of September 30, 2022 and December 31, 2021, investment in FHLBB stock totaled $9.7 million and $4.9 million, respectively, and our investment in FRB stock was $5.4 million at each date.
Investments in mutual funds are designated as trading securities and carried at fair value. These investments are held within a rabbi trust and will be used for future payments associated with the Company’s Executive and Director Deferred Compensation Plan. These investments are carried at fair value using level 1 valuation techniques. Refer to Note 15 of the consolidated financial statements for further details on fair value.
AFS debt securities that are in an unrealized loss position are assessed to determine if an allowance should be recorded or if a write-down is required. We did not record any allowances or write-down any of our AFS debt securities in an unrealized loss position as of September 30, 2022 or December 31, 2021. As noted above, the unrealized losses within our AFS debt securities as of September 30, 2022 and December 31, 2021 were driven by changes in the interest rate environment and were not credit-related.
HTM debt securities are assessed to determine if an allowance should be recorded or if a write-down is required. Based on the portfolio of the HTM debt securities as of September 30, 2022 and December 31, 2021, we did not record any allowances or write-down any of the HTM debt securities. Refer to "Note 3—Investments" for further discussion of the detail of the portfolio and our determination that the expected credit loss was immaterial.
We continually 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 the review of credit ratings. The overall mix of debt securities at September 30, 2022, compared to December 31, 2021, remains relatively unchanged and the Company expects it will continue to be well positioned to provide a stable source of cash flow. At September 30, 2022 and December 31, 2021, the duration of our debt investment securities portfolio, adjusting for calls when appropriate and consensus prepayment speeds, was 5.8 years and 4.8 years, respectively. Similar to the weighted-average life of the investment portfolio, the duration of the investment portfolio primarily increased between periods due to the increase in interest rates during the first half of 2022.
Loans
The Company provides loans primarily to customers located within our geographic market area. Our primary market continues to be Maine, making up 70% and 72% of the loan portfolio as of September 30, 2022 and December 31, 2021, respectively. Massachusetts and New Hampshire are our second and third largest markets that we serve, making up 15% and 9%, of our total loan portfolio as of September 30, 2022, respectively, and 14% and 9% as of December 31, 2021. As of September 30, 2022, our distribution channels included 57 branches within Maine, a residential mortgage lending office in Massachusetts, a branch and commercial loan production office in New Hampshire, and online residential mortgage and small commercial loan platforms.
60
The following table sets forth the composition of our loan portfolio as of the dates indicated:
Change
(Dollars in thousands)
September 30, 2022
December 31, 2021
($)
(%)
Commercial real estate - non-owner-occupied
$
1,229,102
$
1,178,185
$
50,917
4
%
Commercial real estate - owner-occupied
333,785
317,275
16,510
5
%
Commercial
423,325
363,695
59,630
16
%
SBA PPP
685
35,953
(35,268)
(98)
%
Residential real estate
1,619,409
1,306,447
312,962
24
%
Consumer and home equity
254,374
229,919
24,455
11
%
Total loans
$
3,860,680
$
3,431,474
$
429,206
13
%
Commercial Loan Portfolio
$
1,986,897
$
1,895,108
$
91,789
5
%
Retail Loan Portfolio
$
1,873,783
$
1,536,366
$
337,417
22
%
Commercial Portfolio Mix
51
%
55
%
Retail Portfolio Mix
49
%
45
%
For the first nine months of 2022, the Company held 79% of its funded residential mortgage production, which was higher than in recent years, primarily due to market conditions, such as local market pricing and jumbo mortgage demand.
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. Effective May 2021, the SBA PPP loan program ended and the Company ceased originating loans under this program. The decrease for the first nine months of 2022 was driven by borrower loans being forgiven under the terms of the program. As of September 30, 2022 and December 31, 2021, there were $20,000 and $1.2 million of SBA PPP loan origination fees yet to be recognized, respectively.
Through the first nine months of 2022, the FOMC increased the Federal Funds Interest Rate sharply in an effort to curb inflationary pressures. In doing so, there is a high likelihood the economy will slow which may have an impact on overall loan demand and slow the Company's loan growth moving forward.
61
Asset Quality
Our practice is to manage the Company's loan portfolio proactively so that we are able to effectively identify problem credits and trends early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continually reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. The Company continues to dedicate significant resources to monitor and manage credit risk throughout our loan portfolio. In light of the current environment, management is monitoring the impact of the following on our borrowers: (1) rising interest rates, (2) widespread inflationary pressures, and (3) challenges across the labor market.
Management of the Company's credit risk includes management and board-level oversight as follows:
•The Credit Risk and Special Assets team and the Credit Risk Policy Committee, which is an internal management committee comprised of various executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Credit Risk and Special Assets, Compliance, and Commercial and Retail Banking, 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 ratings system.
•The adequacy of the ACL 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 Underwriting, Credit Risk and Special Assets, Compliance, and Commercial and Retail Banking. The Management Provision Committee supports the oversight efforts of the Audit Committee of the Board of Directors.
•The Directors Credit Committee of the Board of Directors reviews large credit exposures, monitors 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, and concentration levels.
•The Audit Committee of the Board of Directors has approval authority and oversight responsibility for the ACL adequacy and methodology.
62
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 composition and amounts of our non-performing loans as of the dates indicated:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Non-accrual loans:
Commercial real estate - non-owner-occupied
$
26
$
51
Commercial real estate - owner-occupied
47
133
Commercial
541
829
Residential real estate
1,562
2,107
Consumer and home equity
589
1,207
Total non-accrual loans
2,765
4,327
Accruing TDRs not included above
2,285
2,392
Total non-performing loans
5,050
6,719
Other real estate owned
—
165
Total non-performing assets
$
5,050
$
6,884
Total loans, excluding loans held for sale
$
3,860,680
$
3,431,474
Total assets
$
5,551,724
$
5,500,356
ACL on loans
$
36,542
$
33,256
ACL on loans to non-accrual loans
1,321.59
%
768.57
%
Non-accrual loans to total loans
0.07
%
0.13
%
Non-performing loans to total loans
0.13
%
0.20
%
Non-performing assets to total assets
0.09
%
0.13
%
Potential Problem Loans
Potential problem loans consist of classified accruing commercial and commercial real estate loans that were 30-89 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, 2022, loans classified as potential problem loans totaled $554,000.
Past Due Loans
Past due loans consist of accruing loans that were 30-89 days past due. The following table presents the recorded investment of past due loans as of the dates indicated:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Accruing loans 30-89 days past due:
Commercial real estate - non-owner-occupied
$
195
$
—
Commercial real estate - owner-occupied
—
47
Commercial
1,344
552
Residential real estate
2,326
400
Consumer and home equity
843
509
Total
$
4,708
$
1,508
Total loans
$
3,860,680
$
3,431,474
Accruing loans 30-89 days past due to total loans
0.12
%
0.04
%
63
ACL
The following table sets forth information concerning the components of our ACL 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, 2021
(Dollars in thousands)
2022
2021
2022
2021
ACL on loans at the beginning of the period
$
34,244
$
32,060
$
33,256
$
37,865
$
37,865
Provision (credit) for loan losses
2,513
269
3,788
(5,037)
(3,817)
Net charge-offs (recoveries)1
Commercial real estate
(1)
(2)
(4)
(7)
(9)
Commercial
122
48
403
344
579
Residential real estate
49
2
65
20
(15)
Consumer and home equity
45
9
38
199
237
ACL on loans at the end of the period
$
36,542
$
32,272
$
36,542
$
32,272
$
33,256
Components of ACL:
ACL on loans
$
36,542
$
32,272
$
36,542
$
32,272
$
33,256
ACL on off-balance sheet credit exposures
3,441
3,185
3,441
3,185
3,195
ACL at end of the period
$
39,983
$
35,457
$
39,983
$
35,457
$
36,451
Total loans, excluding loans held for sale
$
3,860,680
$
3,315,303
$
3,860,680
$
3,315,303
$
3,431,474
Average Loans
$
3,796,212
$
3,299,063
$
3,631,500
$
3,276,038
$
3,299.313
Net charge-offs to average loans
0.02
%
0.01
%
0.02
%
0.02
%
0.02
%
Provision (credit) for loan losses (annualized) to average loans
0.26
%
0.03
%
0.21
%
(0.31)
%
(0.12)
%
ACL on loans to total loans
0.95
%
0.97
%
0.95
%
0.97
%
0.97
%
(1) Additional information related to net charge-offs (recoveries) is presented in the following table for the periods indicated:
64
For The Three Months Ended September 30,
(Dollars in thousands)
Total Charge-offs
Total Recoveries
Net Charge-Offs (Recoveries)
Average Loans
Ratio of Net Charge-Offs (Recoveries) to Average Loans
2022:
Commercial real estate
$
—
$
1
$
(1)
$
1,546,638
—
%
Commercial
183
61
122
424,726
0.03
%
SBA PPP
—
—
—
1,254
—
%
Residential real estate
49
—
49
1,571,449
—
%
Consumer and home equity
46
1
45
252,145
0.02
%
Total
$
278
$
63
$
215
$
3,796,212
0.01
%
2021:
Commercial real estate
$
—
$
2
$
(2)
$
1,410,201
—
%
Commercial
97
49
48
365,640
0.01
%
SBA PPP
—
—
—
105,742
—
%
Residential real estate
4
2
2
1,174,559
—
%
Consumer and home equity
20
11
9
242,921
—
%
Total
$
121
$
64
$
57
$
3,299,063
—
%
For The Nine Months Ended September 30,
2022:
Commercial real estate
$
—
$
4
$
(4)
$
1,512,285
—
%
Commercial
744
341
403
410,377
0.10
%
SBA PPP
—
—
—
9,138
—
%
Residential real estate
65
—
65
1,459,659
—
%
Consumer and home equity
130
92
38
240,041
0.02
%
Total
$
939
$
437
$
502
$
3,631,500
0.01
%
2021:
Commercial real estate
$
—
$
7
$
(7)
$
1,400,224
—
%
Commercial
503
159
344
363,914
0.09
%
SBA PPP
—
—
—
139,453
—
%
Residential real estate
92
72
20
1,117,389
—
%
Consumer and home equity
233
34
199
255,058
0.08
%
Total
$
828
$
272
$
556
$
3,276,038
0.02
%
For the Year Ended December 31,
2021:
Commercial real estate
$
—
$
9
$
(9)
$
1,412,884
—
%
Commercial
799
220
579
361,256
0.16
%
SBA PPP
—
—
—
118,414
—
%
Residential real estate
92
107
(15)
1,156,698
—
%
Consumer and home equity
273
36
237
250,061
0.09
%
Total
$
1,164
$
372
$
792
$
3,299,313
0.02
%
65
ACL on Loans
There were no significant changes in our modeling methodology to determine the ACL on loans during the nine months ended September 30, 2022. The significant key assumptions used with the ACL on loans calculation at September 30, 2022 and December 31, 2021, included: (i) Company-specific macroeconomic factors (i.e. loss drivers), (ii) our forecast period and reversion speed, (iii) prepayment speeds, and (iv) various qualitative factors.
As of September 30, 2022 and December 31, 2021, the recorded ACL on loans was $36.5 million and $33.3 million, respectively, and represented our best estimate. The increase in the ACL on loans between periods was primarily driven by loan growth and the economic outlook of a softening economy over the coming quarters, net of the release of $5.0 million of reserves provided for certain COVID modified loans deemed as "recovered" or have been paid off. To have been deemed "recovered" by the Company, the borrower must have met certain credit metrics, including a debt service coverage ratio and consistent timely payments of full principal and interest under an agreed upon payment schedule. Refer to "—Results of Operations—Provision for Credit Losses—Provision (Credit) for Loan Losses" for further discussion of the drivers of the change between periods. As of September 30, 2022, all COVID modified loans have been paid off or deemed fully "recovered".
The overall global and national markets continue to be volatile and carry a high degree of uncertainty, and any changes to our forecast or qualitative factors subject our ACL estimate to a higher risk of fluctuation between periods.
We may adjust our assumptions to account for differences between expected and actual losses from period to period. A future change of our assumptions likely will alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL on loans is reviewed periodically within a calendar quarter to assess trends in CECL key assumptions and asset quality, and their effects on the Company's financial condition.
ACL on Off-Balance Sheet Credit Exposures
There were no significant changes in our modeling methodology to determine the ACL on off-balance sheet credit exposures during the three and nine months ended September 30, 2022. The model uses the credit loss factors for each segment calculated within the ACL on loans model described above. The ACL on off-balance sheet credit exposures as of September 30, 2022 and December 31, 2021, was $3.4 million and $3.2 million, respectively.
The ACL on off-balance sheet credit exposures was presented within accrued interest and other liabilities on the consolidated statements of condition. Increases (decreases) to the ACL on off-balance sheet credit exposures were presented within provision (credit) for credit losses on the consolidated statements of income.
We may adjust our assumptions to account for differences between expected and actual losses from period to period. A future change to our assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition.
Liabilities and Shareholders’ Equity
Deposits
At September 30, 2022, deposits totaled $4.6 billion, a decrease of $40.3 million, or 1%, since December 31, 2021. The decrease in deposits during the first half of 2022 was driven by a decrease in brokered deposits of $118.7 million as we used alternative borrowing sources to manage funding costs. Core deposits (non-GAAP) totaled $4.2 billion as of September 30, 2022, an increase of $108.5 million, or 3% since year end, driven by checking account growth of $74.4 million, or 3%, during the period.
The Company's loan-to-deposit ratio was 85% at September 30, 2022, compared to 74% at December 31, 2021.
66
Uninsured Deposits
Total deposits that exceed the FDIC deposit insurance limit of $250,000 were $1.2 billion at September 30, 2022 and $1.3 billion at December 31, 2021. The Company has pledged assets as collateral covering certain deposits in the amount of $314.2 million and $347.0 million at September 30, 2022 and December 31, 2021, respectively.
The portion of time deposits that exceed the FDIC deposit insurance limit of $250,000, by time remaining until maturity, at September 30, 2022, was $57.7 million. At September 30, 2022, the Company does not have time deposits that are otherwise uninsured.
Borrowings
At September 30, 2022, total borrowings were $465.4 million, an increase of $209.5 million, or 82%, since December 31, 2021. This increase was the result of a shift in alternative funding over this period from brokered deposits to more cost-effective overnight borrowings, as well as the need for additional funding to support loan growth during the first nine months of 2022.
Shareholders' Equity
Shareholders' equity at September 30, 2022 totaled $431.0 million, a decrease of $110.3 million, or 20%, since December 31, 2021. The decrease in shareholders' equity over the first nine months of 2022 was driven by a decrease in the valuation of our investments of $139.1 million, which included a $85.4 million, net of tax, decrease in the debt securities portfolio valuation designated as AFS in response to the increase in interest rates during 2022, and net unrealized losses of $53.7 million from the AFS to HTM transfer, net of tax. These net unrealized losses were recorded in the second quarter of 2022 as we transferred selected securities from AFS to HTM to protect our capital position in the rising interest rate environment. As discussed further in "—Investments," management believes the decrease in shareholders' equity is temporary and does not believe that the decrease is an indication of permanent losses. The Company and the Bank continue to be well-capitalized under the standards set by its regulators. Refer to Note 10 of the consolidated financial statements for further details.
On September 27, 2022, the Company announced a quarterly cash dividend to shareholders of $0.40 per share, payable on October 31, 2022 to shareholders of record as of October 14, 2022. As of September 30, 2022, the Company's annualized dividend yield was 3.76% based on Camden National's closing share price of $42.60, as reported by NASDAQ on September 30, 2022.
In January 2022, the Company's Board of Directors authorized the repurchase of up to 750,000 shares of the Company's common stock, representing approximately 5% of the Company's issued and outstanding shares of common stock as of December 31, 2021. During the nine months ended September 30, 2022, the Company repurchased 225,245 shares at a weighted average price of $45.46 per share.
67
The following table presents certain information regarding shareholders’ equity as of and 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, 2021
2022
2021
2022
2021
Financial Ratios
Average equity to average assets
8.21
%
10.26
%
8.78
%
10.51
%
10.33
%
Common equity ratio
7.76
%
9.92
%
7.76
%
9.92
%
9.84
%
Tangible common equity ratio (non-GAAP)
6.13
%
8.30
%
6.13
%
8.30
%
8.22
%
Dividend payout ratio
41.24
%
36.73
%
38.34
%
30.77
%
32.03
%
Per Share Data
Book value per share
$
29.59
$
30.52
$
29.59
$
30.52
$
36.72
Tangible book value per share (non-GAAP)
$
22.97
$
30.23
$
22.97
$
30.23
$
30.15
Dividends declared per share
$
0.40
$
0.36
$
1.20
$
1.08
$
1.48
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 and monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. As of September 30, 2022 and December 31, 2021, our level of liquidity exceeded target levels. We believe that we currently have appropriate liquidity available to respond to demands. Sources of funds that we utilize consist of deposits; borrowings from the FHLBB and other sources; cash flows from loans and investments; and cash flows from operations, including other contractual obligations and commitments.
We believe that our 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 brokered deposit and wholesale repurchase markets, could significantly affect our liquidity position.
Deposits. Deposits continue to represent our primary source of funds. As of September 30, 2022 and December 31, 2021, total deposits, including brokered deposits, were $4.6 billion, which included money market deposits of $61.5 million and $63.9 million, respectively, from Camden National Wealth Management, which represent client funds. These funds fluctuate with changes in the portfolios of the clients of Camden National Wealth Management. Time deposits are generally considered to be more interest rate sensitive than other deposits and, therefore, more likely to be withdrawn to obtain higher yields elsewhere if available.
The following is a summary of the scheduled maturities of CDs as of September 30, 2022:
(In thousands)
CDs
1 year or less
$
199,794
> 1 year
79,809
Total
$
279,603
Borrowings. 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. As of September 30, 2022, total borrowings were $465.4 million, compared to $255.9 million as of December 31, 2021. 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-
68
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 $42.7 million as of September 30, 2022. We also believe we have additional untapped access to the brokered deposit market, wholesale reverse repurchase transaction market, and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan.
The following is a summary of the scheduled maturities of borrowings as of September 30, 2022:
(In thousands)
FHLBB Advances
Customer Repurchase Agreements
Subordinated Debentures
Total
1 year or less
$
152,225
$
268,876
$
—
$
421,101
> 1 year
—
—
44,331
44,331
Total
$
152,225
$
268,876
$
44,331
$
465,432
Loans. Contractual loan repayments also affect our liquidity position. Actual speed and timing of repayment may differ materially from contract terms due to prepayments or nonpayment. Specifically, in a rising interest rate environment prepayment speeds may slow, which then would decrease the pace in which we receive cash flow from loans. The Company's residential mortgage loan portfolio is also a significant source of contingent liquidity for the Company that could be accessed in a reasonable time period through the sale of loans on the secondary market, as needed. As of September 30, 2022, book value of $1.7 billion of qualifying loans were pledged as collateral.
The following table presents the contractual maturities of loans at the date indicated:
September 30, 2022
(Dollars in thousands)
Due in 1 Year or Less
Due after 1 Year Through 5 Years
Due After 5 Years Through 15 Years
Due in More than 15 Years
Total
Percent of Total Loans
Maturity Distribution(1):
Fixed Rate:
Commercial real estate(2)
$
12,821
$
159,790
$
578,271
$
2,117
$
752,999
20
%
Commercial
13,277
96,326
97,645
453
207,701
5
%
Residential real estate
204
10,074
177,041
1,130,819
1,318,138
34
%
Consumer and home equity
1,327
14,317
24,089
168,401
208,134
5
%
Total fixed rate
27,629
280,507
877,046
1,301,790
2,486,972
64
%
Variable Rate:
Commercial real estate(2)
5,832
161,266
386,635
256,155
809,888
21
%
Commercial
45,459
114,493
45,466
10,891
216,309
6
%
Residential real estate
25
802
39,099
261,345
301,271
8
%
Consumer and home equity
484
2,729
12,020
31,007
46,240
1
%
Total variable rate
51,800
279,290
483,220
559,398
1,373,708
36
%
Total loans
$
79,429
$
559,797
$
1,360,266
$
1,861,188
$
3,860,680
100
%
(1) Scheduled repayments are reported in the maturity category in which payment is due. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less
(2) Commercial real estate loans includes non-owner-occupied and owner-occupied properties.
Additionally, we have active relationships with various secondary market investors that purchase residential mortgage loans we originate. In addition to managing our interest rate risk position and earnings through the sale of these loans, we are also able to manage our liquidity position through timely sales of residential mortgage loans to the secondary market.
Investments. We generally invest in amortizing MBS and CMO debt securities that return cash flow at an accelerated rate in comparison to other types of debt securities that are of a bullet structure. As of September 30, 2022 and December 31, 2021, the Company's MBS and CMO debt securities portfolio totaled 88% and 90%, respectively, of the Company's investment portfolio. The investment portfolio is also a significant source of contingent liquidity for the Company that could be accessed in a reasonable time period through the sale of investments on the secondary market, if needed. For purposes of assessing our
69
liquidity position, we only consider those investments designated as AFS. As of September 30, 2022, $358.6 million of our AFS debt securities, or 43%, were not pledged as collateral, compared to $867.4 million, or 58%, as of December 31, 2021.
The following is a summary of the scheduled cash flows from our debt securities portfolio, including investments designated as AFS and HTM, as of September 30, 2022:
(In thousands)
Contractual
Cash Flows(1)
1 year or less
$
148,827
> 1 year
1,219,370
Total
$
1,368,197
(1) Expected contractual cash flows could differ as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Prepayment speeds may slow in a rising interest rate environment, which then would decrease the pace within which we receive cash flow from our investments.
Other Liquidity Requirements. Through the Company's normal course of business it generates cash flows from earnings and, while not contractual, it has a history of paying a quarterly cash dividend to its shareholders and repurchasing its shares of common stock. For the nine months ended September 30, 2022, the Company reported $46.1 million of net income, paid cash dividends of $17.7 million to shareholders and repurchased shares of its common stock for $10.0 million.
Also through its normal operations, the Company is party to several other contractual obligations not previously discussed, such as various lease agreements on a number of its branches. Renewal options within the various lease contracts, as applicable, were 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. At September 30, 2022, we had the following lease and other contractual obligations 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
Operating leases
$
3,598
$
1,318
$
2,280
Finance leases
941
311
630
Other contractual obligations
6,954
6,954
—
Total
$
11,493
$
8,583
$
2,910
The Company's estimated lease liability for its various operating and finance leases was reported within other liabilities on our consolidated statements of condition.
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. Many of the commitments will expire without being drawn upon, and thus, the total amount does not necessarily represent future cash requirements. Refer to Note 7 of the consolidated financial statements for additional details.
We use derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. These contracts with our various counterparties may subject the Company to various cash flow requirements, which may include posting of cash as collateral (or other assets) for arrangements that the Company is in a liability position (i.e. “underwater”). Refer to Note 8 of the consolidated financial statements for further discussion of our derivatives and hedge instruments.
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 $431.0 million and $541.3 million at September 30, 2022 and December 31, 2021,
70
respectively, which amounted to 8% and 10% of total assets, respectively. Refer to "— Financial Condition — Liabilities and Shareholders' Equity" for discussion regarding the driver for the decrease in shareholders' equity for the nine months ended September 30, 2022.
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 $17.6 million and $16.1 million for the nine months ended September 30, 2022 and 2021, 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, 2022 and 2021, the Bank declared dividends payable to the Company in the amount of $23.9 million and $32.8 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, 2022 and December 31, 2021, 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.
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, Enterprise Risk Management and Chief Risk Officer, 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 in 2020 to develop and oversee the Company’s response. The Pandemic Work Group: (i) developed employee practices, policies and playbooks to address pandemic related issues; (ii) implemented monitoring of all federal, state and local actions, such as stay-at-home orders, masking mandates and others, 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) oversaw the roll out of and continue to monitor the SBA PPP loan program and temporary loan relief programs; (vi) developed our branch network plan, including determination of which of our branches were to close in order to best allocate resources; (vii) developed a plan for, and oversaw the re-opening of our branches in June 2020, which included ensuring health and safety protocols and practices were in place for our employees and customers; and (viii) completed and implemented the Company's “return-to-office” strategy during the third quarter of 2021, which included certain employees returning to the office full-time, others through a hybrid model (i.e., work from home part-time and from one of the Company's physical locations part-time), and others working remotely full-time. The Company's Executive Committee re-assessed its use of a hybrid model for its employees during the first quarter of 2022 and, at this time, will continue to use such model and govern in accordance with the established policy. The Executive Committee will continue to monitor and assess the related policy and its practice periodically.
The Pandemic Work Group was established in response to the COVID-19 pandemic to oversee the Company’s response to the COVID-19 pandemic and its impact on the Company and its employees. These areas of oversight included, but were not limited to, 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. Throughout the pandemic, the
71
Pandemic Work Group, through the Company's executive team, reported to the Board of Directors on related matters 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. The Pandemic Work Group continues to meet periodically as needed, based on current developments relating to the COVID-19 pandemic, and updates the Board of Directors accordingly.
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, 2021. Please refer to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 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 a static balance sheet, 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 have resulted in negative rates as of September 30, 2021, as many deposit and funding rates were below 2.00%. In this case, a downward shift of 100 basis points was the only down scenario performed. 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 and 200 basis points scenarios, 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%.
The sensitivity analysis below does not represent a forecast and should not be relied upon as being indicative of expected operating results. 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 and reinvestment/replacement of asset and liability cash flows. While 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.
As of September 30, 2022 and 2021, 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, 2022
September 30, 2021
Year 1
+200 basis points
(2.82)
%
1.68
%
-100 basis points
N/A
(1.52)
%
-200 basis points
1.56
%
N/A
Year 2
+200 basis points
8.34
%
7.19
%
-100 basis points
N/A
(11.43)
%
-200 basis points
5.09
%
N/A
72
If rates remain at or near current levels, net interest income is projected to increase in year two of the simulation. Asset cash flows reprice and replace into the current higher rate environment at rates above current portfolio averages while funding costs remain largely unchanged, causing balance sheet spread to expand.
If rates increase 200 basis points, net interest income is projected to decrease in the first year of the simulation as the funding base adjusts into the higher rate environment to a greater degree than asset yields increase. In the second year, net interest income is projected to increase as loan and investment yields continue to reprice/reset into higher yields and funding cost increases continually slow.
If rates decrease 200 basis points, net interest income is projected to increase slightly as reductions in funding costs are able to more than offset near-term asset yield deterioration. In the second year, net interest income is projected to further improve as asset yields are supported by fixed rates and floors while remaining cost of funds reductions are exhausted.
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 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. The administrator of LIBOR has announced that the publication of the most commonly used U.S. Dollar LIBOR settings will cease to be provided or will cease to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be provided or ceased to be representative as of December 31, 2021. As such, the Company has an internal project team that is focused on an orderly transition from LIBOR to alternative reference rates. The markets for alternative rates are developing. The Company will continue to assess the use of alternative rates, including SOFR, and expects to transition to alternative rates as the markets and best practices further develop. The Company is also currently assessing the applicability and scope of the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), which was enacted on March 15, 2022. The LIBOR Act establishes a process for replacing LIBOR on existing LIBOR contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate. Under the LIBOR Act’s process for replacing LIBOR, a benchmark replacement identified by the Board of Governors of the Federal Reserve System that is based on SOFR will replace LIBOR as the benchmark for such contracts. The final implementation of the LIBOR Act currently is uncertain, as the Federal Reserve has not yet issued final regulations that are necessary for the LIBOR Act’s administration. As of September 30, 2022, the Company has no LIBOR-based deposits.
73
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.
74
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 Operating Officer and Chief Financial Officer & Principal Financial and Accounting Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal year. 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 Operating Officer and Chief Financial Officer & Principal Financial and 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 SEC’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.
There was no change in our 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, our internal control over financial reporting.
75
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
There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, for discussion of these risks.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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, 2022, formatted in iXBRL: (i) Consolidated Statements of Condition - September 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income - Three and Nine Months Ended September 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive (Loss) Income - Three and Nine Months Ended September 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three and Nine Months Ended September 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2022 and 2021; 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.
77
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 3, 2022
Gregory A. Dufour
Date
President and Chief Executive Officer (Principal Executive Officer)
/s/ Michael R. Archer
November 3, 2022
Michael R. Archer
Date
Chief Financial Officer and Principal Financial & Accounting Officer
