Published: 2022-08-04 00:00:00 ET

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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 June 30, 2022 and December 31, 2021, the consolidated statements of income for the three and six months ended June 30, 2022 and 2021, the consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2022 and 2021, the consolidated statements of changes in shareholders' equity for the three and six months ended June 30, 2022 and 2021, and the consolidated statements of cash flows for the six months ended June 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 six months ended June 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 six months ended June 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.

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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

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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 issued ASU 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.

Trading Securities

Trading securities are reported on the Company's consolidated statements of condition at fair value. As of June 30, 2022 and December 31, 2021, the fair value of the Company's trading securities were $3.8 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
June 30, 2022
Obligations of states and political subdivisions						$	54,004					$	62					$	(320)					$	53,746
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises						642,019						91						(65,644)						576,466
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises						145,457						3						(8,890)						136,570
Subordinated corporate bonds						23,120						35						(1,814)						21,341
Total AFS debt securities						$	864,600					$	191					$	(76,668)					$	788,123
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 June 30, 2022 and December 31, 2021, there was no allowance carried on AFS debt securities.

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During 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 the transfer were $72.1 million, pre-tax, and were reported within AOCI. These unrealized losses will be amortized over the remaining life of the securities. At June 30, 2022, the net unrealized losses on the transferred securities reported within AOCI were $56.0 million, net of a deferred tax asset of $15.3 million.

The net unrealized losses on AFS debt securities reported within AOCI at June 30, 2022, were $60.0 million, net of a deferred tax asset of $16.4 million. The net unrealized losses on AFS debt securities reported within AOCI 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 June 30,												Six Months Ended June 30,
(In thousands)						2022						2021						2022						2021
Proceeds from sales of investments						$	8,723					$	—					$	8,723					$	—
Gross realized gains						13						—						13						—
Gross realized losses						(22)						—						(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
June 30, 2022
Obligations of states and political subdivisions						78						$	39,703					$	(320)					$	—					$	—					$	39,703					$	(320)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises						170						500,257						(53,944)						70,192						(11,700)						$	570,449					(65,644)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises						76						99,345						(5,562)						34,506						(3,328)						133,851						(8,890)
Subordinated corporate bonds						11						15,453						(1,668)						1,853						(146)						17,306						(1,814)
Total AFS debt securities						335						$	654,758					$	(61,494)					$	106,551					$	(15,174)					$	761,309					$	(76,668)
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 six months ended June 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 will be

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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 not reflective of credit events. The issuers continue to make timely principal and interest payments on the bonds.

At June 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 $1.9 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 June 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						$	1,217					$	1,222
Due after one year through five years						9,227						8,762
Due after five years through ten years						63,681						62,078
Due after ten years						2,999						3,025
Subtotal						77,124						75,087
Mortgage-related securities						787,476						713,036
Total						$	864,600					$	788,123

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
June 30, 2022
Obligations of U.S. government-sponsored enterprises						$	7,389					$	—					$	(158)					$	7,231
Obligations of states and political subdivisions						55,837						223						(816)						55,244
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises						329,542						—						(5,529)						324,013
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises						151,384						—						(2,593)						148,791
Subordinated corporate bonds						2,368						—						(109)						2,259
Total HTM debt securities						$	546,520					$	223					$	(9,205)					$	537,538
December 31, 2021
Obligations of states and political subdivisions						$	1,291					$	89					$	—					$	1,380
Total HTM debt securities						$	1,291					$	89					$	—					$	1,380

During the second quarter of 2022, the Company transferred securities with a fair value of $520.3 million from AFS to HTM.

As of June 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 enterprise securities have a long 40 years of 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

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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, an allowance was not carried on its HTM debt securities at June 30, 2022 or December 31, 2021.

As of June 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 six months ended June 30, 2022 and 2021, the Company did not recognize any interest income on non-accrual HTM debt securities. At June 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 June 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						865						870
Due after five years through ten years						14,528						14,310
Due after ten years						50,201						49,554
Subtotal						65,594						64,734
Mortgage-related securities						480,926						472,804
Total						$	546,520					$	537,538

AFS and HTM Debt Securities Pledged

At June 30, 2022 and December 31, 2021, AFS and HTM debt securities with an amortized cost of $662.8 million and $640.1 million and estimated fair values of $619.5 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 six months ended June 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)						June 30, 2022						December 31, 2021
FHLBB						$	9,057					$	4,906
FRB						5,374						5,374
Total other investments						$	14,431					$	10,280

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Loans

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

(In thousands)						June 30, 2022						December 31, 2021
Commercial Loans:
Commercial real estate - non-owner-occupied						$	1,208,700					$	1,178,185
Commercial real estate - owner-occupied						324,214						317,275
Commercial						421,220						363,695
SBA PPP						2,509						35,953
Total commercial loans						1,956,643						1,895,108
Retail Loans:
Residential real estate						1,517,239						1,306,447
Home equity						230,865						210,403
Consumer						19,480						19,516
Total retail loans						1,767,584						1,536,366
Total loans						$	3,724,227					$	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)						June 30, 2022						December 31, 2021
Net unamortized fair value mark discount on acquired loans						$	(467)					$	(593)
Net unamortized loan origination costs(1)						5,633						3,110
Total						$	5,166					$	2,517

(1)    Net unamortized loan origination costs includes unrecognized origination fees for SBA PPP loans of $67,000 and $1.2 million as of June 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, 19 loans totaling $2.5 million remained outstanding as of June 30, 2022.

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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 June 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 June 30, 2022 and 2021, the Company sold $47.0 million and $110.8 million, respectively, of residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $1.0 million and $2.9 million, respectively. For the six months ended June 30, 2022 and 2021, the Company sold $93.7 million and $303.4 million, respectively, of residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $2.2 million and $9.1 million, respectively.

At June 30, 2022 and December 31, 2021, the Company had certain residential mortgage loans with a principal balance of $3.4 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 June 30, 2022 and December 31, 2021, recorded an unrealized (loss) gain of ($40,000) and $29,000, respectively. For the three months ended June 30, 2022 and 2021, the Company recorded an unrealized gain on loans held for sale recorded within mortgage banking income, net, on the Company's consolidated statements of income of $73,000 and $267,000, respectively. For the six months ended June 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 ($69,000) and ($804,000) respectively.

The Company has forward delivery commitments with a secondary market investor on each of its loans held for sale at June 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 June 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:

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-

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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.

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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 June 30, 2022
Beginning balance, March 31, 2022						$	16,572					$	2,339					$	4,838					$	4					$	6,476					$	1,435					$	106					$	31,770
Loans charged off						—						—						(316)						—						(16)						—						(17)						(349)
Recoveries						—						—						223						—						—						86						3						312
(Credit) provision for loan losses						(362)						162						400						(3)						1,978						275						61						2,511
Ending balance, June 30, 2022						$	16,210					$	2,501					$	5,145					$	1					$	8,438					$	1,796					$	153					$	34,244
At or For The Six Months Ended June 30, 2022
Beginning balance, December 31, 2021						$	18,834					$	2,539					$	4,183					$	19					$	6,133					$	1,469					$	79					$	33,256
Loans charged off						—						—						(561)						—						(16)						—						(84)						(661)
Recoveries						1						2						280						—						—						86						5						374
(Credit) provision for loan losses						(2,625)						(40)						1,243						(18)						2,321						241						153						1,275
Ending balance, June 30, 2022						$	16,210					$	2,501					$	5,145					$	1					$	8,438					$	1,796					$	153					$	34,244
At or For The Three Months Ended June 30, 2021
Beginning balance, March 31, 2021						$	22,473					$	2,548					$	5,170					$	87					$	3,093					$	2,176					$	228					$	35,775
Loans charged off						—						—						(259)						—						(35)						(107)						(19)						(420)
Recoveries						—						3						67						—						70						—						17						157
(Credit) provision for loan losses						(2,896)						(35)						(636)						(21)						77						(4)						63						(3,452)
Ending balance, June 30, 2021						$	19,577					$	2,516					$	4,342					$	66					$	3,205					$	2,065					$	289					$	32,060
At or For The Six Months Ended June 30, 2021
Beginning balance, December 31, 2020						$	21,778					$	2,832					$	6,703					$	69					$	3,474					$	2,616					$	393					$	37,865
Loans charged off						—						—						(406)						—						(88)						(145)						(68)						(707)
Recoveries						—						5						110						—						70						—						23						208
(Credit) provision for loan losses						(2,201)						(321)						(2,065)						(3)						(251)						(406)						(59)						(5,306)
Ending balance, June 30, 2021						$	19,577					$	2,516					$	4,342					$	66					$	3,205					$	2,065					$	289					$	32,060
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 $1.0 million during the six months ended June 30, 2022, to $34.2 million. The increase was driven by: (1) a softening overall economy and increasing likelihood of a forecasted recession, and (2) 9% loan growth during this period, that offset (3) a decrease of $4.2 million of reserves that had been 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 these loans meet certain predetermined credit metrics, the established reserve is released. As of June 30, 2022 and December 31, 2021, the allowance on these loans was $768,000 and $5.0 million, respectively.

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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 June 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 June 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.

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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
June 30, 2022
Commercial real estate - non-owner-occupied						$	92					$	—					$	49					$	141					$	1,208,559					$	1,208,700					$	—
Commercial real estate - owner-occupied						—						166						133						299						323,915						324,214
Commercial						325						20						643						988						420,232						421,220						—
SBA PPP						—						46						—						46						2,463						2,509						—
Residential real estate						1,123						61						945						2,129						1,515,110						1,517,239						—
Home equity						466						116						410						992						229,873						230,865						—
Consumer						51						13						27						91						19,389						19,480						—
Total						$	2,057					$	422					$	2,207					$	4,686					$	3,719,541					$	3,724,227					$	—
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:

						June 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						$	38					$	12					$	50					$	38					$	13					$	51
Commercial real estate - owner-occupied						85						47						132						86						47						133
Commercial						371						352						723						785						44						829
Residential real estate						1,463						368						1,831						1,780						327						2,107
Home equity						675						66						741						1,064						111						1,175
Consumer						28						—						28						32						—						32
Total						$	2,660					$	845					$	3,505					$	3,785					$	542					$	4,327

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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:

						June 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						$	325					$	—					$	325					$	268					$	—					$	268
Home equity						—						—						—						111						—						111
Total						$	325					$	—					$	325					$	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 $38,000 and $67,000 for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 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 $85,000 and $143,000, 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 six months ended June 30, 2022 and 2021. An immaterial amount of accrued interest on non-accrual loans was written-off during the three and six months ended June 30, 2022 and 2021, by reversing interest income. At June 30, 2022 and December 31, 2021, total accrued interest receivable on loans, which has been excluded from reported amortized cost basis on loans, was $8.5 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)						June 30, 2022						December 31, 2021						June 30, 2022						December 31, 2021						June 30, 2022						December 31, 2021
Commercial real estate - owner-occupied						1						1						$	116					$	118					$	46					$	43
Commercial						2						2						66						74						—						—
Residential real estate						19						19						2,276						2,341						325						$	348
Consumer and home equity						3						3						251						253						6						6
Total						25						25						$	2,709					$	2,786					$	377					$	397

At June 30, 2022, the Company had performing and non-performing TDRs with a recorded investment balance of $2.3 million and $393,000, 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.

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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 June 30:
Home equity:
Maturity concession						—						1						$	—					$	144					$	—					$	143					$	—					$	6
Total						—						1						$	—					$	144					$	—					$	143					$	—					$	6
For the Six Months Ended June 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 June 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 six months ended June 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 June 30, 2022 and December 31, 2021, the Company had $607,000 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 $1.5 billion and $1.4 billion at June 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.

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)						June 30, 2022						December 31, 2021
Short-Term Borrowings:
Customer repurchase agreements						$	224,852					$	211,608
Overnight borrowings						96,650						—
FHLBB borrowings						50,000						—
Total short-term borrowings						$	371,502					$	211,608

The Company's subordinated debentures were $44.3 million at both June 30, 2022 and December 31, 2021. As of June 30, 2022, 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.

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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)						June 30, 2022						December 31, 2021
Customer Repurchase Agreements(1)(2):
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises						$	117,618					$	120,846
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises						107,234						88,749
Obligations of states and political subdivisions						—						2,013
Total						$	224,852					$	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 June 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.

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)						June 30, 2022						December 31, 2021
Commitments to extend credit						$	881,631					$	834,533
Standby letters of credit						8,486						7,952
Total						$	890,117					$	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. 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.

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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 June 30, 2022 and December 31, 2021, the ACL on off-balance sheet credit exposures was $3.2 million. 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 June 30, 2022 and 2021, the (credit) provision for credit losses on off-balance sheet credit exposures was ($166,000) and $49,000, respectively. For the six months ended June 30, 2022 and 2021, the credit for credit losses on off-balance sheet credit exposure was ($5,000) and ($53,000).

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.

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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 six months ended June 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 $1.8 million will be reclassified as a decrease to interest expense and an additional $1.4 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.

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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
June 30, 2022
Derivatives designated as hedging instruments:
Interest rate contracts(1)						$	110,000					Other assets						$	10,909					$	133,000					Accrued interest and other liabilities						$	5,836
Total derivatives designated as hedging instruments																		$	10,909																	$	5,836
Derivatives not designated as hedging instruments:
Customer loan swaps(1)						$	270,974					Other assets						$	7,272					$	270,974					Accrued interest and other liabilities						$	7,322
Risk participation agreements						22,055						Other assets						—						52,891						Accrued interest and other liabilities						—
Fixed Rate mortgage interest rate lock commitments						13,923						Other assets						170						6,583						Accrued interest and other liabilities						81
Forward delivery commitments						3,380						Other assets						91						—						Accrued interest and other liabilities						—
Total derivatives not designated as hedging instruments																		$	7,533																	$	7,403
December 31, 2021
Derivatives designated as hedging instruments:
Interest rate contracts(1)						$	160,000					Other assets						$	5,589					$	83,000					Accrued interest and other liabilities						$	7,872
Total derivatives designated as hedging instruments																		$	5,589																	$	7,872
Derivatives not designated as hedging instruments:
Customer loan swaps(1)						$	345,545					Other assets						$	19,297					$	345,545					Accrued interest and other liabilities						$	19,485
Risk participation agreements						25,347						Other assets						—						53,704						Accrued interest and other liabilities						—
Fixed rate mortgage interest rate lock commitments						20,437						Other assets						371						8,587						Accrued interest and other liabilities						91
Forward delivery commitments						3,882						Other assets						86						1,903						Accrued interest and other liabilities						6
Total derivatives not designated as hedging instruments																		$	19,754																	$	19,582

(1)    Reported fair values include accrued interest receivable and payable.

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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 June 30, 2022
Interest rate contracts						$	(904)					$	(904)					$	—					Interest and fees on loans						$	237					$	237					$	—
Interest rate contracts						2,233						2,233						—						Interest on deposits						32						32						—
Interest rate contracts						2,259						2,259						—						Interest on subordinated debentures						(271)						(271)						—
Total						$	3,588					$	3,588					$	—											$	(2)					$	(2)					$	—
For the Six Months Ended June 30, 2022
Interest rate contracts						$	(3,915)					$	(3,915)					$	—					Interest and fees on loans						$	619					$	619					$	—
Interest rate contracts						5,721						5,721						—						Interest on deposits						(117)						(117)						—
Interest rate contracts						5,417						5,417						—						Interest on subordinated debentures						(622)						(622)						—
Total						$	7,223					$	7,223					$	—											$	(120)					$	(120)					$	—
For the Three Months Ended June 30, 2021
Interest rate contracts						$	66					$	66					$	—					Interest and fees on loans						$	403					$	403					$	—
Interest rate contracts						(1,511)						(1,511)						—						Interest on deposits						(164)						(164)						—
Interest rate contracts						$	(1,758)					(1,758)												Interest on subordinated debentures						(431)						(431)
Total						$	(3,203)					$	(3,203)					$	—											$	(192)					$	(192)					$	—
For the Six Months Ended June 30, 2021
Interest rate contracts						$	(736)					$	(736)					$	—					Interest and fees on loans						$	795					$	795					$	—
Interest rate contracts						1,952						1,952						—						Interest on deposits						(320)						(320)						—
Interest rate contracts						1,973						1,973						—						Interest on subordinated debentures						(853)						(853)						—
Total						$	3,189					$	3,189					$	—											$	(378)					$	(378)					$	—

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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 June 30,
						2022																		2021
(Dollars in thousands)						Interest and fees on loans						Interest on deposits												Interest on subordinated debentures						Interest and fees on loans						Interest on deposits												Interest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded						$	33,121					$	2,510											$	532					$	30,865					$	1,921											$	640
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income						$	237					$	32											$	(271)					$	403					$	(164)											$	(431)
Amount of gain (loss) reclassified from AOCI into income - included component						$	237					$	32											$	(271)					$	403					$	(164)											$	(431)
Amount of gain (loss) reclassified from AOCI into income - excluded component						$	—					$	—											$	—					$	—					$	—											$	—

						Location and Amount of Gain (Loss) Recognized in Income
						Six Months Ended June 30,
						2022																		2021
(Dollars in thousands)						Interest and fees on loans						Interest on deposits												Interest on subordinated debentures						Interest and fees on loans						Interest on deposits												Interest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded						$	65,156					$	4,343											$	1,061					$	61,425					$	3,984											$	1,445
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income						$	619					$	(117)											$	(622)					$	795					$	(320)											$	(853)
Amount of gain (loss) reclassified from AOCI into income - included component						$	619					$	(117)											$	(622)					$	795					$	(320)											$	(853)
Amount of gain (loss) reclassified from AOCI into income - excluded component						$	—					$	—											$	—					$	—					$	—											$	—

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:

						Location of Gain (Loss) Recognized in Income						Amount of Gain (Loss) Recognized in Income
												Three Months Ended June 30,												Six Months Ended June 30,
(Dollars in thousands)												2022						2021						2022						2021
Customer loan swaps						Other expense						$	44					$	—					$	138					$	—
Fixed rate mortgage interest rate lock commitments						Mortgage banking income, net						268						(489)						(191)						456
Forward delivery commitments						Mortgage banking income, net						(155)						(469)						11						13
Total												$	157					$	(958)					$	(42)					$	469

                                                        

Credit Risk-Related Contingent Features    

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

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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 June 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 $4.7 million and $26.1 million, respectively. As of June 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 $1.8 million and $30.7 million, respectively. If the Company had breached any of these provisions at June 30, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at their termination value of $4.7 million and $26.1 million, respectively.

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.

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
June 30, 2022
Derivative assets:
Customer loan swaps - commercial customer(2)						$	7,272					$	—					$	7,272					$	—					$	—					$	7,272
Interest rate contracts(3)						10,909						—						10,909						—						(10,909)						—
Total						$	18,181					$	—					$	18,181					$	—					$	(10,909)					$	7,272
Derivative liabilities:
Customer loan swaps - dealer bank(3)						$	7,322					$	—					$	7,322					$	—					$	—					$	7,322
Interest rate contracts(3)						5,836						—						5,836						—						5,836						—
Total						$	13,158					$	—					$	13,158					$	—					$	5,836					$	7,322
Customer repurchase agreements						$	224,852					$	—					$	224,852					$	224,852					$	—					$	—
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)    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.

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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 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 June 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 June 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:

						June 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						$	538,226					14.10		%				10.50		%				10.00		%				$	522,714					14.71		%				10.50		%				10.00		%
Tier 1 risk-based capital ratio						500,793						13.12		%				8.50		%				6.00		%				486,263						13.68		%				8.50		%				6.00		%
Common equity Tier 1 risk-based capital ratio(1)						457,793						11.99		%				7.00		%				N/A						443,263						12.47		%				7.00		%				N/A
Tier 1 leverage capital ratio(1)						500,793						9.25		%				4.00		%				N/A						486,263						8.92		%				4.00		%				N/A
Camden National Bank:
Total risk-based capital ratio						$	506,550					13.30		%				10.50		%				10.00		%				$	488,070					13.78		%				10.50		%				10.00		%
Tier 1 risk-based capital ratio						469,117						12.32		%				8.50		%				8.00		%				451,620						12.75		%				8.50		%				8.00		%
Common equity Tier 1 risk-based capital ratio						469,117						12.32		%				7.00		%				6.50		%				451,620						12.75		%				7.00		%				6.50		%
Tier 1 leverage capital ratio						469,117						8.67		%				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

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statements of condition, the Company is permitted, in accordance with applicable regulation, to include, subject to certain limits, the debentures within its calculation of risk-based capital. At June 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.

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
						June 30, 2022																		June 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						$	(53,580)					$	11,520					$	(42,060)					$	2,925					$	(629)					$	2,296
Less: reclassification adjustment for net realized losses(1)						(9)						2						(7)						—						—						—
Net change in fair value						(53,571)						11,518						(42,053)						2,925						(629)						2,296
Cash Flow Hedges:
Change in fair value						3,588						(771)						2,817						(3,203)						689						(2,514)
Less: reclassified AOCI loss into interest expense(2)						(239)						51						(188)						(595)						128						(467)
Less: reclassified AOCI gain into interest income(3)						237						(51)						186						403						(86)						317
Net change in fair value						3,590						(771)						2,819						(3,011)						647						(2,364)
Postretirement Plans:
Amortization of settlement recognition of net loss and prior service credit(4)						231						(50)						181						217						(46)						171
Other comprehensive (loss) income						$	(49,750)					$	10,697					$	(39,053)					$	131					$	(28)					$	103

(1) 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.

(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.

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						For the Six Months Ended
						June 30, 2022																		June 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						$	(146,333)					$	31,462					$	(114,871)					$	(19,380)					$	4,167					$	(15,213)
Less: reclassification adjustment for net realized losses(1)						(9)						2						(7)						—						—						—
Net change in fair value						(146,324)						31,460						(114,864)						(19,380)						4,167						(15,213)
Cash Flow Hedges:
Change in fair value						7,223						(1,553)						5,670						3,189						(685)						2,504
Less: reclassified AOCI loss into interest expense(2)						(739)						159						(580)						(1,173)						252						(921)
Less: reclassified AOCI gain into interest income(3)						619						(133)						486						795						(170)						625
Net change in fair value						7,343						(1,579)						5,764						3,567						(767)						2,800
Postretirement Plans:
Amortization of settlement recognition of net loss and prior service credit(4)						463						(100)						363						435						(94)						341
Other comprehensive loss						$	(138,518)					$	29,781					$	(108,737)					$	(15,378)					$	3,306					$	(12,072)

(1) 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.

(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.

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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 June 30, 2022
Balance at March 31, 2022						$	(73,984)					$	1,166					$	(3,095)					$	(75,913)
Other comprehensive (loss) income before reclassifications						(42,060)						2,817						185						(39,058)
Less: Amounts reclassified from AOCI						(7)						(2)						4						(5)
Other comprehensive (loss) income						(42,053)						2,819						181						(39,053)
Balance at June 30, 2022						$	(116,037)					$	3,985					$	(2,914)					$	(114,966)
At or For the Six Months Ended June 30, 2022
Balance at December 31, 2021						$	(1,173)					$	(1,779)					$	(3,277)					$	(6,229)
Other comprehensive (loss) income before reclassifications						(114,871)						5,670						372						(108,829)
Less: Amounts reclassified from AOCI						(7)						(94)						9						(92)
Other comprehensive (loss) income						(114,864)						5,764						363						(108,737)
Balance at June 30, 2022						$	(116,037)					$	3,985					$	(2,914)					$	(114,966)
At or For the Three Months Ended June 30, 2021
Balance at March 31, 2021						$	11,801					$	538					$	(3,774)					$	8,565
Other comprehensive (loss) income before reclassifications						2,296						(2,514)						175						(43)
Less: Amounts reclassified from AOCI						—						(150)						4						(146)
Other comprehensive income (loss)						2,296						(2,364)						171						103
Balance at June 30, 2021						$	14,097					$	(1,826)					$	(3,603)					$	8,668
At or For the Six Months Ended June 30, 2021
Balance at December 31, 2020						$	29,310					$	(4,626)					$	(3,944)					$	20,740
Other comprehensive income (loss) before reclassifications						(15,213)						2,504						350						(12,359)
Less: Amounts reclassified from AOCI						—						(296)						9						(287)
Other comprehensive (loss) income						(15,213)						2,800						341						(12,072)
Balance at June 30, 2021						$	14,097					$	(1,826)					$	(3,603)					$	8,668

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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 June 30,												Six Months Ended June 30,
(In thousands)												2022						2021						2022						2021
Debit card interchange income						Debit card income						$	3,213					$	3,112					$	6,137					$	5,848
Services charges on deposit accounts						Service charges on deposit accounts						1,931						1,517						3,764						3,056
Fiduciary services income						Income from fiduciary services						1,681						1,707						3,312						3,233
Investment program income						Brokerage and insurance commissions						1,272						939						2,266						1,892
Other non-interest income						Other income						450						447						850						847
Total non-interest income within the scope of ASC 606												8,547						7,722						16,329						14,876
Total non-interest income not in scope of ASC 606												2,594						3,598						4,637						11,659
Total non-interest income												$	11,141					$	11,320					$	20,966					$	26,535

 

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 June 30,												Six Months Ended June 30,
Net periodic pension cost												2022						2021						2022						2021
Service cost						Salaries and employee benefits						$	133					$	126					$	267					$	252
Interest cost						Other expenses						115						98						230						195
Recognized net actuarial loss						Other expenses						215						194						431						389
Total												$	463					$	418					$	928					$	836

Other Postretirement Benefit Plan:

(In thousands)						Location on Consolidated Statements of Income						Three Months Ended June 30,												Six Months Ended June 30,
Net periodic postretirement benefit cost												2022						2021						2022						2021
Service cost						Salaries and employee benefits						$	5					$	6					$	10					$	13
Interest cost						Other expenses						28						25						56						51
Recognized net actuarial loss						Other expenses						22						29						44						58
Amortization of prior service credit						Other expenses						(6)						(6)						(12)						(12)
Total												$	49					$	54					$	98					$	110

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

						Three Months Ended June 30,												Six Months Ended June 30,
(In thousands, except number of shares and per share data)						2022						2021						2022						2021
Net income						$	15,026					$	18,143					$	31,821					$	37,883
Dividends and undistributed earnings allocated to participating securities(1)						(40)						(51)						(83)						(105)
Net income available to common shareholders						$	14,986					$	18,092					$	31,738					$	37,778
Weighted-average common shares outstanding for basic EPS						14,651,851						14,943,486						14,696,323						14,930,017
Dilutive effect of stock-based awards(2)						52,800						63,985						60,739						64,121
Weighted-average common and potential common shares for diluted EPS						14,704,651						15,007,471						14,757,062						14,994,138
Earnings per common share:
Basic EPS						$	1.02					$	1.21					$	2.16					$	2.53
Diluted EPS						$	1.02					$	1.21					$	2.15					$	2.52
Awards excluded from the calculation of diluted EPS(3):
Performance-based awards						305						—						76						—

(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. 

  

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:

 

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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: The fair value of trading securities is reported using market quoted prices and has been classified as Level 1 as such 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 June 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.

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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)
June 30, 2022
Financial assets:
Trading securities						$	3,808					$	3,808					$	—					$	—
AFS debt securities:
Obligations of states and political subdivisions						53,746						—						53,746						—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises						576,466						—						576,466						—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises						136,570						—						136,570						—
Subordinated corporate bonds						21,341						—						21,341						—
Loans held for sale						3,340						—						3,340						—
Customer loan swaps						7,272						—						7,272						—
Interest rate contracts						10,909						—						10,909						—
Fixed rate mortgage interest rate lock commitments						170						—						170						—
Forward delivery commitments						91						—						91						—
Financial liabilities:
Trading securities						$	3,808					$	3,808					$	—					$	—
Customer loan swaps						7,322						—						7,322						—
Interest rate contracts						5,836						—						5,836						—
Fixed rate mortgage interest rate lock commitments						81						—						81						—
December 31, 2021
Financial assets:
Trading securities						$	4,428					$	4,428					$	—					$	—
AFS debt securities:
Obligations of U.S. government-sponsored enterprises						8,344						—						8,344						—
Obligations of states and political subdivisions						117,478						—						117,478						—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises						1,000,257						—						1,000,257						—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises						358,849						—						358,849						—
Subordinated corporate bonds						22,558						—						22,558						—
Loans held for sale						5,815						—						5,815						—
Customer loan swaps						19,297						—						19,297						—
Interest rate contracts						5,589						—						5,589						—
Fixed rate mortgage interest rate lock commitments						371						—						371						—
Forward delivery commitments						86						—						86						—
Financial liabilities:
Trading securities						$	4,428					$	4,428					$	—					$	—
Customer loan swaps						19,485						—						19,485						—
Interest rate contracts						7,872						—						7,872						—
Fixed rate mortgage interest rate lock commitments						91						—						91						—
Forward delivery commitments						6						—						6						—

 The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 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.

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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 of 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 June 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 six months ended June 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 six months ended June 30, 2022, that indicated the carrying amount may not be recoverable.

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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)
June 30, 2022
Financial assets:
Collateral-dependent loans						$	70					$	—					$	—					$	70
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

June 30, 2022

Collateral-dependent loans:

Partially charged-off

$

70

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%

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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)
June 30, 2022
Financial assets:
HTM debt securities						$	546,520					$	537,538					$	—					$	537,538					$	—
Commercial real estate loans(1)(2)						1,514,202						1,507,652						—						—						1,507,652
Commercial loans(2)						416,075						412,810						—						—						412,810
SBA PPP loans(2)						2,509						2,575						—						—						2,575
Residential real estate loans(2)						1,508,801						1,379,295						—						—						1,379,295
Home equity loans(2)						229,069						232,754						—						—						232,754
Consumer loans(2)						19,328						17,363						—						—						17,363
Servicing assets						2,486						4,349						—						—						4,349
Financial liabilities:
Time deposits						$	296,422					$	289,787					$	—					$	289,787					$	—
Short-term borrowings						371,502						371,254						—						371,254						—
Subordinated debentures						44,331						32,362						—						32,362						—
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.

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