Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is management's analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Company. It should be read in conjunction with the consolidated financial statements and footnotes and selected financial data presented elsewhere in this Annual Report. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes. The detailed financial discussion that follows focuses on 2022 results compared to 2021. For a discussion of 2021 results compared to 2020, see the Company's Annual Report on Form 10-K for the year ended December 31, 2021 .
GENERAL
The Company is a bank holding company headquartered in Maine, providing a broad array of banking and nonbanking products and services to businesses and consumers primarily within our three-state footprint. The Company's primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities) and noninterest income (principally fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits).
ANNUAL PERFORMANCE SUMMARY
Earnings (For year ended December 31, 2022 compared to the same period of 2021)
● Net income was $43.6 million, an increase of 11%, or 25% on a non-GAAP basis when excluding the accretion from Paycheck Protection Program (“PPP”) loan fees. The increase is primarily due to a benefit to net interest income as our assets repriced to higher rates and efficiency measures on non-interest expense.
● Diluted earnings per share was $2.88, an increase of $0.27 or 11%. Diluted earnings per share included a $0.01 and $0.30 benefit from PPP loans in 2022 and 2021, respectively.
● Return on assets increased to 1.16% from 1.06%. Return on equity was 10.91% compared to 9.50%. Both ratios include the benefit of higher net income and lower average balances related to unrealized losses on securities as noted below under the “Financial Position” section.
● Net interest income was $113.7 million, an increase of 19%. Net interest margin (NIM) was 3.36%, an increase of 48 basis points from the same period in 2021. The increase is primarily due to the repricing of variable rate assets and continued loan growth.
● The provision for credit losses was an expense of $2.9 million mainly due to loan growth compared to a net benefit of $1.3 million reflecting improved economic forecasts.
● Non-interest income was $35.3 million, down from $42.3 million primarily due to a $5.0 million decrease in mortgage banking income and $2.9 million of gains on security sales in 2021 that did not reoccur in 2022.
● Non-interest expense was $91.2 million versus $90.5 million. Prior year included a $2.9 million loss on extinguishment of debt.
● Efficiency ratio improved to 59% from 61%, excluding the impact of PPP loans it improved 59% from 64%. The improvement in the ratio showcases our displaced approach to expense management.
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Financial Position (For year ended December 31, 2022 compared to the same period of 2021)
● Total assets increased $200.6 million to $3.9 billion mainly due to strong loan growth offset in part by unfavorable fair value adjustments on our securities portfolio.
● Cash and cash equivalents decreased to $92.3 million, from $250.4 million principally due to self-funding loan growth in the first half of 2022.
● Securities were $574.4 million, or 15% of total assets, compared to $625.7 million, or 16% of total assets. Net unrealized losses were $71.8 million, or 12% of gross securities, compared with a gain of $2.6 million, or 0.4% of gross securities as fixed rate securities continued to reprice to higher interest rates. All securities are classified as available for sale preserving capital flexibility.
● Total loans grew 15% year-over-year as commercial loans increased 21%. Loan growth was generated across all of our footprint while adhering to selective criteria and only experienced operators. We believe that the economy in Northern New England continues to be strong despite pressures from the broader economy.
● The ratio of the allowance for credit losses to total loans was 0.89%, decreasing from 0.90%, which reflects solid credit quality. Net charge-offs continue to be insignificant and each credit metric improved during the year.
● While deposit balances were consistent with 2021, we did see a decline during the fourth quarter of 2022 primarily in institutional accounts with low activity, which tend to be most rate sensitive. We continue to work with each customer on rates rather than make sweeping movements, which allows us to focus on expanding those relationships as we review individual requests.
● Borrowings increased to $394.2 million from $178.5 million as short-term funding was used to grow loans in the second half of 2022.
● Total book value per share was $26.09 compared to $28.27. Net unrealized security losses reduced book value per share by $3.87. Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 9% on annualized basis on net income offset by dividends to shareholders.
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SELECTED FINANCIAL DATA
At or For the Years Ended December 31,
(in millions, except ratios and share data)
2022
2021
2020
Financial Condition Data:
Total assets
$
3,910
$
3,709
$
3,724
Total earning assets (1)
3,601
3,377
3,371
Total investments
574
626
599
Total loans
2,903
2,532
2,563
Allowance for credit losses
26
23
19
Total goodwill and intangible assets
125
126
127
Total deposits
3,043
3,049
2,906
Total borrowings
394
179
336
Total shareholders' equity
393
424
407
Operating Data:
Total interest and dividend income
$
127
$
111
$
126
Total interest expense
13
15
27
Net interest income
114
96
99
Non-interest income
35
42
43
Net revenue (2)
149
138
142
Provision for credit losses
3
(1)
6
Total non-interest expense
91
91
95
Income tax expense
11
9
8
Net income
44
39
33
Ratios and Other Data:
Per Common Share Data
Basic earnings
$
2.90
$
2.63
$
2.18
Diluted earnings
2.88
2.61
2.18
Total book value (5)
26.09
28.27
27.29
Dividends
1.02
0.94
0.88
Common stock price:
High
33.11
32.94
25.55
Low
24.00
21.26
13.05
Close
32.04
28.93
22.59
Weighted average common shares outstanding (in thousands) :
Basic
15,040
14,969
15,246
Diluted
15,112
15,045
15,272
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At or For the Years Ended December 31,
(in millions, except ratios and share data)
2022
2021
2020
Performance Ratios: (4)
Return on assets
1.16
%
1.06
%
0.88
%
Return on equity (6)
10.91
9.50
8.29
Interest rate spread
3.24
2.74
2.92
Net interest margin (5)
3.36
2.88
2.97
Dividend payout ratio
35.20
35.81
40.36
Organic Growth Ratios:
Total commercial loans
19
%
7
%
17
%
Total loans
15
(1)
(3)
Total deposits
(0)
5
8
Asset Quality and Condition Ratios:
Non-accruing loans/total loans
0.23
%
0.40
%
0.48
%
Net (recoveries) charge-offs/average loans
(0.01)
0.01
0.07
Allowance for credit losses/total loans
0.89
0.90
0.74
Loans/deposits
95
83
88
Capital Ratios:
Tier 1 capital to average assets - Company
9.21
%
8.66
%
8.12
%
Tier 1 capital to risk-weighted assets - Company
11.02
11.90
11.28
Tier 1 capital to average assets - Bank
10.10
9.62
9.02
Tier 1 capital to risk-weighted assets - Bank
12.67
13.22
12.52
Shareholders equity to total assets (5)
10.06
11.43
11.04
(1) Earning assets includes non-accruing loans and interest-bearing deposits with other banks. Securities are valued at amortized cost.
(2) Net revenue is defined as net interest income plus non-interest income.
(3) All performance ratios are based on average balance sheet amounts, where applicable.
(4) Fully taxable equivalent considers the impact of tax advantaged securities and loans.
(5) Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures for additional information.
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AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and average rates and yields on a fully taxable equivalent basis for the periods included:
Year Ended December 31,
2022
2021
2020
Average
Interest
Yield/
Average
Interest
Yield/
Average
Interest
Yield/
(in millions, except ratios)
Balance
(3)
Rate (3)
Balance
(3)
Rate (3)
Balance
(3)
Rate (3)
Assets
Interest-earning deposits with other banks
$
72
1
1.07
%
$
219
$
—
0.15
%
$
89
$
—
0.15
%
Securities available for sale and FHLB stock (2)(3)
630
19
2.99
621
16
2.63
625
20
3.20
Loans:
Commercial real estate
1,340
55
4.13
1,210
40
3.34
993
40
4.02
Commercial and industrial (3)
410
17
4.25
348
14
3.98
379
21
5.62
Paycheck protection program
1
—
17.27
51
6
11.93
109
5
4.19
Residential
873
31
3.55
825
32
3.86
1,078
41
3.78
Consumer
100
4
4.41
99
4
3.77
124
5
4.03
Total loans (1)
2,724
107
3.98
2,533
96
3.78
2,683
112
4.16
Total earning assets
3,426
127
3.73
%
3,373
112
3.33
%
3,397
132
3.87
%
Cash and due from banks
37
35
27
Allowance for credit losses
(24)
(23)
(17)
Other assets
308
333
351
Total assets
$
3,747
$
3,718
$
3,758
Liabilities
NOW
$
907
1
0.16
%
$
949
$
1
0.11
%
$
643
$
1
0.20
%
Savings
658
1
0.10
629
1
0.90
467
1
0.16
Money market
466
3
0.63
390
1
0.12
396
2
0.42
Time deposits
366
2
0.61
425
6
1.51
796
14
1.80
Total interest bearing deposits
2,397
7
0.31
2,393
9
0.36
2,302
18
0.78
Borrowings
203
6
2.71
175
7
3.82
507
9
1.75
Total interest bearing liabilities
2,600
13
0.49
%
2,568
16
0.59
%
2,809
27
0.96
%
Non-interest bearing demand deposits
679
668
481
Other liabilities
69
68
67
Total liabilities
3,348
3,304
3,357
Total shareholders' equity
399
414
401
Total liabilities and shareholders' equity
$
3,747
$
3,718
$
3,758
Net interest income
$
114
$
96
$
105
Net interest spread
3.24
%
2.74
%
2.91
%
Net interest margin
3.36
2.88
2.97
Adjusted net interest margin (4)
3.35
2.76
2.93
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(1) The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
(2) The average balance for securities is based on amortized cost.
(3) Fully taxable equivalent considers the impact of tax-advantaged securities and loans.
(4) Adjusted net interest margin excludes PPP loans.
RATE/VOLUME ANALYSIS
The following table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest- earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the change due to the rate and the change due to volume.
2022 Compared with 2021
2021 Compared with 2020
Increases (Decreases) due to
Increases (Decreases) due to
(in thousands)
Rate
Volume
Net
Rate
Volume
Net
Interest income:
Interest-earning deposits with other banks
$
660
$
(224)
$
436
$
11
$
191
$
202
Securities available for sale and FHLB stock
2,274
233
2,507
(3,560)
(139)
(3,699)
Loans:
Commercial real estate
10,614
4,340
14,954
(8,244)
8,748
504
Commercial and industrial
75
3,448
3,523
(5,712)
(1,752)
(7,464)
Paycheck protection program
114
(5,891)
(5,777)
3,919
(2,450)
1,469
Residential
(2,662)
1,836
(826)
647
(9,566)
(8,919)
Consumer
644
43
687
(263)
(1,011)
(1,274)
Total loans
8,785
3,776
12,561
(9,653)
(6,031)
(15,684)
Total interest income
$
11,719
$
3,785
$
15,504
$
(13,202)
$
(5,979)
$
(19,181)
Interest expense:
Deposits:
NOW
$
466
$
(48)
$
418
$
(842)
$
617
$
(225)
Savings
101
25
126
(452)
262
(190)
Money market
2,368
93
2,461
(1,148)
(23)
(1,171)
Time deposits
(3,318)
(886)
(4,204)
(1,230)
(6,685)
(7,915)
Total deposits
(383)
(816)
(1,199)
(3,672)
(5,829)
(9,501)
Borrowings
(2,249)
1,062
(1,187)
3,619
(5,812)
(2,193)
Total interest expense
$
(2,632)
$
246
$
(2,386)
$
(53)
$
(11,641)
$
(11,694)
Change in net interest income
$
14,351
$
3,539
$
17,890
$
(13,149)
$
5,662
$
(7,487)
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NON-GAAP FINANCIAL MEASURES
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America ("GAAP") and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Annual Report that we identify as being “non-GAAP financial measures.” In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this Annual Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Annual Report when comparing such non-GAAP financial measures. The following reconciliation table provides a more detailed analysis of these, and reconciliation for, each of non-GAAP financial measures.
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items for the time periods presented:
At or For The Years Ended December 31,
(in thousands)
Calculations
2022
2021
2020
Net income
$
43,557
$
39,299
$
33,244
Non-recurring items:
Gain on sale of securities, net
(53)
(2,870)
(5,445)
Gain on sale of premises and equipment, net
10
378
(32)
Gain on other real estate owned
—
—
355
Loss on debt extinguishment
—
2,851
1,351
Acquisition, conversion and other expenses
266
1,667
5,801
Income tax expense (1)
(51)
(479)
(481)
Total non-recurring items
172
1,547
1,549
Total adjusted income (2)
(A)
$
43,729
$
40,846
$
34,793
Net interest income
(B)
$
113,681
$
95,573
$
99,180
Plus: Non-interest income
35,321
42,261
42,956
Total Revenue
149,002
137,834
142,136
Gain on sale of securities, net
(53)
(2,870)
(5,445)
Total adjusted revenue (2)
(C)
$
148,949
$
134,964
$
136,691
Total non-interest expense
$
91,253
$
90,508
$
94,860
Non-recurring expenses:
Gain on sale of premises and equipment, net
(10)
(378)
32
Gain on other real estate owned
—
—
(355)
Loss on debt extinguishment
—
(2,851)
(1,351)
Acquisition, conversion and other expenses
(266)
(1,667)
(5,801)
Total non-recurring expenses
(276)
(4,896)
(7,475)
Adjusted non-interest expense (2)
(D)
$
90,977
$
85,612
$
87,385
Total revenue
149,002
137,834
142,136
Total non-interest expense
91,253
90,508
94,860
Pre-tax, pre-provision net revenue
$
57,749
$
47,326
$
47,276
Adjusted revenue (2)
148,949
134,964
136,691
Adjusted non-interest expense (2)
90,977
85,612
87,385
Adjusted pre-tax, pre-provision net revenue (2)
$
57,972
$
49,352
$
49,306
(in millions)
Average earning assets
(E)
$
3,425
$
3,373
$
3,397
Average paycheck protection program (PPP) loans
(R)
1
51
109
Average interest-bearing deposits with other banks
(U)
72
219
89
Average earning assets, excluding PPP loans
(S)
3,424
3,103
3,199
Average assets
(F)
3,747
3,718
3,758
Average shareholders' equity
(G)
399
414
401
Average tangible shareholders' equity (2)(3)
(H)
273
288
273
Tangible shareholders' equity, period-end (2)(3)
(I)
268
298
284
Tangible assets, period-end (2)(3)
(J)
3,784
3,583
3,598
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At or For The Years Ended December 31,
Calculations
2022
2021
2020
(in thousands)
Common shares outstanding, period-end
(K)
15,083
15,001
14,916
Average diluted shares outstanding
(L)
15,112
15,045
15,272
Adjusted earnings per share, diluted (2)
(A/L)
$
2.89
$
2.72
$
2.28
Tangible book value per share, period-end (2)
(I/K)
17.78
19.86
18.77
Securities adjustment, net of tax (1)(4)
(M)
(55,246)
1,985
10,023
Tangible book value per share, excluding securities adjustment (2)(4)
(I+M)/K
21.44
19.73
18.09
Total tangible shareholders' equity/total tangible assets (2)
(I/J)
7.09
8.32
7.78
Performance ratios (5)
Return on assets
1.16
%
1.06
%
0.88
%
Adjusted return on assets (2)
(A/F)
1.17
1.10
0.93
Pre-tax, pre-provision return on assets
1.54
1.27
1.26
Adjusted pre-tax, pre-provision return on assets (2)
(U/F)
1.49
1.33
1.31
Return on equity
10.91
9.50
8.29
Adjusted return on equity (2)
(A/G)
10.96
9.87
8.68
Return on tangible equity
16.20
13.92
12.45
Adjusted return on tangible equity (1)(2)
(A+Q)/H
16.26
14.46
13.02
Efficiency ratio (1)(2)(6)
(D-O-Q)/(C+N)
59.26
61.29
61.71
Net interest margin
(B+P)/E
3.36
2.88
2.97
Adjusted net interest margin (2)
(B+P-T)/S
3.35
2.93
2.76
Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio
(N)
$
2,020
$
2,330
$
2,477
Franchise taxes included in non-interest expense
(O)
583
528
477
Tax equivalent adjustment for net interest margin
(P)
1,398
1,653
1,853
Intangible amortization
(Q)
932
940
1,024
Interest and fees on PPP loans
(T)
223
6,039
4,569
Interest and fees on interest-earning deposits with other banks
(V)
769
333
131
(1) 2022 assumes a marginal tax rate of 23.53% for the fourth quarter and 23.41% for the first three quarters. 2021 assumes a marginal tax rate of 23.41% for the fourth quarter and 23.71% for the first three quarters.
2020 assumes a marginal tax rate of 23.71% for the fourth quarter and 23.87% for the first three quarters.
(2) Non-GAAP financial measure.
(3) Tangible shareholders’ equity is computed by taking total shareholders’ equity less the intangible assets at period-end. Tangible assets are computed by taking total assets less the intangible assets at period-end.
(4) Securities adjustment, net of tax represents the total unrealized (loss) gain on securities recorded on the Company’s consolidated balance sheets within total common shareholders’ equity.
(5) All performance ratios are based on average balance sheet amounts, where applicable.
(6) Efficiency ratio is computed by using adjusted non-interest expense net of franchise taxes and intangible amortization divided by adjusted revenue tax effected for tax-advantaged assets. Adjusted net interest margin excludes PPP loans and interest-earning deposits with other banks.
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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2022 AND 2021
Cash and cash equivalents
Total cash and cash equivalents at December 31, 2022 were $92.3 million, compared to $250.3 million at December 31, 2021. Interest-earning cash held with other banks totaled $52.4 million at year-end 2022 compared to $216.9 million at year end 2021 carrying a yield of 1.07% in 2022 versus 0.15% in 2021. The decrease in cash reflects loan growth on relatively flat deposit balances on a year-over-year basis.
Securities
Securities totaled $574.4 million at year-end 2022 and $625.7 million at year-end 2021. During 2022, security purchases totaled $109.0 million and were offset by $7.1 million of sales and $73.7 million of maturities, calls and pay-downs of amortizing securities. There were $11.0 million of purchases and $3.5 million in sales of FHLB stock during the year. Fair value adjustments decreased the security portfolio by $71.8 million in 2022 compared to a $2.8 million unrealized gain in 2021. Unrealized gains shifted to loss position in 2022 due to changes in the long-term treasury yield curve. The weighted average yield of the securities portfolio was 2.99% as of December 31, 2022 compared to 2.63% at year-end 2021. At the end of 2022, our securities portfolio had an average life of 9.4 years with an effective duration of 5.0 compared to an average life of 5.3 years with an effective duration of 4.2 years at the end of 2021. The extension of duration during 2022 was driven by the increase in rates. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds.
Loans
Loans increased by $370.8 million from year-end 2021 or 15%. The increase was the net result of the strategy to grow commercial portfolios. Total commercial loans were $1.8 billion growing 19% in 2022 and 10% in 2021 when excluding PPP loans, which was driven mostly from new relationships in commercial real estate fixed-rate products. Total residential loans increased 3% or $25.5 million from year-end 2021, as we placed more originations on the balance sheet instead of selling into the secondary market. Residential loan origination volume in 2022 is significantly down as compared to the respective period of 2021 on lower refinancing activity due to increasing market rates.
Allowance for Credit Losses
The ACL was $25.9 million at the end of 2022 compared to $22.7 million at year-end 2021. The increase is primarily due to the loan portfolio growth. Non-accruing loans decreased to $6.5 million, or 0.23% of total loans at the end of 2022 from $10.2 million or 0.40% of total loans at year-end 2021. The ratio of accruing past due loans to total loans improved to 0.09% of total loans from 0.32%. Total delinquent and non-accruing loans as percentage of total improved to 0.32% from 0.72%. Net charge-offs continue to be historically low with a net recovery of $238 thousand in 2022 compared to a net charge-off of $209 thousand in 2021.
Other Assets
Total other assets increased $47.8 million to $366 million at December 31, 2022 from $318 million as of December 31, 2021. The increase is primarily attributed to a $10.1 million increase in partnership investments, and a $16.2 million increase in the asset position of the derivative and hedging instruments. Deferred tax assets, net, increased $18.9 million as of December 31, 2022 compared to 2021 driven by the unrealized loss position in the securities available for sale portfolio.
Deposits and Borrowings
Total deposits were $3.0 billion at the end of 2022 and 2021. Non-maturity deposits increased $97.0 million in 2022, or 4% due to growth in new accounts with over 2,460 new accounts opened. Time deposits decreased $102.1 million to $323.4 million at year-end 2022 versus $425.5 million in 2021. $178 million of brokered deposits matured in of 2021 and were not replaced due to excess liquidity. Retail time deposits decreased $63.0 million as customers moved funds to transactional accounts upon contractual maturity. Total borrowings increased by $215.6 million at December 31, 2022 primarily due to funding loan growth opportunities.
Derivative Financial Instruments and Other Liabilities
Other liabilities totaled $78.7 million at the end of 2022 compared to $58.0 million as of December 31, 2021. The $20.7 million increase primarily reflects a $10.1 million increase in capital commitments on limited partnership investments, a
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$6.4 million net increase in customer loan swaps, and a $4.2 million variable rate loan hedge increase due to higher interest rates compared to 2021. The net fair value of all derivatives was an asset of $4.8 million at the end of 2022 compared to a $1.1 million liability at year-end 2021. The increase in net derivative fair values reflects the rise in long-term interest rates.
Unused credit lines grew at the end of 2022 increasing reserves by $1.7 million, which are also recorded in other liabilities.
Equity
Total equity was $393.5 million at year-end 2022, compared with $424.1 million at year-end 2021. Book value per share was $26.09 as of December 31, 2022 compared with $28.27 at December 31, 2021. Equity included net unrealized losses on securities, derivative and pension revaluations, net of tax, totaling a $58.3 million loss at the end of 2022 compared to a $2.3 million gain at year-end 2021.
During 2022 and 2021, the Company declared and distributed regular cash dividends on its common stock in the aggregate amounts of $15.3 million, respectively. The Company’s 2022 dividend payout ratio amounted to 35%, compared with 36% in 2021. Total cash dividends paid in 2022 was $1.02 per common share of stock, compared with $0.88 in 2021.
The Company and the Bank remained well-capitalized under regulatory guidelines at period end as further described in Note 12 – Shareholders’ Equity and Earnings Per Common Share on the Consolidated Financial Statements.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Net Interest Income
Net interest income for 2022 was $113.7 million compared with $95.6 million in 2021. The net interest margin was 3.36% in 2022 compared to 2.88% in the prior year. The 2022 adjusted net interest margin (non-GAAP measure), which excludes PPP loans was 3.35% versus 2.93% in 2021. Acceleration of PPP loan fee amortization due to forgiveness contributed 1 basis point to NIM in 2022 and 14 basis points in the same period of 2021. Interest-earning cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 5 basis points in the year and 19 basis points in 2021. The yield on earning assets totaled 3.73% compared to 3.33% in 2021. Excluding the impact of PPP and excess cash, the yield on earning assets totaled 3.79% and 3.42% for the same periods. The yield on loans was 3.98% in 2022 and 3.78% in 2021. Excluding PPP loans the yield on loans was 3.97% in 2022, and 3.62% in 2021. Costs of interest-bearing liabilities decreased to 0.52% from 0.59% in 2021 due to decreased core deposit levels offset by increased deposit rates.
Provision for Credit Losses
The provision in 2022 was a $2.9 million expense versus a recapture of $1.3 million in 2021. The expense is primarily attributed to the 15% loan growth in 2022. Overall credit quality remains strong and credit quality metrics improved with decreases in non-accruing and past due loans. The benefit in 2021 is primarily due to a partial recapture of the Day 1 CECL allowance that was established January 1, 2021 given steady improvements in most macroeconomic drivers to the ACL during that year.
Non-Interest Income
Non-interest income in 2022 was $35.3 million compared to $42.3 million in 2021. Trust management fees were $14.6 million in 2022 compared to $15.2 in 2021 due to lower market valuation of assets under management (“AUM”). While assets under management were $2.3 billion compared to $2.5 billion in 2021, we added more than $132 million of new account balances. We believe that we have a strong wealth management group and are well positioned to realize an organic lift as market valuations return. Customer service fees increased 12% to $14.8 million in 2022 due to higher transaction volumes associated with 2,460 net new core accounts that opened during the year. The Company sold securities resulting in gains of $53 thousand in 2022 compared to $2.9 million during 2021. Mortgage banking income decreased to $1.6 million from $6.5 million in 2021 primarily driven by the rate environment and lower loan sales.
Non-Interest Expense
Non-interest expense was $91.3 million in 2022 compared to $90.5 million in 2021. Salaries and benefits expense increased $1.5 million to $48.7 million in 2022 due to a $1.5 million increase in incentive accruals on stronger performance metrics and a $1.5 million decrease in deferred loan origination costs driven by lower residential loan volume. Those additional costs in 2022 were offset in part by a $767 thousand benefit from the revaluation of post-retirement plan
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liabilities as discount rates increased throughout the year, and $539 thousand in savings from employee insurance and other benefit plans.
The provision for credit losses on unfunded commitments increased $1.6 million due to higher commercial construction unused lines of credit. Other expenses increased $1.7 million in 2022 due to a $352 thousand one-time charitable contribution and a $1.4 million increase in various operating expenses including travel, software and statement processing and postage. The increases were offset with a $4.1 million decrease in non-recurring expenses. Non-recurring expenses in 2022 were mostly contract renegotiation costs totaling $267 thousand compared to $4.9 million in 2021 which included a $2.9 million prepayment penalty on debt extinguishment and $1.4 million in reduction in workforce expenses.
Income Tax Expense
Income tax expense was $11.3 million for the year ended December 31, 2022, compared with $9.3 million for the year ended December 31, 2021. The effective tax rate increased to 20.6% in 2022 from 19.2% in 2021 due to a higher proportion of revenue from non-exempt sources.
LIQUIDITY AND CASH FLOWS
Liquidity is measured by the ability to meet short-term cash needs at a reasonable cost or minimal loss. Favorable sources of liabilities are sought to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.
The liquidity position is actively managed through target ratios established under our liquidity and funding policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the ability to employ strategies necessary to maintain adequate liquidity. The policy is to maintain a liquidity position of at least 8% of total assets. A portion of the deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the liquidity position tightens.
A liquidity contingency plan is approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the liquidity position.
The existing cash and cash equivalents (including an interest-bearing deposit at the FRB Boston), securities available for sale and cash flows from operating activities will be sufficient to meet anticipated cash needs for at least the next 12 months. Future working capital needs will depend on many factors, including the rate of business and revenue growth. To the extent cash and cash equivalents, securities available for sale and cash flows from operating activities are insufficient to fund future activities, the need to raise additional funds through debt arrangements or public or private debt or equity financings may be utilized. The need to raise additional funds may be needed in the event it is determined in the future to effect one or more acquisitions of banks or businesses. If additional funding is required, we may not be able to obtain debt arrangements or to effect an equity or debt financing on terms acceptable or at all.
Capital Resources
Consistent with our long-term goal of operating a sound and profitable organization, at December 31, 2022, we continue to be a “well-capitalized” financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.
At December 31, 2022, available same-day liquidity totaled approximately $1.0 billion, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company's amortizing securities and loan portfolios. We have unused borrowing capacity at the FHLB of $275 million, unused borrowing capacity at the Federal Reserve of
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$90 million and unused lines of credit totaling $51 million, in addition to over $200 million in unencumbered, liquid investment portfolio assets.
Purchase Obligations
In the normal course of conducting our banking and financial services business, and in connection with providing products and services to our customers, a variety of traditional third-party contracts for support services have been entered into. Examples of such contractual agreements include, but are not limited to: services providing core banking systems, ATM and debit card processing, trust services software, accounting software and the leasing of T-1 telecommunication lines and other technology infrastructure supporting our network. These types of purchase obligations that will come due during 2023 totaled $7.7 million as of December 31, 2022 which is expected to be funded by cash flows generated from our operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Please refer to the notes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in Note 1 – Summary of Significant Accounting Policies of the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 – Summary of Significant Accounting Policies to our audited Consolidated Financial Statements for the year ended December 31, 2022 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of our financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition.
Allowance for credit losses on loans (the “allowance”).
The allowance is sensitive to a number of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The allowance is also sensitive to external factors such as the general health of the economy, as evidenced by changes in unemployment rates, home pricing index, gross domestic product, retail sales and changes in commercial real estate values. We consider these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts.
Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. Additionally, changes in circumstances related to individually large credits, or certain macroeconomic forecast assumptions may result in volatility.
It is difficult to estimate how potential changes in any one economic factor might affect the overall allowance because a wide variety of factors and inputs are considered in the allowance estimate. Changes in the factors and inputs may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to consider the impact of a hypothetical stressed forecast, we estimated the allowance using forecast inputs that were severely unfavorable to the expected scenario for each macroeconomic variable. This unfavorable scenario resulted in an allowance that is approximately $8.0 million higher than the allowance using the expected scenario.
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