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 2023 results compared to 2022. For a discussion of 2022 results compared to 2021, see the Company's Annual Report on Form 10-K for the year ended December 31, 2022 .
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, 2023 compared to the same period of 2022)
● Net income was $44.9 million compared to $43.6, an increase of 3%, driven primarily due to a benefit to net interest income as our assets repriced to higher rates. Diluted earnings per share was $2.95, an increase of $0.07 or 2%.
● Return on assets was 1.14% compared to 1.16%. Return on equity was 10.88% compared to 10.91%. Both ratios include higher borrowing costs and lower unrealized losses on securities as noted below under the “Financial Position” section.
● Net interest income was $117.7 million, an increase of 4%. Net interest margin was 3.29%, a decrease of 7 basis points from the same period in 2022. The decrease is primarily due to the repricing of variable rate assets and continued loan growth offset by higher borrowing costs and cost of interest-bearing liabilities.
● The provision for credit losses was an expense of $2.9 million in both 2023 and 2022.
● Non-interest income was $35.8 million, compared to $35.3 million primarily due to $699 thousand higher bank-owned life insurance (“ BOLI”) income related to one-time death benefits during the first quarter of 2023.
● Non-interest expense was $93.5 million versus $91.3 million. Salaries and benefits expense increased $3.9 million to $52.5 million in 2023 due to revaluation of post-retirement plan liabilities, higher stock compensation expense and decrease in deferred loan origination costs.
● Efficiency ratio improved to 58.7% in 2023 from 59.3% in 2022.
Financial Position (For year ended December 31, 2023 compared to the same period of 2022)
● Total assets increased $61.1 million to $4.0 billion mainly due to loan growth offset by available for sale security pay-downs.
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● Cash and cash equivalents increased to $94.8 million, from $92.3 million primarily due to excess cash available generated from operations.
● Total securities were $547.4 million, or 14% of total assets, compared to $574.4 million, or 15% of total assets. Net unrealized losses were $62.4 million, or 11% of gross securities, compared with a gain of $71.8 million, or 12% of gross securities. All securities are classified as available for sale preserving capital flexibility.
● Total loans grew 3% year-over-year as commercial loans increased 6%. The increase was the net result of the strategy to grow commercial construction and commercial real estate owner-occupied segments.
● The ratio of the allowance for credit losses to total loans was 0.94%, increasing from 0.89%, reflecting more refined economic forecasting, especially in the national unemployment figures, increase in specific reserves, and loan portfolio growth. Net charge-offs increased to $590 thousand in 2023 compared to a net recovery of $238 thousand in 2022 primarily driven by one non-accrual commercial and industrial (“C&I loan”).
● Deposit balances increased 3% year-over-year due to consumer’s migration to brokerage accounts and higher yielding time deposits and an increase in brokered deposits.
● Borrowings decreased to $331.5 million from $394.3 million primarily due to excess cash available generated from operations.
● Total book value per share was $28.48 compared to $26.09. Net unrealized security losses reduced book value per share by $3.14. Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 9% on an 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)
2023
2022
2021
Financial Condition Data:
Total assets
$
3,971
$
3,910
$
3,709
Total earning assets (1)
3,664
3,601
3,377
Total investments
547
574
626
Total loans
2,999
2,903
2,532
Allowance for credit losses
28
26
23
Total goodwill and intangible assets
124
125
126
Total deposits
3,141
3,043
3,049
Total borrowings
332
394
179
Total shareholders' equity
432
393
424
Operating Data:
Total interest and dividend income
$
174
$
127
$
111
Total interest expense
57
13
15
Net interest income
118
114
96
Non-interest income
36
35
42
Net revenue (2)
154
149
138
Provision for credit losses
3
3
(1)
Total non-interest expense
93
91
91
Income tax expense
12
11
9
Net income
45
44
39
Ratios and Other Data:
Per Common Share Data
Basic earnings
$
2.96
$
2.90
$
2.63
Diluted earnings
2.95
2.88
2.61
Total book value (5)
28.48
26.09
28.27
Dividends
1.10
1.02
0.94
Common stock price:
High
32.42
33.11
32.94
Low
19.55
24.00
21.26
Close
29.36
32.04
28.93
Weighted average common shares outstanding (in thousands) :
Basic
15,142
15,040
14,969
Diluted
15,195
15,112
15,045
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At or For the Years Ended December 31,
(in millions, except ratios and share data)
2023
2022
2021
Performance Ratios: (4)
Return on assets
1.14
%
1.16
%
1.06
%
Return on equity
10.88
10.91
9.50
Interest rate spread
2.86
3.24
2.74
Net interest margin (5)
3.29
3.36
2.88
Dividend payout ratio
36.93
35.20
35.81
Organic Growth Ratios:
Total commercial loans
6
%
19
%
7
%
Total loans
3
15
(1)
Total deposits
3
(0)
5
Asset Quality and Condition Ratios:
Non-accruing loans/total loans
0.18
%
0.23
%
0.40
%
Net (recoveries) charge-offs/average loans
—
(0.01)
0.01
Allowance for credit losses/total loans
0.94
0.89
0.90
Loans/deposits
95
95
83
Capital Ratios:
Tier 1 capital to average assets - Company
9.70
%
9.21
%
8.66
%
Tier 1 capital to risk-weighted assets - Company
11.96
11.02
11.90
Tier 1 capital to average assets - Bank
10.50
10.10
9.62
Tier 1 capital to risk-weighted assets - Bank
12.96
12.67
13.22
Shareholders equity to total assets (5)
10.88
10.06
11.43
(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,
2023
2022
2021
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
$
37
$
2
5.33
%
$
72
1
1.07
%
$
219
$
—
0.15
%
Securities available for sale and FHLB stock (2)(3)
610
26
3.88
630
19
2.99
621
16
2.63
Loans:
Commercial real estate
1,537
81
5.27
1,340
55
4.13
1,210
40
3.34
Commercial and industrial (3)
437
28
6.39
410
17
4.25
348
14
3.98
Paycheck protection program
—
—
—
1
—
17.27
51
6
11.93
Residential
905
35
3.82
873
31
3.55
825
32
3.86
Consumer
97
7
6.75
100
4
4.41
99
4
3.77
Total loans (1)
2,976
151
5.04
2,724
107
3.98
2,533
96
3.78
Total earning assets
3,623
179
4.85
%
3,426
127
3.73
%
3,373
112
3.33
%
Cash and due from banks
34
37
35
Allowance for credit losses
(27)
(24)
(23)
Other assets
304
308
333
Total assets
$
3,934
$
3,747
$
3,718
Liabilities
NOW
$
900
$
9
0.98
%
$
907
1
0.16
%
$
949
$
1
0.11
%
Savings
595
2
0.39
658
1
0.10
629
1
0.90
Money market
407
10
2.48
466
3
0.63
390
1
0.12
Time deposits
533
17
3.19
366
2
0.61
425
6
1.51
Total interest bearing deposits
2,435
38
1.57
2,397
7
0.31
2,393
9
0.36
Borrowings
401
18
4.56
203
6
2.71
175
7
3.82
Total interest bearing liabilities
2,836
56
1.99
%
2,600
13
0.49
%
2,568
16
0.59
%
Non-interest bearing demand deposits
619
679
668
Other liabilities
67
69
68
Total liabilities
3,522
3,348
3,304
Total shareholders' equity
412
399
414
Total liabilities and shareholders' equity
$
3,934
$
3,747
$
3,718
Net interest spread
2.86
%
3.24
%
2.74
%
Net interest margin
3.29
3.36
2.88
(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.
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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.
2023 Compared with 2022
2022 Compared with 2021
Increases (Decreases) due to
Increases (Decreases) due to
(in thousands)
Rate
Volume
Net
Rate
Volume
Net
Interest income:
Interest-earning deposits with other banks
$
1,595
$
(369)
$
1,226
$
660
$
(224)
$
436
Securities available for sale and FHLB stock
5,424
(575)
4,849
2,274
233
2,507
Loans:
Commercial real estate
17,630
8,110
25,740
10,614
4,340
14,954
Commercial and industrial
9,360
1,168
10,528
75
3,448
3,523
Paycheck protection program
—
(223)
(223)
114
(5,891)
(5,777)
Residential
2,376
1,142
3,518
(2,662)
1,836
(826)
Consumer
2,280
(109)
2,171
644
43
687
Total loans
31,646
10,088
41,734
8,785
3,776
12,561
Total interest income
$
38,665
$
9,144
$
47,809
$
11,719
$
3,785
$
15,504
Interest expense:
Deposits:
NOW
$
7,342
$
(12)
$
7,330
$
466
$
(48)
$
418
Savings
1,707
(66)
1,641
101
25
126
Money market
7,517
(376)
7,141
2,368
93
2,461
Time deposits
13,761
1,015
14,776
(3,318)
(886)
(4,204)
Total deposits
30,327
561
30,888
(383)
(816)
(1,199)
Borrowings
7,406
5,368
12,774
(2,249)
1,062
(1,187)
Total interest expense
$
37,733
$
5,929
$
43,662
$
(2,632)
$
246
$
(2,386)
Change in net interest income
$
932
$
3,215
$
4,147
$
14,351
$
3,539
$
17,890
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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.
These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. Because non-GAAP financial measures presented in this Annual Report are not measurements determined in accordance with GAAP and are susceptible to varying calculations, these non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures presented by other companies. A reconciliation of non-GAAP financial measures to GAAP measures is provided herein. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP financial measures can be of substantial importance to the Company’s results for any particular quarter or year. Each non-GAAP measure used by the Company in this Annual Report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information. The Company utilizes these non-GAAP financial measures for purposes of measuring our performance against our peer group and other financial institutions and analyzing our internal performance. We also believe these non-GAAP financial measures help investors better understand the Company’s operating performance and trends and allow for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance.
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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Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items for the time periods presented:
Year Ended December 31,
(in thousands)
Calculations
2023
2022
2021
Net income
$
44,852
$
43,557
$
39,299
Non-recurring items:
Gain on sale of securities, net
(34)
(53)
(2,870)
Gain on sale of premises and equipment, net
182
10
378
Loss on debt extinguishment
—
—
2,851
Acquisition, conversion and other expenses
283
266
1,667
Income tax expense (1)
(104)
(51)
(479)
Total non-recurring items
327
172
1,547
Total adjusted income (2)
(A)
$
45,179
$
43,729
$
40,846
Net interest income
(B)
$
117,675
$
113,681
$
95,573
Plus: Non-interest income
35,829
35,321
42,261
Total Revenue
153,504
149,002
137,834
Gain on sale of securities, net
(34)
(53)
(2,870)
Total adjusted revenue (2)
(C)
$
153,470
$
148,949
$
134,964
Total non-interest expense
$
93,479
$
91,253
$
90,508
Non-recurring expenses:
Gain on sale of premises and equipment, net
(182)
(10)
(378)
Loss on debt extinguishment
—
—
(2,851)
Acquisition, conversion and other expenses
(283)
(266)
(1,667)
Total non-recurring expenses
(465)
(276)
(4,896)
Adjusted non-interest expense (2)
(D)
$
93,014
$
90,977
$
85,612
Total revenue
153,504
149,002
137,834
Total non-interest expense
93,479
91,253
90,508
Pre-tax, pre-provision net revenue
$
60,025
$
57,749
$
47,326
Adjusted revenue (2)
153,470
148,949
134,964
Adjusted non-interest expense (2)
93,014
90,977
85,612
Adjusted pre-tax, pre-provision net revenue (2)
(U)
$
60,456
$
57,972
$
49,352
(in millions)
Average earning assets
(E)
$
3,623
$
3,425
$
3,373
Average paycheck protection program (PPP) loans
(R)
—
1
51
Average earning assets, excluding PPP loans
(S)
3,623
3,424
3,103
Average assets
(F)
3,934
3,747
3,718
Average shareholders' equity
(G)
412
399
414
Average tangible shareholders' equity (2)(3)
(H)
288
273
288
Tangible shareholders' equity, period-end (2)(3)
(I)
308
268
298
Tangible assets, period-end (2)(3)
(J)
3,847
3,784
3,583
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Year Ended December 31,
Calculations
2023
2022
2021
(in thousands)
Common shares outstanding, period-end
(K)
15,172
15,083
15,001
Average diluted shares outstanding
(L)
15,195
15,112
15,045
Adjusted earnings per share, diluted (2)
(A/L)
$
2.95
$
2.89
$
2.72
Tangible book value per share, period-end (2)
(I/K)
20.28
17.78
19.86
Securities adjustment, net of tax (1)(4)
(M)
(47,649)
(55,246)
1,985
Tangible book value per share, excluding securities adjustment (2)(4)
(I+M)/K
23.42
21.44
19.73
Total tangible shareholders' equity/total tangible assets (2)
(I/J)
8.00
7.09
8.32
Performance ratios (5)
Return on assets
1.14
%
1.16
%
1.06
%
Core return on assets (2)
(A/F)
1.15
1.17
1.10
Pre-tax, pre-provision return on assets
1.53
1.54
1.27
Adjusted pre-tax, pre-provision return on assets (2)
(U/F)
1.54
1.49
1.33
Return on equity
10.88
10.91
9.50
Core return on equity (2)
(A/G)
10.96
10.96
9.87
Return on tangible equity
15.84
16.20
13.92
Adjusted return on tangible equity (1)(2)
(A+Q)/H
15.96
16.26
14.46
Efficiency ratio (1)(2)(6)
(D-O-Q)/(C+N)
58.67
59.26
61.29
Net interest margin
(B+P)/E
3.29
3.36
2.88
Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio
(N)
$
2,392
$
2,020
$
2,330
Franchise taxes included in non-interest expense
(O)
638
583
528
Tax equivalent adjustment for net interest margin
(P)
1,550
1,398
1,653
Intangible amortization
(Q)
932
932
940
Interest and fees on PPP loans
(T)
—
223
6,039
(1) 2023 assumes a marginal tax rate of 24.01% for the fourth quarter and 23.80% for the first three quarters.
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.
(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, 2023 AND 2022
Cash and cash equivalents
Total cash and cash equivalents at December 31, 2023 were $94.8 million, compared to $92.3 million at December 31, 2022. Interest-earning cash held with other banks totaled $52.6 million at year-end 2023 compared to $52.4 million at year-end 2022 carrying a yield of 5.33% in 2023 versus 1.07% in 2022.
Securities
Securities totaled $547.4 million at year-end 2023 and $574.4 million at year-end 2022. During 2023, security purchases totaled $7.5 million and were offset $44.6 million of maturities, calls and pay-downs of amortizing securities. There were $18.4 million of purchases and $20.5 million in sales of FHLB stock during the year. Fair value adjustments decreased the security portfolio by $62.4 million in 2023 compared to a $71.8 million unrealized gain in 2022. 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 3.85% as of December 31, 2023 compared to 2.99% at year-end 2022. At the end of 2023, our securities portfolio had an average life of 8.7 years with an effective duration of 4.8 compared to an average life of 9.4 years with an effective duration of 5.0 years at the end of 2022. 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 $96.4 million from year-end 2022 or 3%. The controlled growth was a function of the tight credit markets and the rising interest rate environment in 2023 that limited commercial loan refinancing activity. Total commercial loans were $2.0 billion, growing 6% in 2023 and 19% in 2022 which was driven mostly from new relationships primarily to commercial borrowers. Total residential loans decreased 2% or $14.6 million from year-end 2022, due to lower demand for prevailing mortgage rates and strategy to sell production to the secondary market. Home Equity lines decreased 4% or $3.2 million from year-end 2022 due to the run-off of balances associated with the repricing of home equity lines of credit.
Allowance for Credit Losses
The ACL was $28.1 million at the end of 2023 compared to $25.9 million at year-end 2022. The increase was primarily due to more refined economic forecasting, especially in the national unemployment figures and in commercial real estate prices, and loan portfolio growth. Non-accruing loans decreased $1 million to $5.5 million, or 0.18% of total loans at the end of 2023 from $6.5 million or 0.23% of total loans at year-end 2022. The ratio of accruing past due loans to total loans increased to 0.12% of total loans from 0.09%. Total delinquent and non-accruing loans as percentage of total loans improved to 0.30% from 0.32%. Net charge-offs increased to $626 thousand in 2023 compared to a net recovery of $238 thousand in 2022 primarily driven by the resolution of one non-accruing C&I loan.
Other Assets
Total other assets decreased $10.6 million to $356 million at December 31, 2023 from $366 million as of December 31, 2022. The decrease is primarily attributed to a $5.1 million decrease in the asset position customer loan swaps and $2.2 million decrease in interest rate swaps on wholesale funding. Other intangible assets decreased $932 thousand from 2022 driven by amortization. Deferred tax assets, net, decreased $1.5 million as of December 31, 2023 compared to 2022 driven by the unrealized loss position in the securities available for sale portfolio. Cash surrender value of Bank Owned Life insurance decreased $1.2 million due to settlement of one-time death benefits that occurred in the first quarter of 2023.
Deposits and Borrowings
Total deposits increased $97.8 million to $3.1 billion at the end of 2023 compared to $3.0 billion at the end of 2022. Non-maturity deposits decreased $279.1 million in 2023, or 10% due to consumer’s migration to brokerage accounts and higher yielding Time deposits. 4,638 non-maturity deposit accounts with new customers were opened in 2023. Time deposits increased $376.8 million to $700.3 million at year-end 2023 versus $323.4 million in 2022. Brokered deposits increased $204.5 million. Retail time deposits increased $172.4 million as customers moved funds from non-maturity deposits into higher yielding alternatives. Our deposit composition at year-end 2023 and 2022 was 47% commercial customers and 53% consumer customers. Total borrowings decreased $62.7 million to $271 million at December 31, 2023 compared to $334 million as of December 31, 2022 primarily due to excess cash available generated from operations.
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Derivative Financial Instruments and Other Liabilities
Other liabilities totaled $66.2 million at the end of 2023 compared to $78.7 million as of December 31, 2022. The $12.5 million decrease primarily reflects a $10.0 million decrease in capital commitments on limited partnership investments, a $5.2 million net decrease in customer loan swaps, and a $1.5 million variable rate loan hedge decrease offset by $3.5 million increase in brokered CD and a $581 thousand increase in CD interest payable. The net fair value of all derivatives was an asset of $3.2 million at the end of 2023 compared to a $4.8 million asset at year-end 2022. The decrease in net derivative fair values reflects the slowing of rising long-term interest rates. The reserve for unfunded commitments remained flat at the end of 2023 at $3.9 million, which are also recorded in other liabilities.
Equity
Total equity was $432.1 million at year-end 2023, compared with $393.5 million at year-end 2022. Book value per share was $28.48 as of December 31, 2023 compared with $26.09 at December 31, 2022. Equity included securities adjustments, net of tax, totaling a $47.6 million loss at the end of 2023 compared to a $55.3 million loss at year-end 2022.
During 2023 and 2022, the Company declared and distributed regular cash dividends on its common stock in the aggregate amounts of $16.6 million compared to $15.3 million, respectively. The Company’s 2023 dividend payout ratio amounted to 37%, compared with 35% in 2022. Total cash dividends paid in 2023 was $1.10 per share of common stock, compared with $1.02 per share of common stock in 2022.
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, 2023 AND 2022
Net Interest Income
Net interest income for 2023 was $117.7 million compared with $113.7 million in 2022. The net interest margin was 3.29% in 2023 compared to 3.35% in the prior year. Interest-earning cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 2 basis points in the year and 5 basis points in 2022. The yield on earning assets totaled 4.85% compared to 3.73% in 2022. The yield on loans was 5.04% in 2023 and 3.98% in 2022. Costs of interest-bearing liabilities increased in 2023 to 1.99% from 0.49% in 2022 due to increased deposit rates. Interest expense on borrowings increased $12.8 million in 2023 compared to 2022 driven by a 79 basis point increase in the weighted average rate of borrowings to 3.24% from 2.45%, respectively, reflecting higher interest rates and increased average borrowings.
Provision for Credit Losses
The provision for credit losses in both 2023 and 2022 was a $2.9 million expense. The expense in 2023 was primarily due to more refined economic forecasting, especially in the national unemployment figures and in commercial real estate prices, and loan portfolio growth. Overall credit quality remains strong and credit quality metrics improved with notable decreases in non-accruing loans.
Non-Interest Income
Non-interest income in 2023 was $35.8 million compared to $35.3 million in 2022. Trust management fees were $14.3 million in 2023 compared to $14.6 in 2022 due to lower market valuation of assets under management (“AUM”) throughout the year. AUM was $2.5 billion compared to $2.3 billion in 2022, the increase of $143 million primarily due to higher security valuations in the fourth quarter 2023. Customer service fees increased 3% to $15.2 million in 2023 due to higher transaction volumes associated with 1,000 net new core accounts that opened during the year. BOLI income increased $699 thousand in 2023 compared to 2022 related to one-time death benefits during the first quarter of 2023.
Non-Interest Expense
Non-interest expense was $93.5 million in 2023 compared to $91.3 million in 2022. Salaries and benefits expense increased $3.9 million to $52.5 million in 2023 due to a $2.0 million increase in revaluation of post-retirement plan liabilities driven by rate environment, $711 thousand increase in stock compensation expense due to the revaluation of our
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long term incentive obligations and a $782 thousand decrease in deferred loan origination costs driven by lower residential loan volume.
Income Tax Expense
Income tax expense was $12.3 million for the year ended December 31, 2023, compared with $11.3 million for the year ended December 31, 2022. The effective tax rate increased to 21.5% in 2023 from 20.6% in 2022 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, 2023, 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, 2023, available same-day liquidity totaled approximately $1.2 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 $381.4 million, unused borrowing capacity at the Federal Reserve of $126.6 million and unused lines of credit totaling $51.0 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
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other technology infrastructure supporting our network. These types of purchase obligations that will come due during 2024 approximates $9.5 million as of December 31, 2023 which is expected to be funded by cash flows generated from our operations.
Impact of Inflation and Changing Prices
A banking organization’s assets and liabilities are primarily monetary. Changes in the rate of inflation do not have as great an impact on the financial condition of a bank as do changes in interest rates. Moreover, interest rates do not necessarily change at the same percentage as inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company.
The FOMC often applies contractionary monetary policies during times of high inflation, resulting in elevated interest rates. Elevated interest rates may lower the market value of existing balance sheet assets and often result in a significant unrealized loss position. These lower market values may negatively affect the Bank’s liquidity position as it results in a lower value of the Bank’s liquid assets.
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, 2023 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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