Item 1A. Risk Factors
An investment in the Company involves risk, which could be substantial. Market, liquidity, credit, operational, legal, compliance, reputational and strategic risks are inherent in our business. The material risks and uncertainties that management believes affect the Company are described below. Any of the following risks could affect the Company’s financial condition and results of operations and could be material and/or adverse in nature. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Economic and Market Conditions Risk
Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. We cannot predict at this time the extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations. The extent of any continued or future adverse effects of the COVID-19 pandemic will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the emergence of new COVID variants and the continued effectiveness of vaccines against such variants, the continued effectiveness of the Company's business continuity plans, direct and indirect impact of the pandemic on our employees, customers, counterparties and service providers, as well as other market participants, actions taken by governmental authorities and other third parties in response to the pandemic. Although our Pandemic Work Group continues to monitor the COVID-19 pandemic and to take action in response to ongoing developments, there can be no guarantee this or any other aspect of our business continuity planning will be effective in addressing some or all of the effects of the COVID-19 pandemic.
Many of the circumstances that arose or became more pronounced after the onset of the COVID-19 pandemic persisted at the end of 2021, including:
•higher inflation and supply chain disruptions;
•significant volatility in financial markets;
•heightened credit risks and increased instances of defaults in many industries, including hospitality, transportation and commercial real estate;
•decreased rates and yields on U.S. Treasury securities, which may lead to further decreased net interest income;
•heightened cybersecurity, information security and operational risks as cybercriminals attempt to profit from the disruption resulting from the pandemic given increased online and remote activity, including as a result of work-from-home arrangements;
•increased risk of counterparty and service provider business disruption that could affect the ability of such counterparties and service providers to perform under the terms of any agreements with us or to provide us with essential services; and
•increased risk of business disruption if our employees are unable to work effectively because of illness, quarantines, government actions, failures in systems or technology that disrupt work-from-home arrangements or other effects of the pandemic.
As a result, our credit, operational and other risks are generally expected to remain elevated until the pandemic subsides. Depending on the duration and severity of the pandemic going forward, the conditions noted above could continue for an extended period and these or other adverse developments may occur or reoccur.
Certain industries to which the Company has credit exposure, including lodging, senior living and care facilities, restaurants, and travel and recreation, have experienced, and may continue to experience, significant operational challenges as a result of COVID-19. Although we have not experienced elevated levels of non-performing assets, the negative effects of COVID-19 may cause our business and consumer customers to be unable to pay their loans as they come due or may decrease the value of collateral, which we expect would cause significant increases in our credit losses.
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Until the pandemic subsides, we may experience reduced revenues from our lending businesses, and increased credit losses in our loan portfolios, as well as recognize the possibility for an increase in credit line utilization. Even after the pandemic subsides, it is possible that the U.S. and other major economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic and actions governmental authorities take in response to the pandemic. In particular, various government programs such as the Paycheck Protection Program are complex and our participation may lead to litigation and governmental, regulatory and third party scrutiny, negative publicity and damage to our reputation.
Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. The continued success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.
Other negative effects of COVID-19 that may affect our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that our business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides. Further, the COVID-19 pandemic has also had the effect of heightening, and may have the effect of heightening further, many of the other risks described in this section.
A downgrade or potential downgrade of the U.S. Government's sovereign credit rating by one or more credit ratings agencies could adversely affect our business.
Future uncertainty over U.S. fiscal policy could result in a downgrade or a reduction in the outlook of the U.S. long-term sovereign credit rating by one or more credit ratings agencies. Any downgrade, or perceived future downgrade, in the U.S. sovereign credit rating or outlook could adversely affect global financial markets and economic conditions and may result in, among other things, increased volatility and illiquidity in the capital markets, declines in consumer confidence, increased unemployment levels and declines in the value of U.S. Treasury securities and securities guaranteed by the U.S. government. As a result, our business, liquidity, results of operations and financial conditions may be adversely affected. Additionally, the economic conditions resulting from any such downgrade or perceived future downgrade may significantly exacerbate the other risks we face.
Fluctuations in market interest rates may adversely affect our performance.
Our profitability depends to a large extent upon our net interest income, which is the difference between interest income earned from loans and investments and the interest expense paid on deposits and borrowings. Net interest income is our largest source of revenue and can be affected significantly by changes in market interest rates, including in the shape of the yield curve or in spreads between different market interest rates, as well as by changes related to inflation. In particular, changes in relative interest rates may reduce our net interest income as the difference between interest income and interest expense decreases. As a result, we have adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources.
As of December 31, 2021, our balance sheet composition supported an asset sensitive interest rate risk position over a one- and two-year period. This would suggest that if interest rates were to decrease, then net interest income would decrease, reducing revenue and net income, while an increase in interest rates would increase net interest income, increasing revenue and net income. However, there is risk that any change in interest rates could negatively impact our results of operations or financial condition. Because market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. During the first quarter of 2020, the Federal Reserve reduced the targeted Federal Funds rate to between zero and 0.25% in response to COVID-19 and lower benchmark interest rates, which continued to compress our net interest margin and pressure net interest income through 2021. An increase in interest rates could also have a negative impact on our results of operations by slowing loan production, and specifically, loan refinance activity, and/or reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to our allowance for credit losses.
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We could be adversely affected by the actions and commercial soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We maintain a diversified securities portfolio and have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Furthermore, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. Any such losses could materially and adversely affect our results of operations.
In addition, although we believe that we have adequately reviewed our investment securities for the need for an allowance for credit losses or impairment, over time, the economic and market environment may provide additional insight regarding the fair value of certain securities, which could change our judgment regarding the need for an allowance for credit losses or impairment. If a counterparty should default, become insolvent, declare bankruptcy, or otherwise cease to exist, the value of our investment may be impaired. This could result in provision for credit losses or realized losses being charged against future income. Given the significant judgments involved, there is risk that material provisions may be recorded to establish an allowance for credit losses resulting in realized losses. We did not recognize any provisions for credit losses on our investment securities portfolio in 2021.
Our financial condition and results of operations have been adversely affected, and in the future may be adversely affected, by the U.S. and international financial market and economic conditions.
We have been, and in the future may be, affected by general business and economic conditions in the United States and, to a lesser extent, abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, unemployment and investor confidence, all of which are beyond our control. Although the U.S. economy had recovered over the past decade prior to the COVID-19 pandemic, economic concerns have been heightened as a result of the pandemic, and deterioration in any of these conditions, including as a result of the COVID-19 pandemic or other future events that we are unable to predict, could result in increases in loan delinquencies and non-performing assets, decreases in loan collateral values, the value of our investment portfolio and demand for our products and services. Higher credit or collateral related losses, or decreases in the value of our investment portfolio or demand for our products and services, could negatively impact our financial condition or results of operations.
In addition, volatility and uncertainty related to inflation and its effects, which could potentially contribute to poor economic conditions, may contribute to or enhance some of the risks described in this section. For example, higher inflation could reduce demand for our products, adversely affect the creditworthiness of our borrowers or result in lower values for our interest-earning assets and investment securities.Any of these effects, or others that we are not able to predict, could adversely affect our financial condition or results of operations.
Camden National Wealth Management may be negatively affected by changes in economic and market conditions.
A substantial portion of income from fiduciary services is dependent on the market value of wealth management assets under management, which are primarily marketable securities. Changes in domestic and foreign economic conditions, volatility in financial markets, and general trends in business and finance, all of which are beyond our control, could adversely impact the market value of these assets and the fee revenues derived from the management of these assets.
If we do not maintain net income growth, the market price of our common stock could be adversely affected.
Return on shareholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on continued growth and expansion. Our growth strategy has two principal components: internal growth and external growth. The ability to generate internal growth is affected by the competitive factors described herein as well as by the primarily rural characteristics and related demographic features of the markets we serve. The ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is an important component of our external growth strategy.
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Continued market volatility may impact our business and the value of our common stock.
Our business performance and the trading price of shares of our common stock may be affected by many factors affecting financial institutions, including volatility in the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and the value of debt and mortgage-backed and other securities that we hold in our investment portfolio. Government action and legislation may also impact us and the value of our common stock. We cannot predict what impact, if any, volatility will have on our business or share price and for these and other reasons our shares of common stock may trade at a price lower than that at which they were purchased.
Reforms to London Interbank Offered Rate (“LIBOR”) and other indices, and related uncertainty, may adversely affect our business, financial condition or results of operations.
The administrator of LIBOR has announced that the publication of the most commonly used U.S. Dollar LIBOR settings will cease to be provided or will cease to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be provided or ceased to be representative as of December 31, 2021. The U.S. federal banking agencies had also issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts by December 31, 2021 at the latest. Because the transition from LIBOR is ongoing, there continues to be significant uncertainty with respect to the effect of the transition on the financial markets for LIBOR-linked financial instruments.
In April 2018, the Federal Reserve Bank of New York commenced publication of the Secured Overnight Financing Rate (“SOFR”), which has been recommended as an alternative to United States dollar LIBOR by the Alternative Reference Rates Committee, a group of market and official sector participants. However, uncertainty remains as to the transition process and acceptance of SOFR as the primary alternative to LIBOR. The market transition from LIBOR to SOFR or a different alternative reference rate is complex and the transition may have a material, adverse effect on the value of, return on and trading market for our financial assets and liabilities that are based on or are linked to benchmarks, including our hedge contracts, or our financial condition or results of operations. In addition, we cannot assure that actions taken by us and third parties to address these risks and otherwise prepare for the transition from LIBOR to alternative interest rate benchmarks will be successful.
Credit Risk and Lending Business Risk
Our loans are concentrated in certain areas of Maine and adverse conditions in those markets could adversely affect our operations.
We primarily serve individuals and businesses located in the state of Maine, with 72% of our loan portfolio concentrated among borrowers in Maine as of December 31, 2021, with higher concentrations of exposure in Cumberland, Kennebec, Knox, and York counties. Further, because a substantial portion of the loan portfolio is secured by real estate in this area, the value of the associated collateral is also subject to regional real estate market conditions. Adverse economic, political or business developments or natural hazards, the severity and frequency of which are increasing as a result of climate change, may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If these regions experience adverse economic, political or business conditions, we would likely experience higher rates of loss and delinquency on these loans than if the loans were more geographically diverse. In addition, the COVID-19 pandemic and the resulting restrictions on individuals and economic activity adversely affected certain industries in Maine more than others, including hospitality, transportation and commercial real estate. Continued negative effects of COVID-19 on those industries could result in higher rates of loss and delinquency on these loans, which could have a material, adverse effect on our financial condition or results of operations.
Our loan portfolio includes commercial real estate and commercial loans, which are generally riskier than other types of loans.
At December 31, 2021, our commercial real estate and commercial loan portfolios comprised 54% of our total loan balances, Commercial loans generally carry larger loan balances and involve a higher risk of nonpayment or late payment than residential mortgage loans. Commercial loans may lack standardized terms and may include a balloon payment feature. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions and prevailing interest rates. Repayment of these loans is generally more dependent on the economy and the successful operation of a business. Because of the risks associated with commercial loans, we may experience higher rates of default than if the portfolio were more heavily weighted toward residential mortgage loans. Higher rates of default could have an adverse effect on our financial condition and results of operations.
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As of December 31, 2021, the most significant industry concentration within our loan portfolio was nonresidential building operators (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings), which was 14% of our total loans and 32% of our total commercial real estate portfolio. As of December 31, 2021, we had no other industry concentrations in excess of 10% of total loans.
If our allowance for credit losses for loans is not adequate to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for credit losses for these loans (herein referred to as the “allowance for loan losses”) based on a number of factors. The level of the allowance for loan losses reflects management's continuing evaluation of industry concentrations, specific credit risks, credit loss experience, current loan portfolio quality, current economic trends and conditions, reasonable and supportable forecasts about the future, changes in competitive, legal, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. On a monthly basis, management reviews the allowance for loan losses to assess recent asset quality trends and impact on the Company's financial condition. On a quarterly basis, the allowance for loan losses is reviewed and approved at the Company's Audit Committee, and later reviewed and ratified by the Bank's Board of Directors. Determination of the allowance for loan losses is inherently subjective because it requires significant estimates and management judgment of credit risks and future trends, which are subject to material changes. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover the losses we could experience, which would have an adverse effect on operating results, and may also cause us to increase the allowance for loan losses in the future. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, changes in accounting principles, and other factors, both within and outside our control, may require an increase in the allowance for loan losses. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provisions for credit losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities could have a material adverse effect on our consolidated results of operations and financial condition. If additional amounts are provided to the allowance for credit losses, our earnings could decrease.
Prepayments of loans may negatively impact our business.
Generally, our customers may prepay the principal amount of their outstanding loans at any time, frequently without financial penalty to the borrower. The speeds at which such prepayments occur, as well as the size of such prepayments, are within our customers’ discretion. Fluctuations in interest rates, in certain circumstances, may also lead to high levels of loan prepayments. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.
Competitive and Strategic Risk
We experience strong competition within our industry and markets, which may impact our profitability.
Competition in the banking and financial services industry is strong. In our market areas, we compete for loans, deposits and other financial products and services with large financial companies, local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services. Some of these competitors have substantially greater resources and lending limits than those of the Bank and may offer services that the Bank does not or cannot provide. Some of our non-bank competitors are not subject to the same extensive regulations we are, and, as a result, may be able to compete more effectively for business. In particular, the activity of marketplace lenders and other financial technology companies (“fintechs”) has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products. For example, a number of fintechs have applied for, and in some cases received, bank or industrial loan charters. In addition, other fintechs have partnered with existing banks to allow them to offer deposit products to their customers. Regulatory changes, such as the recent revisions to the FDIC’s rules on brokered deposits, may also make it easier for fintechs to partner with banks and offer deposit products. Other recent regulation has reduced the regulatory burden of large bank holding companies, and raised the asset thresholds at which more onerous requirements apply, which could cause certain large bank holding companies with less than $250 billion in total consolidated assets, which were previously subject to more stringent enhanced prudential standards, to become more competitive or to pursue expansion more aggressively. There is also increased competition by out-of-market competitors through online and mobile channels. Our long-term success depends on our ability to compete successfully with other financial institutions and fintechs. Because we maintain a smaller staff and have fewer financial and other resources than larger institutions with which we compete, we may be limited in our ability to attract customers. If we are unable to attract and retain customers, we may be unable to achieve growth in the loan and core deposit portfolios, and our results of operations and financial condition may be negatively affected.
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Market changes may adversely affect demand for our services and impact results of operations.
Channels for servicing our customers are evolving rapidly, with less reliance on traditional branches, more use of online and mobile banking, and increased demand for universal bankers and other relationship managers who can service multiple product lines. We compete with larger providers that are rapidly evolving their service offerings, thereby escalating the costs of evolving the Bank’s efforts to keep pace. We have a process for evaluating the profitability of our branches and other office and operational facilities. The identification of unprofitable operations and facilities can lead to restructuring charges and introduce the risk of disruptions to revenues and customer relationships.
Camden National Wealth Management faces intense competition in attracting and retaining clients.
Due to strong competition, Camden National Wealth Management may not be able to attract and retain clients at current levels. Competition is strong as there are numerous well-established and successful investment management and wealth advisory firms including commercial banks and trust companies, investment advisory firms, mutual fund companies, stock brokerage firms, and other financial companies. Our ability to attract and retain wealth management clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services, and marketing and distribution capabilities. If we are not successful, our results of operations and financial condition may be negatively impacted.
The Company faces competition in pursuing acquisition opportunities.
In pursuing acquisition opportunities, we may be in competition with other companies having similar growth strategies. As a result, we may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative effect on the market price of our common stock.
Liquidity Risk
Our cost of funds may increase as a result of loss of deposits or a change in deposit mix.
Deposits are a low cost, stable source of funding. We compete with banks, other financial institutions and fintechs for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin, net interest income and net income.
As of December 31, 2021, brokered deposits made up 5% of our total deposits. We have and will continue to utilize brokered deposits when it is a more cost effective source of funding compared to alternative funding sources. Should we become less than well-capitalized under the prompt corrective action framework, our use of brokered deposits may be limited, which could result in the use of more costly funding sources that would reduce our net interest margin, net interest income and net income. See “Supervision and Regulation—Capital Adequacy and Safety and Soundness—Prompt Corrective Action”and“Supervision and Regulations—Regulation of the Bank—Brokered Deposits” for additional information on the prompt corrective action framework and the regulation of brokered deposits.
Wholesale funding sources may prove insufficient to replace deposits and support our operations and future growth.
The Company and the Bank must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include brokered deposits, borrowings through the Federal Home Loan Bank and correspondent banks, proceeds from the sale of investments and loans, and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs, or if there are unforeseen outflows of cash or collateral, such as that seen by certain financial institutions during 2020 when corporate customers drew on revolving credit facilities at a historic pace in response to COVID-19. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.
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We are a holding company and dependent upon our subsidiary for dividends, distributions and other payments to meet our liquidity needs.
We are a legal entity separate and distinct from our direct and indirect subsidiaries. Our revenue (on a parent-only basis) is derived primarily from interest and dividends paid to us by the Bank. Our right, and consequently the right of our shareholders, to participate in any distribution of the assets or earnings of the Bank through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors), except to the extent that certain claims of us in a creditor capacity may be recognized.
Holders of our common stock are entitled to receive dividends only when, and if declared by our Board of Directors. Although we have historically declared cash dividends on our common stock, we are not required to do so and our Board of Directors may reduce or eliminate our common stock dividend in the future. The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. Additionally, the OCC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Further, as a bank holding company, we are required inform and consult with FRB supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. If we experience losses in a series of consecutive quarters, we may be required to inform and consult with the FRB supervisory staff prior to declaring or paying any dividends. In this event, there can be no assurance that the FRB will approve the payment of such dividends. Our ability to pay dividends would also be restricted under current regulatory capital rules if we do not maintain a capital conservation buffer. A reduction or elimination of dividends could adversely affect the market price of our common stock. See Item 1. “Business—Supervision and Regulation—Dividend Restrictions” and “Business—Supervision and Regulation—Regulatory Capital Requirements.”
Regulatory and Legal Risk
Our banking business is highly regulated, and we may be adversely affected by changes in law and regulation.
We are subject to regulation and supervision by the FRB, and the Bank is subject to regulation and supervision by the OCC and the FDIC, as well as regulations issued by the CFPB. Federal laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The OCC possesses the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we may conduct business and obtain financing.
Our business is highly regulated and the laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change, and there have been significant revisions to the laws and regulations applicable to banks and bank holding companies that have been enacted or proposed in recent years. In addition, we expect that we will remain subject to extensive regulation and supervision, and that the level of regulatory scrutiny may fluctuate over time, based on numerous factors, including changes in the U.S. presidential administration or one or both houses of Congress and public sentiment regarding financial institutions (which can be influenced by scandals and other incidents that involve participants in the industry). In particular, fee revenues from overdraft protection programs have been, and may continue to be, subject to increased scrutiny. For example, in December 2021, the OCC’s Acting Comptroller identified a range of options to reform national bank overdraft practices that, if implemented, could impose significant restrictions on a national bank’s ability to charge overdraft protection fees. Any such restrictions could adversely affect our noninterest income and results of operations.
We are unable to predict the form or nature of any future changes to statutes or regulation, including the interpretation or implementation thereof. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, have and could in the future subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, and results of operations. See Item 1., “Business—Supervision and Regulation.”
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We may become involved in lawsuits and legal proceedings that may lead to adverse consequences.
As a participant in the financial services industry, many aspects of the Company’s business involve substantial risk of legal liability. From time to time, we are named or threatened to be named as defendants in various lawsuits, including class actions, arising from our business activities. In addition, when other financial institutions receive adverse judgments in litigation or
agree to settlements, that may encourage plaintiffs and their attorneys to bring and maintain claims, including class actions,
against other financial institutions, including the Company. There is no assurance that litigation with private parties will not increase in the future. Future actions against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case. As a result, a judgment against us in any such litigation and/or legal costs incurred in defending us against such litigation could have a material adverse effect on our financial condition and results of operation.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.
The financial services industry is subject to intense scrutiny from bank supervisors in the examination process and aggressive enforcement of federal and state regulations, particularly with respect to mortgage-related practices and other consumer compliance matters, and compliance with AML, BSA and OFAC regulations, and economic sanctions against certain foreign countries and nationals. Enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. In addition, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there were systems and procedures designed to ensure compliance in place at the time. There have been a number of significant enforcement actions in recent years by regulators, state attorneys general and the Department of Justice against banks and other non-bank financial institutions with respect to AML and sanctions laws, and some have resulted in substantial penalties including criminal pleas. Although the Company and the Bank have adopted policies and procedures designed to comply with these laws, any failure to comply with these laws and other regulations, or to maintain an adequate compliance program, could result in significant fines, penalties, lawsuits, regulatory sanctions, reputational damage, or restrictions on our business.
We are subject to numerous laws designed to meet the credit needs of low- and moderate-income communities and to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The FRB, OCC, CFPB, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
We are required to maintain sufficient capital and adequate liquidity.
As a banking organization, our capital and liquidity are subject to regulation and supervision by banking regulators. We are required to maintain minimum levels of capital. In addition, our banking regulators could require us to maintain more and higher quality capital than previously expected. Our banking regulators could also require us to hold higher levels of short-term investments, thereby limiting our ability to invest in longer-term or less liquid assets at higher yields. The need to maintain capital and liquidity could result in our being required to take steps to increase our regulatory capital and may dilute shareholder value or limit our ability to pay dividends or otherwise return capital to our investors through stock repurchases. In addition, if we fail to maintain appropriate levels of capital or liquidity, we could become subject to formal or informal enforcement actions that may impose restrictions on our business, including limiting our lending activities or our ability to expand, requiring us to raise additional capital (which may be dilutive to shareholders) or requiring regulatory approval to pay dividends or otherwise return capital to shareholders. See Item 1. “Business-Supervision and Regulation-Regulatory Capital Requirements” for additional information on capital requirements applicable to us and the Bank.
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Operational and Business Risk
Damage to our reputation could significantly harm our business.
We are dependent on our reputation within our market area, as a trusted and responsible financial company, for all aspects of our relationships with customers, employees, vendors, third-party service providers and others with whom we conduct business or potential future business, particularly because our business is primarily concentrated in certain areas of Maine. Our actual or perceived failure to (i) identify and address potential conflicts of interest, ethical issues, money-laundering, or privacy issues; (ii) meet legal and regulatory requirements applicable to the Bank and to the Company; (iii) maintain the privacy of customer and accompanying personal information; (iv) maintain adequate record keeping; (v) engage in proper sales and trading practices; and (vi) identify the legal, reputational, credit, liquidity and market risks inherent in our products; or any action of one of our employees that results in actual or perceived misconduct or error, among other things, could give rise to reputational risk that could cause harm to the Bank and our business prospects. If we fail to address any of these issues in an appropriate manner, we could be subject to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Because we primarily serve individuals and businesses located in Maine, any negative impact resulting from reputational harm, including any impact on our ability to attract and retain customers and employees, likely would be greater than if our business were more geographically diverse. Moreover, the advent and expansion of social media creates the potential for rapid and widespread dissemination of information, including inaccurate, misleading, or false information, that could damage our reputation and affect our ability to attract and retain customers and employees.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes. Market conditions over the last several years, including those resulting from the COVID-19 pandemic, have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk. If our risk and control framework, or the assumptions underlying our framework, prove ineffective, we may not be able to mitigate our risk exposures effectively, and, as a result, we could incur litigation, negative regulatory consequences, reputational damage or other adverse consequences, and we could suffer unexpected losses that may affect our business, financial condition or results of operations.
Our business may be adversely affected if we are unable to attract and retain qualified employees.
The Company’s employees are its most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense. If the Company provides inadequate succession planning, or is unable to continue to retain and attract qualified employees, this could result in a material adverse effect on the Company’s performance, including its competitive position.
COVID-19 has had significant effects on labor and employment, including heightened pressures on employers to increase compensation and provide work-from-home and other flexible working arrangements. During the COVID-19 pandemic, employees have shifted their focus to expectations that extend beyond compensation, including better work-life balance, improved advancement opportunities and improved training, and many businesses, including us, have experienced higher rates of turnover as a result of such changes. Our ability to compete successfully for talent has been and may continue to be affected by our ability to adapt quickly to such shifts in employee focus, and there is no assurance that these developments will not cause increased turnover or impede our ability to retain and attract qualified employees.
We could be held responsible for environmental liabilities of properties we acquired through foreclosure.
In the course of business, we may acquire, through foreclosure, properties securing loans originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered on these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.
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Systems failures, interruptions or breaches of security concerning ourinformation base, including the information we maintain relating to our customers, could have an adverse effect on our financial condition and results of operations.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store sensitive data, including financial information regarding customers. We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, inadequate or failed internal processes, human error, customer or employee fraud, cyberattacks, hacking, identity theft and catastrophic failures resulting from terrorist acts or natural disasters. We depend upon data processing, software, communication, and information exchange on a variety of computing platforms and networks and over the internet, and we rely on the services of a variety of vendors to meet our data processing and communication needs. Despite instituted safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. While we maintain a system of internal controls and procedures, any of these results could have a material adverse effect on our reputation, business, financial condition, results of operations or liquidity.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. We have expended substantial resources to protect our systems, and may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures in our computer systems and networks, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through insurance maintained by us. Any such losses, which may be difficult to detect, could adversely affect our financial condition or results of operations. In addition, the occurrence of such a loss could expose the Company and the Bank to reputational risk, the loss of customers and additional regulatory scrutiny.
We are subject to a variety of cybersecurity risks that, if realized, could adversely affect our business, financial condition and results of operations.
Information security risks for financial institutions such as the Company and the Bank have increased significantly in recent years due to the use of online, telephone and mobile banking channels by customers and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Third parties with whom we or our customers do business also present operational and information security risks to us. We see an increasing trend of cyberattacks targeting providers in the financial services industry, as well as, increased security breaches or failures of their own systems. Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Our businesses rely on our digital technologies, computer and email systems, software, and networks to conduct their operations. As our reliance on technology systems increases, the potential risks of technology-related interruptions in our operations or the occurrence of cyber incidents also increases. Our technologies, systems, networks and our customers’ devices are periodically the target of cyberattacks, and may be the target of future cyberattacks, including through the introduction of computer viruses, and/or malicious code, or by means of phishing attacks, social engineering or other information security breaches. Malicious actors may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information, including passwords and other identifying information, in order to gain access to data or our systems.
In recent years, there have been several well-publicized attacks on various companies, including in the financial services industry, and personal, proprietary, and public e-mail systems in which the perpetrators gained unauthorized access to confidential information and customer data, often through the introduction of computer viruses or malware, cyberattacks, phishing, or other means. Even if not directed at the Company or the Bank specifically, attacks on other entities with whom we do business or on whom we otherwise rely or attacks on financial or other institutions important to the overall functioning of the financial system could adversely affect, directly or indirectly, aspects of our business.
Information security risks have generally increased in recent years, and continue to increase, in part because of the proliferation of new technologies, the implementation of work-from-home arrangements, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our systems or to investigate and remediate vulnerabilities. System enhancements and updates may also create risks associated with implementing and integrating new systems. Due to the complexity and interconnectedness
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of information technology systems, the process of enhancing our systems can itself create a risk of systems disruptions and security issues.
Although we believe we have appropriate information security controls and procedures, we may not be able to anticipate, detect, or implement effective preventative measures against all potential threats, particularly because the techniques used by cyber criminals change frequently, often are not recognized until launched and can be initiated from a variety of sources. In the event one or more of the events described above occurs, this could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, the theft of customer assets through fraudulent transactions or disruption of our or our customers’ or other third parties’ business operations, which could result in legal or regulatory action, significant losses, increased compliance costs or reputational damage, any of which could adversely affect our business, financial condition or results of operations.
We must adapt to information technology changes in the financial services industry, which could present operational issues, require significant capital spending, or impact our reputation.
The financial services industry is constantly undergoing technological changes, with frequent introductions of new technology-driven products and services. We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully implement and integrate future system enhancements could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
We rely on other companies to provide key components of our business infrastructure.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could also entail significant delay and expense.
Third parties with which we do business could also be sources of information security risk to us, including from breakdowns, systems failures or cyber threats through their systems to our systems. Any of these occurrences could impact our ability to operate our business, or cause financial loss, potential liability to clients, reputational damage or regulatory consequences, any of which could have a material adverse effect on our financial condition or results of operations.
Our operations and financial performance could be adversely affected by natural disasters, and climate change may exacerbate those risks and create compliance, strategic, reputational and other risks.
Our business, as well as the operations and activities of our customers, could be negatively affected by climate change. Climate change presents both immediate and long-term risks to us and our customers and these risks are expected to increase over time. Climate changes presents several risks, including (i) operational risk from the physical effects of climate events on our facilities and other assets as well as those of our customers; and (ii) transitional risks, including new or more stringent regulatory requirements and potential effects on our reputation and/or changes in our business as a result of our climate change practices, our carbon footprint and our business relationships with customers who operate in carbon-intensive industries.
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Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business (including as a result of damage to our own facilities or systems or to the facilities or systems of third-party vendors on which we rely), and our insurance coverage may be insufficient to compensate for losses that may occur. Because we primarily serve individuals and businesses located in Maine, a natural disaster likely would have a greater impact on our business, operations and financial condition than if our business were more geographically diverse.
Both the frequency and severity of some kinds of natural disasters, including wildfires, flooding, tornadoes and hurricanes, have increased, and we expect will continue to increase, as a result of climate change. In addition, long-term shifts in the climate, including altered distribution and intensity of rainfall, rising sea levels and a rising heat index, negatively affect our ability to predict the effects of natural disasters accurately. Climate change may result in reduced availability of insurance for our borrowers, including insurance that protects property pledged as collateral, or disrupt their operations, which could increase our credit risk by diminishing borrowers’ repayment capacity or collateral values.
Efforts to transition to a low-carbon economy could result in new and/or more stringent regulatory requirements.Federal and state banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs. In addition, changes to consumer and business preferences or in the attitudes of regulators, shareholders and employees regarding climate change, may affect the activities in which we engage and the products that we offer, and may require us to adjust our lending portfolios and business strategies.Risks associated with climate change are continuing to evolve rapidly, making it difficult to assess the effects of climate change on our business, and we expect that climate change-related risks will continue to evolve and increase over time.
Acts of terrorism, pandemics and other external events could harm our business.
Acts of terrorism, war or other international hostilities, civil unrest, violence or pandemics could cause disruptions to our business or the economy as a whole, such as the disruptions experienced during the COVID-19 pandemic. Any of these events could affect us directly (for example, by interrupting our systems, causing significant damage to our facilities or otherwise preventing us from conducting our ordinary business) or indirectly as a result of effects on our borrowers and other customers or third-party vendors (for example, by damaging property pledged as collateral for our loans). Although we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition, such as the negative effects that resulted from the COVID-19 pandemic and other effects that we may be unable to predict.
Accounting and Tax Risk
Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.
Pursuant to U.S. generally accepted accounting principles, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”
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We may be required to write down goodwill and other identifiable intangible assets.
When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill. At December 31, 2021, our goodwill and other identifiable intangible assets totaled $96.9 million. Under current accounting standards, if we determine goodwill or intangible assets are impaired, we would be required to write down the value of these assets to fair value. We conduct an annual review, or more frequently if events or circumstances warrant such additional review, to determine whether goodwill is impaired. We recently completed our goodwill impairment analysis as of November 30, 2021 and concluded goodwill was not impaired. We conduct a review of our other intangible assets for impairment should events or circumstances warrant such review. There were no triggers for such review for impairment for other intangible assets for the year ended December 31, 2021. We may be required to take an impairment charge in the future. Any impairment charge would have a negative effect on our shareholders’ equity and financial results and may cause a decline in our stock price.
Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to anticipate and implement and can materially impact how we record and report our financial condition and results of operations. For example, the introduction of Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as updated, commonly referred to as “CECL,” substantially changed how we calculate our allowance for credit losses. Other future changes in accounting standards could materially impact how we report our financial condition, and we cannot predict whether such standards will be adopted or their resultant impact.
Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our financial statements.
Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a material adverse effect on our results. In addition, there may be future changes to tax laws, administrative rulings or court decisions that could adversely affect our financial condition, including an increased provision for income taxes and/or reduced net income. We are not able to predict the timing or impact of any changes in local, state or federal tax laws.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2021, the Company owned or leased a total of 64 facilities, excluding any properties designated as other real estate owned. All facilities are fully utilized and considered suitable and adequate for the purposes intended. The Company owns 42 of its facilities, none of which are subject to a mortgage, and the remaining branches and loan offices are leased by the Company. The Company has 56 branches located throughout Maine, a branch in Portsmouth, New Hampshire, a commercial loan production office in Manchester, New Hampshire, and a mortgage loan production office in Braintree, Massachusetts.
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The following table presents the Company's materially important locations and properties as of December 31, 2021:
3 Canal Plaza Portland, Maine 1 floor Executive office Leased 3,850
2 Canal Plaza Portland, Maine 2 floors Branch and service center Leased 17,710
Hanley Center Rockport, Maine 2 story building Service center Owned 32,360
Gardiner Gardiner, Maine 3 story building Branch and service center Owned 17,497
Auburn Auburn, Maine 3 story building Branch Owned 13,000
Bangor Bangor, Maine 1 floor Branch Leased 17,432
Ellsworth Ellsworth, Maine 3 story building Branch Owned 44,000 (2)
Rockland Rockland, Maine 3 story building Branch Owned 21,600
(1) Total square footage for leased locations represents the amount of space the Company occupies.
(2) Includes space leased to third parties.
For additional information regarding the Company's premises and equipment and lease obligations see Notes 5 and 6 of the consolidated financial statementswithin Item 8. Financial Statements and Supplementary Data.
Item 3. Legal Proceedings
The Company is currently involved, and from time to time in the future may become involved, in various legal claims that arise in the normal course of the Company’s business. The Company may also in the future become involved in other regulatory, judicial and/or arbitration proceedings relating to matters that arise in connection with the conduct of the Company’s business. Because of the difficulty in predicting the outcome of these matters, particularly when they are in their early stages, the Company cannot predict what the final outcome of each legal proceeding may be, or what the eventual loss, fine or penalty related to each proceeding may be, if any. Based on currently available information, in our opinion the results of legal proceedings that are currently pending are not expected to have a material effect on our 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. 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. As of December 31, 2021 and 2020, the Company did not maintain material reserves against legal claims.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is currently traded on the NASDAQ Global Market (“NASDAQ”) under the ticker symbol “CAC.” The Company has paid quarterly dividends since its foundation in 1984. The high and low closing sales prices (as quoted by NASDAQ for 2021 and 2020) and cash dividends declared per share of the Company’s common stock, by calendar quarter for the past two years, were as follows:
High Low High Low
As of February 22, 2022, there were 14,740,895 shares of the Company’s common stock outstanding by approximately 1,100 shareholders, as obtained through our transfer agent. Such number of shareholders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.
Although the Company has historically paid quarterly dividends on its common stock, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will be paid in the future. For further information on dividend restrictions, refer to Item 1. “Business—Supervision and Regulation” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources.”
The following graph illustrates the annual percentage change in the cumulative total shareholder return of the Company’s common stock for the period December 31, 2016 through December 31, 2021. For purposes of comparison, the graph illustrates comparable shareholder returns of the SNL $1B – $5B Bank Index and the Russell 2000 Stock Index. The graph assumes a $100 investment on December 31, 2016 in each case and measures the amount by which the market value, assuming reinvestment of dividends, has changed as of December 31, 2021.
Stock Performance Graph
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In February 2021, the Board of Directors authorized a common stock repurchase program, authorizing management to repurchase up to 750,000 shares, or approximately 5%, of the Company's outstanding common stock, that had an expiration date of the earlier of (i) reaching the authorized share repurchase amount, (ii) vote by the Board of Directors to terminate the plan, or (iii) one year. As of December 31, 2021, the Company repurchased 217,931 shares at an average price of $46.25. This repurchase program subsequently terminated in January 2022.
Issuer's Purchases of Equity Securities
In January 2022, the Board of Directors authorized a common stock repurchase program authorizing management to repurchase up to 750,000 shares, or approximately 5%, of the Company's outstanding common stock. This program replaces the 2021 repurchase program and will terminate upon the earlier of (i) reaching the authorized share repurchase amount, (ii) vote by the Board of Directors to terminate the plan, or (iii) January 3, 2023.
Other information required by this item is incorporated by reference to Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion below focuses on the factors affecting our consolidated results of operations for the year ended
December 31, 2021, 2020 and 2019 and financial condition at December 31, 2021 and 2020 and, where appropriate, factors that may affect our future financial performance, unless stated otherwise. This discussion should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and selected consolidated financial data.
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ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used throughout Item 7. “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 this section of the Form 10-K:
Acronym Description Acronym Description
AFS: Available-for-sale FRBB: Federal Reserve Bank of Boston
ACL: Allowance for credit losses GDP: Gross domestic product
ASC: Accounting Standards Codification HTM: Held-to-maturity
ASU: Accounting Standards Update IRS: Internal Revenue Service
BOLI: Bank-owned life insurance LIBOR: London Interbank Offered Rate
CD: 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
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 ROU: Right-of-use
FHLB: Federal Home Loan Bank SBA: U.S. Small Business Administration
FNMA: Federal National Mortgage Association TDR: Troubled-debt restructured loan
FRB: Federal Reserve System Board of Governors U.S.: United States of America
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NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP
In addition to evaluating the Company’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures, such as return on average tangible equity; the efficiency ratio; net interest income (fully-taxable equivalent); earnings before income taxes and provision; earnings before income taxes, provision, and SBA PPP loan income; total loans, excluding SBA PPP loans; ACL on loans to total loans, excluding SBA PPP loans; adjusted yield on interest-earning assets and adjusted net interest margin (fully-taxable equivalent); tangible book value per share; tangible common equity ratio; and core deposits and average core deposits. We utilize these non-GAAP financial measures for purposes of measuring 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. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.
Return on Average Tangible Equity. Return on average tangible equity is the ratio of (i) net income, adjusted for tax effected amortization of core deposit intangible assets and other adjustments, as necessary, to (ii) average shareholders' equity, adjusted for average goodwill and core deposit intangible assets. This adjusted financial ratio reflects a shareholders' return on tangible capital deployed in our business and is a common performance measure within the financial services industry.
For the Year EndedDecember 31,
Add: amortization of intangible assets, net of tax(1) 517 539 557
Less: average goodwill and other intangible assets (97,211) (97,880) (98,570)
(1) Assumed a 21% income tax rate.
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Efficiency Ratio. The efficiency ratio represents an approximate measure of the cost required for the Company to generate a dollar of revenue. This is a common measure used by financial institutions and is a key ratio for evaluating Company performance. The efficiency ratio is calculated as the ratio of (i) total non-interest expense, adjusted for certain operating expenses to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.
For the Year EndedDecember 31,
Less: legal settlement — (1,200) —
Less: prepayment fees on borrowings (514) — —
Add (Less): net loss (gain) on sale of securities — — 105
Ratio of non-interest expense to total revenues(2) 55.41 % 53.52 % 56.15 %
(1) Reported on a tax-equivalent basis using a 21% income tax rate.
(2) Revenue is the sum of net interest income and non-interest income.
Net Interest Income (Fully-Taxable Equivalent). Net interest income on a fully-taxable equivalent basis is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. This is a common measure with the financial services industry and is used within the calculation of net interest margin on a fully-taxable equivalent basis.
For the Year EndedDecember 31,
(1) Reported on a tax-equivalent basis using a 21% income tax rate.
Earnings before Income Taxes and Provision, and Earnings before Income Taxes, Provision and SBA PPP Loan Income. Earnings before income taxes and provision, and earnings before income taxes, provision and SBA PPP loan income are each a supplemental measure of operating earnings and performance. Earnings before income taxes and provision is calculated as net income before provision for credit losses and income tax expense, and earnings before income taxes, provision and SBA PPP loan income is calculated as net income before provision for credit losses, income tax expense and SBA PPP loan income. These supplemental measures have become more widely used by financial institutions as a measure of financial performance for comparability across financial institutions due to the impact of the COVID-19 pandemic on the provision for credit losses, as well as the origination of SBA PPP loans in response to the COVID-19 pandemic that are not a recurring and sustainable source of revenues for financial institutions.
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For the Year EndedDecember 31,
Add: provision for credit losses, as presented (3,190) 12,418 2,861
Less: SBA PPP loan income (8,170) (7,750) —
Adjusted Yield on Interest-Earning Assets. Adjusted yield on interest-earning assets normalizes the Company's reported yield on interest-earning assets for certain unusual, non-recurring items, including: (i) the impact of SBA PPP loans and (ii) excess cash/liquidity held by the Company, primarily due to Federal stimulus programs and changes in the FRB cash holding requirements for financial institutions both in response to COVID-19.
For the Year EndedDecember 31,
Yield on interest-earning assets, as presented 3.07 % 3.56 % 4.15 %
Adjusted yield on interest-earning assets 3.10 % 3.59 % 4.16 %
Adjusted Net Interest Margin (Fully-Taxable Equivalent). Adjusted net interest margin on a fully-taxable equivalent basis normalizes the Company's reported net interest margin on a fully-taxable equivalent basis for certain unusual, non-recurring items, including: (i) the impact of PPP loans and (ii) excess cash/liquidity held by the Company, primarily due to Federal stimulus programs and changes in the FRB cash holding requirements for financial institutions both in response to COVID-19.
For the Year EndedDecember 31,
Adjusted net interest margin (fully-taxable equivalent) 2.87 % 3.10 % 3.16 %
Total Loans, excluding SBA PPP Loans. Total loans, excluding SBA PPP loans is used by management to measure the Company's core loan portfolio. The Company calculates total loans, excluding SBA PPP loans as total loans (as reported on the consolidated statements of condition) less SBA PPP loans.
Allowance for Credit Losses (“ACL”) on Loans to Total Loans, excluding SBA PPP Loans. ACL on loans to total loans, excluding SBA PPP loans, is calculated as (i) ACL on loans, adjusted for the ACL allocated to SBA PPP loans, to (ii) total loans, adjusted to exclude SBA PPP loans. SBA PPP loans were provided to qualifying businesses as part of the federal government stimulus package issued in response to the COVID-19 pandemic. These loans are fully-guaranteed by the SBA, and may even be forgiven in full or in part, and, thus, present little to no credit risk to the Company. By excluding the impact of the SBA PPP loans, the ratio attempts to be more comparable with prior periods and demonstrates the level of loan loss reserves established on the Company's loans originated as part of its core operations and credit underwriting standards.
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(In thousands) December 31,
Total Loans, excluding SBA PPP Loans:
ACL on Loans to Total Loans, excluding SBA PPP Loans:
Less: ACL on loans allocated to SBA PPP loans (18) (69)
ACL on loans to total loans 0.97% 1.18%
ACL on loans to total loans, excluding SBA PPP loans 0.98% 1.23%
Tangible Book Value per Share and Tangible Common Equity Ratio. Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill, premium on deposits and other acquisition-related intangibles to (ii) total common shares outstanding at period end. Tangible book value per share is a common measure within our industry when assessing the value of a company as it removes goodwill and other intangible assets generated within purchase accounting upon a business combination.
Tangible common equity is the ratio of (i) shareholders’ equity less goodwill and other intangible assets to (ii) total assets less goodwill and other intangible assets. This ratio is a measure used within our industry to assess whether or not a company is highly leveraged.
(In thousands, except number of shares and per share data) December 31,
Tangible Book Value Per Share:
Less: goodwill and other intangible assets (96,885) (97,540)
Tangible book value per share $ 30.15 $ 28.96
Tangible Common Equity Ratio:
Less: goodwill and other intangibles (96,885) (97,540)
Tangible common equity ratio 8.22 % 8.99 %
Core Deposits. Core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and lower cost. The Company calculates core deposits as total deposits (as reported on the consolidated statements of condition) less certificates of deposit and brokered deposits.Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.
December 31,
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Average Core Deposits. Average core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and at a lower interest rate cost. The Company calculates average core deposits as total deposits (as disclosed on the Average Balance, Interest and Yield/Rate Analysis table) less certificates of deposit. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.
For the Year EndedDecember 31,
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CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues, and expenses reported. Actual results could materially differ from our current estimates, as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including (i) the ACL, including the ACL on loans, off-balance sheet credit exposures and investments; (ii) accounting for acquisitions and the subsequent review of goodwill and intangible assets generated in an acquisition for impairment; (iii) income taxes; and (iv) accounting for defined benefit and postretirement plans.
Refer to Note 1 of the consolidated financial statements for additional details of the Company's accounting policies, including new accounting standards recently adopted.
Allowance for Credit Losses (“ACL”). Effective January 1, 2020, but applied to reporting periods on or after October 1, 2020, the Company adopted the new accounting standard for credit losses, ASU No. 2016-13, Financial Instruments - Credit Losses(Topic 326):Measurement of Credit Losses on Financial Instruments, as amended (“ASU 2016-13). This new accounting standard, commonly referred to as “CECL,” significantly changed our methodology for accounting for reserves on loans, unfunded off-balance sheet credit exposures, including certain unfunded loan commitments and standby guarantees, as well as introduced the consideration for an allowance on HTM debt investments. ASU 2016-13 replaced the “incurred loss” methodology used to establish an allowance on loans and off-balance sheet credit exposures, with an “expected loss” approach. Under CECL, the ACL at each reporting period serves as our best estimate of projected credit losses over the contractual life of certain assets, adjusted for expected prepayments, given an expectation of economic conditions and forecasts as of the valuation date.
The recorded ACL on loans and HTM debt investments is determined based on the amortized cost basis of the assets and may be determined at various levels, including homogeneous loan pools, individual credits with unique risk factors, and CUSIP. We have elected to use a discounted cash flow approach to calculate the ACL for each loan segment. Within the discounted cash flow model, a probability of default (“PD”) and loss given default (“LGD”) assumption is applied to calculate the expected loss for each loan segment. PD is the probability the asset will default within a given timeframe and LGD is the percentage of the assets not expected to be collected due to default. PD and LGD data may be derived using (1) internal historical default and loss experience, as well as from (2) external data there are not statistically meaningful loss events or internal loss data does not span a full economic cycle for a given loan segment.
CECL may create more volatility in our ACL, particularly our ACL on loans and ACL on off-balance sheet credit exposures. Under CECL, our ACL may increase or decrease period-to-period based on many factors, including, but not limited to: (i) macroeconomic forecasts and conditions; (ii) a change in the forecast period; (iii) a change in the reversion speed; (iv) a change in the prepayment speed assumption; (v) an increase or decrease in loan balances, including a changes in loan portfolio mix; (vi) credit quality of the loan portfolio; and (vii) various qualitative factors outlined in ASU 2016-13.
ASU 2016-13 also changed our methodology and accounting for credit losses within our investment portfolio designated as AFS. To the extent the fair value of a security designated as AFS is less than its amortized cost and we either (i) intend to sell the security or (ii) it is more-likely-than-not we will be required to sell the security before recovery of its amortized cost basis, then the investment is permanently impaired and the amortized cost basis is written down to fair value and a corresponding impairment charge is recorded within the consolidated statements of income. If neither of the above is true, but the fair value of the investment is below its amortized cost basis at the reporting date, then an allowance is established on the AFS investment for the portion of the impairment that is due to credit reasons (e.g. credit rating downgrades, past due receivables, and/or other macro- or micro-adverse trends). The allowance established on an AFS investment due to credit losses is limited to the amount the fair value of the investment is below its amortized cost basis as of the reporting date. If the fair value of the investment is below its amortized cost basis for non-credit-related reasons (e.g. interest rate environment), then the impairment continues to be recognized within shareholders' equity through AOCI, as it did prior to the adoption of ASU 2016-13.
ACL on Loans. We consider the ACL on loans to be a critical accounting policy given the uncertainty in evaluating the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of the loans in its portfolio. Determining the appropriateness of the allowance is a key management function that requires significant judgment and estimate by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the current loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in future periods. While our current evaluation indicates that the ACL at December 31, 2021 and 2020 was appropriate, the allowance may need to be increased under adversely different conditions or assumptions.
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The significant key assumptions used with the ACL calculation at December 31, 2021 using the CECL methodology, included:
•Macroeconomic factors (loss drivers): Macroeconomic factors are used within our discounted cash flow model to forecast the PD over the forecast period. As macroeconomic factor condition worsen, the PD increases, and the corresponding LGD increases, resulting in an increase in the ACL. We monitor and assess Maine unemployment, changes in Maine GDP, changes in National GDP, and changes in Maine's Housing Price Index at least annually to determine if these macroeconomic factors continue to be the most predictive indicator of losses within our loan portfolio. Macroeconomic factors used in the calculation of the ACL may change from time to time. In the fourth quarter of 2021, the Company reassessed its macroeconomic factors and, as a result, is no longer considering the changes in Maine’s Retail Sales in the calculation of the ACL as of December 31, 2021.
•Forecast Period and Reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable forecast period in developing the ACL, which represents the time period that management believes it can reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be reasonable and supportable is set annually and validated through an assessment of economic leading indicators. In periods of greater volatility and uncertainty, such as that seen across the global markets and economies, including the U.S., throughout 2021 and 2020 largely due to the ongoing COVID-19 pandemic, we are likely to use a shorter forecast period, whereas when markets, economies and various other factors are considered more stable and certain, we are likely to use a longer forecast period. Also, in times of greater uncertainty, we may consider a range of possible forecasts and evaluate the probability of each scenario. Generally, we expect our forecast period to range from one to three years. Once the reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for prepayments. In determining the length of time over which the reversion will take place (i.e. “reversion speed”), we consider such factors such as, but not limited to, historical loan loss experience over previous economic cycles, as well as where we believe we are within the current economic cycle.
At December 31, 2021 and 2020, we used a one-year forecast period and one-year reversion period for each loan segment.
•Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing our own historical loan data, as well as consideration of current environmental factors. The prepayment speed assumption is utilized with the discounted cash flow model (i.e. the CECL model) to forecast expected cash flows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed assumption will drive a lower ACL, and vice versa.
•Qualitative factors: As within previous accounting guidance used for the “incurred loss” model, ASU 2016-13 requires companies to consider various qualitative factors that may impact expected credit losses. We continue to consider qualitative factors in determining and arriving at our ACL each reporting period.
As of December 31, 2021 and 2020, the recorded ACL was $33.3 million and $37.9 million, respectively, and represented our best estimate of expected credit losses within our loan portfolio as of each date. However, we may adjust our assumptions to account for differences between expected and actual losses from period to period. A future change of our assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in the aforementioned key assumptions as well as asset quality within our loan portfolio, and we consider the impact of these trends on the ACL and the Company's financial condition, if any. The ACL is reviewed and approved on a quarterly basis by the Company's Audit Committee, and later reviewed and ratified by the Bank's Board of Directors.
Refer to “—Results of Operations—Provision for Credit Losses,” “—Financial Condition—Asset Quality,” and Note 3 of the consolidated financial statements for further discussion.
ACL on Off-Balance Sheet Credit Exposures. We consider the ACL on off-balance sheet credit exposures to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses on expected future loan fundings of, primarily, unfunded loan commitments for those that are not unconditionally cancellable by the Company. The expected credit loss factors for each loan segment calculated using the ACL on loans methodology described above, as well as within Note 1 of the consolidated financial statements, is used to calculate the ACL on off-balance sheet credit exposures for each applicable loan segment, and, thus, are subject to the same level of estimation risk and volatility previously described. In addition, one other key assumption is used to derive the ACL on off-balance sheet credit exposures and that is the expected funding rate. The expected funding rate is derived using historical loan-level data for credit line usage, and is applied to total off-balance sheet credit exposures at each reporting date, excluding any
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that are unconditionally cancellable by the Company, to determine the expected funding amount. As unfunded loan commitments are funded, the allowance migrates from that provided for off-balance sheet credit exposures to the ACL on loans. If the expected funding rate or any other key assumption used is not reasonable, then this could have an adverse impact on the total ACL upon funding.
As of December 31, 2021 and 2020, the recorded ACL on off-balance sheet credit exposures was $3.2 million and $2.6 million, respectively, and presented within accrued interest and other liabilities on the consolidated statements of condition. Increases (decreases) to the allowance are presented within provision (credit) for credit losses on the consolidated statements of income. The allowance at December 31, 2021 and 2020, represented our best estimate, however, we may adjust our assumptions to account for differences between expected and actual losses from period to period. A future change to our assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL on off-balance sheet credit exposures is approved on a quarterly basis by the Company's Audit Committee, and later reviewed and ratified by the Bank's Board of Directors.
Refer to “—Results of Operations—Provision for Credit Losses,” “—Financial Condition—Asset Quality,” and Note 3 and 11 of the consolidated financial statements for further discussion.
ACL for HTM Debt Securities. The estimate of expected credit losses on our HTM investment portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, we utilize external third party loss forecast models as the sole source of municipal default and loss rates. Investment cash flows are modeled over a reasonable and supportable forecast period and then revert to the long-term average economic conditions on a straight line basis (similar to that of our ACL on loans policy). Management may exercise discretion to make adjustments based on various environmental factors.
At December 31, 2021 and 2020, the Company held three securities in its HTM portfolio with an amortized cost basis of $1.3 million and no allowance was carried given the immaterial nature of such securities. These investments are all investment-grade municipal securities and two of the three securities also carried credit enhancements. Should our HTM portfolio grow in size, change its mix and/or experience credit deterioration, an allowance may be recorded at that time.
Prior to 2020, the Company evaluated its HTM portfolio for OTTI. The Company did not record any OTTI for the year ended 2019.
Refer to “—Financial Condition—Investments” and Note 2 of the consolidated financial statements for further discussion.
ACL on AFS Debt Securities. We consider the ACL on AFS debt securities to be a critical accounting policy given the size of the investment portfolio and level of estimation used to determine the allowance, as appropriate. As of December 31, 2021 and 2020, the Company's AFS portfolio is entirely made up of assets that are fair valued using level 2 valuation techniques in accordance with ASC 820, Fair Value Measurement. We engage a third party pricing agency to assist with the valuation of such debt securities and the assets are carried at fair value at each reporting period. An allowance is recorded on an AFS debt security to the extent an event has occurred that suggests receipt of full contractual payments are at risk. When such an event has been identified, a discounted cash flow model is used to determine the expected losses due to credit risk, and an allowance is recorded to reduce the carrying value of the debt security by the calculated expected loss amount, limited to the amount by which the fair value of the debt security is below its amortized cost basis.
As further described within “—Financial Condition—Investments,” the Company's AFS portfolio, as of December 31, 2021 and 2020, was primarily consisted of plain-vanilla MBS and CMO debt securities issued or guaranteed by U.S. government-sponsored agencies, and, thus, presenting little to no credit risk. As of December 31, 2021 and 2020, the Company had not identified indications of credit risk and did not carry any allowance for credit losses on its AFS portfolio, nor did it record any permanent impairments during 2021 or 2020.
Prior to 2020, the Company evaluated its AFS portfolio for OTTI. The Company did not record any OTTI for the year ended 2019.
Refer to “—Financial Condition—Investments” and Note 2 of the consolidated financial statements for further discussion.
Purchase Price Allocation and Impairment of Goodwill and Identifiable Intangible Assets. We record all acquired assets and liabilities at fair value, which is an estimate determined by the use of internal valuation techniques. We also may engage external valuation services to assist with the valuation of material assets and liabilities acquired, including, but not limited to,
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loans, core deposit intangibles and/or other intangible assets, real estate and time deposits. As part of purchase accounting, we typically acquire goodwill and other intangible assets as part of the purchase price. These assets are subject to ongoing periodic impairment tests under differing accounting models. We did not acquire any other company or assets during 2021 or 2020.
Goodwill impairment evaluations are required to be performed at least annually, but may be required more frequently if certain conditions indicate a potential impairment may exist. Our policy is to perform the goodwill impairment analysis annually as of November 30th, or more frequently as warranted. The goodwill impairment evaluation is required to be performed at the reporting unit level. Effective January 1, 2020, accounting guidance no longer requires a company to determine the implied fair value of goodwill to measure impairment. Instead, goodwill is now impaired by the amount the book value of the reporting unit exceeds its fair value, and an impairment charge is recorded for the lesser of this amount or the amount to write-down goodwill to zero.
We may use a qualitative analysis to evaluate goodwill for impairment when it is believed that it is not more-likely-than-not that the fair value of the reporting unit is below its book value, or if a quantitative analysis was recently used to estimate the fair value of the reporting unit, and there are not any indications of events that would suggest such conclusions for impairment have changed. We performed our annual goodwill impairment assessment as of November 30, 2021 and 2020, using a qualitative analysis and concluded that it was not more-likely-than-not that goodwill was impaired. Furthermore, we performed an interim goodwill impairment assessment in the second quarter of 2020, in response to the turmoil in the global markets and economy spurred by COVID-19, including its impact on the Company's share price. At that time, a quantitative analysis, using various valuation techniques, including a discounted cash flow model and market valuation models, was used to assess the Company's goodwill for impairment. The Company did not recognize any impairment of goodwill in 2021 or 2020.
The Company's core deposit intangible assets have a finite life and are amortized over their estimated useful lives. Core deposit intangible assets are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. Core deposit intangible assets are measured for impairment utilizing a cost recovery model. We did not identify any events or circumstances that occurred in 2021 or 2020 that would indicate that our core deposit intangible assets may be impaired and should be evaluated for such.
Refer to “—Financial Condition—Goodwill and Core Deposit Intangible Assets” and Note 4 of the consolidated financial statements for further discussion.
Income Taxes. We account for income taxes by deferring income taxes based on the estimated future tax effects of differences between the book and tax bases of assets and liabilities, considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the consolidated statements of condition.
We must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance for those assets determined not likely to be recoverable. At December 31, 2021 and 2020, the Company carried deferred tax assets totaling $19.2 million and $12.0 million, respectively, and did not record any valuation allowance on these deferred tax assets. Although we determined a valuation allowance was not required for our deferred tax assets as of December 31, 2021 and 2020, there is no guarantee that these assets will be realized. To the extent a valuation allowance on the Company's deferred tax assets is recorded in future periods, a material charge to the Company's consolidated statements of income may result and reduce net income.
Judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income.
As of December 31, 2021, our federal and state income tax returns for 2020, 2019 and 2018 were open to audit by federal and various state authorities. If, as a result of an audit, we were to be assessed interest and penalties, the amounts would be recorded through other non-interest expense on the consolidated statements of income.
Refer to “—Results of Operations—Income Tax Expense” and Note 19 of the consolidated financial statements for further discussion.
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Defined Benefit and Postretirement Plans. We use a December 31stmeasurement date to determine the expenses for the Company's defined benefit and postretirement plans and related financial disclosure information. Postretirement plan expense is sensitive to changes in the number of eligible employees, changes in the discount rate, mortality rate, and other expected
rates, such as medical cost trends rates and salary scale assumptions. There are no new entrants to the Company's defined benefit and postretirement plans.
Refer to Note 18 of the consolidated financial statements for further discussion.
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EXECUTIVE OVERVIEW
2021 Overview. The Company reported record net income and diluted EPS for the year ended 2021 of $69.0 million and $4.60, respectively, in the face of continued challenges stemming from the COVID-19 pandemic. Interest rates remained at record low-levels throughout 2021, and the impact was seen by the Company, and more broadly across the industry, as our net interest margin compressed 25 basis points during the year to 2.84%. Like 2020, the record-setting residential mortgage activity spurred by the low interest rate environment carried forward throughout 2021 and we broke our previous residential mortgage originations record set in 2020. For the year ended 2021, we originated $1.1 billion in residential mortgages, an increase of 5% over 2020.
At the onset of the COVID-19 pandemic in 2020, our greatest concern (like many others across the industry) was credit risk. We proactively worked with our loan customers to provide temporary debt relief using the terms provided for under the CARES Act. In doing so, by mid-year 2020, we had granted temporary debt relief to many of our commercial and retail customers totaling over $600 million of loans. By December 31, 2020, this balance was reduced to $26.5 million (less than 1% of our loan portfolio), and, as of December 31, 2021, all of these loans had returned to contractual payment status. Our overall asset quality throughout the COVID-19 pandemic has remained very strong, highlighted by non-performing assets of 0.13% of total loans at December 31, 2021, compared to 0.22% at December 31, 2020; net charge-offs of 0.02% of average loans for the year ended December 31, 2021 and 2020; and loans 30-89 days past due of 0.04% of total loans at December 31, 2021, compared to 0.10% at December 31, 2021. Due to the strength of our loan portfolio, and improving macroeconomic conditions, our ACL on loans decreased from 1.18% of total loans at December 31, 2020 to 0.97% of total loans at December 31, 2021.
Our balance sheet continues to be a source of strength for the Company and enables us not only to be well-positioned to withstand the turbulent and volatile markets we have faced the last two years, but also positions us to capitalize on efficient organic growth moving forward.
•All of our regulatory capital ratios for the Company and Bank were well in excess of regulatory capital requirements at December 31, 2021, and our common equity ratio was 9.84% and tangible common equity ratio (non-GAAP) was 8.22% at December 31, 2021.
•Another solid year of deposit growth of 15% during 2021 resulted in a loan-to-deposit ratio of 74% at December 31, 2021, well below our historical norm.
•Our ACL to loans ratio of 0.97% at December 31, 2021 continues to be at an elevated-level compared to that seen pre-pandemic (0.81% at December 31, 2019).
During 2021, through the combination of cash dividends and share repurchases, the Company returned $31.2 million of capital to shareholders, which included the repurchase of 217,931 shares of its common stock at a weighted average price of $46.25 and cash dividends to shareholders of $1.48 per share, a 12% increase over 2020.
As we enter 2022, the FOMC has signaled its intent to raise short-term interest rates in an effort to combat inflation. The Company's interest rate risk position is asset sensitive, and should the FOMC increase short-term interest rates we expect that the Company's net interest margin and net interest income are likely to increase. However, we are cautious that if the yield curve should flatten, or worse invert, this could have a negative impact on overall market growth and on customer loan demand.
Operating Results. Net income for the year ended 2021 was $69.0 million, representing an increase of $9.5 million, or 16%, over 2020. Earnings before incomes taxes and provision for credit losses (non-GAAP) for the year ended 2021 was $83.5million, representing a decrease of $3.4 million, or 4%, compared to 2020.
The key drivers of the increase in net income between periods include:
•An increase in net interest income of $1.1 million, or 1%, driven by a lower interest expense of $9.8 million, more than offsetting the decrease in interest income of $8.7 million.
•A decrease in provision for credit losses of $15.6 million. For the year ended 2020, the Company reported provision expense of $12.4 million as it built-up its ACL in response to the onset of the COVID-19 pandemic. For the year ended 2021, the Company reported negative provision expense (or a credit) of $3.2 million as it released a portion of its ACL established in 2020 as markets improved and credit quality deterioration did not occur.
•A decrease in non-interest income of $755,000, or 1%, driven by lower mortgage banking income of $4.8 million, or 26%, as we shifted our strategy to hold more residential mortgages in our loan portfolio to manage our liquidity and interest rate risk position, partially offset by higher debit card income of $2.7 million, or 26%.
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•An increase in non-interest expense of $3.7 million, or 4%, primarily driven by higher salaries and employee benefits costs of $3.1 million, or 5%. Our ratio of non-interest expense to total revenue2 was 55.41% for 2021, compared to 53.52% for 2020, or on a non-GAAP-basis our efficiency ratio was 54.85% and 52.56% for the same periods, respectively.
Other key financial metrics between years included:
•Diluted EPS for the year ended 2021 was $4.60, an increase of $0.65, or 16%, over 2020.
•Return on average assets for the year ended 2021 was 1.31%, compared to 1.23% for 2020.
•Return on average equity for the year ended 2021 was 12.72%, compared to 11.81% for 2020.
•Return on average tangible equity (non-GAAP) for the year ended 2021 was 15.61%, compared to 14.79% for 2020.
2 Revenue is the sum of net interest income and non-interest income.
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RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Net interest income is the interest earned on loans, securities, and other interest-earning assets, plus net loan fees, origination costs and fair value marks on loans and/or time deposits created in purchase accounting, less the interest paid on interest-bearing deposits and borrowings. Net interest income, which is our largest source of revenue, accounted for 73% of total revenues for both years ended 2021 and 2020. Net interest income is affected by factors including, but not limited to, changes in interest rates, loan and deposit pricing strategies and competitive conditions, loan prepayment speeds, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets.
Net Interest Income. Net interest income on a fully-taxable equivalent basis for the year ended 2021 was $138.4 million, an increase of $962,000, or 1%, over 2020. The increase was driven by a $9.8 million decrease in interest expense between periods that more than offset the decrease in interest income on a fully-taxable equivalent basis of $8.9 million between periods.
•The decrease in interest expense was the result of a 25 basis point decrease in our average cost of funds and strong average deposits growth of $430.0 million, or 12%, during 2021. In 2021, our funding costs benefited from a full year of record lower interest rates as the FOMC held the Federal Funding Rate at 0.00%-0.25% for all of 2021, having lowered it in early-2020 in response to the COVID-19 pandemic. In addition, our favorable deposit growth during 2021 led to a strong overall liquidity position, and allowed us to take actions to manage funding costs to help minimize the impact of lower interest-earning asset yields, including: (1) a decrease in average CD balances of $121.4 million, (2) the early termination of a $25.0 million long-term borrowing contract during the first quarter of 2021, and (3) the full redemption of the Company's $15.0 million subordinated notes during the second quarter of 2021, at par plus accrued interest.
•The decrease in interest income on a fully-taxable equivalent basis was the result of a 49 basis point decrease in our yield on average interest-earning assets during 2021, again, driven by the lower interest rate environment, but was partially offset by average interest-earning asset growth of $426.0 million, or 10%. Average investment balances for 2021 increased $308.9 million, or 31%, compared to 2020 and average loan balances for 2021 grew $27.9 million, compared to 2020. We increased our investment holdings during 2021 to manage the Company's excess liquidity that was driven by its strong deposits growth during 2021. The Company's loan growth was primarily within its commercial real estate loan portfolio and residential real estate loan portfolio, which increased 8% and 7%, respectively.
Net Interest Margin. Net interest margin is calculated as net interest income on a fully-taxable equivalent basis as a percentage of average interest-earning assets. Our net interest margin on a fully-taxable equivalent basis for 2021 and 2020 was 2.84% and 3.09%, respectively, and our adjusted net interest margin on a fully-taxable equivalent basis (non-GAAP) for the year ended 2021 was 2.87%, compared to 3.10% for 2020.
The following table presents, for the periods noted, average balances, interest income, interest expense, and the corresponding average yields earned and rates paid, as well as net interest income, net interest rate spread and net interest margin:
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Average Balance, Interest and Yield/Rate Analysis
For the Year Ended December 31,
ASSETS
Interest-earning assets:
Loans(3):
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Borrowings:
Less: fully-taxable equivalent adjustment (988) (1,155) (1,029)
Net interest rate spread (fully-taxable equivalent) 2.83 % 3.07 % 3.10 %
Net interest margin (fully-taxable equivalent) 2.84 % 3.09 % 3.15 %
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(1) Reported average balances are calculated on a daily basis.
(2) Reported on a tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.
(3) Non-accrual loans and loans held for sale are included in total average loans.
The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume. The (a) changes in volume (change in volume multiplied by prior year's rate), (b) changes in rates (change in rate multiplied prior year's volume), and (c) changes in rate/volume (change in rate multiplied by the change in volume), which is allocated to the change due to rate column.
(In thousands) Volume Rate Volume Rate
Interest-earning assets:
Interest-bearing liabilities:
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Net interest income included the following for the periods indicated:
Income Statement Location For the Year EndedDecember 31,
Recoveries on previously charged-off acquired loans Interest income 226 258 216
(1) For the year ended 2021 and 2020, the Company recognized $6.9 million and $6.2 million of fees associated with SBA PPP loan originations. As of December 31, 2021, there were $1.2 million of SBA PPP loan origination fees yet to be recognized.
The Company's consolidated financial statements and the notes to the consolidated financial statements presented within have been prepared in accordance with GAAP, which requires the measurement of the financial position and operating results in terms of historical dollars and, in some cases, current fair values without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of our assets and virtually all of our liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general level of inflation. Over short periods of time, interest rates and the yield curve may not necessarily move in the same direction or in the same magnitude as inflation.
As of the date of this Annual Report on Form 10-K, the FOMC has signaled that there could be multiple short-term interest rate hikes during 2022 in an effort to curb inflationary pressures. The Company's interest rate risk position as of December 31, 2021 is asset sensitive, and if the FOMC increases the Federal Funding Rate one or more times during 2022 it is our expectation that net interest income is likely to increase as variable rate loans and deposits reprice, and new loans indexed to short-term interest rates are originated at higher yields.
Provision for Credit Losses
The Company adopted ASU 2016-13, commonly referred to as “CECL,” to account for the ACL, effective January 1, 2020. As such, ACL and provision for credit losses as of and for the years ended December 31, 2021 and 2020 were accounted for in accordance with the CECL standard. The ACL and provision for credit losses as of and for the year ended December 31, 2019 were accounted for under the incurred loss methodology. Refer to “—Critical Accounting Policies” and Note 1 of the consolidated financial statements for the Company's accounting and policies for the ACL.
The provision for credit losses was made up of the following components for the periods indicated:
For the Year EndedDecember 31, Change from2021 to 2020
(CECL) (CECL) (Incurred Loss)
Provision for loan losses. At the onset of the COVID-19 pandemic in 2020, we increased the Company's ACL on loans to account for the adverse impact the COVID-19 pandemic was anticipated to have on its loan portfolio, based on the various macroeconomic data trends and various qualitative considerations. For the year ended 2020, we recorded $13.2 million of provision expense to carry the ACL on loans at $37.9 million, or 1.18% of total loans, as of December 31, 2020. In 2021, we recorded a credit for loan losses of $3.8 million, which reflects (1) the shift in the macroeconomic conditions and outlook in as trends and market optimism improved in comparison to 2020, and (2) overall credit deterioration within the Company's loan portfolio did not materialize as anticipated due to COVID-19. Net charge-offs for the years ended December 31, 2021 and 2020 were 0.02% of average loans; non-performing assets were 0.13% of total assets as of December 31, 2021, compared to 0.22% as of December 31, 2020; and loans 30-89 days past were 0.04% of total loans as of December 31, 2021, compared to 0.10% as of December 31, 2020.
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Provision for credit losses on off-balance credit exposures. At December 31, 2021, the ACL on off-balance sheet credit exposures was $3.2 million, as compared to $2.6 million as of December 31, 2020. The increase was driven by elevated unfunded commitments of $104.1 million between periods, partially offset by a lower expected loss factor given the overall macroeconomic improvement between periods.
Non-Interest Income
The following table sets forth information regarding non-interest income for the periods indicated:
For the Year EndedDecember 31, Change from2021 to 2020
Net (loss) gain on sale of securities — — (105) — —
Non-interest income as a percentage of total revenues(1) 27 % 27 % 25 %
(1) Revenue is the sum of net interest income and non-interest income.
Mortgage banking income, net is generated through the sale of residential mortgage loans to secondary market investors and also includes income recognized upon the sale of a residential mortgages in which we maintain the servicing rights creating a mortgage servicing asset, net of related amortization of the capitalized mortgage servicing asset. Our current practice has been to sell the servicing rights for residential mortgages originated, except for certain third party relationships that require the Company to service the loan.
The decrease in mortgage banking income, net for 2021 compared to 2020, was driven by our change in strategy during the first half of 2021 as we shifted to sell less of our residential mortgage loan production in 2021, in order to hold more of it in our loan portfolio to manage our interest rate risk and overall liquidity position. We sold 44% of our residential mortgage production to the secondary market during 2021, compared to 61% during 2020 (or $154.1 million less between periods).
Debit card income represents theinterchange fees earned from debit card transactions of our business and consumer checking account customers, and the annual incentive bonus received from our network provider. The increase for 2021 over 2020 was driven by an increase in customer spend volume of 21% as our average customer spend increased likely driven by government stimulus over the past two years in response to the COVID-19 pandemic. The increase in customer spend volume also resulted in a larger annual incentive bonus from Visa of $740,975 for 2021, compared to $555,000 for 2020.
Service charges on deposit accounts represents the fees earned from providing various services to deposit customers, including overdraft and non-sufficient funds fees, normal fees for servicing deposit accounts, and cash management fees for business customers. Overdraft and non-sufficient fund fees totaled $4.7 million and $4.8 million for the years ended 2021 and 2020, respectively.
Income from fiduciary services represents the fees earned for investment advisory and trust services provided by Camden National Wealth Management. The fees earned are primarily a percentage of our clients' assets under management. Assets under management were $1.1 billion and $957.0 million as of December 31, 2021 and 2020, respectively.
Brokerage and insurance commissions represent the fees earned for brokerage services, investment advisory and insurance services provided by the Bank, doing business as Camden Financial Consultants. The increase for 2021 over 2020 was driven by fees for brokerage and advisory services, including assets under administration growth of $130.2 million, or 23%, during 2021 over 2020 to $704.1 million as of December 31, 2021.
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Bank-owned life insurance represents the change in cash surrender value of the Company's various BOLI policies in place for certain current and former officers of the Company and Bank. The change in cash surrender value reflects the performance of the underlying investments of the policies. The decrease in income for 2021 compared to 2020 was driven by the lower interest rate environment.
Customer loan swap fees represents fees earned from the counterparty upon execution of a back-to-back commercial loan swap with our customers. For the year ended 2021, we did not execute any back-to-back loan swaps with our customers given the interest rate environment and our overall interest rate risk position.
Net (loss) gain on sale of securities represents the realized (loss) gain upon sale of our debt investments. We did not sell any investment securities during the year ended 2021 or 2020.
Other Income includes third party merchant and credit card commissions, other miscellaneous fees and net gains on equity securities.
Non-Interest Expense
The following table sets forth information regarding non-interest expense for the periods indicated:
For the Year EndedDecember 31, Change from2021 to 2020
Amortization of core deposit intangible assets 655 682 705 (27) (4) %
Ratio of non-interest expense to total revenues 55.41 % 53.52 % 56.15 %
Salaries and employee benefits includes employee wages, commissions, incentives, equity compensation, employer-related taxes, insurance benefits, and other certain employee-related costs, net of direct employee-related costs incurred for loan originations. The increase in 2021 over 2020 was driven by: (i) an increase in wages and related taxes of 4% as we issued our normal annual merit in March 2021 and a second (off-cycle) merit increase in October 2021 where we provided all current employees with a 3% or more wage increase, with limited exceptions, and increased our starting minimum wage for new employees to $17 per hour. The off-cycle merit increase was in response to the tight labor market within our markets; and (ii) an increase in bonuses and incentives of $1.7 million, based on annual performance-to-budget.
Furniture, equipment and data processing includes depreciation expense of capitalized furniture, equipment and data-related costs, and ongoing system and other data processing costs, including outsourced solutions. The increase in 2021 over 2020 was driven by continued investments in technology, including information security-related investments.
Net occupancy costs include building and property costs associated with the operation of our branches, loan production offices and service centers, including, but not limited to, rent, depreciation, maintenance and related taxes, net of rental income earned from the lease of office space.
Consulting and professional fees include third party consulting services and other professional fees, such as audit and tax services, legal services, and Company and Bank director fees.
Debit card expense is the cost incurred for the generation of debit card income, including third party switch network provider fees and related data transmission costs, and plastic card costs for the generation of debit cards for checking account
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customers. Debit card expense increased 15% in 2021 compared to 2020, while debit card income increased 26% over this same period. Many of the costs associated with debit card expense are fixed per unit.
Regulatory assessments are the costs incurred and paid to various regulatory agencies, including the FDIC and OCC. Regulatory assessment fees are based on a number of factors, not limited to, asset growth, regulator risk assessment and positive or negative trends specific to the financial institution. The increase in 2021 over 2020 was driven by the receipt of the Small Bank Assessment Credit from the FDIC in the first and second quarters of 2020. We did not receive any further credits during 2021, and our regulatory assessment costs have returned to normal historical levels.
OREO and collection costs, net include the costs associated with OREO, collection and foreclosure efforts for the Company's loans. The decrease in 2021 compared to 2020 was primarily driven by the recovery of $160,000 of costs in 2020 that were expensed in 2020, a gain of $190,000 recognized in 2021 upon the sale of an OREO property, and a reflection of the Company's strong asset quality. Should asset quality metrics begin to deteriorate, the associated costs with OREO, collection and foreclosure efforts will likely increase.
Amortization of core deposit intangible assets represents the amortization expense on core deposit intangible assets.
Other expenses include employee-related costs, such as certain SERP and other postretirement benefits expenses; hiring, training, education, meeting and business travel costs; donations and marketing costs; postage, freight and courier costs; and other expenses.
Income Tax Expense
Income tax expense for the year ended 2021 and 2020 was $17.6 million and $14.9 million, respectively, which resulted in an effective income tax rate of 20.3% for the year ended 2021 and 20.0% for 2020. The increase in the Company's effective tax rate between periods was driven by an increase in its blended state income tax rate between periods. As the Company continues to expand its footprint outside of Maine its blended state tax rate has increased, and will continue to increase, because Maine's state tax rate for financial institutions is lower than other states in the region in which we operate.
The Company's effective income tax rate for the year ended 2021 of 20.3% was lower than our marginal tax rate of 22.2%, which includes our 21.0% federal income tax rate and 1.4% state income tax rate, net of federal tax benefit, primarily due to non-taxable interest income from municipal bonds and certain qualifying loans, non-taxable BOLI, and tax credits received on qualifying investments.
The Company's deferred tax assets were $19.2 million and $12.0 million at December 31, 2021 and 2020, respectively. We continuously monitor and assess the need for a valuation allowance on our deferred tax assets, and we determined that no valuation allowance was necessary as of December 31, 2021 and 2020.
Refer to Note 19 of the consolidated financial statements for further discussion of income taxes and related deferred tax assets and liabilities.
2020 Operating Results as Compared to 2019 Operating Results
The Company's net income for the year ended 2020 was $59.5 million, an increase of $2.3 million, or 4%, over 2019. Over the same period, diluted EPS increased $0.26, or 7%, to $3.95 per share for the year ended December 31, 2020. The Company's 2020 operating results compared to 2019 are summarized as follows:
Net Interest Income and Net Interest Margin. Net interest income on a fully-taxable equivalent basis for 2020 was $137.5 million, an increase of $8.8 million, or 7%, over 2019. The increase was largely driven by a $20 million, or 49%, decrease in interest expense due to the rate declines. Conversely, interest income on a fully-taxable equivalent basis declined by $11.2 million, or 7%, partially offsetting the increase in interest income. Average interest earning assets increased by $365.0 million, or 9%, which included average SBA PPP loans of $146.9 million, but produced a 59 basis point decline in our average yield on interest-earning assets between periods and reduced our average yield to 3.56% for the year ended December 31, 2020. Average funding liabilities increased by $353.0 million, or 9%, which was driven by average deposit growth of $432.9 million, or 13%, and produced a 53 basis point decline in our funding cost between periods to 0.49% for the year ended December 31, 2020.
Net interest margin on a fully-taxable equivalent basis declined by 6 basis points between periods to 3.09% for the year ended December 31, 2020, and, on an adjusted-basis (excluding SBA PPP loans and excess liquidity) (non-GAAP), our net interest margin on a full-taxable equivalent basis was 3.10% for the year ended 2020, compared to 3.16% for 2019.
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Provision for Credit Losses. The provision for credit losses for 2020 was $12.4 million, an increase of $9.6 million compared to 2019. The increase between periods was due to the COVID-19 pandemic and the inherent level of uncertainty within the markets and impact on the Company's loan portfolio at that time. Furthermore, the Company adopted the CECL during 2020, whereas the incurred loss methodology was used to account for the ACL for 2019.
Non-Interest Income. Non-interest income for 2020 was $50.5 million, and increased $8.4 million, or 20%, over 2019. The net increase was primarily driven by:
•An increase in mortgage banking income of $10.7 million, or 136%, between periods primarily due to an increase in residential mortgage loan originations of 79% driven by the decline in interest rates in 2020 in response to the onset of the COVID-19 pandemic.
•An increase in debit card income of $719,000, or 7%, between periods driven by an increase in customer spend volume of 11%.
•A decrease in service charges on deposit accounts of $1.7 million, or 20%, between periods driven by lower overdraft and non-sufficient funds fees due to elevated deposit balances across our customer base as a result of government-issued stimulus in response to COVID-19.
•A decrease in other income of $986,000, or 24%, between periods as we recognized a $928,000 unrealized gain on another bank stock in 2019. In 2020, the bank stock was redeemed and a realized gain of $38,000 was recognized.
Non-Interest Expense.Non-interest expense for 2020 was $100.0 million, an increase of $4.7 million, or 5%, over 2019. The net increase was driven by:
•An increase in salaries and employee benefits of $3.4 million, or 6%, between periods, primarily due to a 5% increase in wages and related taxes, a 10% increase in health insurance costs, and higher bonus and incentives of $1.3 million, based on annual performance-to-budget.
•An increase in furniture, equipment and data processing costs of $875,000, or 8%, between periods, driven by continued technology and data-related investments made throughout 2020, as well as an increase in online banking costs of $125,000 as the pace of customer migration to electronic banking channels accelerated in 2020 due to COVID-19 and its impact.
•An increase in net occupancy costs of $538,000, or 8%, between periods, driven by an increase in rent and rent-related expenses of $495,000 and an increase in office cleaning costs of $331,000 due to COVID-19, partially offset by lower utility costs of $289,000 as many of our employees worked remotely through much of 2020 due to COVID-19.
For 2020, our ratio of non-interest expense to total revenues was 53.52%, compared to 56.15% for 2019, and, on a non-GAAP basis, our efficiency ratio was 52.56% for 2020, compared to 55.77% for 2019.
Income Tax Expense. Income tax expense for 2020 was $14.9 million, with an effective tax rate of 20.0%, compared to $14.4 million for 2019, with an effective tax rate of 20.1%.
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FINANCIAL CONDITION
Cash and Cash Equivalents
Total cash and cash equivalents at December 31, 2021 were $220.6 million, compared to $145.8 million at December 31, 2020. The increase in cash and cash equivalents balances of $74.8 million between periods was primarily driven by an increase in deposits of $487 million, or 61%, during 2021, which was likely the result of additional government stimulus programs issued in 2021 in response to COVID-19. We continuously manage and monitor our cash levels to ensure compliance with applicable regulatory requirements, including liquidity and FRB reserve requirements.
In March 2020, the FRB reduced reserve requirement ratios to zero percent, effectively eliminating the cash reserve requirement for all depository institutions.
Investments
The Company utilizes the investment portfolio to manage liquidity, interest rate risk, and regulatory capital, as well as to take advantage of market conditions to generate returns without undue risk. At December 31, 2021 and 2020, the Company’s investment portfolio generally consisted of MBS, CMO, municipal and corporate debt securities, FHLBB and FRB common stock, and mutual funds held in a rabbi trust for purposes of Company executive and director nonqualified retirement plans. We designate our debt securities as AFS or HTM based on our intent and investment strategy and are carried at fair value or amortized cost, respectively; our FHLBB and FRB common stock is carried at cost; and our mutual funds are trading securities which are carried at fair value. At December 31, 2021 and 2020, total investments were 28% and 23% of total assets, respectively.
At December 31, 2021 and 2020, the Company's investments portfolio totaled $1.5 billion and $1.1 billion, respectively, representing an increase of $390.7 million, or 34%, for the year ended December 31, 2021. The increase was driven primarily by investments in our AFS debt securities portfolio, including:
•Purchase of $758.8 million of debt securities in an effort to deploy excess liquidity that resulted from significant
deposit growth over the past year as consumers and businesses received proceeds from various government stimulus programs in response to the COVID-19 pandemic. The weighted-average life of investments purchased during 2021 was 5.8 years, in part driving the increase in the weighted-average life of our debt securities portfolio from 5.1 years at December 31, 2020 to 5.9 years at December 31, 2021.
•Partially offsetting the purchases were (i) paydowns and calls of $321.6 million during 2021 and (ii) a $38.8 million decrease in the fair value of certain securities, based on changes in market interest rates as of December 31, 2021.
Our AFS debt securities portfolio, which comprised 99% of our investment portfolio at December 31, 2021 and 2020, was carried at fair value using level 2 valuation techniques. Refer to Notes 1 and 21 of the consolidated financial statements for further details on the Company's fair value techniques.
The AFS and HTM debt securities portfolio has limited credit risk due to its composition, which includes highly rated debt securities by nationally recognized rating agencies, and securities backed by the U.S. government and government-sponsored agencies. At December 31, 2021 and 2020, these investments represented approximately 90% and 88%, respectively, of the investment portfolio. The majority of the municipal bonds, which represented 8% and 11% of the investment portfolio at December 31, 2021 and 2020, respectively, had a credit rating of “AA” or higher.
Our other investments on the consolidated statements of condition consist of FHLBB and FRB common stock. These investments are carried at cost. We are required to maintain a certain level of investment in FHLBB stock based on our level of FHLBB advances, and maintain a certain level of investment in FRB common stock based on the Bank's capital levels. As of December 31, 2021 and 2020, our investment in FHLBB stock totaled $4.9 million and $6.2 million, respectively, and our investment in FRB stock was $5.4 million.
Our investments in mutual funds are designated as trading securities and carried at fair value. These investments are held within a rabbi trust and will be used for future payments associated with the Company’s Executive and Director Deferred Compensation Plan. These investments are carried at fair value using level 1 valuation techniques.
Beginning in 2020, upon adoption of CECL, our AFS debt securities that are in an unrealized loss position are assessed to determine if an allowance should be recorded or if a write-down is required. As of and for the years ended December 31, 2021 and 2020, we did not record any allowances or write-down any of our AFS debt securities in an unrealized loss position. Refer
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to “—Critical Accounting Policies” and Note 1 of the consolidated financial statements for further discussion of our practices and policies, and refer to Note 2 of the consolidated financial statements for additional details of our assessment of the allowance for AFS investments as of and for the year ended December 31, 2021.
Beginning in 2020, upon adoption of CECL, each reporting period our HTM debt securities are assessed to determine if an allowance should be recorded or if a write-down is required. As of and for the years ended December 31, 2021 and 2020, we did not record any allowances or write-down any of our HTM debt securities as of December 31, 2021. Refer to “—Critical Accounting Policies” and Note 1 of the consolidated financial statements for further discussion of our practices and policies, and refer to Note 2 of the consolidated financial statements for additional details of our assessment of the allowance for HTM investments as of and for the year ended December 31, 2021.
The following table sets forth the carrying value of AFS and HTM debt securities along with the percentage distribution as of the dates indicated:
December 31,
Trading Securities (carried at fair value):
Total trading securities 4,428 — % 4,161 — %
AFS Debt Investments (carried at fair value):
Obligations of U.S. government-sponsored enterprises 8,344 — % — — %
HTM Debt Investments (carried at amortized cost):
Obligations of states and political subdivisions 1,291 — % 1,297 — %
Total HTM debt investments 1,291 — % 1,297 — %
Other Investments (carried at cost):
We continuously monitor and evaluate our investment securities portfolio to identify and assess risks within our portfolio, including, but not limited to, the impact of the current rate environment and the related prepayment risk, and review credit ratings. The overall mix of debt securities at December 31, 2021 compared to December 31, 2020 remains relatively unchanged and well positioned to provide a stable source of cash flow. The duration of our debt investment securities portfolio at December 31, 2021 was 4.8 years, compared to 3.9 years at December 31, 2020. We are currently investing in cash flowing debt securities with average lives in the 3-5 year part of the yield curve with limited extension risk in a rising interest rate environment.
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The following table presents the book value and fully-taxable equivalent weighted-average yields of debt investments by
contractual maturity and the book value of other investments, for the periods indicated. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay.
December 31,
Debt investments:
Other investments(2):
Mutual funds (fair value) $ 4,428 $ 4,161
(1) Weighted average is calculated by dividing the book value by the book value times tax yield.
(2) There is no scheduled maturity date.
Loans
The Company provides loans primarily to customers located within our geographic market area. Its primary markets continue to be in Maine, making up 72% and 73% of our loan portfolio as of December 31, 2021 and 2020, respectively. Massachusetts and New Hampshire are our second and third largest markets, making up 14% and 9%, respectively, of our total loan portfolio as of December 31, 2021, compared to 13% and 8%, respectively, as of December 31, 2020. As of December 31, 2021, our distribution channels include 57 branches within Maine; one residential mortgage lending office in Braintree, Massachusetts; two locations in New Hampshire, including a branch in Portsmouth and a commercial loan production office in Manchester; and an online residential mortgage and small commercial digital loan platform.
The most significant industry concentration within our loan portfolio at December 31, 2021 and 2020 was the non-residential building operators industry (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings). At December 31, 2021 and 2020, the non-residential building operators' industry concentration was 32% of our total commercial real estate portfolio and 14% of total loans, respectively. At December 31, 2021, there were no other industry concentrations within our loan portfolio that exceeded 10% of total loans.
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The following table sets forth the composition of our loan portfolio at the dates indicated:
December 31,
Loan portfolio mix:
Commercial Real Estate - Non-Owner-Occupied. Non-owner-occupied commercial estate loans are investment properties in which the primary source for repayment of the loan by the borrower is derived from rental income associated with the property or the proceeds of the sale, refinancing, or permanent refinancing of the property. Non owner-occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, multi-family residential, commercial/retail office space, industrial/warehouse space, hotels, assisted living facilities and other specific use properties. Also included within the non-owner-occupied commercial real estate loan segment are construction projects until they are completed.
Commercial Real Estate - 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.
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, is eligible for forgiveness by the SBA should the qualifying small business meet certain conditions. These 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 is no longer originating loans under this program.
Residential Real Estate. Residential real estate loans consist of loans secured by one-to four-family properties, including for investment purposes. We generally retain in our portfolio adjustable rate mortgages, fixed rate mortgages with original terms of 30 years or less, and jumbo/non-conforming residential mortgages.
For the year ended 2021, we originated a record $1.1 billion of residential mortgage loans, an increase of 5% over 2020. In 2021, we sold 44% of our residential mortgage production to secondary market investors, compared to 61% for 2020. The historically low interest rate environment in 2020 carried into 2021 and drove strong purchase and refinance activity. Refinance activity was 47% of our residential mortgage originations for the year ended 2021, compared to 55% for 2020.
As part of our overall asset/liability management strategy, we sell residential mortgages we originate to secondary market participants to manage our interest rate risk position and generate non-interest income. Factors we consider in determining which loans to sell, include, but are not limited to, current and future outlook of the interest rate environment; loan terms, including loan size, interest rate, fixed or variable and maturity date; and estimated prepayment speed.
Consumer and Home Equity. Consumer and home equity loans are originated for a wide variety of purposes designed to meet the needs of our customers. Consumer loans include overdraft protection, automobile, boat, recreational vehicle, and mobile home loans, home equity loans and lines, and secured and unsecured personal loans.
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