BAR HARBOR BANKSHARES The following discussion is management's analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Company. It should be read in conjunction with the consolidated financial statements and footnotes and selected financial data presented elsewhere in this Annual Report. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes. The detailed financial discussion that follows focuses on 2022 results compared to 2021. For a discussion of 2021 results compared to 2020, see the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
GENERAL
The Company is a bank holding company headquartered inMaine , providing a broad array of banking and nonbanking products and services to businesses and consumers primarily within our three-state footprint. The Company's primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities) and noninterest income (principally fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits).
ANNUAL PERFORMANCE SUMMARY
Earnings (For year ended
Net income was
when excluding the accretion from Paycheck Protection Program ("PPP") loan
? fees. The increase is primarily due to a benefit to net interest income as our
assets repriced to higher rates and efficiency measures on non-interest expense.
Diluted earnings per share was
? earnings per share included a
and 2021, respectively.
Return on assets increased to 1.16% from 1.06%. Return on equity was 10.91%
? compared to 9.50%. Both ratios include the benefit of higher net income and
lower average balances related to unrealized losses on securities as noted
below under the "Financial Position" section.
Net interest income was
? margin (NIM) was 3.36%, an increase of 48 basis points from the same period in
2021. The increase is primarily due to the repricing of variable rate assets
and continued loan growth.
The provision for credit losses was an expense of
? loan growth compared to a net benefit of
economic forecasts.
Non-interest income was
? a
security sales in 2021 that did not reoccur in 2022.
? Non-interest expense was
included a
Efficiency ratio improved to 59% from 61%, excluding the impact of PPP loans it
? improved 59% from 64%. The improvement in the ratio showcases our displaced
approach to expense management.
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Financial Position (For year ended
Total assets increased
? growth offset in part by unfavorable fair value adjustments on our securities
portfolio.
? Cash and cash equivalents decreased to
principally due to self-funding loan growth in the first half of 2022.
Securities were
million, or 16% of total assets. Net unrealized losses were
? 12% of gross securities, compared with a gain of
securities as fixed rate securities continued to reprice to higher interest
rates. All securities are classified as available for sale preserving capital
flexibility.
Total loans grew 15% year-over-year as commercial loans increased 21%. Loan
growth was generated across all of our footprint while adhering to selective
? criteria and only experienced operators. We believe that the economy in
Northern
economy.
The ratio of the allowance for credit losses to total loans was 0.89%,
? decreasing from 0.90%, which reflects solid credit quality. Net charge-offs
continue to be insignificant and each credit metric improved during the year.
While deposit balances were consistent with 2021, we did see a decline during
the fourth quarter of 2022 primarily in institutional accounts with low
? activity, which tend to be most rate sensitive. We continue to work with each
customer on rates rather than make sweeping movements, which allows us to focus
on expanding those relationships as we review individual requests.
? Borrowings increased to
funding was used to grow loans in the second half of 2022.
Total book value per share was
? security losses reduced book value per share by
share excluding net unrealized security losses (non-GAAP) increased 9% on
annualized basis on net income offset by dividends to shareholders.
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SELECTED FINANCIAL DATA
At or For the Years Ended December 31,
(in millions, except ratios and share data) 2022 2021 2020
Financial Condition Data:
Total assets $ 3,910 $ 3,709 $ 3,724
Total earning assets(1) 3,601 3,377 3,371
Total investments 574 626 599
Total loans 2,903 2,532 2,563Allowance for credit losses 26 23 19 Total goodwill and intangible assets 125
126 127 Total deposits 3,043 3,049 2,906 Total borrowings 394 179 336
Total shareholders' equity 393 424 407 Operating Data: Total interest and dividend income $ 127 $
111$ 126 Total interest expense 13 15 27 Net interest income 114 96 99 Non-interest income 35 42 43 Net revenue(2) 149 138 142 Provision for credit losses 3 (1) 6 Total non-interest expense 91 91 95 Income tax expense 11 9 8 Net income 44 39 33 Ratios and Other Data: Per Common Share Data Basic earnings$ 2.90 $ 2.63 $ 2.18 Diluted earnings 2.88 2.61 2.18 Total book value(5) 26.09 28.27 27.29 Dividends 1.02 0.94 0.88 Common stock price: High 33.11 32.94 25.55 Low 24.00 21.26 13.05 Close 32.04 28.93 22.59 Weighted average common shares outstanding (in thousands): Basic 15,040 14,969 15,246 Diluted 15,112 15,045 15,272 36 Table of Contents At or For the Years Ended December 31,
(in millions, except ratios and share data) 2022
2021 2020 Performance Ratios:(4) Return on assets 1.16 % 1.06 % 0.88 % Return on equity(6) 10.91 9.50 8.29 Interest rate spread 3.24 2.74 2.92 Net interest margin(5) 3.36 2.88 2.97 Dividend payout ratio 35.20 35.81 40.36 Organic Growth Ratios: Total commercial loans 19 % 7 % 17 % Total loans 15 (1) (3) Total deposits (0) 5 8 Asset Quality and Condition Ratios: Non-accruing loans/total loans 0.23 % 0.40 % 0.48 % Net (recoveries) charge-offs/average loans (0.01) 0.01 0.07 Allowance for credit losses/total loans 0.89
0.90 0.74 Loans/deposits 95 83 88 Capital Ratios:
Tier 1 capital to average assets - Company 9.21 % 8.66 % 8.12 % Tier 1 capital to risk-weighted assets - Company 11.02 11.90 11.28 Tier 1 capital to average assets - Bank 10.10 9.62 9.02 Tier 1 capital to risk-weighted assets - Bank 12.67 13.22 12.52 Shareholders equity to total assets(5) 10.06 11.43 11.04
(1) Earning assets includes non-accruing loans and interest-bearing deposits with
other banks. Securities are valued at amortized cost.
(2) Net revenue is defined as net interest income plus non-interest income.
(3) All performance ratios are based on average balance sheet amounts, where
applicable.
(4) Fully taxable equivalent considers the impact of tax advantaged securities
and loans.
(5) Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial
Measures for additional information.
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AVERAGE BALANCES AND AVERAGE YIELDS/RATES
The following table presents average balances and average rates and yields on a fully taxable equivalent basis for the periods included:
Year Ended December 31,
2022 2021 2020
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
(in millions, except ratios) Balance (3) Rate(3) Balance (3) Rate(3) Balance (3) Rate(3)
Assets
Interest-earning deposits
with other banks $ 72 1 1.07 % $
219 $ - 0.15 %
630 19 2.99 621 16 2.63 625 20 3.20
Loans:
Commercial real estate 1,340 55 4.13 1,210 40 3.34 993 40 4.02 Commercial and industrial(3) 410 17 4.25 348 14 3.98 379 21 5.62 Paycheck protection program 1 - 17.27
51 6 11.93 109 5 4.19
Residential 873 31 3.55 825 32 3.86 1,078 41 3.78
Consumer 100 4 4.41 99 4 3.77 124 5 4.03
Total loans (1) 2,724 107 3.98 2,533 96 3.78 2,683 112 4.16
Total earning assets 3,426 127 3.73 % 3,373 112 3.33 % 3,397 132 3.87 %
Cash and due from banks 37 35 27
Allowance for credit losses (24) (23) (17)
Other assets 308 333 351
Total assets $ 3,747 $ 3,718 $ 3,758
Liabilities
NOW $ 907 1 0.16 % $ 949 $ 1 0.11 % $ 643 $ 1 0.20 %
Savings 658 1 0.10 629 1 0.90 467 1 0.16
Money market 466 3 0.63 390 1 0.12 396 2 0.42
Time deposits 366 2 0.61 425 6 1.51 796 14 1.80
Total interest bearing
deposits 2,397 7 0.31 2,393 9 0.36 2,302 18 0.78
Borrowings 203 6 2.71 175 7 3.82 507 9 1.75
Total interest bearing
liabilities 2,600 13 0.49 % 2,568 16 0.59 % 2,809 27 0.96 %Non-interest bearing demand deposits 679 668 481 Other liabilities 69 68 67 Total liabilities 3,348 3,304 3,357 Total shareholders' equity 399 414 401 Total liabilities and shareholders' equity$ 3,747 $ 3,718 $ 3,758 Net interest income$ 114 $ 96 $ 105 Net interest spread 3.24 % 2.74 % 2.91 % Net interest margin 3.36 2.88 2.97 Adjusted net interest margin(4) 3.35 2.76 2.93 38 Table of Contents
(1) The average balances of loans include non-accrual loans and unamortized
deferred fees and costs.
(2) The average balance for securities is based on amortized cost.
(3) Fully taxable equivalent considers the impact of tax-advantaged securities
and loans.
(4) Adjusted net interest margin excludes PPP loans.
RATE/VOLUME ANALYSIS
The following table presents the effects of rate and volume changes on the fully
taxable equivalent net interest income. Tax exempt interest revenue is shown on
a tax-equivalent basis for proper comparison. For each category of interest-
earning assets and interest-bearing liabilities, information is provided with
respect to changes attributable to (1) changes in rate (change in rate
multiplied by prior year volume), (2) changes in volume (change in volume
multiplied by prior year rate), and (3) changes in volume/rate (change in rate
multiplied by change in volume) have been allocated proportionately based on the
absolute value of the change due to the rate and the change due to volume.
2022 Compared with 2021 2021 Compared with 2020
Increases (Decreases) due to Increases (Decreases) due to
(in thousands) Rate Volume Net Rate Volume Net
Interest income:
Interest-earning deposits with
other banks $ 660 $ (224) $ 436 $ 11 $ 191 $ 202
Securities available for sale
and FHLB stock 2,274 233 2,507 (3,560) (139) (3,699)
Loans:
Commercial real estate 10,614 4,340 14,954 (8,244) 8,748 504
Commercial and industrial 75 3,448 3,523 (5,712) (1,752) (7,464)Paycheck protection program 114 (5,891) (5,777)
3,919 (2,450) 1,469
Residential (2,662) 1,836 (826) 647 (9,566) (8,919)
Consumer 644 43 687 (263) (1,011) (1,274)
Total loans 8,785 3,776 12,561 (9,653) (6,031) (15,684)
Total interest income $ 11,719 $ 3,785 $ 15,504 $ (13,202) $ (5,979) $ (19,181)
Interest expense:
Deposits:
NOW $ 466 $ (48) $ 418 $ (842) $ 617 $ (225)
Savings 101 25 126 (452) 262 (190)
Money market 2,368 93 2,461 (1,148) (23) (1,171)
Time deposits (3,318) (886) (4,204) (1,230) (6,685) (7,915)
Total deposits (383) (816) (1,199) (3,672) (5,829) (9,501)
Borrowings (2,249) 1,062 (1,187) 3,619 (5,812) (2,193)
Total interest expense $ (2,632) $ 246 $ (2,386)
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NON-GAAP FINANCIAL MEASURES
Our accounting and reporting policies conform to accounting principles generally accepted inthe United States of America ("GAAP") and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Annual Report that we identify as being "non-GAAP financial measures." In accordance withSEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time inthe United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both. The non-GAAP financial measures that we discuss in this Annual Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Annual Report when comparing such non-GAAP financial measures. The following reconciliation table provides a more detailed analysis of these, and reconciliation for, each of non-GAAP financial measures. 40 Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items for the time
periods presented:
At or For The Years Ended December 31,
(in thousands) Calculations 2022 2021 2020
Net income $ 43,557 $ 39,299 $ 33,244
Non-recurring items:Gain on sale of securities, net (53) (2,870) (5,445) Gain on sale of premises and equipment, net 10 378 (32) Gain on other real estate owned - - 355 Loss on debt extinguishment - 2,851 1,351 Acquisition, conversion and other expenses 266 1,667 5,801 Income tax expense (1) (51) (479) (481) Total non-recurring items 172 1,547 1,549 Total adjusted income(2) (A)$ 43,729 $ 40,846 $ 34,793 Net interest income (B)$ 113,681 $ 95,573 $ 99,180 Plus: Non-interest income 35,321 42,261 42,956 Total Revenue 149,002 137,834 142,136
Gain on sale of securities, net (53)
(2,870) (5,445)
Total adjusted revenue(2) (C) $ 148,949 $ 134,964 $ 136,691
Total non-interest expense $ 91,253 $ 90,508 $ 94,860
Non-recurring expenses:
Gain on sale of premises and equipment,
net (10) (378) 32
Gain on other real estate owned - - (355)
Loss on debt extinguishment - (2,851) (1,351)
Acquisition, conversion and other
expenses (266) (1,667) (5,801)
Total non-recurring expenses (276) (4,896) (7,475)
Adjusted non-interest expense(2) (D) $ 90,977 $ 85,612 $ 87,385 Total revenue 149,002 137,834 142,136 Total non-interest expense 91,253 90,508 94,860
Pre-tax, pre-provision net revenue$ 57,749
Adjusted revenue(2) 148,949 134,964 136,691 Adjusted non-interest expense(2) 90,977 85,612 87,385 Adjusted pre-tax, pre-provision net revenue(2)$ 57,972 $ 49,352 $ 49,306 (in millions) Average earning assets (E)$ 3,425 $ 3,373 $ 3,397 Average paycheck protection program (PPP) loans (R) 1 51 109 Average interest-bearing deposits with other banks (U) 72 219 89 Average earning assets, excluding PPP loans (S) 3,424 3,103 3,199 Average assets (F) 3,747 3,718 3,758 Average shareholders' equity (G) 399 414 401 Average tangible shareholders' equity(2)(3) (H) 273 288 273 Tangible shareholders' equity, period-end(2)(3) (I) 268 298 284 Tangible assets, period-end(2)(3) (J) 3,784
3,583 3,598
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At or For The Years Ended December 31,
Calculations 2022 2021 2020
(in thousands)Common shares outstanding, period-end (K) 15,083 15,001 14,916 Average diluted shares outstanding (L) 15,112
15,045 15,272
Adjusted earnings per share, diluted(2) (A/L) $ 2.89
$ 2.72 $ 2.28 Tangible book value per share, period-end(2) (I/K) 17.78 19.86 18.77 Securities adjustment, net of tax(1)(4) (M) (55,246) 1,985 10,023 Tangible book value per share, excluding securities adjustment(2)(4) (I+M)/K 21.44 19.73 18.09 Total tangible shareholders' equity/total tangible assets(2) (I/J) 7.09
8.32 7.78
Performance ratios(5)
Return on assets 1.16 % 1.06 % 0.88 %Adjusted return on assets(2) (A/F) 1.17 1.10 0.93 Pre-tax, pre-provision return on assets 1.54 1.27 1.26 Adjusted pre-tax, pre-provision return on assets(2) (U/F) 1.49 1.33 1.31 Return on equity 10.91 9.50 8.29 Adjusted return on equity(2) (A/G) 10.96 9.87 8.68 Return on tangible equity 16.20 13.92 12.45
Adjusted return on tangible equity(1)(2) (A+Q)/H 16.26
14.46 13.02
Efficiency ratio(1)(2)(6) (D-O-Q)/(C+N) 59.26 61.29 61.71
Net interest margin (B+P)/E 3.36 2.88 2.97Adjusted net interest margin(2) (B+P-T)/S 3.35 2.93 2.76 Supplementary data (in thousands) Taxable equivalent adjustment for efficiency ratio (N) $ 2,020$ 2,330 $ 2,477 Franchise taxes included in non-interest expense (O) 583 528 477 Tax equivalent adjustment for net interest margin (P) 1,398 1,653 1,853 Intangible amortization (Q) 932 940 1,024 Interest and fees on PPP loans (T) 223 6,039 4,569 Interest and fees on interest-earning deposits with other banks (V) 769 333 131
2022 assumes a marginal tax rate of 23.53% for the fourth quarter and 23.41% (1) for the first three quarters. 2021 assumes a marginal tax rate of 23.41% for
the fourth quarter and 23.71% for the first three quarters.
2020 assumes a marginal tax rate of 23.71% for the fourth quarter and 23.87% for the first three quarters.
(2) Non-GAAP financial measure.
Tangible shareholders' equity is computed by taking total shareholders' (3) equity less the intangible assets at period-end. Tangible assets are computed
by taking total assets less the intangible assets at period-end.
Securities adjustment, net of tax represents the total unrealized (loss) gain (4) on securities recorded on the Company's consolidated balance sheets within
total common shareholders' equity.
(5) All performance ratios are based on average balance sheet amounts, where
applicable.
Efficiency ratio is computed by using adjusted non-interest expense net of (6) franchise taxes and intangible amortization divided by adjusted revenue tax
effected for tax-advantaged assets. Adjusted net interest margin excludes PPP
loans and interest-earning deposits with other banks.
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COMPARISON OF FINANCIAL CONDITION AT
Cash and cash equivalents
Total cash and cash equivalents atDecember 31, 2022 were$92.3 million , compared to$250.3 million atDecember 31, 2021 . Interest-earning cash held with other banks totaled$52.4 million at year-end 2022 compared to$216.9 million at year end 2021 carrying a yield of 1.07% in 2022 versus 0.15% in 2021. The decrease in cash reflects loan growth on relatively flat deposit balances on a year-over-year basis. Securities Securities totaled$574.4 million at year-end 2022 and$625.7 million at year-end 2021. During 2022, security purchases totaled$109.0 million and were offset by$7.1 million of sales and$73.7 million of maturities, calls and pay-downs of amortizing securities. There were$11.0 million of purchases and$3.5 million in sales of FHLB stock during the year. Fair value adjustments decreased the security portfolio by$71.8 million in 2022 compared to a$2.8 million unrealized gain in 2021. Unrealized gains shifted to loss position in 2022 due to changes in the long-term treasury yield curve. The weighted average yield of the securities portfolio was 2.99% as ofDecember 31, 2022 compared to 2.63% at year-end 2021. At the end of 2022, our securities portfolio had an average life of 9.4 years with an effective duration of 5.0 compared to an average life of 5.3 years with an effective duration of 4.2 years at the end of 2021. The extension of duration during 2022 was driven by the increase in rates. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds.
Loans
Loans increased by$370.8 million from year-end 2021 or 15%. The increase was the net result of the strategy to grow commercial portfolios. Total commercial loans were$1.8 billion growing 19% in 2022 and 10% in 2021 when excluding PPP loans, which was driven mostly from new relationships in commercial real estate fixed-rate products. Total residential loans increased 3% or$25.5 million from year-end 2021, as we placed more originations on the balance sheet instead of selling into the secondary market. Residential loan origination volume in 2022 is significantly down as compared to the respective period of 2021 on lower refinancing activity due to increasing market rates.
Allowance for Credit Losses
The ACL was
Non-accruing loans decreased to$6.5 million , or 0.23% of total loans at the end of 2022 from$10.2 million or 0.40% of total loans at year-end 2021. The ratio of accruing past due loans to total loans improved to 0.09% of total loans from 0.32%. Total delinquent and non-accruing loans as percentage of total improved to 0.32% from 0.72%. Net charge-offs continue to be historically low with a net recovery of$238 thousand in 2022 compared to a net charge-off of$209 thousand in 2021. Other Assets
Total other assets increased$47.8 million to$366 million atDecember 31, 2022 from$318 million as ofDecember 31, 2021 . The increase is primarily attributed to a$10.1 million increase in partnership investments, and a$16.2 million increase in the asset position of the derivative and hedging instruments.
Deferred tax assets, net, increased
Deposits and Borrowings
Total deposits were$3.0 billion at the end of 2022 and 2021. Non-maturity deposits increased$97.0 million in 2022, or 4% due to growth in new accounts with over 2,460 new accounts opened. Time deposits decreased$102.1 million to$323.4 million at year-end 2022 versus$425.5 million in 2021.$178 million of brokered deposits matured in of 2021 and were not replaced due to excess liquidity. Retail time deposits decreased$63.0 million as customers moved funds to transactional accounts upon contractual maturity. Total borrowings increased by$215.6 million atDecember 31, 2022 primarily due to funding loan growth opportunities.
Derivative Financial Instruments and Other Liabilities
Other liabilities totaled$78.7 million at the end of 2022 compared to$58.0 million as ofDecember 31, 2021 . The$20.7 million increase primarily reflects a$10.1 million increase in capital commitments on limited partnership investments, a 43 Table of Contents$6.4 million net increase in customer loan swaps, and a$4.2 million variable rate loan hedge increase due to higher interest rates compared to 2021. The net fair value of all derivatives was an asset of$4.8 million at the end of 2022 compared to a$1.1 million liability at year-end 2021. The increase in net derivative fair values reflects the rise in long-term interest rates.
Unused credit lines grew at the end of 2022 increasing reserves by
Equity
Total equity was$393.5 million at year-end 2022, compared with$424.1 million at year-end 2021. Book value per share was$26.09 as ofDecember 31, 2022 compared with$28.27 atDecember 31, 2021 . Equity included net unrealized losses on securities, derivative and pension revaluations, net of tax, totaling a$58.3 million loss at the end of 2022 compared to a$2.3 million gain at year-end 2021.
During 2022 and 2021, the Company declared and distributed regular cash
dividends on its common stock in the aggregate amounts of
The Company and the Bank remained well-capitalized under regulatory guidelines at period end as further described in Note 12 - Shareholders' Equity and Earnings Per Common Share on the Consolidated Financial Statements.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
Net Interest Income
Net interest income for 2022 was$113.7 million compared with$95.6 million in 2021. The net interest margin was 3.36% in 2022 compared to 2.88% in the prior year. The 2022 adjusted net interest margin (non-GAAP measure), which excludes PPP loans was 3.35% versus 2.93% in 2021. Acceleration of PPP loan fee amortization due to forgiveness contributed 1 basis point to NIM in 2022 and 14 basis points in the same period of 2021. Interest-earning cash balances, held mostly at theFederal Reserve Bank , reduced NIM by 5 basis points in the year and 19 basis points in 2021. The yield on earning assets totaled 3.73% compared to 3.33% in 2021. Excluding the impact of PPP and excess cash, the yield on earning assets totaled 3.79% and 3.42% for the same periods. The yield on loans was 3.98% in 2022 and 3.78% in 2021. Excluding PPP loans the yield on loans was 3.97% in 2022, and 3.62% in 2021. Costs of interest-bearing liabilities decreased to 0.52% from 0.59% in 2021 due to decreased core deposit levels offset by increased deposit rates.
Provision for Credit Losses
The provision in 2022 was a$2.9 million expense versus a recapture of$1.3 million in 2021. The expense is primarily attributed to the 15% loan growth in 2022. Overall credit quality remains strong and credit quality metrics improved with decreases in non-accruing and past due loans. The benefit in 2021 is primarily due to a partial recapture of the Day 1 CECL allowance that was establishedJanuary 1, 2021 given steady improvements in most macroeconomic drivers to the ACL during that year.
Non-Interest Income
Non-interest income in 2022 was
Trust management fees were$14.6 million in 2022 compared to$15.2 in 2021 due to lower market valuation of assets under management ("AUM"). While assets under management were$2.3 billion compared to$2.5 billion in 2021, we added more than$132 million of new account balances. We believe that we have a strong wealth management group and are well positioned to realize an organic lift as market valuations return. Customer service fees increased 12% to$14.8 million in 2022 due to higher transaction volumes associated with 2,460 net new core accounts that opened during the year. The Company sold securities resulting in gains of$53 thousand in 2022 compared to$2.9 million during 2021.
Mortgage banking income decreased to
Non-Interest Expense
Non-interest expense was$91.3 million in 2022 compared to$90.5 million in 2021. Salaries and benefits expense increased$1.5 million to$48.7 million in 2022 due to a$1.5 million increase in incentive accruals on stronger performance metrics and a$1.5 million decrease in deferred loan origination costs driven by lower residential loan volume. Those additional costs in 2022 were offset in part by a$767 thousand benefit from the revaluation of post-retirement plan 44 Table of Contents
liabilities as discount rates increased throughout the year, and
The provision for credit losses on unfunded commitments increased$1.6 million due to higher commercial construction unused lines of credit. Other expenses increased$1.7 million in 2022 due to a$352 thousand one-time charitable contribution and a$1.4 million increase in various operating expenses including travel, software and statement processing and postage. The increases were offset with a$4.1 million decrease in non-recurring expenses. Non-recurring expenses in 2022 were mostly contract renegotiation costs totaling$267 thousand compared to$4.9 million in 2021 which included a$2.9 million prepayment penalty on debt extinguishment and$1.4 million in reduction in workforce expenses.
Income Tax Expense
Income tax expense was
LIQUIDITY AND CASH FLOWS
Liquidity is measured by the ability to meet short-term cash needs at a reasonable cost or minimal loss. Favorable sources of liabilities are sought to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions. The liquidity position is actively managed through target ratios established under our liquidity and funding policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the ability to employ strategies necessary to maintain adequate liquidity. The policy is to maintain a liquidity position of at least 8% of total assets. A portion of the deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the liquidity position tightens. A liquidity contingency plan is approved by the Bank's Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the liquidity position. The existing cash and cash equivalents (including an interest-bearing deposit at the FRB Boston), securities available for sale and cash flows from operating activities will be sufficient to meet anticipated cash needs for at least the next 12 months. Future working capital needs will depend on many factors, including the rate of business and revenue growth. To the extent cash and cash equivalents, securities available for sale and cash flows from operating activities are insufficient to fund future activities, the need to raise additional funds through debt arrangements or public or private debt or equity financings may be utilized. The need to raise additional funds may be needed in the event it is determined in the future to effect one or more acquisitions of banks or businesses. If additional funding is required, we may not be able to obtain debt arrangements or to effect an equity or debt financing on terms acceptable or at all.
Capital Resources
Consistent with our long-term goal of operating a sound and profitable organization, atDecember 31, 2022 , we continue to be a "well-capitalized" financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth. AtDecember 31, 2022 , available same-day liquidity totaled approximately$1.0 billion , including cash, borrowing capacity at FHLB and theFederal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company's amortizing securities and loan portfolios. We have unused borrowing capacity at the FHLB of$275 million , unused borrowing capacity at theFederal Reserve of 45 Table of Contents
Purchase Obligations
In the normal course of conducting our banking and financial services business, and in connection with providing products and services to our customers, a variety of traditional third-party contracts for support services have been entered into. Examples of such contractual agreements include, but are not limited to: services providing core banking systems, ATM and debit card processing, trust services software, accounting software and the leasing of T-1 telecommunication lines and other technology infrastructure supporting our network. These types of purchase obligations that will come due during 2023 totaled$7.7 million as ofDecember 31, 2022 which is expected to be funded by cash flows generated from our operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Please refer to the notes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 - Summary of Significant Accounting Policies to our audited Consolidated Financial Statements for the year endedDecember 31, 2022 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of our financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition.
Allowance for credit losses on loans (the "allowance").
The allowance is sensitive to a number of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The allowance is also sensitive to external factors such as the general health of the economy, as evidenced by changes in unemployment rates, home pricing index, gross domestic product, retail sales and changes in commercial real estate values. We consider these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. Additionally, changes in circumstances related to individually large credits, or certain macroeconomic forecast assumptions may result in volatility. It is difficult to estimate how potential changes in any one economic factor might affect the overall allowance because a wide variety of factors and inputs are considered in the allowance estimate. Changes in the factors and inputs may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to consider the impact of a hypothetical stressed forecast, we estimated the allowance using forecast inputs that were severely unfavorable to the expected scenario for each macroeconomic variable. This unfavorable scenario resulted in an allowance that is approximately$8.0 million higher than the allowance using the expected scenario. 46 Table of Contents
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