The following is management's discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and nine months ended
September 30, 2022and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Form 10-Q as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate. Bar Harbor Bankshares(the "Company," "we," "our" or "us" or similar terms) is the parent company of Bar Harbor Bank & Trust(the "Bank"), which is the only community bank headquartered in Northern New Englandwith branches in Maine, New Hampshireand Vermont. The Bank is a regional community bank that thinks differently about banking. The Bank provides the technology offerings and capabilities of larger banks, accompanied by access to local decision makers who are acutely focused on their local markets. Having recently celebrated the 135th anniversary of the Bank's founding, we remain focused on helping our customers achieve their goals as the key to the Bank's success. With over 500 dedicated professionals and more than 50 locations, we are committed to servicing and building enduring relationships by providing a higher standard of banking. We offer a variety of financial products and services designed around our customers in order to serve their banking and financial needs. Through these efforts, we continue to be a relationship-focused community bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals within our footprint. Our corporate goal is to be one of the top performing banks in New England, and our business model is centered on the following:
? The employee and customer experience is the foundation of superior performance,
resulting in a significant financial benefit for shareholders
? Geography, heritage and performance are essential while remaining faithful to a
? Commitment to risk management while balancing growth and profit
? Service and sales oriented culture, focused on core business growth
? Commission income is critical to our profitability through trust and cash flow
management services, client derivatives and sale of mortgages on the secondary market
? Investment in processes, products, technology, training, leadership and
? Expanding our brand and business to deepen our market presence
? Opportunity and growth for existing employees while adding catalyst recruits across all levels 56 Table of Contents
Below is our profile at
[[Image Removed: Graphic]] 57 Table of Contents SELECTED FINANCIAL DATA
The following summary data is based in part on the unaudited consolidated financial statements and accompanying notes and other information appearing elsewhere in this Form 10-Q or in earlier documents.
Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 PER SHARE DATA Net earnings, diluted
$ 0.76 $ 0.73 $ 2.07 $ 1.97Adjusted earnings, diluted(1) 0.76 0.73 2.07 2.04 Total book value 25.22 27.92 25.22 27.92
Tangible book value per share(1) 16.89 19.48
16.89 19.48 Market price at period end 26.52 28.05 26.52 28.05 Dividends 0.26 0.24 0.76 0.70 PERFORMANCE RATIOS(2) Return on assets 1.20 % 1.16 % 1.11 % 1.05 %
Adjusted return on assets(1) 1.20 1.16 1.12 1.09 Pre-tax, pre-provision return on assets 1.65 1.43 1.48 1.26 Adjusted pre-tax, pre-provision return on assets (1) 1.65 1.43 1.49 1.31 Return on equity 11.55 10.38 10.32 9.54 Adjusted return on equity(1) 11.54 10.39 10.38 9.98 Return on tangible equity 17.25 15.08 15.28 14.01
Adjusted return on tangible equity(1) 17.24 15.09 15.37 14.50 Net interest margin, fully taxable equivalent (FTE)(1) (3) 3.47 3.02 3.21 2.88 Adjusted net interest margin(1) 3.47 2.75 3.21 2.73 Efficiency ratio(1) 57.67 59.18
FINANCIAL DATA (In millions) Total assets
$ 3,840 $ 3,738 $ 3,840 $ 3,738Total earning assets(4) 3,525 3,394 3,525 3,394 Total investments 566 556 566 556 Total loans 2,850 2,534 2,850 2,534
Allowance for credit losses 25 22 25 22 Total goodwill and intangible assets 126 126 126 126 Total deposits 3,136 3,007 3,136 3,007 Total shareholders' equity 380 418
380 418 Net income 11 11 31 30 Adjusted income(1) 11 11 31 31 ASSET QUALITY AND CONDITION RATIOS Net charge-offs (recoveries) (annualized)/average loans 0.01 % 0.03 % - % (0.02) % Allowance for credit losses/total loans 0.88 0.89 0.88 0.89 Loans/deposits 91 84 91 84 Shareholders' equity to total assets 9.89 11.19 9.89 11.19 Tangible shareholders' equity to total tangible assets(1) 6.85 8.08
Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures(1) section of the “Management’s Discussion and Analysis of
Status and Results of Operations” in this Form 10-Q for additional information
(2) All performance ratios are annualized and are based on the average balance sheet
amounts, if any.
(3) The fully taxable equivalent takes into account the impact of the tax-advantaged investment
securities and loans.
(4) Performing assets include unaccrued loans and securities are valued at
amortized cost. 58 Table of Contents
CONSOLIDATED ANALYSIS OF LOANS AND DEPOSITS
The following tables show the quarterly trend of loan and deposit data and related growth rates as of
LOAN ANALYSIS Annualized Growth % Quarter Year (in thousands, except ratios) Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 to Date to Date Commercial real estate
$ 1,421,962 $ 1,331,860 $ 1,289,968 $ 1,210,580 $ 1,170,37227 % 23 % Commercial and industrial 376,624 360,304 346,394 340,129 331,091 18 14 Paycheck Protection Program (PPP) - 170 1,126 6,669 24,227 * * Total commercial loans 1,798,586 1,692,334 1,637,488 1,557,378 1,525,690 25 21 Total commercial loans, excluding PPP 1,798,586 1,692,164 1,636,362 1,550,709 1,501,463 25 21 Residential real estate 896,618 876,644 868,382 821,004 849,692 9 12 Consumer 100,822 100,816 96,876 98,949 100,933 - 3 Tax exempt and other 54,338 57,480 51,816 54,579 57,839 (22) (1) Total loans $ 2,850,364 $ 2,727,274 $ 2,654,562 $ 2,531,910 $ 2,534,15418 % 17 %
*Indicates ratios of 100% or greater.
DEPOSIT ANALYSIS Annualized Growth % Quarter Year (in thousands, except ratios) Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 to Date to Date Demand
$ 700,218 $ 670,268 $ 653,471 $ 664,420 $ 664,39518 % 7 % NOW 918,822 883,239 918,768 940,631 888,021 16 (3) Savings 669,317 663,676 658,834 628,670 605,977 3 9 Money market 513,075 499,456 424,750 389,291 379,651 11 42 Total non-maturity deposits 2,801,432 2,716,639
2,655,823 2,623,012 2,538,044 12 9 Total term deposits
334,248 361,906 391,940 425,532 469,221 (31) (29) Total deposits
$ 3,135,680 $ 3,078,545 $ 3,047,763 $ 3,048,544 $ 3,007,2657 % 4 % 59 Table of Contents
AVERAGE BALANCES AND AVERAGE RETURNS/RATES
The following tables present the average balances and the average yields and rates on an annualized basis in fully taxable equivalent for the periods included:
Three Months Ended September 30, 2022 2021 Average Average (in thousands, except ratios) Balance Interest(3) Yield/Rate(3) Balance Interest(3) Yield/Rate(3) Assets Interest-earning deposits with other banks
$ 59,556$ 320 2.13 % $ 284,429$ 110 0.15 % Securities available for sale and FHLB stock(2)(3) 642,475 5,058 3.12 610,381 3,986 2.59 Loans: Commercial real estate 1,351,599 14,510 4.26 1,153,813 10,269 3.53 Commercial and industrial 421,963 4,739 4.46 391,191 3,739 3.79 Paycheck protection program 94 - - 45,835 2,690 23.28 Residential 882,158 7,676 3.45 824,686 7,574 3.64 Consumer 101,175 1,161 4.55 101,545 968 3.78 Total loans (1) 2,756,989 28,086 4.04 2,517,070 25,240 3.98 Total earning assets 3,459,020 33,464 3.84 % 3,411,880 29,336 3.41 % Other assets 313,289 352,208 Total assets $ 3,772,309 $ 3,764,088Liabilities NOW $ 905,668$ 366 0.16 % $ 860,206$ 272 0.13 % Savings 668,255 143 0.08 591,440 124 0.08 Money market 491,683 808 0.65 381,755 115 0.12 Time deposits 349,787 485 0.55 471,934 1,044 0.88 Total interest bearing deposits 2,415,393 1,802 0.30 2,305,335 1,555 0.27 Borrowings 202,296 1,374 2.69 334,097 1,778 2.11 Total interest bearing liabilities 2,617,689 3,176 0.48 % 2,639,432 3,333 0.50 % Non-interest bearing demand deposits 690,134 641,769 Other liabilities 71,934 61,436 Total liabilities 3,379,757 3,342,637 Total shareholders' equity 392,552 421,451 Total liabilities and $ 3,772,309 $ 3,764,088shareholders' equity Net interest spread 3.36 % 2.91 % Net interest margin 3.47 3.02 Adjusted net interest margin(4) 3.47 2.75
(1) Average loan balances include unaccrued and unamortized loans
fees and deferred charges.
(2) The average balance of securities available for sale is based on the
(3) The fully taxable equivalent takes into account the impact of taxable securities
(4) Adjusted net interest margin excludes PPP loans.
60 Table of Contents Nine Months Ended September 30, 2022 2021 Average Interest Yield/ Average Interest Yield/ (in millions, except ratios) Balance (3) Rate(3) Balance (3) Rate(3) Assets Interest-earning deposits with other banks
$ 86,390 $ 5030.78 % $ 229,235 $ 2030.12 % Securities available for sale and FHLB stock(2)(3) 630,679 13,297 2.82 617,373 12,424 2.69 Loans: Commercial real estate 1,306,664 37,765 3.86 1,128,134 30,177 3.58 Commercial and industrial(3) 408,620 11,871 3.88 381,753 10,727 3.76 Paycheck protection program 4,676 223 6.39 62,562 5,058 10.81 Residential 865,259 22,801 3.52 861,629 24,145 3.75 Consumer 99,673 2,943 3.95 105,371 2,833 3.59 Total loans (1) 2,684,892 75,603 3.76 2,539,449 72,940 3.84 Total earning assets 3,401,961 89,403 3.51 % 3,386,057 85,567 3.38 % Other assets 323,253 357,334 Total assets $ 3,725,214 $ 3,743,391Liabilities NOW $ 909,793 $ 9840.14 % $ 801,292 $ 7600.13 % Savings 655,727 418 0.09 568,726 431 0.10 Money market 455,645 1,139 0.33 376,775 354 0.13 Time deposits 376,496 1,645 0.58 583,529 5,565 1.28 Total interest bearing deposits 2,397,661 4,186 0.23 2,330,322 7,110 0.41 Borrowings 187,629 3,458 2.46 336,432 5,415 2.15 Total interest bearing liabilities 2,585,290 7,644 0.40 % 2,666,754 12,525 0.63 % Non-interest bearing demand deposits 671,490 598,434 Other liabilities 66,298 64,360 Total liabilities 3,323,078 3,329,548
Total shareholders' equity 402,136
413,843 Total liabilities and shareholders' equity
$ 3,725,214 $ 3,743,391Net interest spread 3.12 % 2.75 % Net interest margin 3.21 2.88 Adjusted net interest margin(4) 3.21 2.73
(1) Average loan balances include unaccrued and unamortized loans
fees and deferred charges.
(2) The average balance of securities available for sale is based on the
(3) The fully taxable equivalent takes into account the impact of taxable securities
(4) Adjusted net interest margin excludes PPP loans.
61 Table of Contents NON-GAAP FINANCIAL MEASURES This document contains certain non-GAAP financial measures in addition to results presented in accordance with accounting principles generally accepted in
the United States of America, or GAAP. These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with our GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to our results for any particular quarter or year. Our non-GAAP adjusted earnings information set forth is not necessarily comparable to non-GAAP information that may be presented by other companies. Each non-GAAP measure used by us in this report as supplemental financial data should be considered in conjunction with our GAAP financial information. In addition, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies because such measures may include or exclude other specified items. We use the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts that we view as unrelated to normalized operations, including gains/losses on securities, premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. Non-GAAP adjustments are presented net of an adjustment for income tax expense. We also calculate adjusted earnings per share based on our measure of adjusted earnings. We view these amounts as important to understanding operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating our performance. We believe that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of us to other companies in the financial services industry. We also adjust certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community. 62
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items for the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, (in thousands) Calculations 2022 2021 2022 2021 Net income
$ 11,430 $ 11,028 $ 31,045 $ 29,533Non-recurring items: Gain on sale of securities, net (44) (1,930) (53) (1,980) Gain on sale of premises and equipment, net - (146) (65) (137) Gain on other real estate owned - - - (11) Loss on debt extinguishment - 1,768 - 1,768 Acquisition, conversion and other expenses 31 318 356 1,759 Income tax expense (1) 3 (2) (55) (332) Total non-recurring items (10) 8 183 1,067 Total adjusted income(2) (A) $ 11,420$
Net interest income (B)
$ 29,910 $ 25,582 $ 80,727 $ 71,758Plus: Non-interest income 8,823 11,350 27,093 31,103 Total Revenue 38,733 36,932 107,820 102,861 Gain on sale of securities, net (44) (1,930) (53) (1,980) Total adjusted revenue(2) (C) $ 38,689 $
Total non-interest expense
$ 23,032 $ 23,372 $ 66,618 $ 67,587Non-recurring expenses: Gain on sale of premises and equipment, net - 146 65 137 Gain on other real estate owned - - - 11 Loss on debt extinguishment - (1,768) - (1,768) Acquisition, conversion and other expenses (31) (318) (356) (1,759) Total non-recurring expenses (31) (1,940) (291) (3,379) Adjusted non-interest expense(2) (D) $ 23,001$
$ 66,327 $ 64,208Total revenue 38,733 36,932 107,820 102,861 Total non-interest expense 23,032 23,372 66,618 67,587
Pre-tax, pre-provision net revenue
Adjusted revenue(2) 38,689 35,002 107,767 100,881 Adjusted non-interest expense(2) 23,001 21,432 66,327 64,208 Adjusted pre-tax, pre-provision net revenue(2)
$ 15,688 $ 13,570 $ 41,440 $ 36,673(in millions) Average earning assets (E) $ 3,459 $ 3,412 $ 3,402 $ 3,386Average paycheck protection program (PPP) loans (R) - 46 5 63 Average earning assets, excluding PPP loans (S) 3,459 3,366 3,397 3,323 Average assets (F) 3,772 3,764 3,725 3,743 Average shareholders' equity (G) 393 421 402 414 Average tangible shareholders' equity(2)(3) (H) 267 295 276 287 Tangible shareholders' equity, period-end(2)(3) (I) 254 292 254 292 Tangible assets, period-end(2)(3) (J) 3,715
3,612 3,715 3,612 63 Table of Contents Three Months Ended Nine Months Ended September 30, September 30, Calculations 2022 2021 2022 2021 (in thousands) Common shares outstanding, period-end (K) 15,066 14,987 15,066 14,987 Average diluted shares outstanding (L) 15,113
15,051 15,100 15,035 Adjusted earnings per share, diluted(2) (A/L)
$ 0.76$ 0.73 $ 2.07$ 2.04 Tangible book value per share, period-end(2) (I/K) 16.89 19.48 16.89 19.48 Securities adjustment, net of tax(1)(4) (M) (58,715) 4,398 (58,715) 4,398 Tangible book value per share, excluding securities adjustment(2)(4) (I+M)/K 20.79 19.19 20.79 19.19 Total tangible shareholders' equity/total tangible assets(2) (I/J) 6.85 8.08 6.85 8.08 Performance ratios(5) Return on assets 1.20 % 1.16 1.11 % 1.05 Adjusted return on assets(2) (A/F) 1.20 1.16 1.12 1.09 Pre-tax, pre-provision return on assets 1.65 1.43 1.48 1.26 Adjusted pre-tax, pre-provision return on assets (2) (U/F) 1.65 1.43 1.49 1.31 Return on equity 11.55 10.38 10.32 9.54 Adjusted return on equity(2) (A/G) 11.54 10.39 10.38 9.98 Return on tangible equity 17.25 15.08 15.28 14.01 Adjusted return on tangible equity(1)(2) (A+Q)/H 17.24 15.09 15.37 14.50 Efficiency ratio(2)(6) (D-O-Q)/(C+N) 57.67 59.18 59.66 61.48 Net interest margin (B+P)/E 3.47 3.02 3.21 2.88
Adjusted net interest margin(2)(7) (B+P-T)/S 3.47 2.75 3.21 2.73 Supplementary data (in thousands) Taxable equivalent adjustment for efficiency ratio (N)
$ 533$ 576 $ 1,500 $ 1,757Franchise taxes included in non-interest expense (O) 149 143 434 396 Tax equivalent adjustment for net interest margin (P) 379 421 1,033 1,284 Intangible amortization (Q) 233 233 699 707 Interest and fees on PPP loans (T) - 2,690 223 5,058
(1) Assuming a marginal tax rate of 23.41% for 2022 and 23.71% for 2021.
(2) Non-GAAP financial measure.
Tangible equity is calculated by taking total equity (3) less intangible fixed assets at the end of the financial year. Fixed assets are calculated
taking total assets less intangible assets at the end of the period.
Securities adjustment, net of tax, represents the total of unrealized losses and (4) gains on available-for-sale securities recognized in our Consolidated Balance Sheet
balance sheets into total common shareholders’ equity.
(5) All performance ratios are based on average balance sheet values, where
The efficiency ratio is calculated by dividing basic non-interest expense net of (6) franchise taxes and intangible amortization divided by basic revenue on a
fully taxable equivalent basis.
(7) Adjusted net interest margin excludes Paycheck Protection Program loans. 64 Table of Contents QUARTERLY PERFORMANCE SUMMARY
Results (third quarter of 2022 compared to the same quarter of 2021)
?Net income was
?Diluted earnings per share were
“Return on assets went from 1.16% to 1.20% or 0.95% on a non-GAAP basis excluding PPP loan fees. Return on equity was 11.55% versus 10.38%.
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
$29.9 million, an increase of 17%. Net interest margin (NIM) was 3.47% in the third quarter of 2022, an increase of 45 basis points from the same period in 2021. The increase is primarily due to the repricing of variable rate assets, continued loan growth and a lower percentage of wholesale borrowings to total debt.
?The provision for credit losses was an expense of
?Non-interest income was
$8.8 million, down $2.5 million. Customer service fee income was up 9%, trust and wealth management income was down 8%, and prior year included $1.9 millionof net securities gains.
?Non-interest charges have been
“The efficiency ratio improved to 58% from 59%, or 63% on a non-GAAP basis that excludes PPP loan fees.
Financial situation (at
? Total assets increased
? Cash and cash equivalents were
$565.8 million, or 15% of total assets, compared to $592.7 million, or 16% of total assets. Net unrealized losses were $76.6 million, or 12% of gross securities, compared with $49.7 million, or 8% of gross securities as fixed rate securities continued to price reflecting higher interest rates. ?Total loans grew 18% on annualized basis during the quarter as commercial loans and residential loans increased 25% and 9%, respectively. Loan growth was generated across all of our footprint and among many industry sectors and business lines. We believe that the economy in Northern New Englandcontinues to be strong despite pressures from the broader economy.
“The ratio of allowance for credit losses to total loans was 0.88%, up from 0.87%, reflecting a more cautious economic outlook.
Net charges continue to be insignificant and every credit metric improved during the quarter.
“Total deposits increased 7% on an annualized basis in the quarter due to a growing number of customer accounts and market share gains.
?Total book value per share was
Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 8% on an annualized basis on net income offset by shareholder dividends.
COMPARISON OF THE FINANCIAL SITUATION AT
Total securities decreased to
$565.8 millionfrom $625.6 millionat year-end 2021. The $59.8 milliondecrease in total securities included $99.3 millionof purchases, $19.5 millionin sales, an $11.7 millioncost reduction to municipal securities that are hedged, and $50.4 millionof maturities, calls and pay-downs and amortization. Fair value adjustments reduced the security portfolio by $76.6 millionat the end of the September 30, 2022quarter, compared to an increase of $2.6 millionat year-end 2021. Net unrealized losses in the nine months of 2022 resulted from the Federal Reserveincreasing the federal funds target interest rate 300 basis points in that period. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds. The weighted average yield of our securities portfolio was 3.43% at quarter-end and 2.63% at year-end. Securities held at quarter-end had an average life of 9.5 years and an effective duration of 5.1 years compared to 5.3 years and 4.2 years at year-end 2021, respectively.
Total loans increased by
$318.5 millionfrom year-end 2021, or 17% annualized, to $2.9 billionat September 30, 2022. Commercial loans increased by $241.2 millionwith growth from existing customers and 491 new lending relationships. PPP loan balances were zero at the end of the quarter, compared to $6.7 millionat year-end. Total residential loans increased by $75.6 millionfrom 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 respective periods 2021 on lower refinancing activity and increasing market rates. Allowance for Credit Losses The ACL increased to $25.0 millionat quarter-end as compared to $22.7 millionat year-end 2021 principally due to loan growth. The ratio of the allowance to loans decreased to 0.88% from 0.90% at year-end reflecting an improvement in economic forecasts used the ACL calculation. Non-accruing loans continue to trend downwards on a quarterly basis to $7.8 millionfrom $10.2 million. The ratio of accruing past due loans to total loans improved to 0.10% of total loans from 0.32%. Total delinquent and non-accruing loans as percentage of total improved to 0.37% from 0.72%. Net recoveries on previously charged-off loans for the first nine months of 2022 totaled $83 thousandcompared to net charge-offs of $434 thousandfor the same period of 2021.
Other assets were
$366.1 millioncompared to $318.5 millionat year-end 2021. The increase includes $18.5 millionof deferred tax assets recorded in connection with unrealized losses on securities, $6.5 millionof investments made in tax credits and community developments, a $7.9 millionincrease in the fair value of customer loan swaps, and a $10.2 millionincrease in the fair value of derivative instruments.
Deposits and borrowings
Total deposits increased by
In the first nine months of 2022 over 2,300 net new deposit accounts opened and over 2,900 were opened in the same period of 2021. The loan to deposit ratio increased to 91% from 83% at the end of 2021 due to loan growth offset in part by 4% annualized growth in total deposits. Core deposits grew by
$178.4 million, or 9% annualized, while time deposits decreased by $27.7 million, which includes $36.0 millionof wholesale deposits that matured. Borrowings increased by $70.5 millionfrom year-end 2021 to supplement excess cash and deposit funding. FHLB borrowings totaled $169.8 millionand $98.6 millionwith weighted average rates of 2.91% and 0.49% at the end of the third quarter of 2022 and year-end 2021, respectively. Wholesale borrowings as a percentage of total debt decreased to 5.8% in the third quarter from 6.0% at year-end 2021. 66 Table of Contents Other Liabilities
Other liabilities have been
$17.6 millionincrease includes $7.0 millionin remaining tax credit investment commitments, a $7.9 millionincrease related to the fair value of customer loan swaps, and a $4.5 millionincrease related to the fair value
of derivative instruments. Equity Total equity at the end of the third quarter of 2022 was
$380.0 millioncompared to $424.1 millionat year-end 2021. The $44.1 milliondecrease in the first nine months of 2022 included net income totaling $31.0 million, $11.4 millionof dividends to shareholders and $64.9 millionof other comprehensive losses.
Other comprehensive income is mainly due to unrealized capital losses on securities, net of tax, totaling
June 2022, our Board of Directors authorized a stock repurchase plan for up to 5% of outstanding shares of common stock, which represents approximately 751,000 shares. As of September 30, 2022, no repurchases have been made, but we will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED
The net profit for the third quarter of 2022 was
During the first nine months of 2022, net income was
$31.0 million, or $2.06per diluted share, compared to $29.5 million, or $1.96per diluted share, in the same period of 2021. Non-recurring items reduced net income by $1.1 million, or $0.07per diluted share, in 2021.
Net interest income
Net interest income was
$29.9 millionin the third quarter of 2022 compared with $25.6 millionin the third quarter of 2021. NIM was 3.47% compared to 3.02% for the same periods, and was 3.50%% and 2.94%, respectively, on a non-GAAP basis when excluding the impact of PPP loan fees and interest-bearing excess cash. The increase in net interest income and net interest margin was due to higher interest on earning assets due to the Federal Reserveincreasing their federal funds target rate. The yield on earning assets totaled 3.84% compared to 3.41% in the third quarter of 2021. The yield on loans was 4.04% in the third quarter of 2022, and 3.98% in the third quarter of 2021. The non-GAAP the yield on loans was 4.04% and 3.62% for the same periods when excluding PPP loan fees. Total cost of deposits was 0.30% in the third quarter of 2022 compared to 0.27% in the third quarter of 2021 reflecting a lower correlation to federal fund rate movements. Borrowing costs were 2.69% compared to 2.11% for the same periods due to the repricing of rolling short-term FHLB borrowings to market rates. For the first nine months of 2022, net interest income was $80.7 millioncompared with $71.8 millionin the same period of 2021. The comparison of NIM and earning asset yields were 3.21% and 2.88%, and 3.51% and 3.38% in 2022 and 2021, respectively. The explanations for improvement in those ratios are consistent with the three month comparison above.
Provision for credit losses
The allowance for credit losses for the quarter was
During the first nine months of 2022, the provision for credit losses was
$2.2 millioncompared to a benefit of $1.4 millionin the same period of 2021. The change in the provisions for credit losses and benefit are mostly attributable to loan growth in 2022, and improved economic forecasts in 2021 as compared
to 2020, respectively. 67 Table of Contents Non-Interest Income
Non-interest income in the third quarter of 2022 was
$8.8 million, compared to $11.4 millionin the same quarter of 2021. Customer service fees were $3.8 millionin the third quarter of 2022, compared to $3.5 millionin the same period of 2021. The increase reflects the net new accounts that were opened and a higher volume of customer activity and transactions. Wealth management income was $3.5 millionin the third quarter of 2022, down from $3.9 millionin the same quarter of 2021. Assets under management ("AUM") declined approximately 16.1% year to date, as compared to the blended decline of the S&P 500 of 24.1%. The smaller decline in AUM is a direct function of effective portfolio management and new business successes. Mortgage banking income was $315 thousandin the third quarter of 2022, compared to $850 thousandin the same period of 2021 reflecting higher on balance sheet activity and lower residential loan originations. Non-interest income for the first nine months of 2022 was $27.1 millioncompared to $31.1 millionin the same period in 2021. Customer service fees increased $1.4 millionwhile mortgage banking income decreased $3.5 millionand in 2021 included a $2.0 millionnet gain on security sales. The reasons for these changes are the same as the quarterly comparison above.
Non-interest expense was
$23.0 millionin the third quarter of 2022, compared to $23.4 millionin the same quarter of 2021. The decrease is primarily the net result of a $499 thousandincrease in salary and benefit expense, a $429 thousandincrease in occupancy and equipment expense, and non-recurring expenses totaling $2.1 millionin 2021. Salary and benefit expense increased due to annual cost of living adjustments in the second quarter 2022 along with higher pay-for-performance incentives. Occupancy and equipment expense increased on higher utility costs and software amortization in 2022. Non-recurring expenses (non-GAAP) in 2021, included a $1.8 millionloss on debt extinguishment and $318 thousandof fees related to consolidating our Wealth Management businesses. For the first nine months of 2022, non-interest expense was $66.6 millioncompared to $67.6 millionin the same period of 2021. The reasons for the decrease in the nine month period is similar to the quarterly explanation above with higher salary and benefits expense and occupancy costs, and lower non-recurring expenses. Non-recurring expenses in 2022 totaled $291 thousandconsisting of mostly contract renegotiation fees. In 2021, non-recurring expenses were $3.4 millionconsisting of $1.8 millionof reduction in workforce costs and a $1.8 millionloss on extinguishment of debt. The efficiency ratio was 59.66% in the first nine months of 2022 compared to 61.48% in same period 2021, which reflects managements disciplined approach to expense management
as revenue continues to grow. Liquidity and Cash Flows Liquidity is measured by our ability to meet short-term cash needs at a reasonable cost or minimal loss. We seek to obtain favorable sources of liabilities and 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 our ability to meet liquidity needs, including variations in the markets served by our network of offices, mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions. The Bank actively manages its liquidity position through target ratios established under its Asset-Liability Management Policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank's policy is to maintain a liquidity position of at least 8% of total assets. A portion of the Bank's deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank's liquidity position tightens. During the third quarter 2022 we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on sold loans. At
September 30, 2022, available same-day liquidity totaled approximately $1.0 billion, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from our amortizing securities and loan portfolios. We had unused borrowing capacity at the FHLB of $385 million, unused borrowing capacity at the Federal 68 Table of Contents
The Bank maintains a liquidity contingency plan 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 us. Our management believes 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 our liquidity position.
Please see the section titled "Comparison of Financial Condition at
September 30, 2022and December 31, 2021--Equity" for a discussion of shareholders' equity together with Note 6 "Capital Ratios and Shareholders' Equity" in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in our most recent Annual Report on Form 10-K. Our principal cash requirement is the payment of dividends on our common stock, as and when declared by our Board of Directors. Dividends to shareholders in the aggregate amount of $11.4 millionand $10.5 millionfor the nine months ended September 30, 2022and 2021, respectively. All dividends declared and distributed by us will be in compliance with applicable state corporate law and regulatory requirements.
Off-balance sheet arrangements
We are, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors. Our off-balance sheet arrangements are limited to standby letters of credit whereby the Bank guarantees the obligations or performance of certain customers. These letters of credit are sometimes issued in support of third-party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.
Our off-balance sheet arrangements have not changed materially since we previously reported them in our Annual Report on Form 10-K for the year ended
CRITICAL ACCOUNTING METHODS
Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accouting Policies and Estimates" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes in our application of critical accounting policies since December 31, 2021. Refer to "Note 1 Basis of Presentation--Recent Accounting Pronouncements" of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented. 69
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